What many do not know is that, from seed capital, a large number of successful ideas emerged without many resources. Brands like Ford, Amazon, and even Apple did it, among other things, because they had the support of this type of financing.
Do you want to know what seed capital is? Read this article and discover everything about this topic.
What is seed capital for entrepreneurs?
Seed capital is an initial financing resource that a barely created company receives to achieve its consolidation or launch. We could say then that this is the first round of capital that a business idea receives.
Because it is oriented towards the development of new companies and its objective is to cover their expenses until they achieve stability, this capital is considered “high risk”. The idea of seed capital is that it can support initiatives that have little chance of receiving an economic stimulus from a banking institution.
What other aspects make this capital qualify as “high risk”? This investment comes amid uncertainty about the viability and economic feasibility of the project.
If every investment has its risk, an investment in a business idea that is just starting could have twice as much. Situations such as the emergence of new needs and the need for more capital may arise.
Poor management or execution due to inexperience in managing resources could put the investment at risk. And of course, the fact that the business idea does not work directly is another scenario to take into account.
Who are the seed capital investors?
After reading the names of three well-known companies in the world such as Ford, Amazon, and Apple, surely the subject has caught your attention. Now that you have discovered what seed capital is, it is time to find out who could be the financiers of a business idea. We can differentiate at least three types:
The close circle
Also known as the 3 F (for its acronym in English: Family, Friends, and Fools) that represent the family, friends, and relatives of the entrepreneur. Here you would ask for financial help from people who have full confidence in you and what you can achieve.
Angel Investors
Angel Investors or Business Angels are people with a high level of capital who invest in emerging companies in exchange for a share in the capital. According to the portal ipyme.org, these also provide added value due to their high knowledge of the sector.
The personal network of business angels, added to their managerial skills, represents great support for the first steps of a project.
Crowdfunding
Crowdfunding is a crowdfunding network that is usually online. Through economic or other donations, the projects obtain their financing.
On these platforms, what you do is publish your project and if it is accepted, investors will be able to finance your business idea.
Venture capital
This method of financing consists of the investment that some people make in the so-called startups that are in the growth phase. In exchange for this, investors will receive a percentage share in the business.
The figures usually range from a minimum to very large amounts. This is also considered a venture capital fund. For this reason, those who invest must know how to define how much to contribute taking into account what they can risk.
Advantages and disadvantages of seed capital
After knowing what seed capital is and who could be the investors of this type of financing, at this point we will show you its advantages and disadvantages. Although it is a great alternative for starting a business, you must take into account the negative points that it could have.
Advantage
- One of the advantages of seed capital is that, initially, you should not borrow from a bank and that is already a great relief.
- By using the help of an investor, you will also be able to take advantage of their experience in the market and apply what you have learned in your business.
- The consolidation of your business can be a reality because from the capital of an investor you will have the possibility of establishing a company.
As you can see, this is an opportunity that anyone with a project can access. So, before thinking of a large loan, or assuming a debt that takes years to pay off, think about the seed capital.
Disadvantages
- If your business idea succeeds, you will inevitably have to share the profits with other people.
- If the conditions are not clear and the limits are not well established, investors could impose themselves on the venture.
Therefore, you should always contemplate the previous points. Although beyond this, seed capital should not be viewed with disfavor, the key is knowing how to manage it.
How to obtain seed capital?
And now the next question that arises is: How to get the seed capital? Like all, this process has steps to follow and here we will show you what each one is about.
Before describing each point, the main thing is that you are clear about your business idea and that you know what seed capital is in detail. This way you can have tools that will make it easier for you to convince potential investors. These are the steps:
1. Develop a business plan
It will always be an aspect in your favor to have a business model which, in a high percentage, can guarantee to be profitable. Your project must have clear factors such as its viability, sustainability, and possible expansion.
The lack of organization in corporate finance could reduce the survival time of a business. Presenting the best arguments can reassure investors that they will not lose their money if they decide to support your idea.
2. Be creative
The more striking and innovative your idea is, the more likely it is to catch the attention of potential investors. We know that this is not an easy task and that creating something new on the market is an extremely complex challenge.
A good idea is to look at innovations in other countries and take ideas that can be useful to you; not directly copy a project, but take aspects that you think might work and put your spin on them so they can also be adapted to your local industry.
3. Analyze your potential investors
Make a detailed analysis of who your investors can be so you don’t waste time and know who to focus on. For this, you must do a good job of research and approach.
This will give you confidence that people are trustworthy and have credibility. Take the necessary time as this step is fundamental for the following ones.
4. Demonstrates complete confidence and knowledge
Seek to be clear about the smallest detail of your project so that when presenting it there is no room for doubt. The people to whom you are showing your idea must notice your security and knowledge of the market.
Every detail will be important, although these three are crucial when it comes to reaching an agreement: the security of the project, the people who will work with you, and how you will make the money you receive work.
Final words
Now that you know what seed capital is, who the investors can be, its advantages and disadvantages, as well as how to get it, it’s time to start looking for business ideas. Or if you already have it, you already know about a good financing option with which you can face the lack of money for your business.
We know that this is a recurrent obstacle that can haunt your head, but if you are convinced, do not stop knocking on doors. At some point, you will reach the right person, who sees your potential and gives you the tools to grow.
Also, remember that to create and run a successful business you will need to set up and fine-tune a clear business plan. Evaluate your finances, comply with all documents and legal requirements, choose your partners well, and implement the best marketing strategies.
Have everything very clear and get ready to embark on an adventure that could change your life. Dream and believe that your business can become a leading brand in the world.
