Seed capital — also called seed money or seed funding — is so called because it is the money raised from an enterprise at an infancy or in the beginning stages. Seed capital is typically used to grow a business idea to a point where it can be pitched effectively to VC firms who have a lot of capital to invest. If the venture capital firms like the idea, they typically receive equity stakes in the new venture in exchange for investing in its development.
Investors supply a seed (the initial investment), which is cultivated by the entrepreneurs to grow into a healthy tree (the company). In exchange, the business owners have to give up some form of value to the investors, like a share in the trees (the company) equity, or a portion of the fruits it produces (profits). A seed investor gives you money in return for a percentage stake in your company, typically 20%-25%.
In the seed round, funding is provided by the investor in exchange for either convertible debt or equity in the company. Known as seed funding, seed financing involves selling some equity of the start-up to an investor or investment company. Seed financing is essentially an equity-based funding that requires investors to put money into a company in its early stages.
Seed funding can help give a new company access to capital at an early stage, so they have it available for the initial startup costs as well as for potential growth. Seed funding is initial capital needed to launch a new business, covering start-up costs such as business proposals and research. In the world of venture capital, seed capital generally refers to an initial round of funding raised to take a startup to profitability, usually within a 12-to-18-month period.
As mentioned earlier, seed funding is generally only sufficient to get the start-up to meet their initial goals. The idea itself might not be enough on its own to convince investors or funding agencies interested in giving the company funding, so seed capital plays a critical role in legitimizing and strengthening the business concepts of the founders. Some entrepreneurs and business owners lack funds or access to the seed money professional investors and financial institutions provide.
Startups seeking capital seldom have a positive net cash flow, and many only have a handful of founders and an excellent plan. Fortunately, there are many resources startups can draw on for getting funded in their early stages. When you have a new business venture that you are looking to launch, it can be difficult to get mainstream investors to jump on board for the first funding round.
It is often said that it is bad to mix business and family, so approaching people who are close to you looking for funding can be difficult, but a friend-and-family seed round can be an excellent beginning to a new business, and there are ways you can approach that initial seed funding round in a way that could reward the people who invested, and give you the cash you need. A friends and family seed round does not have to be a formal process like a traditional investing one — it is okay to approach potential friends and family investors in a more casual manner in order to ask for their investment. The best way to get seed funding is to pitch your business idea in a professional manner, even if your investors are close friends and family.
Once a business is established following a proof-of-concept, a business may receive investments from VCs, angel investors, and financial institutions. Professional angel investors sometimes provide seed capital, either via loans or in exchange for equity in the company. Angel investors are typically high-net-worth individuals that invest seed money into startups as equity.
Angel investors are usually investors that give seed money, but they also give advice and guidance that helps a company to grow. Angel investments are usually one-time funds to help a company get off the ground, or ongoing investments that sustain and push a business forward through its early stages. Angel investors and VCs also may choose to make loans to companies during the initial stages of their existence, instead of making equity investments.
Venture capitalists can opt to invest in the early stages of the business through a seed round, but typically with an increased emphasis on monetary returns. Seed funding, by contrast, comes in before investors have the project to assess, and as such, amounts invested are usually lower than those from VCs. Seed capital is distinct from venture capital in that the latter comes from institutional investors, is usually far larger amounts of money, and involves extreme difficulty when it comes to writing an investment agreement.
Their own money may be sufficient to take a company beyond the developmental stages to professional investors. For companies that make physical products, it might be unreasonable to expect sufficient seed-round funding to achieve profitability (since manufacturing costs are higher). The differences between these financing rounds are mostly due to investment amounts, the company valuation, and your ventures stage.
Seed funding is used to finance early stages of a new company, potentially right up until your products are launched. Seed funding funds your start-up during its early stages, and can also be essential for the product or services to be launched. Seed money is meant to support early operations of the new company until it begins generating profits or is ready to seek additional investors.
Businesses typically use the seed money to develop products, conduct market research, hire employees, acquire equipment and facilities, and initial manufacturing and distribution. Seed funding not only allows critical developmental steps, like the development of the product, to be funded, but it gives founders the ability to invest in initial marketing or PR, critical hiring (such as bringing in a vice president or CTO early), or building a successful sales team. There are several different sources of funding that your startup could investigate, including investors, crowdfunding, and borrowing from family or friends.