What Is “Seed” Money?

One reader asked via email:

What exactly is a “seed” company? What about “seed” capital?

Startups, Philosophers and Seeds

Go figure – it took a 19th century poet and philosopher to capture the thought process of a 21st century angel investor making a financial commitment at the seed stage of a technology startup. Henry David Thoreau summed the situation up pretty well when he wrote, “Convince me that you have a seed there, and I am prepared to expect wonders.” Odds are, Thoreau had something very different in mind when he wrote (he was more into the simple things in life); still, his thoughts give us a jumping-off place for a discussion about startups and seeds.

From a little seed . . .

Thoreau’s words pretty well sum up the potential and promise of a startup company in its seed stage. The seed stage can be a perilous time for the entrepreneur, a period when the business may have little to show for itself. It’s no wonder, then, that a seed stage entrepreneur often finds it difficult to round up financing at this most critical point.

A thoughtful angel investor might want to make a mental note of Thoreau’s words because wonders do happen. A solid seed stage is essential to the enterprise’s successful future. An analogy that draws on the work of Mother Nature and Old MacDonald may help: in the earliest days of the life cycle of green, growing things – corn, for instance – small seeds fall (or are thrust) into the ground. Assuming Old MacDonald does his job well and creates the proper conditions for his seeds, they sprout and eventually develop into beautiful, tall stalks of corn.

Capital – seed for business

Seed capital is that money that entrepreneurs need to get their business idea into practice. To get started, the company’s founders will pump all their resources into the enterprise, then call on friends and family for additional support. Many successful startups wake up one day with the knowledge that outside financing is going to make the difference between growing the business or letting it wilt on the vine.

Quite often, an angel investor provides funds at that crucial point in the venture. The startup requires sustenance – in this case, capital – to support product development and market research. As an angel investor and part owner (you receive a piece of the business in return for your financial investment), you may be able to touch a prototype or see a demonstration, but oftentimes there is no mass production of products or services to sell at this point.

Angel investing at the seed stage is not a matter of blind faith: when you do your investment homework thoroughly, you are more likely to be able to sort the strong seeds from the duds.