# Understanding Seed Capital: Definition, Process, and Example

## What Is Seed Capital?

Seed capital is the type of [financing](https://www.investopedia.com/terms/f/financing.asp) used to form a [startup](https://www.investopedia.com/terms/s/startup.asp). Sources for obtaining seed capital include family, friends, and angel investors. It is important in covering a startup’s initial expenses, such as its business plans and operating costs. Seed capital progresses to venture capital, the first two of four funding stages required for a startup to establish itself as a business.

### Key Takeaways

*   Seed capital is essential for startups, as it provides the initial funding necessary to develop a business idea, covering expenses like a business plan, rent, equipment, and research and development costs.
*   Unlike other financing stages, seed capital is often raised from personal networks, including family and friends, due to the high-risk nature and lack of a track record of startups.
*   Angel investors, who are high-net-worth individuals, may provide seed capital either through loans or by taking an equity stake, offering startups more opportunities for growth and development.
*   The primary goal of seed funding is to advance a business idea to a stage where it can attract venture capitalists, who provide more substantial financial backing for further development.
*   A startup generally progresses through four stages of funding: seed capital, venture capital, mezzanine financing, and an initial public offering (IPO), with each stage building on the success of the previous one.

![Seed Capital](https://www.investopedia.com/thmb/pyEKNynUa2agQLCq9qIPZVBIhJg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/seedcapital.asp-FINAL-1-c9de77a2deb04f6faa029f41904ea9d3.png)

*— Joules Garcia / Investopedia*

## Understanding Seed Capital

A company that is first starting out may have limited access to funding and other sources. [Banks](https://www.investopedia.com/terms/b/bank.asp) and other [investors](https://www.investopedia.com/terms/i/investor.asp) may be reluctant to invest because it has no history or established track record, or any measure of success. Many startup executives often turn to people they know for initial investments—family and friends. This financing is referred to as seed capital.

Seed [capital](https://www.investopedia.com/terms/c/capital.asp)—also called seed money or seed financing—is referred to as such because it is money raised by a business in its infancy or early stages. It doesn’t have to be a large amount of money. Because [it comes from personal sources](https://www.investopedia.com/terms/l/lovemoney.asp), it’s often a relatively modest sum. This money generally covers only the essentials a startup needs such as a [business plan](https://www.investopedia.com/terms/b/business-plan.asp) and initial [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp)—rent, equipment, payroll, insurance, and/or [research and development (R&D)](https://www.investopedia.com/terms/r/randd.asp) costs.

The primary goal at this point is to attract more financing. This means catching the interest of [venture capitalists](https://www.investopedia.com/terms/v/venturecapitalist.asp) and/or banks. Neither is inclined to invest large sums of money in a new idea that exists only on paper unless it comes from a successful serial entrepreneur.

## Special Considerations

A startup normally has to move through four distinct phases of investment before it is truly established—seed capital, venture capital, [mezzanine funding](https://www.investopedia.com/terms/m/mezzaninefinancing.asp), and an [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp). As mentioned above, seed capital tends to be just enough to help a startup achieve its initial goals. If the company is successful in the initial phase, it may catch the interest of venture capitalists. These investors are likely to invest heavily in the company before it moves further. So-called mezzanine financing is sometimes necessary to support a company into its introductory phase. This is usually available only to businesses with a track record—even then at a high rate of [interest](https://www.investopedia.com/terms/i/interest.asp). The final stage is when early investors get their payday. When a young company [goes public](https://www.investopedia.com/terms/g/goingpublic.asp) with its IPO, it raises sufficient capital to keep growing and expanding.

> **Important**
>
> Seed capital is one of the four phases of investment along with venture capital, mezzanine funding, and an initial public offering.

## Seed Capital vs. Angel Investing

Professional [angel investors](https://www.investopedia.com/terms/a/angelinvestor.asp) sometimes provide seed money either through a [loan](https://www.investopedia.com/terms/l/loan.asp) or in return for equity in the future company. These investors are generally [high-net-worth individuals (HNWIs)](https://www.investopedia.com/terms/h/hnwi.asp) and may come from the personal network of a startup’s founder(s). Angel investors often enjoy a hands-on role in helping develop a company from scratch. If the angel investor contributes less than $1 million, the money is usually in the form of a loan. For the [entrepreneur](https://www.investopedia.com/terms/e/entrepreneur.asp), this can solve the problem of attracting sufficient seed money, given the reluctance of financial institutions and even venture capitalists to take on considerable risk. When contributing more than $1 million, an angel investor typically prefers seed equity and becomes a co-owner of the startup and the holder of preferred stock with voting rights.

## Seed Capital vs. Venture Capital

Seed capital and [venture capital](https://www.investopedia.com/terms/v/venturecapital.asp) are often used as synonyms, and they tend to overlap. Seed capital is generally used to develop a business idea to the point that it can be presented effectively to venture capital firms that have large amounts of money to invest. If venture capital firms like the idea, they generally get a stake in the new venture in return for investing in its development.

Venture capitalists provide the lion’s share of the money needed to start a new business. It is a considerable investment, paying for product development, [market research](https://www.investopedia.com/terms/m/market-research.asp), and prototype production. Most startups at this stage have offices, staff, and consultants, even though they may have no actual product.

## Example of Seed Capital

Alphabet, the [parent company](https://www.investopedia.com/terms/p/parentcompany.asp) of Google, provided seed money to the Center for Resource Solutions in 2016 for a project to implement renewable energy certification programs in Asia. The goal of the San Francisco-based center is to help businesses buy power from clean sources. The Center for Resource Solutions is a [nonprofit organization](https://www.investopedia.com/terms/n/non-profitorganization.asp), but Google has a business interest in the venture. It is already the world’s largest non-utility purchaser of renewable energy, but it wants to power its global data centers, and eventually its entire operations, with renewable energy.

## The Bottom Line

Seed capital is the initial funding required to launch a business or product, and is primarily sourced from personal networks such as family, friends, or angel investors. It’s a crucial first step before approaching venture capitalists, who may provide more substantial funding later. It also involves financial risk for both the startup and the investors, as both the financial history and measures of success are limited at this point.

Seed capital is the first of four stages—followed by venture capital, mezzanine financing, and an IPO—to provide a road map for startup financing. It differs from venture capital, the next step, in that venture capital typically involves larger investments, a higher level of commitment, and a more well-developed business idea.

Alphabet’s investment in the Center for Resource Solutions demonstrates how seed capital can be used to achieve specific business goals, even in the nonprofit sector.  

> **Article Sources**
>
> 1.  Startups.com. “[A Guide to Different Stages of Funding for Startups](https://www.startups.com/library/expert-advice/different-stages-of-funding-for-startups).”
>     
> 2.  Corporate Finance Institute. “[Mezzanine Fund](https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/mezzanine-fund/).”
>     
> 3.  Google. “[Laying the Foundation for Renewable Energy Certification Programs in Asia](https://blog.google/outreach-initiatives/environment/laying-foundation-for-renewable-energy/).”
>     
> 4.  Center for Resource Solutions. “[About Us](https://resource-solutions.org/about-us/mission/).”