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What is Seed Capital?

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Seed Capital

Seed Capital is the initial fund that is required to kick start a new business enterprise. These funds are rarely available from the formal financial sector. The money is generally invested by the entrepreneur-founder, friends and relatives, and angel investors.

Need for Seed Capital

The fund requirement is generally small but critical. Without this money, the prospective business would exist only on paper. Fundamentally, the investment decision hinges on whether or not the investor shares the dream of the entrepreneur.

High Risk Investment

The investment is considered high risk because the money is used for incurring expenses and not necessarily for creation of tangible assets. Usually, it is deployed for research, market assessment, and prototype development.

There is no revenue stream and the investment is committed either to help the founder get the business up and running, or to cash in on future rewards once the enterprise turns the corner and starts making profit. The first investors look for a niche idea, and personal conviction and financial commitment of the entrepreneur-founder.

Ownership Issue

Seed capital can be classified as a high risk – high reward investment. It is often linked to the entrepreneur parting with a stake in the equity of the company.  For the entrepreneur, it is important to be grateful to the investors but to retain control of the management of the business.

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Randolph Rowe is a professional banker and former General Manager of Small Industries Development Bank of India (SIDBI). He brings with him the wealth of 34 years of all-round experience in the banking sector - comprising 12 years with IDBI and 22 years with SIDBI - which he combines with his flair for writing.

2 COMMENTS

  1. A “seed” is something planted which then grows into a large plant, yielding delicious fruit 🙂
    Seed capital can be seen in the same way; though because it is so risky it usually comes from a private source (non-government) and the profits it grows can only really be yielded by the original investor. If you have the capital, waiting for this seed to grow can make excellent returns.

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