It’s time for another article from the series that brings us closer to understanding various terms and mechanisms in the field of investment. This time we will tackle down the subject of seed investment. Let’s get started!
Cutting straight to the chase - seed money, also known as seed funding or seed capital, is a form of initial capital raised by a startup company in its very early stage. It entails securities offering, where an investor, in exchange for an equity stake or a convertible bond, puts his funds into an early-stage company. Seed money sources may include more professional investors, such as seed venture capitalists, angel investors, accredited investors, business incubators or crowdfunding platforms, but also private sources with links to the entrepreneur, such as friends or family.
Seed investment, as the name itself suggests, is a very early investment, which provides funds that are used to support the business until it can generate capital of its own, or until the business is ready for a next stage of further investments. Obtaining seed capital is the first step a startup needs to take on the way to become an established business, as it helps to cover the necessary expenses such as market research, product development and to employ initial members of the team who will help to nourish the company and allow it to begin growing from a “seed” to, eventually, a fully grown “tree”.
Seed funding, of course, may vary in terms of how much capital it provides for different startups - it can produce anywhere between $10,000 and $2 million. The value of most companies raising seed funding is estimated to be from $3 million up to $6 million. How exactly is the company value estimated? The entrepreneur decides how much shares investors can buy and what percent of the firm they can get. For example, if they decide to raise $100,000 via a seed funding round and offer 10% of the company to the new shareholders, the venture’s worth is $1 million. The entrepreneurs should remember not to set their company’s initial value too high - it might hinder the process of raising capital from, say, venture capitals, in later stages, as it will cause your seed investors’ ownership shares to get significantly diluted - which is something they might be opposed to.
The individual investors you raise the money from usually get a board seat, meaning they get a say in future decision-making for the company. Remember to thoroughly research them before deciding to cooperate, find out about their previous experiences with other entrepreneurs and see if you share similar views and goals, and if you simply get along. Go with your gut feeling and try to create a board of members that will be a pleasure to work with.
A good alternative to raising seed capital via individual investors, especially for people still lacking in networking skills, is raising it through crowdfunding platforms. In case of seed investment for startup companies, the platforms usually operate on equity crowdfunding methods - the investors receive unlisted shares in the company they choose to support. Crowdfunding platforms can help to connect startups with a number of investors and secure seed capital quickly, as well as can kick off the process of building a strong community around your project.
We hope this brief introduction to seed investment has brought you closer to understanding the idea behind and need for seed capital. We encourage conducting afurther, more detailed research on the subject and we invite you to read other articles covering various issues connected to the world of investment.