Seed Funding: An Overview for Investors and Startups
Let’s say you have an idea for a new business. It’s a solid idea with the capacity to fill a niche in the marketplace. Your business plan has potential, but there’s one problem: money.
You don’t have the capital to get your idea off the ground. You need funding to execute your early-stage business plans. This is where a seed investment can make all the difference. Let’s take a closer look at seed funding…
What Is Seed Funding?
A seed investment provides funding for business startups, research or new products.
Most startups go through many rounds of financing before they can finance their operations on their own. The seed stage is the first round of funding from outside investors. Family members, friends, crowdfunding and angel investors usually provide seed funding for equity in the company.
The Importance of a Seed Investment
The capital raised covers the early-stage expenses that allow a company to grow. External funding can also help make a company look more attractive to other investors. This can help secure more funding in the future.
Financing a company’s first steps, such as market research or product development, can plant the seeds that help to grow a business. With enough seeds planted, the company will hopefully grow into a tree.
If you’re interested in learning more about practices for startup investing, check out how to invest in startups.
Let’s take a closer look at the different types of seed capital…
Types of Seed Funding
Startups interested in a seed investment can receive capital from different investors, including…
Crowdfunding is one of the most popular ways to get seed funding. This funding pools small amounts of capital from a large number of investors to finance a new business venture.
Websites, such as Kickstarter and Indiegogo, bring hundreds of thousands of people together to invest in the next big thing.
Angel investors are another popular way to get seed funding. These investors provide capital in exchange for equity in the company. They’re referred to as angels because they save startups that are at risk of failure.
These investors are often wealthy people who invest in startups. They usually receive equity in the company in exchange for providing capital. You can find angel investors all over Silicon Valley, the home of many tech startups.
Angel investors are also often entrepreneurs or managers themselves. They have more to give than money. These investors are usually experienced in the spaces they invest in. They can share their experience and network to help a company in the earliest stages of a startup.
If you’re interested in learning more about angel investors, check out this article on what business angels look for when investing.
Corporate Seed Funders
Corporate seed funders are companies that back startups with seed money. Some corporate seed funding companies are Apple (Nasdaq: AAPL), Alphabet (Nasdaq: GOOGL) and Intel (Nasdaq: INTC). These companies regularly back startups with notable products.
Companies that offer seed funding often look at startups as a future source of profit or talent.
Venture capitalists (VCs) are investors who provide funding based on factors such as growth potential, market conditions and the founder’s vision. They receive equity in the company in exchange for investing.
VCs generally offer much higher amounts of capital than angel investors. These investors are similar to angel investors but they have a longer decision-making process. VCs will often join several rounds of investing after the seed stage.
The Bottom Line on Seed Funding
A seed investment allows a company to form a strong foundation. This first round of funding can be critical to develop the business and create strong products or services.
You should always do your own research before making a seed investment. Most startups don’t have established rapport. Investors are taking a leap of faith when they put money in at this stage. There are no guarantees of returns or profit.
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About Aimee Bohn
Aimee Bohn graduated from the College of Business and Economics at Towson University. Her background in marketing research helps her uncover valuable trends. Researching IPOs and other trends has been her primary focus over the past year. When Aimee isn’t writing for Investment U, you can usually find her doing graphic design or traveling with friends.