What Is “Seed” Money?
Dr. Colleen Morrison | May 20, 2009
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.
Filed Under: Angel Investing Basics • Definitions • Questions
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According to Dr. Scott Shane's findings, successful angels expect a 30x payoff, and 45.5% of investors expect at least 10x. To receive such payoffs, it certainly helps if angels can bring more than money to the table.
According to Dr. Scott Shane's findings, successful angels expect a 30x payoff of invested capital. And 45.5% of investors expect at least 10x return. To receive such payoffs, it certainly helps if angels can bring more than money to the table.
Thoreau had it right when he talked about the seed and the potential growth that can spring forth. If you consider how small a mustard seed is and then look at the tree that comes forth, you can only hope that your seed money multiplies to the same extent. Along with the seed money or capital, angel investors can also aid the growth through their expertise and nurturing. Great things can happen given the time and proper care.
[...] angel investors operating throughout the world, there are many more wannabe entrepreneurs seeking seed money. Time is a premium and you shouldn’t grant just anyone an audience. You should seek entrepreneurs [...]
[...] are likely to be somewhat picky when it comes to the companies that you financially support through seed stage investing. Entrepreneurs are going to offer you all sorts of different opportunities in a [...]
Like our reply to sybil, you may find a list of basic terms here. We'll update it regularly. Hope you find it useful.
You're most welcome. You may find a list of basic terms here, updated constantly.
This is a great explanation and it really goes to basic, It's nice to read from someone who really knows what the terms are in the business world. Seed Money, Everything starts from little you have to nurture it to become a tree same thing with business.
[...] trying to get off the ground. A typical angel investment in an early stage company, also called a seed stage business, is under US $1 million most of the time, but not [...]
Right on. When you invest in a startup, you're essentially investing in the founder or the founding team, for there's hardly anything else to evaluate besides the people. Does the team have the drive and capability to grow the business? This is a question you want to ask yourself when presented with an investment opportunity.
Glad you like it. Analogies often make things easier to understand.
I understand the seed concept, but I think sometimes it's more about the person selling the idea than the idea itself. You can have the best idea in the world, but if you can't present and explain it clearly and effectively then you may never get the investment to get it off the ground.
Thanks for replying to the readers query, it is very helpful to us and to everyone who really don't know the meaning of seed capital. Those who were already engaged in business surely know this.
I really love the comparison to Thoreau's words about seeds and wonders. It's a visual concept that is easy to visualize and conceptualize. Good things often start out small. They just need to be nurtured to grow, just like the seed needs nurturing with water and care. Great explanation and actually humanizing the business world.