Seed money

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.^[1]

Usage

Startup Financing Stages

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. Investors can also be outside angel investors, venture capitalists, accredited investors, equity crowdfunding investors or government programmes.

Types of early stage funding

Seed capital can be distinguished from venture capital in that venture capital investments tend to come from institutional investors and tend to involve significantly more money, an arm's length transactions, and much greater complexity in the contracts and corporate structure that accompany 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.

Other sources of seed funding

Seed money may also come from product crowdfunding or from financial bootstrapping, rather than an equity offering.^[2] Bootstrapping in this context means making use of the cash flow of an existing enterprise, such as in the case of Chitika and Cidewalk. ^[3]

Government funds

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 runs microfinance programmes (loans under €25 000) for self-employed people and businesses with fewer than 10 employees.^[4] European seed capital is available, but typically is limited to a 50% share.^[5] 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, for example greentrustwind.co.uk, a means by which the UK place subsidies in the green sector,^[6] or the Energy Saving Trust, designed to draw attention to energy conservation.^[7]

• 23 page description of EU support programmes for SMEs
• inventorium.org - South-West UK specific list
• European Commission page on "Seed and start-up finance"

See also

• Series A round

References

Private equity and venture capital Basic investment types Buyout Venture Mezzanine Growth Secondaries Equity co-investment History History of private equity and venture capital Early history of private equity Private equity in the 1980s Private equity in the 1990s Private equity in the 2000s Terms and concepts Buyout Financial sponsor Management buyout Divisional buyout Buy–sell agreement Leveraged recapitalization Dividend recapitalization Venture Angel investor Business incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital financing Venture debt Venture round Structure Private equity firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity Business Development Company Venture capital trust Private investment in public equity (PIPE) Pledge fund Investors Corporations Institutional investors Pension funds Insurance companies Fund of funds Endowments Foundations Investment banks Merchant banks Commercial banks High-net-worth individuals Family offices Sovereign wealth funds Crowdfunding Related financial terms AUM Cap table Capital call Capital commitment Capital structure Distribution waterfall EBITDA Envy ratio High-yield debt IPO IRR Leverage Liquidation preference M&A PME Taxation of private equity and hedge funds Undercapitalization Vintage year Private equity and venture capital investors Private equity firms Venture capital firms Angel investors Portfolio companies