Seed financing (also known as “seed capital,” “seed money” and “seed funding”) is the initial funding used by a startup to build out its first product or service. The word “seed” tells you all you need to know – the goal of seed financing is to plant the seed for a much larger company that can emerge later after 12-18 months of careful incubation and growth.
Seed financing exists because pre-revenue companies have a hard time attracting funding in the marketplace. Banks won’t provide capital to these companies because it would be the equivalent of providing a no collateral, no-recourse loan in which the bank is almost certain to lose its initial investment. And since a seed stage startup might not even have a commercialized product yet, it makes it difficult as well to raise money from traditional financial services providers.
Seed financing, then, is a risky, speculative form of investment that places enormous trust in the vision of the company’s founder and any previous track record that individual might have, either in the startup world or the corporate world. Seed financing is generally the first stage in the funding lifecycle of a company. The next steps after seed financing are Series A, B, and C financing.
So who invests in seed-stage startups? Unlike the first “friends and family round” of financing, which usually consists of money raised from family members (i.e., rich uncles), seed financing consists of money raised from third-party investors that often specialize in investing in high-tech companies. These third-party investors can include angel investors, angel funds, angel networks, family offices, and seed-stage VC firms. Angel investors include everyone from doctors and dentists with a little extra capital to invest, to retired tech entrepreneurs with an urge to get back into the game.
Most angels invest under $1 million. And, in fact, angels prefer to invest much less (anywhere from $10,000 to $250,000). Thus, your seed financing will probably consist of cobbling together capital from a number of different angel investors. To make the process as easy as possible, it’s best to aim for angels who can invest the max.
For seed financing more than $1 million, you would typically need to find an angel network (which consists of accredited, high net-worth individuals capable of writing a big check) or a formal seed-stage VC fund that earmarks part of its capital for investing in risky and speculative seed-stage companies. But unless you have a successful product already, or some form of proprietary intellectual capital, it is far more likely that you will need to reach out to angels for your seed financing.
The best part about seed financing is that most investments can be obtained with just a single PowerPoint pitch (usually 12 slides or less) and a minimal amount of due diligence. Moreover, most angels require little documentation of their investment (which is generally structured as a loan or a convertible note).
The primary goal of seed financing should be to get you enough runway (usually 12 months or more) to get you to your next funding milestone. Not all angel investors will join your next round of funding, but they may be able to provide the needed introductions and mentorship to open the right doors for you within the VC world.