Seed Money

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Seed Money Meaning

Seed money is the financing used to finance a new startup or new enterprise at its initial launch stage in exchange for equity. The word "seed" denotes the notion that if a plant is to be grown, the seed is required; likewise, initial funding is required if a business grows.

Seed Money Meaning

A seed money scheme or seed funding initiative serves as the foundation for helping a startup establish and grow. The agreement created is quite lenient and negotiable, which makes it preferred over the bank borrowing options.

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How Does Seed Money Work?

A seed money grant is one of the best measures to be adopted to ensure the establishment of a new business or startup. To understand what is seed money, it is important to learn about the reasons that drive aspiring business owners toward this option.

Initially, it is not easy for the startups to arrange for funds as banks and other potential investors or lenders may be reluctant to provide loans or invest as there is no established track record of startups. Therefore, many startups arrange for funds from their relatives and friends. This kind of financing is termed seed financing.

The seed money is not particularly large as it is received from personal sources. The money received is mostly used to frame initial business plans and manage expenses like R&D costs, rent, purchase of fixed assets, insurance, payroll, etc.

Seed funding generally involves several small funding instead of one large investment. The flexibility in seed funding is also very high and can be used in many things. So, generally, startups get seed funding by selling small parts of equity in a company which slowly leads to a high volume of investors.

Examples

Let us consider the following examples to check how seed money schemes can be adopted and applied:

#1 - Owned Funds

Firstly an entrepreneur must use their savings for their business as involving others' money may bring their control or ownership. Apart from savings, the owner can use their credit cards, valuable assets such as land and building, a worthy mortgage house, etc. It will increase an owner's credibility in the eyes of investors who may invest in the future.

#2 - Relatives and Friends

The easiest way to finance your business is by asking your close friends and family members to fund your business. Even the interest rate is zero or low when the funds are received from close friends and family members.

Seed Money

#3 - Angel Investors

Angel investors are potential investors like lawyers, doctors, and existing entrepreneurs interested in investing their wealth into new startups. However, these investors cannot provide a huge amount of funds but can provide funds for the early needs of the startup.

#4 - Seed Venture Capital Firms

Venture capital firms are firms that provide private equity financing to startups. Venture capital invests in startups in exchange for some ownership or equity. These firms demand more equity stake as compared to individuals and relatives.

How to Get?

The steps that can help raise funds are as follows:

  1. Approach the investor of your niche or industry. Don't go through the other industry's investment and concentrate on your niche.
  2. Get the investor's trust by showing them your success in your previous projects and ventures. Explain to them the returns that has already been earned.
  3. Please give them the proper budget in terms of gross profit, profit margins, income statement, and financial statements in the proper presentation.
  4. Present them with the proper research work you have done and show them enough confidence in the area of your venture.

Uses

  1. Primarily seed money is used for research and development, framing plans for the business, and on essential expenses of the business such as legal and consultancy costs, etc.
  2. Further, the seed money is used for doing the initial investment in property, plant & equipment, rent, etc.

Benefits

  1. Seed money helps arrange funds at the initial stages of new startups at a zero or minimal interest rate.
  2. The startup is not overburdened by debt liability as seed financing is provided in exchange for equity.
  3. Some big sources like crowdfunding,  and angel investors allow the budding entrepreneur to use their communications and networks to build their business and relations, which thereby helps entrepreneurs to establish and grow their business. Also, these big sources share their knowledge and guide the startups to establish their business.
  4. The agreement is mostly negotiable and flexible, unlike bank borrowing and venture capitalists' funds.