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How exactly does seed funding differ from VC funding?
I am researching ways to fund my start-up and am curious about the difference between seed and VC funding. I thought that you could apply for VC funding right at the start? Is it true that you need seed funding before VCs will even look at your project?
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6 Answers
Catherine
Most entrepreneurs and inventors come from the working class. When you have a start-up, you have nothing to sell and no margin. All the time and effort you put in (sweat equity) and all the cash you take out of your own savings fall in the category of seed funding.
While no revenue is coming in you still have bills to pay and work to accomplish like market studies to clarify what is the product, who is the customer, can it win it the market and is it worth doing.
Seed round investors are often called friends and family. They are the people who are willing to take the biggest risk based on their personal relationship with you. They, like the person starting the company are typically from the working class. Their willingness to help you get through this no revenue period is typically based on them making a contribution out of their savings. Some will give you the money. Others will want it back when you can.
Non-personal investors in this no revenue stage of a company are called angels. They are investing on their assessment of you and your idea, as it fits with their perception of the market. Most of these non-personal angel investors give you a loan with no repayment for a while. There are groups of angels in a lot of metro areas. There are places like funding post on the Web where semi pro angels look for deals. There are also lists of angels and even some incubators that will help you meet angels.
Angels are usually willing to invest with just the idea that they will get their money back in the future and make a couple of bucks (just say 20%). They may even want to participate in the Company and help it become successful. Some will put in money if they get to join and control the spending.
VCs (venture and vulture capital) investors are generally considered to be professional investors. They are investing in your idea and whether they think you can get it to market. They typically give you a convertible loan and they want a significant piece of the company.
If you have a track record with them or other leverage with them, VCs will sometimes enter a Company in place of angels. Again, VCs are looking for a high rate of return on their money versus an angel. If an angel wants say 20% ROI a VC wants 60% and maybe some rights to your first born;)
VCs like to say they are helping you by giving you the benefits of their experience of getting companies up and running. Most quickly become detrimental participants trying to manage a process that is not necessarily benefitted by experiences from different markets, technologies and people.
Seed rounds may range from $5 to $100K and get you into revenue production in some non-technology cases. Angels will be in the $25 to $200K range. Hopefully, the friends, family and angel rounds get you through the prototype, innovator and early adopter deliverables and into the cash flow management of the Company. Once you are in cash flow you can circumvent the VC phase through investment bankers, hard money lenders (fund inventory to orders) and other types of bank and order lenders.
Hope this helps.
Howard Gunn
'Seed' basically just means very early stage/first round funding - and Seed funding can certainly come from VCs although many VCs (particularly the better-known firms) tend to focus on later-stage investing.
Here's a good overview - http://www.askthevc.com/blog/archives/2007/07/is-there-a-dist.php - the Ask the VC site contains a lot of great info as you do your research.
Great question, Catherine. Others may differ, but in my experience, seed funding typically comes directly from founders, friends, family and so-called "angel" investors. Many if not most of these sources do not demand equity, sometimes providing funding as a loan or even a gift. VCs, in contrast, almost always require significant equity for their investments. Some may even want a say in who runs your company. And most VCs do want to see that a start-up has already found or raised at least some seed money before the VCs are willing to look at the start-up. Hope this helps. Good luck with your start-up, and please keep the community here at Focus.com apprised of your progress!
A very practical question. I guess you could consider seed funds as the money value, in cash or kind, that an idea owner(s) has/have invested in a project in order to get that project out of the ground and to give it some visible form or shape such that it can attract others who will see the positive opportunity to risk some capital in exchange for negotiated equity, share or income from future proceeds. In summary, seed funds are like sunk funds made by the initial idea owner, and venture capital is the unsecured investment by others who buy the idea for one reason or another.
Seed money is as described...it's to take the seed of an idea and get it started - some kind of demonstrable prototype, a business plan...it's really the baby step.
VC step in once you've got something that they can make sense out of. Then they decide if it's worth taking to the next level.
Looking for seed money $25,000. for 2 all Electric vehicles that do not require plug-inone of the projects is already in progress and is 40% completed. yvg59@ca.rr.com
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