seed capital

What is seed capital?

The term seed capital refers to the type of financing used to launch a startup. Funding is provided by private investors – usually in exchange for equity in the company or a portion of the product’s profits. The bulk of the seed money a company raises likely comes from sources close to the founders, including family, friends and other acquaintances. Obtaining seed funding is the first of the four stages of financing a startup needs to become a full-fledged business.

key takeaways

  • Seed capital is money raised to start developing an idea for a business or new product.
  • This funding usually only covers the cost of creating a proposal.
  • After securing seed financing, startups may contact venture capitalists for additional financing.
  • Some seed funding may come from angel investors — professional investors with high net worth.

Learn about seed capital

A start-up company may not have access to funding and other sources. Banks and other investors may be reluctant to invest because it has no historical or established track record or any measure of success. Many startup executives often turn to people they know for initial investment—family and friends. This financing is called seed capital.

Seed capital (also known as seed funding or seed financing) is called seed funding because it is money raised by businesses that are in their infancy or early stage. It doesn’t have to be a lot of money. Because it comes from a personal source, it’s usually a relatively modest amount. This money usually only covers the basics a startup needs, such as a business plan and initial operating expenses – rent, equipment, salaries, insurance and/or research and development (R&D) costs.

The main goal at this point is to attract more capital. That means generating interest from venture capitalists and/or banks. Unless it’s from a successful serial entrepreneur, neither of them is willing to invest large sums of money into new ideas that only exist on paper.

special attention items

Startups typically have to go through four distinct investment stages before they can actually be established—seed capital, venture capital, mezzanine financing, and an initial public offering (IPO). As mentioned above, seed capital is often enough to help a startup achieve its initial goals. If the company is successful in its initial stages, it could be of interest to venture capitalists. These investors are likely to invest heavily in the company before it grows further. Sometimes so-called mezzanine financing is required to support a company into its introduction stage. This usually only applies to businesses with a proven track record – even with high interest rates. The final stage is when early investors get their payday. When a young company goes public with an IPO, it raises enough money to keep growing and expanding.

Seed capital is one of the four investment stages of venture capital, mezzanine financing, and initial public offerings.

Seed Capital and Angel Investing

Professional angel investors sometimes provide seed funding through loans or equity in future companies. These investors are typically high net worth individuals (HNWIs) and may come from the personal networks of startup founders. Angel investors often like to be involved in helping companies grow from scratch. If the angel investor contributes less than $1 million, the money is usually in the form of a loan. For entrepreneurs, this can solve the problem of attracting enough seed funding, as financial institutions and even venture capitalists are reluctant to take considerable risks. When contributing more than $1 million, angel investors typically prefer seed equity and become co-owners and voting preferred stockholders of the startup.

Seed Capital and Venture Capital

Although seed capital and venture capital are often used as synonyms, they often overlap. Seed capital is often used to develop a business idea so that it can be effectively presented to venture capital firms with significant capital to invest. If venture capital firms like the idea, they usually take a stake in the new venture in exchange for investment in its development.

Venture capitalists provide most of the funding needed to start a new business. This is a sizable investment that pays for product development, market research, and prototyping. At this stage, most startups have offices, employees, and advisors, even though they may not have an actual product.

example of seed capital

Google’s parent company, Alphabet, provided seed funding to the Resource Solutions Center in 2015 for a project to implement a renewable energy certification program in Asia.The San Francisco-based center’s goal is to help businesses buy electricity from clean energy sources. The Resource Solutions Center is a nonprofit, but Google has a commercial interest in the venture. It’s already the world’s largest non-utility purchaser of renewable energy, but it wants to supply renewable energy to its global data centers and, ultimately, its entire operations.

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