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.
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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