Seed money

A newly formed startup usually doesn't have a track record. VC capitalists are often sceptical of the new venture's prospects for success and won't invest in them. Seed money becomes the best hope for the startup founders to raise their initial capitals. In return, the seed money investors receive an equity stake in the company.

Seed money, also named seed capital or seed funding, is the first round of capital that's used to fund a startup during its launch stage. Statistically, around a third of startups fail as a result of running out of cash due to the lack of adequate funding sources. Therefore, seed money plays a critically important role in a startup's initial creation and growth. The word seed here gives the meaning for a startup to grow, similar to planting a seed for a tree to grow. Seed money is mainly used for preliminary operations, such as setting up a startup, hiring a lawyer/accountant, employing core team members, marketing, product development, and so on.

A startup can go to the following to obtain seed money:

• Angel investors: These are wealthy individuals that commonly having a vision regarding the startup and where it can lead to. Therefore, they are more willing to take the risk and invest in a new venture that is no more than an idea on paper.
• Family members and friends: They know the startup founders personally and choose to believe in them. They are often the strongest supporters.
• Equity crowdfunding investors or accredited investors.
• Seed VC firms: Companies such as 500 startups, SV Angel, and Andreessen Horowitz are active seed VC firms.
• Government programs and grants.
• Money pooled from the founders' own savings and loans.
• Online crowdfunding platforms, such as SeedInvest and Seedrs. Investors make their investment decisions based on their assessments of the founders' credentials and the merits of their proposed projects.