Startup capital and seed money are sometimes used interchangeably, but there is a difference.
As it implies, seed capital is provided at the concept stage. It’s an idea that an investor feels warrants more thorough research and investigation. However, the investment is generally not a very large sum of money, usually up to $250,000. This is merely to research, expand on a possibility and prove or disprove a concept. Can this idea become a viable business? Does this warrant a major capital investment? Most of all, seed funding allows an investor to decide whether it would be worth making a larger investment in the form of startup capital.
How does a seed capital investor expect the funds to be used?
- Produce a working prototype or process
- Market research
- Demographic targeting
- Creating a working team
- Generate investor interest for successive financing rounds
- Testing the waters before committing to a full-scale investment
Where does seed capital usually come from?
Seed funding is usually an emotional investment driven by the passion of the founders. The capital often comes from the founders’ personal savings, excited family members and friends, banks, or angel investors. What about venture capital? With the possible exception of disruptive technologies, VC generally invest in a business that’s already up and running.
Risk to the investor
Seed capital is the riskier of the two for an investor. Because they’re investing in the possible viability of an idea, without a product, service or any proof of revenue.
Seed capital is the very first source of funding that a business will receive for an idea. Think of seed capital as what transforms a business from an idea into a successful startup business.
Startup capital is provided when you’re past the concept stage and are ready to actually implement an idea. Mostly, it’s used to get a business with a proven idea up and running. And it’s usually a larger amount of money that would be provided for seed capital.
How does a startup capital investor expect the funds to be used?
- Legally register your company
- Permits, licenses, etc.
- Creating a website
- Open an office or place of business
- Furnish and equip your office or business
- Develop and manufacture your product
- Sell your product or service and gain some traction
- Any other expense specific to your industry
Where does startup capital usually come from?
At this stage, financing can come from a business loan provided by a bank or from an investor or group of investors. And this is also the stage where venture capital investors generally begin to take notice. This is because startups are less risky than companies at the idea stage but they still provide an opportunity for a high return on investment. A bank loan will incur interest rates and fees. And an investor will negotiate startup capital in exchange for a stake in the company.
Risk to the investor
While the risk of investing in a startup is large, a startup may already be generating revenue and maybe even profits. As a result, an investor has a clearer picture of the founding team’s abilities and where the business is capable of going.
Do you have a great idea but need the capital to explore its viability in the market? Are you already past the idea stage and ready to get your business up and running? Seed money and startup capital are both used to fund new ventures. Finding the right investors for your company begins with identifying which type of investment you need.
Until next time,
To Your Growth & Profits
William De Temple, CEO Antirion LLC
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