Seed capital/Seed round/Seed funding
Say, 3 people decide to start a business in biotechnology. They do so by incorporating a company limited by shares. They provide the initial capital. They are the only three shareholders. They are the founders of the company. The initial capital they provide is known as seed capital. The process of such injection of capital is known as a seed round or seed funding. The amount of money involved is usually relatively small – e.g., around US$10,000 or less. The money is primarily used to cover preliminary expenses such as market research and product development.
The most probable answer to your question is that the amounts you are seeking are way too small to tempt Venture Capitalists or Hedge fund managers. After all it is relative. If a VC has tens of millions of pounds to invest into private equity why invest into 100 or 200 start-up companies? Who could possibly manage and foresee all of these investments and entrepreneurs? Its hard enough to manage one sometimes! So relatively speaking, investing in you would most-likely prove cost-prohibitive for them even though arguably they would receive more value overall.
The Hunt – VCs vs Angels
Venture Capital firms are one way to raise a serious amount of capital but as you may imagine there are pitfalls. The main one being loss of equity far beyond the 51% mark. Further the final vote on ‘the right of sale’ will also most probably be a mandatory right for them. Since VCs main motivation is ‘ROISAP’ (return on investment soon as possible) VCs will always have a frantic desire to flip every deal as quickly as possible. And they will not care where that return comes from, yourself or an outside party as long as they receive a massive bonus for the risk and skill for what they have invested.
More appealing to an entrepreneur starting-up is to seek a business angel investor interested in the line of work you are involved in as they will either take an equity position and some level of debt (or typically a combination of the two) in exchange for their investment. They will also take a seat on your board of directors, which they will use as a platform to monitor their investment and to provide invaluable advice. Sometimes they can actually take an active role in the organization and get it kick started into high gear. This freedom can afford an organization the ability to swiftly hire key employees and develop its business model to the point where it is ready to seek larger scale, second-round financing at a much more reasonable cost-to-equity due to the proven track record within the organization.
Other benefits to the entrepreneur include access to the expertise and business networks that the angel investors may be involved with. In addition to this, the growing trend of angel investor syndicating means that an individual entrepreneur can raise significant capital (significantly above the £500K mark) in a single financing deal without the need to negotiate separately with each investor.
Angel investors are individuals who invest in startup businesses that exhibit high growth prospects. They are usually wealthy entrepreneurs or business executives who look to invest in companies that have a synergy with their own businesses, or that have high growth potential in its industry. Since the company does not yet have a profits track record, the risk involved is very high.
Venture capital/Series A financing
Venture capitalists provide venture capital to startup, high growth businesses with a prospect of achieving an IPO within a number of years (e.g., 3-5 years). Venture capitalists generally invest in the form of funds that are privately held limited partnerships (LP or LLC). A venture capital fund is a substantial pooled investment. Such funds may come from institutional investors such as pensions funds, endowment funds, insurance companies, foundations and corporations. Wealthy individuals may also participate in such funds.
Venture capitalists generally ask for convertible preferred shares. Most certainly venture capitalists will also demand a board seat(s) as this gives them more control over the company than being mere shareholders
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