Seed money, also known as seed funding or seed capital, is a form of

securities offering A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital (economics), capital project, an acquisition, or some oth ...

in which an

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

puts capital in a

startup company A startup or start-up is a company or project undertaken by an Entrepreneurship, entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses including self-employment and businesses tha ...

in exchange for an equity stake or convertible note 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 Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

), or until it is ready for further investments. Seed money options include friends and family funding, seed venture capital funds, angel funding, and

crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance, to fund projects "withou ...

Usage

Traditionally, companies that have yet to meet listing requirements or qualify for bank loans, recognize VC as providers of financial support and value added services. Seed money can be used to pay for preliminary operations such as

market research Market research is an organized effort to gather information about target markets and customers. It involves understanding who they are and what they need. It is an important component of business strategy and a major factor in maintaining com ...

and product development. Investors can be the founders themselves, using savings and loans. They can be family members and friends of the founders. Investors can also be outside

angel investor An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible de ...

venture capitalist Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number ...

accredited investor An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, ac ...

equity crowdfunding Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...

investors, revenue-based financing lenders, or government programs.

Early-stage funding

Seed capital can be distinguished from

venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

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 is generally one of the first steps investors offer to get startups on their feet before they become fully operational. 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

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.

Government funding

This is the most selective type of funding. Government funds may be targeted toward youth, with the age of the founder a determinant. Often, these programmes can be targeted towards adolescent self-employment during the summer vacation. Depending on the political system, municipal government may be in charge of small disbursements. The

European Commission The European Commission (EC) is the primary Executive (government), executive arm of the European Union (EU). It operates as a cabinet government, with a number of European Commissioner, members of the Commission (directorial system, informall ...

runs microfinance programmes (loans under €25 000) for self-employed people and businesses with fewer than 10 employees. European seed capital is available, but typically is limited to a 50% share. European SMEs can often benefit from the Eureka programme, which federates SMEs and research organisations, such as universities. Government programmes are often tied to political initiatives.

Other sources

Seed money may also come from product

or from financial bootstrapping, rather than an equity offering. Bootstrapping in this context means making use of the

of an existing enterprise, such as in the case of Chitika and Cidewalk.

Types of Seed funding

* Friends and family funding: This type of seed funding involves raising money from friends and family members. *

Angel investing An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital to a business or businesses, including startups A startup or start-up is a company or p ...

: As mentioned above, angel investors are wealthy individuals who provide seed funding in exchange for equity ownership. * Seed accelerators: These are programs that provide startups with seed funding, mentorship, and resources to help them grow their businesses. *

Crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance, to fund projects "withou ...

: This type of funding allows startups to raise money from a large number of people, typically through an online platform. * Incubators: These are organizations that provide startups with seed funding, office space, and resources to help them grow their businesses. * Government grants: Some government agencies provide seed funding for startups working on specific projects or in specific industries. * Corporate ventures: Some big companies set up venture arms to provide seed funding to startups in their industry or complementary field. * Micro-Venture Capital: A type of venture capital that provides seed funding to new startups and early-stage companies with a small amount of money.

References