Knowledge Centre

Seed capital is the initial capital used when starting a business, often coming from the founders’ personal assets, friends or family, for covering initial operating expenses and attracting venture capitalists. This type of funding is often obtained in exchange for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing. Because banks and venture capital investors view seed capital as an “at risk” investment by the promoters of a new venture, capital providers may wait until a business is more established before making larger investments of venture capital funding.

Seed capital, venture capital, mezzanine funding and an initial public offering are the stages involved in financing startups. Seed capital is typically provided for market research, product development, prototype production or other early-stage operations. The business owner’s skills, business capabilities and track record, along with the product’s or service’s benefits, help determine how much seed capital investors may contribute to a startup.

Professional angel investors actively work with entrepreneurs in pooling resources and growing startups. These investors enjoy hands-on interaction while helping develop a company’s daily operations. Professional angel investors typically provide seed money through either providing a loan or by buying equity in the company.

When raising under $1 million, professional angel investors typically provide a seed loan. The paperwork is relatively straightforward and involves less-costly legal fees than seed equity. Interest rates tend to be lower, and the terms involve no restrictions. Also, future equity financing may be converted at a lower rate with a seed loan. In some cases, warrants may be issued so the professional angel investor may participate in company growth.

In contrast, when raising more than $1 million, professional angel investors typically utilize seed equity. Seed equity involves the investors purchasing preferred stock with voting rights and becoming co-owners of the startup. Seed equity transactions are more complex and expensive than those of seed loans, but may be viewed as more beneficial to investors when more seed money is needed.

Capital investment refers to funds invested in a firm or enterprise for the purpose of furthering its business objectives. Capital investment may also refer to a firm’s acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years. Sources of capital investment are manifold and can include equity investors, banks, financial institutions, venture capital and angel investors.

While capital investment is usually earmarked for capital or long-life assets, a portion may also be used for working capital purposes. Capital investment encompasses a wide variety of funding options. While funding for capital investment is generally in the form of common or preferred equity issuances, it may also be through straight or convertible debt. It may range from an amount of less than $100,000 in seed financing for a start-up to amounts in the hundreds of millions for massive projects in capital-intensive sectors such as mining, utilities and infrastructure.

Capital investment is concerned with the deployment of capital for long-term uses. Companies make continual capital investment to sustain existing operations and expand their businesses for the future. The main type of capital investment is in fixed assets to allow increased operational capacity, capture a larger share of the market and in the process, generate more revenue. Companies may also make capital investment in the form of equity stakes in other companies’ operations, which indirectly benefits the investor companies by building business partnerships or expanding into new markets.

Companies make conscious decisions about what kind of capital investment and how much of it they should have over time. This spells out the funding requirements and therefore affects the choice of financing sources. The first funding option is always a company’s own operating cash flow, which sometimes may not be enough to satisfy the amount of capital expenditures required. It is more likely than not that companies will resort to outside financing, debt or/and equity to make up for any internal cash flow shortfall.

Capital investment is meant to benefit a company in the long run, but it nonetheless has some short-term downsides. Intensive, ongoing capital investment tends to reduce earnings in the interim, strain on liquidity from payment demand on interest and maturing principals, and dilute earnings and ownership if new equity is used.

Funds raised as long-term capital should be for long-term purposes of capital investment to make comparable returns and adequately cover related financing costs. However, to maintain uninterrupted operations, companies need to have extra current assets over total current liabilities as an added assurance for meeting any due obligations.

Short-term funds set aside as such are commonly referred to as working capital and may come from long-term capital, whose longer maturity dates are typically beyond the due dates of any current liabilities. As a result, companies sacrifice some long-term return to ensure short-term liquidity.