What is seed funding?
Seed funding is an investment made in a company in exchange for equity in that company. Seed capital is similar to venture capital with the main difference being the source. Venture capital generally comes from institutions and is generally much greater in amount than seed capital. Think of seed funding as getting a lot of smaller investments rather than one large investment. Seed funding is also very flexible and can be used for many things. So, it follows that a startup gets seed funding by selling small chunks of equity in the company to a — hopefully — high volume of individual investors. Here’s an idea of how much is given at each funding stage:
When does seed funding take place?
Seed funding can be crucial at the early stages of a business because it can signal to venture capitalists that a business is ready to take on funding. Venture capitalists generally like to reduce their risk and a business that has already generated seed funding seems to be less of a risk. Further, venture capitalists do not like to invest in startups at such an early stage, so seed funding is generally used as a first round of funding. Thus, if a startup is successful at raising seed funding at an early stage, it will be more likely to receive larger amounts of venture capital down the road.
Where to find seed funding?
So, an entrepreneur will want to exhaust every resource when seeking seed funding. Seed funding can come from many different sources, so it is important for an entrepreneur to be creative when thinking of these potential sources. Friends and family are a very good resource, as are neighbors and local business owners, and. Remember, you are not asking one person for a huge sum of money so your goal should be to find as many sources as possible. You will get plenty of practice pitching your business idea at this stage (another reason why it is good to start with your friends and family).
What else helps?
An experienced attorney that has been through the seed funding process before can be an asset to an entrepreneur. I hope this answered your question, but if you would like to learn more you should check outfor a free consultation with an experienced attorney. We also have a full chapter regarding in our book – How to Start a Business: An Entrepreneur’s Legal Guide. Give it a look!