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Seed Capital

Definition - What does Seed Capital mean?

Seed capital, or seed money, is the initial money needed to start a business from scratch. It is the most fundamental aspect needed to start a business because there are going to be expenses incurred from the very beginning, even before the company becomes operational. For this reason, it is important for the entrepreneur to plan for finances as soon as he/she decides to start a new venture.

Divestopedia explains Seed Capital

Seed money comes, in most cases, from the personal savings of individuals or by borrowing money from the bank in the form of a loan. It can also come from friends and family who are willing to help an entrepreneur to build on his/her idea. This money can come either as a loan or as a form of investment, depending on the financial position of friends and their interest in a particular business' industry. This money is usually used to perform preliminary market research, other research and development activities and the creation of a sound business plan.

This seed capital rarely comes from institutional investors, venture capitalists or angel investors because of the high risk involved. Since the new business is not yet functional and does not have any past track record, many investors will be hesitant to make an investment. Even those who are willing to invest may want to have high stakes in the company's future, which may or may not be acceptable to the owner. However, if the business idea is revolutionary and they believe it can generate huge amounts of return for them, then it is possible to receive funds from venture capitalists or angels.

Besides venture capitalists, angels and personal finances, seed money can also come from crowdfunding where many people contribute small amounts of money towards one cause.

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