What is seed capital?

What is seed capital and what is it used for? You may have asked yourself this question when searching the internet for ideas on how and where to find business financing for your new business. With so many types of funding being mentioned, how do we differentiate between seed capital, venture capital, angel finance, private equity financing, bank finance and what ever other type of business funding you may have heard of.

Seed capital enables businesses to launch a new product or service without depending fully on a business loan. The funds for this form of financing are typically provided by private investors who are looking for a high return on their investment of at least 30 percent. The investors look to invest in an industry with a market of at least R1 billion, and they also want an industry with few competitors for your business.

Businesses that typically obtain seed capital are young companies around one year of age that have not produced a product or service for commercial sale yet. The companies are so new, so it can be difficult to obtain a regular commercial loan that is sufficient for covering all of the related start up expenses.

Regular lending institutions also don't like taking large risks in companies, but an investor will take a risk for the hope of a high return on the investment. 
There are some things about seed capital that are extremely important for a business owner to understand. An investor often will want partial control of the business, so you have to be willing to give up a portion of your business if you want financing from an investor. Another thing to keep in mind when seeking investors is that you will have to share confidential information about your business with them.

It’s best to be creative and explore all possibilities when looking for money for your start-up. It is also important to know that all money is not the same- each offer for financing comes with its own terms. Make a smart decision by understanding and comparing the options. Decide what terms you can live with, and then explore the possibilities.

Note that there is a difference between seed money and professional venture capital. Most of the programs listed below are offering true start-up support. They will offer you the money to fund the initial stages of forming the company, creating your plan and then approaching serious Venture Capital Funds. A key part of seed money is providing the start-up with mentors, ideas and suggestions to start the company off on the best foot possible.

For Investors Network, some of the criteria on their website are:

• You must be a developer, or your co-founder must be a developer, or you must have identified a specific developer who has the ability to deliver a prototype of your product or service.
• Your product or service must make use of the Internet, preferably in a new and exciting way.
• Your project must never have raised serious money from an institutional investor
• You should have a prototype to show us before you apply. Mention it in your application.

For Y Combinator, in addition to filling out the application, they say this:

• “The people in your group are what matter most to us. We look for brains, motivation, and a sense of design. Experience is helpful but not critical.

• Your idea is important too, but mainly as evidence that you can have good ideas. Most successful startups change their idea substantially.
• We’re more likely to fund people we know are smart from their submissions and comments on Hacker News. In fact, that was one of the main reasons we wrote it: so that we could get to know people before they applied.

“We have a simple, straight-forward application process. We care most about the quality of your idea (boldness and simplicity are two characteristics we’ve seen correlate with success), and the talent and commitment of you and your team. This is as much a bet on people as it is on the idea. If you have some initial design/software done, that’s great—we’d love to see it.

TechStars
“We fund technology oriented companies, typically these are web-based or other software companies, but we’ve funded companies that don’t quite fit that mold as well. We’re also looking for companies that can have national or worldwide reach. Specifically, we don’t fund medical device companies, biotechnology companies, restaurants, consultancies, or other local service oriented companies.”

Charles River Ventures
“What we do look for is outstanding people, with a vision of how their company can play a role in the evolving technology and business landscape. It’s really that simple. The best way to get our attention is not with a 100-page business plan, but rather to network through someone in our portfolio.
Because the lay of the land changes so quickly in our key industries, a detailed business plan is often a futile exercise. Instead, a concise executive summary, an expense budget for the first two years, the revenue model, and a PowerPoint presentation are generally the materials we’re interested in seeing.”

DreamIt Ventures
“As we review applications we are going to focus on the following questions:
• How BIG is the idea?
• How big is the market opportunity?
• Can you complete a prototype, beta or market-ready product within 3 months?
• Is the team comprised of bright, capable, enthusiastic people with whom we can work?


Capital Factory
"We like lean companies that can get to profitability quickly and can scale rapidly. Most of us have technology backgrounds and while it is not a requirement, it is very likely that the companies we select will have technology components to them. We're happy to start with just an idea on a napkin, but we'll also work with companies that have some customers or angel investors and are now ready to scale their business. ...Most importantly, we want to get involved with companies that we can have the biggest impact on."

So if you think that seed capital is indeed what you are looking for, log on to your local investors network and find an investor that provides this type of funding for your business