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What Is Seed Funding and What Are the Sources for Seed Funding for Start-ups

As start-ups begin to grow beyond an idea stage to a minimum viable product stage, they begin to brainstorm in order to develop a market ready product.  However, all the product development and testing does not happen for free.  A good product development lifecycle will need a lot of resources both financially and physically.  While physical resources can be spared, finances can often drain out quickly thereby jeopardizing the future of a start-up.  Therefore, start-ups look for investors who will be willing to invest capital into the start-up.  The investment happens during seed funding events where venture capitalists look out for promising ideas and products in which to invest.

Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a start-up company in exchange for an equity stake.  Imagine a start-up as a plant which needs to grow but in order for it to grow a seed needs to be planted.  A seed funding also works in a similar way, by giving a start-up enough working capital to get things off the ground.  Undoubtedly, this is one of the most important processes for laying a strong foundation for a successful start-up.

There are multiple sources for a start-up to infuse seed capital and the list of sources is given below.  Read on to find out more about the various sources of seed capital.

1) Bootstrapping

Bootstrapping is nothing but building a start-up from the ground up with only personal savings.  While this brings in added pressure of using one’s own money it comes with its own benefits of not having to worry about returning borrowed money.

2) Incubators

Incubators are a great way to grow as well.  An incubator acts as a source of funding for businesses if they have good business models.  Many well-known business schools act as incubators.  The famous start-up We Work also began as an incubator platform for start-ups and they have branches all over the world now.   A lot of incubation programmes do not take equity from the start-up but do offer support beyond just funding.

3) Accelerators

Accelerators work with start-ups to scale up their business rapidly as opposed to Incubators which nurture early-stage innovation.  Accelerators also provide minimal seed funding for start-ups along with professional services, networking opportunities, mentoring and workspace.  Y Combinator is the most famous accelerator around the world.

4) Business Revenue

Once a start-up has a minimum viable product, they can begin sales in order to generate revenue.  This revenue is then invested back into the start-up as a capital to develop a fully functional product.  In recent times, this method has gained prominence as it does not involve the complexity of seeking external funding or diluting stake.

5) Corporate seed funding

Large corporations often are looking for a way to invest in a start-up which is bringing a new innovation to the market.  This source of funding brings big visibility for the start-up brand and is usually an early indication of an acquisition in the future.  Tech giants like Apple, Facebook, Google and Microsoft are constantly on the lookout to spot latest innovations.  

6) Angel investment

An angel investor is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.  These investors often come together to form angel networks where they each invest small amounts into a start-up during the early stages when the risk of failure is high.  AngelList, Indian Angel Network and Lead Angels are some of the leading angel investment groups.

7) Philanthropic Investors

This is a perfect source of investments for start-ups who are looking to address social problems with their products.   Start-ups could approach international philanthropes, who act as seed investors for start-ups with social impact.  One of the major advantages with philanthropic investors is they do it for the love of mankind and not for profit and therefore the expectations are fewer than venture capitalists.

This concludes the list of sources of seed funding.  Looking for seed funding does not have to be a complicated exercise and it can begin by looking into these various sources of initial capital.  

*This article was covered by Top Business Tycoon