Seed investment, also known as seed capital or seed funding, is an integral part of the journey for anyone looking to start a business. As such, it’s common to hear new enterprises discuss their seed funding rounds while on their mission to launch.
Seed investment works similarly to any other type of investment, where entrepreneurs can obtain the funding they need while relinquishing equity shares in their company. The ‘seed’ element refers to the fact this is usually very early-stage funding to cover their initial expenses. At this point, few ventures will have experienced much traction, which can make it a challenge to secure financing.
In this guide, we have explored the topic of seed investment in more detail, focusing on what it is, where you can get it, and any other considerations you need to make.
What is seed investment?
As we’ve already touched upon, seed finance is the initial funding that a start-up raises to become established and start to grow. Using this capital, they can cover the costs associated with their establishment, including supplier costs, premises and any other operating expenses that need to be absorbed. It might also cover product development, market research and business plan costs.
The seed funding stage will often be followed by further rounds, as the enterprise gets a better sense of how much money they need and increases the leverage they have to secure investment (such as sales orders, letters of intent, etc). So, seed investment is by no means the end of the financial journey, nor should an entrepreneur expect to get all the capital they need at this stage.
Who provides seed capital?
Seed capital is often provided by private investors, such as angels, who see promise in an upcoming business idea.
However, it’s worth noting that, at this point, the enterprises seeking investment will often have no assets or achievements to their name. They may also have limited documentation as their business model and strategies are still being developed. This can make it hard to secure funding, particularly as investors and lenders tend to rely on pitch decks and comprehensive plans to prove the value of the business. As such, seed funding can often come from personal sources, such as friends and family, who will not require such documentation.
Of course, not all entrepreneurs will raise substantial seed capital from friends and family depending on their unique situations. So, there may also be a need in this stage to attract wider investment through networking and pitching to investors.
If you do obtain seed capital from an investor, it can carry additional benefits. Many investors will want to get involved beyond offering funding, which can help you develop your business in the early stages. This will ensure you start with solid foundations and increase your chances of success (and future funding).
Some venture capital firms may also provide seed funding, provided they see worth in the idea you are pursuing.
How do I raise it?
The first step to raising seed capital is understanding what milestones you want to achieve and how much funding you need to do it. For most entrepreneurs, this will mean deducing what you need to have in place to begin to grow your business and the expenses required.
It’s also worth remembering that the amount of capital you can secure will depend on the perceived value of your idea and your ability to convince investors. Even if your complete business plan isn’t yet developed, you need to be able to shine a light on your value proposition and provide elevator pitches that capture the interest of investors.
Once you know what you need and are confident in the worth of your business, it’s a matter of seeking out appropriate contacts through networking or approaching venture capital firms or other platforms that offer seed capital, like SeedCamp. Once you find the right investors, the focus will be on persuading them that your idea is one to back.
Other considerations to make
Before pursuing seed investment, there are a few factors first to consider. Although they are supplying early-stage funding, investors will gain a long-term stake in your business that will extend past the point that you launch and begin generating revenue. This means they will be entitled to a share of future distributed profits. Something to consider is creating a mechanism whereby on the business achieving key milestones, you have the option to increase your share of the business – clearly the investor will need to be in agreement with this for it to occur.
You also need to determine how involved you want any investor to be. If they get involved at the seed stage, their insight and expertise can help you shape your strategies – which some entrepreneurs will appreciate, while others might want to go it alone.
Remember that you will need to get further funding as your business goes through its growth journey. So, be sure that the seed capital you have is used efficiently to help you later in the financial journey. Investors will what to know about your previous funding rounds when you approach them for future funding.
Conclusion
Seed investment is a crucial stage for every business so that they can take the first steps towards becoming an established enterprise. With the right capital, they can cover their initial costs and develop their offering, which can help them secure future finance to support their journey.
Understanding what seed capital is and where to get it can help you kickstart your funding mission and make your idea a reality.
Our team of advisors are happy to discuss your needs and put you in contact with appropriate sources to help you raise the capital you need. We can also assist you in developing your business plan and strategies to set you on the best path.