Seed Capital

There are multiple stages of financing for successful startups, including seed or angel capital, venture capital, mezzanine and initial public offering (or IPO for short). Seed capital, also called angel capital, is a startup’s initial capital. Founders and their family and friends often provide most of the seed capital for startups, but sometimes angel investors, wealthy individuals who invest their own funds, provide seed capital as well. There are some smaller venture capital firms that make seed investments, but they are more the exception than the norm.

Raising seed capital is difficult. In order to raise seed capital from angel investors, a startup is usually beyond the back of a napkin business plan and often has a prototype or some evidence of its product or service. When a startup is purely an idea, seed capital is typically available only from founders’ own funds and their family and friends. Most startups do not have revenue when they raise seed capital. Seed capital is invested on the basis of the founders’ track records and business capabilities and the perceived value of the product or service their startup will offer.

To put it bluntly, great seed investors like Ron Conway take a “spray-and-pray” approach to investing. They invest small amounts in a number of startups and hope for the big win. Most of their investments are losers, but one Google or Facebook makes them wildly successful.

In the last decade, there are more institutional seed investors, such as First Round Capital and SV Angel. These are venture capital firms that primarily make seed investments. Like more traditional venture capitalists, these investors favor hands-on involvement in the daily operations of the startup, in contrast to angel investors who are typically more passive with respect to the day-to-day activities of the startup.

Seed capital is different from venture capital in a number of ways. First, as mentioned above, seed capital is invested earlier in the life cycle of a startup. This usually means seed investments are riskier than venture investments and more risk tends to lower valuations for seed investments compared to venture financing valuations. Second, the amount of seed capital raised is much lower than a typical Series A venture round. Third, seed capital is also raised more often from individual angels who invest their own funds; whereas, venture capitalists invest funds of outside investors, such as institutional investors. Fourth, the terms of seed capital investment and the transaction agreements are often simpler than venture investment terms and agreements.

Seed investments are structured in one of two ways — either convertible debt or priced seed equity. A typical seed valuation is $2.5 to $4.0 million pre-money. Generally, the aggregate amount of seed capital raised by a startup is less than $1.0 million and more often $250,000 to $500,000.