Seed funding is the initial capital sourced to either start a business or to run it during its very early stages of operation. Oftenly, seed capital is funded through the personal assets of the company's founder or from friends and family. The term 'seed' indicate that the funding is at its early stage and is a means to support the business till it can generate cash on its own. Seed funding could be sourced through various means but here are some of the popular methods of raising capital.
Mostly all entrepreneurs have to invest their cash into the business, which goes along with an enormous amount of unpaid labour during the early days of business. Self-funding may allow entrepreneurs to boost confidence of investors, who might invest in the start-up at the later stage. A business owner could also fund the business by way of loan, however, converting into equity is most common way of the investment process.
Family and friends:
After self-funding, an another popular method of financing is through arranging cash from relatives and friends. They could be the people who closely know the entrepreneur and believe in his entrepreneur skills. However, one must try to set real expectations of these group of people about their stake in the company against the capital as well as their probability of losing money if the business fails.
The high-net-worth individuals (HNI)s in India are keen on investing in a start-up during its early stages nowadays. Though such HNIs invest for a short-term, for a period in between 1-2 years and look for a return of up to 2-3 times their invested capital. The only shortcoming here is that angel investors do not invest in second rounds of capital raising and do not have great connections with venture firms.
Seed Funds or Micro Venture Capital Firms:
Over the last few years, Micro VCs or Seed Funds have started investing into start-up entities. These firms work quickly in decision making and can be the fast mode for one to secure capital though they come with some disadvantages as well.