Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in exchange for an equity stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own (see cash flow), or until it is ready for further investments. Seed money options include friends and family funding, angel funding, and crowdfunding. Investors can also be outside angel investors, venture capitalists, accredited investors, equity crowdfunding investors or government programmes.
Most founders of startup companies get their seed round of funding by successfully completing two or three of the five early-stage funding strategies, such as bootstrapping, funding from friends and family, seed accelerator and business incubator funding. For example, someone might bootstrap their way to an incubator by having presold their software to two companies before getting their angel round.
Seed money can be used to pay for preliminary operations such as market research and product development. Investors can be the founders themselves, using savings and loans. They can be family members and friends of the founders.
Types of early-stage funding
Seed capital can be distinguished from venture capital in that venture capital investments tend to come from institutional investors, involve significantly more money, are arm's length transactions, and involve much greater complexity in the contracts and corporate structure accompanying the investment. Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing projects to evaluate for funding. Hence, the investments made are usually lower (in the tens of thousands to the hundreds of thousands of dollars range) as against normal venture capital investment (in the hundreds of thousands to the millions of dollars range), for similar levels of stake in the company. Seed funding can be raised online using equity crowdfunding platforms such as SeedInvest, Seedrs and Angels Den. Investors make their decision whether to fund a project based on the perceived strength of the idea and the capabilities, skills and history of the founders.