One of the greatest pitfalls of a startup is convincing investors that your idea is going to work. It is not easy to tell financers that you have it in you to start a business on your own and make it big. But that is one challenge many young minds are willing to take nowadays. If you are planning on starting a business and understand the importance of attracting financiers, you first have to know the different types of funding. However, before you knock the doors of prospective investors, you should have a perfect pitch deck that has concise information about your startup. Once that’s ready, you can think about getting funds for your project, either through seed funding or venture capital funding.

These are the two most preferred financing approaches used by startups. Let’s take a look at how seed finding and venture capital funding are different from each other.

Seed Funding

Seed funding, also known as seed money is getting financial help from family, friends, angel funding and crowdfunding. The usual practice in seed funding is taking financial help from your close ones in lieu of some form of securities (generally equity stake). However, this is more often a very informal agreement and doesn’t usually have any contractual bidding. The idea behind seed funding is to get just enough cash so as to kick start the startup, hence help from close people. Seed funding is investment at a very early stage of the startup, usually just when you start with market research.

Related article: 7 proven ways to raising money from angel investors

Venture Capital Funding

Venture capital funding is institutionalized funding by rich business persons who are known as venture capitalist. The venture capitalists invest in small, early-stage startups with the belief that they will earn huge dividends once the business grows. Venture capitalists see the growth potential of a startup and accordingly invest. Initially they invest in exchange of equity shares of the startup. Venture capitalists are known to fund risky projects, usually in the innovative informative technology sector.

The Difference

One of the major differences between seed funding and venture capital funding is that in the former case, startups can expect only limited funds while in the latter, investment generally run into millions of dollars.

In seed funding, people invest money directly from their pockets in your startup, while in venture capital funding, money comes from a pool of funds especially allocated for funding startups.

Another difference between the two is that the money acquired through seed funding is used in the initial phase of a startup and investment for later stages are bootstrapped. However, with venture capital funding, a startup goes big right from the word go.

Whatever be the source of funding, a startup with a big idea can make it big under every circumstance.