Seed capital is the first capital contribution of an enterprise which is sometimes even injected prior to the establishment of the company. These funds are generally used to fund all costs of placing the the first product on the market. Ideally, they can also cover costs of research and development, prototype, business plan, legal services, rent.
Besides the company's founders and their families, these funds also come from business angels or specialized funds. Subsequent phases of development of the company can be financed by venture capital. Seed capital finds its place particularly in the context of the development of high growth potential start up companies.
Unlike the first contributions of the founders, their families or the state, the interventions of seed capital funds are a milestone in the life of a young company. It is then when questions regarding the value of the company are asked.
If the founders do not have a clear plan on the distribution of power within the company. They will find themselves faced with a situation where management objectives diverge, be it financial or industrial, short term or longer term. The manager will reflect a synthesis of these different expectations.
The seed capital has the great advantage of significantly strengthening the capital base of young companies and is often the only alternative for the development of start-ups.
Seed capital can also be derived from crowd funding or financial bootstrapping sources instead of an offering. Bootstrapping in this context translates to the use of the cash flow of another business entity. Investors decide to fund a project on the basis of the merits of the concept and the capabilities of its management.
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