Seed capital is the money used to jumpstart a new business venture. When entrepreneurs have an idea but not much else, they need to raise seed capital by getting investors excited about their venture. To attract investors, the founders usually have to offer them a stake in the company, with the understanding that the idea might never get off the ground. To keep the investor’s financial risk as low as possible, entrepreneurs usually try to raise the bare minimum amount of seed capital they need to get their venture started.
To picture how this works, imagine you’ve designed a new kind of smart paperclip that has a touchscreen embedded in it. At this point, your invention is still just an idea. You have no money to get a prototype built. You try to raise $10,000 in seed capital from investors by offering shares in what you hope will someday be the Microsoft of paperclips. If you can find investors who are willing to take a gamble on your invention, you can use their money to develop your idea into a real product. Later on, when you’re ready to start mass production, you might ask your seed investors for second-round venture capital funding, which is typically much bigger than the initial seed.
To raise seed capital, first you need an idea for a business. Then, you need to draft a reasonably detailed white paper for investors describing the idea and laying out your business plan. Give an honest estimate of your short-term startup costs, add 10 percent for safety, and then start shopping around for investors who like getting in on the ground floor of things.