Seed Capital Definition
The initial investment used to kickstart a new business is called the ‘Seed Capital’. It could be fronted by the founders themselves, their friends or family. This money is utilised to flesh out the idea of the business, and pay for the operational expenses of setting up the firm to attract angel investors. Although the channels of obtaining Seed Capital might be less formal, it usually involves trading a percentage of the stake in the firm. ‘Seed Capital’ carries a high risk as the new business is yet to prove its mettle. Venture capitalists and banks wait until the business shows steady growth or performs on par with forecasts before making large investments in new businesses.
A Little More on What is Seed Capital
There are four various stages of acquiring capital to start a new business until going public. Seed capital from founders -> Venture Capital from accredited investors -> Mezzanine Capital from equities -> Initial Public Offering (IPO). Business owners usually utilise Seed Capital in getting the business up from the ground via market research, product design and development, producing the prototypes and taking it up from there. ‘Seed Capital’ amounts depend on the owners standing, reach, reputation, network, track record, as well as the robustness of the product idea and its perceived benefits.
Professional Angel Investors
Seed Capital can also be provided by professional investors who are more involved in helping in the launch of a new business, guiding it at its initial stages, and overseeing everyday operations. They can offer it as a loan or in exchange for a percentage of equities in the new venture.
If the investment amount is less than a million dollars, professional investors might offer it as a loan. The terms and conditions of this loan are pretty straightforward, require very less legal costs, come at low interest rates, and do not impose any contractual restrictions on the firm. If the angel investors decide to participate in the everyday operations and working of the company, a warrant to this effect is issued allowing the investor a seat at the board meetings.
If the investment amount exceeds a million dollars, ‘Seed Equity’ comes into play. This involves the private purchase of stocks in the company to help it raise capital without going public. The investors become part stakeholders in the company with voting rights. They could even come on board as co-owners. ‘Seed Equities’ are costlier than ‘Seed Funds’ but are more beneficial to the investors.
Example of Seed Money
Electronics Data System was established by Ross Perot with $1000 he had in his personal savings account. This way, his savings became the ‘Seed Capital’ that would see EDA become a renowned information technology equipment firm.
References for Seed Capital
Academic Research on Seed Capital
A policy response to regional disparities in the supply of risk capital to new technology-based firms in the European Union: the European seed capital fund scheme, Murray, G. C. (1998). A policy response to regional disparities in the supply of risk capital to new technology-based firms in the European Union: the European seed capital fund scheme. This article takes a look at the policies regarding Seed Capital Fund Schemes in Europe.
Factors affecting success and failure of seed capital/start-up negotiations, Rea, R. H. (1989). Factors affecting success and failure of seed capital/start-up negotiations. Journal of business Venturing, 4(2), 149-158. This article highlights the impact of Seed Capital on start-up negotiations and the factors that influence it.
Determinants of the incidence and scale of seed capital investments by venture capital firms, Dimov, D., & Murray, G. (2008). Determinants of the incidence and scale of seed capital investments by venture capital firms. Small Business Economics, 30(2), 127-152. This paper examines the factors that influence Venture Capital (VC) firms in undertaking Seed Capital investments.
Strategic alliances as a source of early-stage seed capital in new technology-based firms, Carayannis, E. G., Kassicieh, S. K., & Radosevich, R. (2000). Strategic alliances as a source of early-stage seed capital in new technology-based firms. Technovation, 20(11), 603-615. This paper takes a look at the possibility of acquiring Seed Capital based on strategic alliances and networking in the field of technology and innovation.
The European union’s support for new technology‐based firms: An assessment of the first three years of the European seed capital fund scheme, Murray, G. (1994). The European union’s support for new technology‐based firms: An assessment of the first three years of the European seed capital fund scheme. European Planning Studies, 2(4), 435-461. This paper takes a look at the support measures in effect since the inception of the European Seed Capital Fund Scheme in 1988, and its impact in the first three years.
Financing technological entrepreneurship: the role of strategic alliances in procuring early-stage seed capital, Carayannis, E. G., Kassicieh, S. K., & Radosevich, R. (1997, July). Financing technological entrepreneurship: the role of strategic alliances in procuring early-stage seed capital. In Innovation in Technology Management-The Key to Global Leadership. PICMET’97: Portland International Conference on Management and Technology (pp. 49-52). IEEE. This article explores the ‘Seed Capital’ gaps in investments faced by new ventures in the field of technology.
The impact of the seed capital program of SERCOTEC in Chile, Bonilla, C. A., & Cancino, C. A. (2011). The impact of the seed capital program of SERCOTEC in Chile (No. IDB-WP-279). IDB Working Paper Series. This paper explores SERCOTEC’s Seed Capital program in Chile.
Building economic self-reliance: Trickle up’s microenterprise seed capital for the extreme poor in rural India, Maes, J., & Basu, M. (2005). Building economic self-reliance: Trickle up’s microenterprise seed capital for the extreme poor in rural India. Journal of Microfinance/ESR Review, 7(2), 6. This paper studies the impact of U.S. based ‘The Trickle Up Program’ in India as a microfinance measure to provide Seed Capital to the poorest sections of rural India.
Entrepreneurship Policy and Firm Performance: Chile’s CORFO Seed Capital Program, Navarro, L. (2014). Entrepreneurship Policy and Firm Performance: Chile’s CORFO Seed Capital Program. This paper examines the impact of CORFO’s entrepreneurship policies and its impact on performance of new firms in Chile.