Seed capital – what is it and what role does it play?

Seed capital is the first stage of funding and through it, business dreams are transformed into concrete plans and products. The capital often comes from courageous individual investors and opens the door to the world of entrepreneurship for young companies.

From this article you will learn, among other things:

• What is seed capital?
• What are the differences between seed capital and venture capital?
• What are the differences and dependencies between seed capital and other forms of business support?
• How to obtain seed capital?
• What are the limitations of seed capital?
• What are the advantages of seed capital?

Seed capital – definition

Seed capital (also known as seed capital) is an initial form of funding, intended for new businesses, which is used to conduct research, develop a product prototype or conduct market tests. It is crucial for startups as it allows them to cover initial operating and development costs before the company starts generating revenue

Seed capital is distinguished from other types of funding by, among other things, the fact that it is usually provided when a company only has a business idea or an initial prototype, but has not yet generated significant revenues. For this reason, seed capital investments are associated with high risk. Seed capital often comes from individual investors, specialised venture capital funds focusing on early-stage companies and sometimes from family and friends of entrepreneurs.

Seed capital is the initial funding provided to startups to support their early development, from ideation to prototype creation and business model validation.

Definition of seed capital

Seed capital investment amounts are usually smaller than in later funding rounds. They cover basic costs such as launching a new product, market research or initial marketing activities. The main objective is to enable entrepreneurs to develop their idea into a working product or service, and investors often receive shares in the company in return.

The modern form of seed capital began to take shape in the 1950s and 1960s, when the first venture capital funds began to emerge in the United States, but the catalyst was Silicon Valley. Technology companies, universities and investors were concentrated in this region, creating an ideal environment for the growth of startups. In the 1990s and early 2000s, the internet and digital technologies led to a significant increase in interest in investing in technology startups, which in turn led to the rise of seed capital around the world^[1][2][3].

Seed capital versus venture capital

Venture capital refers to investments made when a startup is growing, has a company business model developed and often generates its first revenues. Venture capital funds, in order to finance rapid growth, usually invest larger sums than seed capital investors and often offer not only capital, but also technical support, access to networks and management assistance.

Seed capital is the first step in the startup financing process that enables a company to get off the ground and prepare for the next stages of growth. At the same time, it is associated with more risk and less money, but if successful, companies can often attract venture capital funding, which allows for further growth and expansion and involves more investment and less risk.

Seed capital versus other forms of business support

Seed capital is one form of financial support for start-ups, but there are also other methods of funding and support:

• Bootstrapping involves funding a business from the founder’s own resources or from generated revenues and, unlike seed capital, does not require raising external funding.
• Business angels, like seed capital, provide capital in the early stages of a company’s development, but in addition to money they often bring experience and contacts.
• Crowdfunding allows you to raise funds from a number of people, usually through online platforms. Unlike seed capital, it does not always involve exchanging shares in a company for capital; it is more often based on a reward or donation system.
• Bank loans and lines of credit require collateral, so they are generally available to companies with a proven track record and some creditworthiness, which distinguishes them from seed capital, where such collateral is not required.
• Government grants and subsidies may be available to startups, particularly in innovative or strategic sectors. Often, they do not require the surrender of shares in the company, but may be subject to specific conditions regarding its operations.

Raising seed capital

The process of raising seed capital starts with the preparation of a convincing business idea and a detailed business plan. This should include a description of the product or service, market analysis, marketing strategy, information about the management team and financial projections. At the same time, the entrepreneur must accurately assess how much money he or she will need to start the business, develop the product or carry out marketing activities and cover other initial operating costs.

The next step is to identify potential investors who may be interested in the project. These could be individual investors, venture capital funds specialising in early-stage investments and sometimes family and friends. To convince them to invest, the entrepreneur needs to prepare a presentation (called a pitch deck) in which he or she demonstrates the value of the project. The presentation should clearly outline the business potential, the earning model and the long-term vision of the company.

Once the investor is interested, the negotiation stage follows, during which issues such as the amount of investment, the share in the company that the investor will receive and other terms of cooperation are discussed. The investment agreement is signed once an agreement is reached – the document should precisely define the terms of cooperation and the rights and obligations of both parties.

Once the agreement is signed, the investor transfers the money to the entrepreneur, who can thus start the business or develop it according to the business plan presented. This does not change the fact that, having received the funding, the entrepreneur is obliged to regularly inform the investor about the progress of the company’s development, the use of the funds and the results achieved.

Limitations of seed capital

Raising seed capital often involves an intensive process of finding investors, preparing presentations and negotiations, which can be time-consuming and distract entrepreneurs from other important aspects of running a business. A disadvantage may also be the limited scope of the funding – the money is earmarked for the early stages of the company’s development, so the amounts are relatively small and may not be enough to cover all the needs of the developing company, especially when there is a need for significant investment in product development or market expansion. It is also worth remembering that investments in start-ups are characterised by high risk.

Once funded, entrepreneurs are under pressure to develop their products and deliver results quickly. Investors may push for quick results, which can sometimes lead to a focus on short-term goals at the expense of the company’s long-term vision. Also, reliance on external investors can affect an entrepreneur’s independence – investors may want to influence business decisions or the direction of the company, which can be both an advantage (due to their experience and knowledge) and a limitation.

Advantages of seed capital

One of the main advantages of seed capital is that it allows entrepreneurs to finance the initial stages of their business, which includes product development, market research, team building and initial marketing activities. With this form of funding, they can turn ideas into viable products or services, which is crucial for startups that are not yet generating revenue.

Without external funding, many startups might not be able to effectively develop their products or expand in the market, and with seed capital they can reach milestones faster. Furthermore, investors often bring with them not only capital, but also valuable experience and a network of business contacts. This can be invaluable for young entrepreneurs.

Raising seed capital from reputable investors can signal to the market and other potential investors that the company has great potential, which in turn can attract further investment, customers or employees. Seed capital allows entrepreneurs to retain control of the company while offering flexibility in managing and growing the business. While investors may have some influence over business decisions, they do not usually take full control of the business, allowing entrepreneurs to pursue their own vision.