Seed Investor vs Angel Investor: Where Should I Secure Funding?

If the start-up has developed a prototype and wants to improve its software then, it would require funding for research and development (R & D). Hence there are different stages in the funding process. In this article, we are going to emphasize the difference between seed and angel investment. One of the main questions which you would definitely have is “seed investor vs angel investor: where should I secure funding?”

It is obvious that all entrepreneurs require some source of funding. Unless you are independently well off or have your own source of funds, securing funding is quite difficult. Going for a bank loan would also be a cumbersome process, due to the additional level of compliance. Hence you would consider seeking funding from a seed investor or an angel investor.

On comparing Seed investor vs Angel Investor, you may think that these terms are interchangeable. However, they are not. An entrepreneur would have some questions at the beginning of the funding stage. ‘What is the form of capital which can be used by my start-up? Whether I would required to pay back the capital after securing some return? Which is the best way to utilize the capital?

To answer the above, this article has broken down all the questions to help you understand the difference.

What is a Seed Investor?

Just like you plant a seed and water it daily to grow into a tree. Similarly, the capital which is infused by an investor at the nascent stage of the start-up is known as seed capital. The individual investor providing such capital is known as the seed investor.

Seed capital can be understood as the amount of money that is contributed during the initial stage of the start-up. Seed capital would cover expenses such as the development of the business plan, conducting customer and market research. You would definitely require seed capital for the initial phases of your start-up.  Without it, your start-up would not be able to develop its product.

During the initial stage of your business, your main goal is to concentrate on developing the business plan. You can use this to pitch the investors to invest more amount of capital. Hence the capital which is contributed to the development of the business plan and market plan is understood as the seed capital.

Suppose you have software and want to implement it into a process, then such software would be termed as a prototype in the development phase. Seed capital or seed funding can be utilized for the development of the software. This capital would be utilized in R & D activities. Securing such capital would be simple if your investor is also from the same domain of expertise.

What does Seed Capital Pay For?

Once you have secured seed capital it can be invested in different areas. However, be cautious to not just invest it in one area. There is a common saying that spends money and resources judiciously. Similarly, seed funding has to be invested in the right places.

You must focus on developing the business plan, marketing plan, and R &D if required. It would be resourceful to spend on areas, which can pitch you more money in future. If your software or product requires further development, then utilize it for development. However, don’t spend all the resources in just one area. Your main focus is to create a product within minimum features at the beginning.

Seed capital can also be invested in other operating expenses. If your business is heavily dependent on equipment, then securing insurance for your equipment would be a priority. Hence when analyzing the sources of funding between seed investors vs angel investors, you would come to an understanding that seed capital is crucial.

Where does seed funding come from?

As seed funding is utilized during the nascent phase of the start-up, an entrepreneur can choose the following sources to secure this funding:

• Boot- Strapping- For the initial development of the business, an entrepreneur can utilize his own savings to fund the business. Using this source to fund your business is a viable option.

• Friends and Family- Another option to consider for funding your start-up is with the help of family and friends. This is another suitable option for you, as your friends and family know you better. They know the skills and talent which you possess. However, they would not be able to fund your business fully.
  
  
• Taking a Bank Loan- Another option for you is to consider credit from a bank. However, taking a loan from a bank is not a straightforward process. Plus, you would also have to repay the principal amount and interest. Taking a loan would not be a viable option for seed financing your start-up.

Now that we know about seed funding, let us look into angel investment 

What is Angel Investment?

Angel investment is usually provided by an angel investor who is an individual. Usually, the investment provided by an angel investor is out of his own funds. Many entrepreneurs and start-ups go for angel investment funding. Such individuals usually work in closed circles and have accreditation with a financial institution.

The funding provided by an angel investor can either be utilized for initial expenses or seed expenses. It can also be used for operating expenses. Angel investors are experienced individuals, who provide funding up to USD 1 Million.

However, it is difficult to convince an angel investor to secure funding. You require to be diligent and confident while presenting your pitch deck to an angel investor. Successful funding through an angel investment would only happen based on your business plan and convincing capabilities.

As there is a high risk in such investment, an angel investor would want an equity stake in the start-up. This would be in exchange for the investment provided. The individual would also want to be a part of the management of the start-up. When comparing seed investment vs angel investment, we understand that seed investment is utilized only for the initial phases of the business. In comparison, angel investment can be used during any stage of the funding process.

Seed Investor vs Angel Investor- Differences

Now that we have understood the above funding options for your business, we go ahead to understand the difference between seed and angel investment.

Investment Requirement

Seed financing or seed funding is required only during the initial phases of the business. You would require such funding to develop your business plan, marketing activities, product development, and other purposes.

In comparison, angel investment can be utilized at any stage of funding your business.

Amount of Investment 

There is no minimum amount which is given during seed financing. An entrepreneur can secure a few thousand dollars during this seed financing phase.

However, during an angel investment round an entrepreneur would secure up to USD 1 Million.

Source of Funds

Seed financing can be secured through bootstrapping, friends and relatives, and bank loans. However, there are several angel investors who also provide seed financing. 

Angel investment can only be secured from qualified and accredited individuals known as angel investors. 

Funding Coverage

Seed financing would cover the initial expenses borne by the business. Such initial expenses include developing the business plan, product development, marketing plan development, and Research and Development (R & D) activities. If your business is heavily dependent on equipment, then such funding can cover operational expenses such as securing insurance coverage.

Funding provided by an angel investor can cover any expense which is required for your start-up. Thus when comparing seed investors vs angel investors, we can conclude that both are required for a start-up.

Equity Ownership

For seed funding, there is no equity ownership if an entrepreneur has utilized his own funds or other methods to secure funding.

In comparison, an angel investor would want equity ownership in the start-up. Usually, about 20 to 30% ownership would be required by the angel investor. With a certain percentage of equity in the start-up, the angel investor would also want to be a part of the management. When analyzing seed investor vs angel investor, it is clear that equity ownership is not a prerequisite in seed funding as the entrepreneur may utilize his own funds.

Conclusion

Now that we have considered the meaning of seed investor vs angel investor we can conclude that these funding options are mandatory and critical for the business. If you require initial funding then seed funding is your option. For further stages of funding, you can approach an angel investor. 

If you have any queries regarding the above please contact us for further information.