In their first years, emerging companies need capital to hire personnel, equipment, and infrastructure to grow. Seed capital is the perfect investment for these types of companies.
The emergence of these companies has been more dynamic in recent years. According to the World Bank’s Entrepreneurship in Latin America report, investing in innovation and new business models is no longer the domain of large corporations. A start-up company can be the precursor of an idea, develop it, and implement it.
New companies and startups in Latin America are responsible for the development of new products and markets, both factors that have a positive impact on the region’s economy, define the organization in its analysis.
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But, what is seed capital?
The resources obtained in the first phase of an emerging company are called seed capital.This capital plays a fundamental role in triggering the development and consolidation of these companies.
“Seed capital allows them to continue operating and growing until they reach a level of favorable profitability. Also, with this capital, the
Regina Ynestrillas, Investment Analyst at Village Capital Latin America.
The purpose of seed capital is to validate the business model of the emerging company and guarantee its growth and consolidation. With this type of investment, the company has the necessary resources to start operations.
For the Village Capital Latin America specialist, one of the main obstacles facing Mexican and Latin American companies is access to capital. There is still a need to democratize this type of investment for more startups in the ecosystem.
You can also read: Venture capital vs seed capital, what is the difference?
Innovation in Latin America
The interest in fostering innovation in Latin America and other emerging markets means that investment alternatives such as private equity and seed capital represent an option for more entrepreneurs.
Investment in ventures in the region with seed capital represents a solution for those companies that are unable to consolidate their business. Investment in the region is concentrated in a few countries: Brazil, Mexico, Colombia, and Argentina.
LPrivate equity investment in Latin America reached $5.4 billion in the first half of 2022,according to LAVCA.
For the private equity industry, investing in startups is a new area to explore. Increased investment in innovation and the emergence of new business models are attracting the interest of more private equity investors, such as:
- 42% in financial services, especially fintech
- 21% in consumer products and services
- 20% in industrial services
Seed capital investment factors
This type of investment is flexible for small companies at a very early stage. Seed capital provides a way for these companies to be capitalized, especially for those that do not meet the requirements to access other types of investment models.
Seed stage venture in the region have grown 7-fold over the past decade, according to according to CrunchbaseIn recent years, seed capital investment has concentrated in markets like the United States.
Now, with greater interest in investing in innovation and new emerging companies, there are alternatives for initial investment.
Regina Ynestrillas explains that the entrepreneurial ecosystem in the region and Mexico offers innovative business models and potential ideas. However, they do not yet have the tools to raise capital and reach the best deal that benefits both investors and entrepreneurs.
“At Village Capital, we have acceleration programs in which we work with entrepreneurs who have a social impact. We provide them with the necessary tools to raise capital and find the best investor who has the same goals as they do, and can work hand in hand”.
Investors who stimulate the ecosystem
Private equity is a flexible investment alternative for small companies that are at a very early stage and do not meet the requirements to access traditional investment models.
The growth of this type of investment in companies from their their seed stage in the last decade has had a growth of 7 times more according to according to CrunchbaseSeed capital investment focused on less than 3,200 companies originating in the United States, one of the main markets in the private equity industry.
Currently, with greater interest in investing in innovation and new emerging companies, there are alternatives for seed investment:
The Three F's (Friends, Family, and Fools)
The primary cash flow to start a business or venture comes from friends and family. In this type of financing, the entrepreneur must convince his or her acquaintances to invest in him or her and his or her idea. The capital may also come from his savings.
The downside of this type of investment is limited because the t initial investment will only be given once.
angel investor
This type of investor looks for ventures with high potential and profitability to invest in their growth. In general, the business angel or angel investor injects capital into an emerging company from its first months of life with capital and advice.
Business incubators
Una incubadora de emprendimientos que aún son ideas de emprendedores sin experiencia para consolidar ese proyecto. Con esta alternativa de inversión impulsa a más emprendimientos y empresas de nueva creación a crecer y estructurar.
Seed capital investment in Mexico is a way to ignite the growth of startups and ventures. In this way, early-stage companies find the capital to consolidate their business model.
private equity funds
These private equity firms invest in small and medium-sized companies with innovative and scalable business models. In some cases, they specialize in promoting the consolidation and growth of companies from their early stages.
Our pioneering model is based on growing the economy by investing in Mexican ventures. In the Startup Fundcompanies receive a financial plan to allocate the capital and include an intelligent Accelerator to the company's operations to guarantee the growth of the venture.
Considerations for Seed Capital Investments
Seed capital, as the first capital, is a risky investment because it finances early-stage companies that are still consolidating in their market.
With this type of capital, an investment is made in a company at a very early stage, and, it is likely, that it will not have the expected return. Nevertheless, the investors do a thorough analysis.
Regina Ynestrillas explains that before investing in seed capital, they look at the team or entrepreneur, as well as the innovative idea and its scalability.
“They look at the founding and management team, that they are capable and passionate about what they do. They also focus on the idea and its ability to grow in their market”.
Finally, for the analyst of Village Capital analyst in Mexico, there is a great opportunity for seed capital, particularly in those sectors that have shown growth in recent months such as fintech, insurtech, and health.
WORTEV CAPITAL is an impact venture capital fund that offers double-digit returns in exchange for investing in Mexican companies in the early stages to generate an ecosystem that positively impacts everyone.
