Capital used by a startup in its initial operations, which is often obtained from family and friends, angel investors and sometimes the entrepreneurial founders themselves.
Seed capital is the startup equivalent of Mom and Dad paying for the first round of lemons, sugar, poster board and markers required to start an effective lemonade stand. During the early stages of funding a startup, seed capital gets the investment “ball rolling.” As startups cannot rely on reputation and a proven track record in order to attract the attention of investors, top talent and lenders, obtaining seed capital is often a make or break reality. If enough seed capital is raised, lenders, investors and top talent may feel confident enough to get onboard. If seed capital remains elusive, a startup may not be able to gain enough traction in order to launch successfully.
Seed capital is often initially obtained from a startup founder’s loved ones. Why? Because if someone loves you, they are much less likely to turn down your request for money to jumpstart your new pet hotel, frozen yogurt and mood ring emporium business. Also, lenders and professional investors do not owe you anything. But your family and friends just might. Finally, family and friends may find the prospect of investing in a loved one’s success “on the ground floor” more appealing than others would. Lenders and professional investors may be interested in helping you obtain necessary financing… but they tend to like to jump in later on, once a financial foundation has been established and you have demonstrated the capacity to gain momentum. Mom and Dad should be approached when you have nothing but a dream and a song in your heart. Venture capital firms should be approached when you have the BIG MO.
What do ground floor investors receive in return for investing seed capital? Sometimes, nothing. For example, when a startup founder asks for seed capital on certain crowdfunding platforms or approaches certain angel investors, all seed capital investors receive is the knowledge that they are investing in an idea worth a relatively minimal amount of their time and money. However, seed capital investors may ultimately expect a certain amount of return for their efforts. As a potential form of equity financing, seed capital investors may be rewarded with partial ownership of the company. It is therefore important for startup founders to think carefully about how much of their businesses they are willing to give away in exchange for critical seed funding.
“Mom, can I have some seed capital?”
(Sighs.) “Okay then, but don’t spend it all on bubble gum and baseball cards.”
“I’m an adult. I need the seed capital to start my own company.”
“What is your company going to sell?”
(Mumbles) “Bubble gum and baseball cards…”