Difference between Seed Funding and Angel Funding
Financing a business venture is no easy task, and considerable effort will have to be made to procure funds. Seed funding and angel funding are two of the most important sources of funds, and it is these two that we cover in this comparison article.
Definition
Seed funding refers to a securities offering in which one or more individuals connected to the new business invest funds that will help the business during its initial stages of development. These funds enable a business to work its way to the point where it can become self-sustaining, or at least has enough inherent value that warrants further investments from other parties. More recently, crowd funding has introduced new options for seed funding.
Angel funding refers to funds that come from angel investors, which are also known as business angels, informal investors, or simply angels. This investor is usually a wealthy individual who is interested in providing start-up capital for a business in exchange for convertible debt or ownership equity in the company. Angel investors often form angel groups or angel networks that research and pool investment capital as a group.
In Practice
Seed funding is often used for preliminary operational expenses. These expenses include market research and product development among others. In most cases, the sources of seed funding are themselves the owners or founders of the business, with the funds being drawn from personal savings, proceeds from mortgage loans, or funds lent by family and friends. Seed capital is often not a large amount, and many businesses are in fact stared up with as little as $10,000, and possibly even less.
Angel funding typically comes from the same sources: the founders or owners of the business. These investors are markedly different from venture capitalists that basically manage pooled funds in a managed setup. While angel funding is often the result of android individual’s investment decision, the funds themselves usually come from a trust, another business organization, a limited liability company, or an investment fund, among other sources. Certain studies (such as The Harvard report, for example) have shown that companies that rely on angel funding have a much better chance of growing than companies that rely on other initial financing sources or methods.
Importance
As mentioned previously, seed funding is an essential source of funds during a company’s initial development stages. This gives companies the opportunity to "get off the ground ", so to speak. As for angel funding, its main benefit is providing a company funding during the equally crucial period between "friends and family" funding, and more substantial venture capital funding.
Similarities and Differences
Seed funding
- A securities offering in which one or more individuals connected to the new business invest funds that will help the business during its initial stages
Angel funding
- Funds that come from angel investors
- Funds usually come from a trust, another business organization, a limited liability company, or an investment fund
