Seed Money Meaning
Seed money is the kind of financing which is used to finance a new startup or new enterprises at their initial launch stage in exchange for equity. The word “seed” denotes the notion that if a plant is to be grown, then the seed is required; likewise, if a business is to grow initial funding is required.
Understanding Seed Money
- Initially, it is not easy for the startups to arrange for funds as banks and other potential investors or lenders may be reluctant to provide loans or to invest as there is no established track record of startups. Therefore, many startups arrange for funds from their relatives and friends. This kind of financing is termed seed financing.
- This seed money is not a particularly large amount as it is received from personal sources. The money received is mostly used for framing initial business plans and managing initial expenses like R&D costs, rent, purchase of fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples., insurance, payroll, etc.
- Seed funding generally involves a number of small funding instead of one large investment. The flexibility in seed funding is also very high and can be used in many things. So, generally, the start-ups get seed funding by the sale of small parts of equity in a company which slowly leads to a high volume of investors.
Seed Money Examples
#1 – Owned Funds
Firstly an entrepreneur must use their own savings for their business as involving other’s money may bring their control or ownership. Apart from savings, the owner can use their credit cards, valuable assets such as land and building, mortgage worthy house, etc. It will increase an owner’s credibility in the eyes of investors who may invest in the future.
#2 – Relatives and Friends
The easiest way to finance your business is by asking your close friends and family members to fund your business. Even the interest rate is zero or low when the funds are received from close friends and family members.
#3 – Angel Investors
Angel investorsAngel InvestorsIndividuals who invest in new firms and start-ups are known as angel investors. In exchange, they demand equity or debt. It's more of an informal investing approach in which the company doesn't have to go through a lot of compliances. are potential investors like lawyers, doctors, and existing entrepreneurs who are interested in investing their wealth into new startups. These investors, although are not able to provide a huge amount of funds but can provide funds for the early needs of the startup.
#4 – Seed Venture Capital Firms
Venture capital firms are firms that provide private equity financing to startups. Venture capitalVenture CapitalVenture capital (VC) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives. invests in startups in exchange for some ownership or equity. These firms demand more equity stake as compared to the individuals and relatives.
How to Approach Investors for Seed Funding?
- Approach the investor of your own niche or industry. Don’t go through the other industry’s investment and concentrate on your own niche.
- Get the trust of the investor by showing them your success in your previous projects and ventures. Explain to them your returns that you have already earned.
- Give them the proper budget in terms of gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services., profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. , income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements., and financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. in the proper presentation.
- Present them the proper research work you have done and show them enough confidence in the area of your venture.
- Primarily seed money is used for the research and development, framing plans for the business and on essential expenses of the business such as legal and consultancy costs, etc.
- Further, the seed money is used for doing the initial investment in property, plant & equipment, rent etc.
- Seed money helps arrange funds at the initial stages of new startups at a zero or minimal rate of interest.
- The startup is not overburdened by the liability of debt as seed financing is provided in exchange of equity.
- Some big sources like crowdfundingCrowdfundingCrowdfunding is a method through which the business can raise capital from many individuals beyond friends, family, relatives, and customers by posting the project details on the websites and other social media platforms. It does not involve banks and any other financial institutions., angel investors allow the budding entrepreneur to use their communications and networks to build their business and relations, which thereby helps entrepreneurs to establish and grow their business. Also, these big sources share their knowledge and guide the startups to establish their business.
- The agreement of seed funding is mostly negotiable and flexible, which is not possible in the case of bank borrowing and venture capitalists.
This has been a guide to What is Seed Money & its meaning. Here we discuss its examples, where to find seed capital, its uses and benefits. You can learn more about from the following articles –