The term seed capital refers to the type of financing used in the formation of a start-up. Funding is provided by private investors—usually in exchange for an equity stake in the company or for a share in the profits of a product. Much of the seed capital a company raises may come from sources close to its founders including family, friends, and other acquaintances. Obtaining seed capital is the first of four funding stages required for a start-up to become an established business. A company that is first starting out may have limited access to funding and other sources. Banks and other investors may be reluctant to invest because it has no history or established track record, or any measure of success. Many start-up executives often turn to people they know for initial investments—family and friends. This financing is referred to as seed capital.
Seed capital—also called seed money or seed financing—is referred to as such because it is money raised by a business in its infancy or early stages. It does not have to be a large amount of money. Because it comes from personal sources, it is often a relatively modest sum. This money generally covers only the essentials a start-up needs such as a business plan and initial operating expenses—rent, equipment, payroll, insurance, and/or research and development costs (R&D).
The primary goal at this point is to attract more financing. This means catching the interest of venture capitalists and/or banks. Neither is inclined to invest large sums of money in a new idea that exists only on paper unless it comes from a successful serial entrepreneur.
A start-up normally must move through four distinct phases of investment before it is truly established—seed capital, venture capital, mezzanine funding, and an initial public offering (IPO). As mentioned above, seed capital tends to be just enough to help a start-up achieve its initial goals. If the company is successful in the initial phase, it may catch the interest of venture capitalists. These investors are likely to invest heavily in the company before it moves further. So-called mezzanine financing is sometimes necessary to support a company into its introductory phase. This is generally available only to businesses with a track record—even then at a high rate of interest. The final stage is when early investors get their payday. When a young company goes public with its IPO, it raises sufficient capital to keep growing and expanding.
Seed Capital vs. Angel Investing: Professional angel investors sometimes provide seed money either through a loan or in return for equity in the future company. These investors are generally high-net-worth individuals (HNWIs) and may come from the personal network of a start-up’s founder(s). Angel investors often enjoy a hands-on role in helping develop a company from scratch. If the angel investor contributes less than $1 million, the money is usually in the form of a loan. For the entrepreneur, this can solve the problem of attracting sufficient seed money, given the reluctance of financial institutions and even venture capitalists to take on considerable risk. When contributing more than $1 million, an angel investor typically prefers seed equity and becomes a co-owner of the start-up and the holder of preferred stock with voting rights.
Seed Capital vs. Venture Capital: Although seed capital and venture capital are often used as synonyms, they tend to overlap. Seed capital is generally used to develop a business idea to the point that it can be presented effectively to venture capital firms that have large amounts of money to invest. If venture capital firms like the idea, they generally get a stake in the new venture in return for investing in its development.

Venture capitalists provide the lion's share of the money needed to start a new business. It is a considerable investment, paying for product development, market research, and prototype production. Most start-ups at this stage have offices, staff, and consultants, even though they may have no actual product.
Once we have understood what seed capital has let us now move on to how to invest in a venture.
These are as follows:
1. Business Revenue: One of the best ways to raise seed capital is by generating revenue through the start-up being built. In recent times, this method has gained prominence as it does not involve the complexity of seeking external funding or diluting stake. And it also proves that there is demand for the product in the market. A variation of this is crowdfunding, where the product is showcased to potential investors through stages of development. With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding.
2. Personal Savings or Bootstrapping: Founders may put in their personal wealth and savings as seed funding. Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
3. Corporate Seed Funds: Usually, mega-corporations and tech giants are looking for a way to invest in new innovation that they may spot in 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 such as Apple, Google, and Intel back start-ups regularly with seed money. GV is the investment arm of Alphabet (Google’s parent company), while Intel Capital is chipmaker Intel’s dedicated division for start-up investments.
4. Incubators: Incubators generally provide small seed investments and offer services such as office space or management training for start-ups that are at an exceedingly early or idea stage. Many incubation programmes do not take equity from the start-up but do offer support beyond just funding. Most importantly, incubators help shape the idea and help solidify the market-fit for start-up products and services.
5. Accelerators: Unlike incubators, accelerators work with start-ups in scaling up their business rather than backing and nurturing early-stage innovation. Accelerators also back start-ups through small seed investments along with professional services, networking opportunities, mentoring and workspace.
6. International Philanthropic Impact Investors: When setting up a business that is dedicated to addressing a social issue, one of the main questions is how to get seed funding for such a start-up. This is where start-ups could approach international philanthropic impact investors, who act as seed investors for start-ups with social impact. One of the major advantages in this class of investors is that although the foundations are large, the expectations are fewer than VCs or institutional investors, as this is a source of philanthropy for the investor and not a business deal per se.
7. Micro VCs: Apart from the above listed options, micro VCs, or micro venture capital firms, have garnered quite a lot of attention in recent times. These firms are into an investment of institutional money when the start-up is in the seed stage itself.
8. Angel Funds: Sometimes, investors come together to form angel networks or groups where they each invest small amounts in the idea or the company during the early stage financing round. The major angel networks in the market currently are AngelList, Indian Angel Network, Lead Angels, as well as angel networks for each major start-up hub in India.
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