Seed Funding – Risks vs Rewards
Seed funding, also referred to as venture capital, seed money or angel funding, involves collaboration between parties that have the common goal of participating in starting a business, with a view to reaping the rewards in the future. Entrepreneurs seeking seed money would need to convince investors that there is a strong possibility of gaining future rewards, bearing in mind that startup businesses carry a higher element of risk.
Typically seed money serves to sustain the business until it reaches the point of turning over a profit, or until it reaches a stage where it has something of value to offer investors and convince them to participate in a second round of funding. Seed funding often comes from small investors who don’t necessarily invest on stock markets. However, many companies that have started this way, have gone on to list on the stock exchange – as the name suggests, a planted seed given the attention it needs often bears much fruit.
While many of the principles are similar, seed funding differs from venture capital in a number of ways. Seed funding is undoubtedly more risky, but because of the lower amounts required to invest – generally ranging from tens of thousands of dollars up to hundreds of thousands) this is often a good stepping stone to greater things for investors. With venture capital investing, amounts start in the hundreds of thousands of dollars, effectively shutting out a wide segment of would-be investors.
Seed fund investors are often the founders of the business, using their own savings and resources and/or tapping into what is sometimes referred to as FFF financing – friends, family and fools. Many successful businesses have been started with as little as $50,000, but opportunities for growth and success have been thoroughly researched before laying money down. Seed money investors basically need to make their decision to invest based on the capabilities and past history of the founders, as well as the often immeasurable possibility of an idea catching on and succeeding. In today’s modern technologically advanced global village, where boundaries are being shifted continually, it is often those with an immeasurable and innovative concept that end up making the big bucks.