Seed Money Meaning Examples How It Works

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.

Understanding Seed Money

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.This 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 assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more, 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, the startups get seed funding by selling small parts of equity in a company which slowly leads to a high volume of investors.

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Seed Money Examples

#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.

#3 – Angel Investors

Angel investorsAngel InvestorsAngel investors refer to wealthy investors who supply capital to budding businesses in return for a portion of their equity. read more 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 capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more invests in startups in exchange for some ownership or equity. These firms demand more equity stake as compared to individuals and relatives.

How to Approach Investors for Seed Funding?

Approach the investor of your niche or industry. Don’t go through the other industry’s investment and concentrate on your niche.Get the investor’s trust by showing them your success in your previous projects and ventures. Explain to them your returns that you have already earned.Please give them the proper budget in terms of gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more, income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more, and financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more in the proper presentation.Present them the proper research work you have done and show them enough confidence in the area of your venture.

Uses

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

Benefits

Seed money helps arrange funds at the initial stages of new startups at a zero or minimal interest rate.The startup is not overburdened by debt liability as seed financing is provided in exchange for equity.Some big sources like crowdfundingCrowdfundingCrowdfunding refers to how the business can raise capital from many individuals beyond friends, family, relatives, and customers by posting the project details on websites and other social media platforms. read more, 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.The agreement of seed funding is mostly negotiable and flexible, which is not possible in the case of bank borrowing and venture capitalists.