What Is Seed Funding? A Simple Definition Of Seed Capital
Seed capital, also referred as seed funding is a commonly used term in the business world. But what does it mean and how exactly is it used? Well, in this article I will try to explain its basics. So, seed funding is a form of financing in which the owner of a business receives money in exchange of a part of the equity of his/her company. It is called ‘seed’, because it happens at the very beginning of the business, before even the latter generates any money (before it is started). This makes seed funding a very risky investment and this is why traditional financial institutions such as banks and credit companies are typically not eager to provide it. Forms of this type of financing are: crowdsourcing and angel funding. Money from friends and family and personal savings are also included here. The higher the risk, the greater the required return is. This is why angel investors for example usually aim at start ups with big growth potential, which can generate two, even three digits yields.
The difference between venture capital and seed funding are mentioned in the table below:
|Seed Funding||Venture Funding|
|Very early business stage||Later stage of the business|
|Usually Private investors||Institutional investors|
|Relatively small investments||Relatively big investments|
|High risk||Moderate risk|
The similarities between these from above are that in both of the cases, the investors acquires a part of the company/business in exchange of their money. According to recent studies, around 95% of new companies are funded by the help of angel investors, friends and family, or entrepreneur’s savings.
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