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What Is a Seed Investor?

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  • Originally Written By: Malcolm Tatum
  • Revised By: Bott
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 September 2014
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Seed investors are a type of angel investors who contribute funds and provide other types of support during the first stages of the launch of a new business or business project. Unlike other types of venture capital investors, the seed investor makes his or her contribution early on, then eventually withdraws from the project at a specified point in time; after withdrawing, the investor may begin to receive returns on the investment. The monetary contribution made by a seed investor usually takes the form of a one-time investment of capital on the front end, rather than continuing to provide financial support over an extended period of time as angel investors typically do. Investors with available monetary means can become seed investors for a new company, either through private-party contracts or by joining an investors network.

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Seed Investor's Role

The funds provided by a seed investor are typically referred to as seed money or seed capital. This type of investment is often helpful in covering all the expenses associated with launching the new business and covering other early stage costs. It is not unusual for the investor to provide the financial support in one lump sum. At the same time, investors may provide some sort of guidance or assistance in helping develop the basic operational structure of the business, securing contracts for shipment and distribution of products, or even assisting in the development of a company web site. Once the investor has provided the support pledged at the onset of the project, he or she typically withdraws from active involvement and waits to see a return on the investment.

Several methods exist to both become and find a seed investor. The Internet can provide multiple names and contact information for joining networks of seed investors or finding an investor to help start a new business. Many entrepreneurs choose to work privately with investors and enter legal contracts with the aid of professionals, such as attorneys and accountants, who may know people with enough monetary means to become seed investors.

Possible Benefits

Since the amount of the investment is usually determined by a one-time contribution to the new business, the degree of possible risk is somewhat limited, which may be considered as a positive for this type of investing. In addition, seed investors make their contributions of time and expertise to the new company in the early stages, rather than over an extended period of time. This makes it possible to move on to other ventures that show promise of earning a return, rather than continuing to devote time and resources to the single project.

Possible Disadvantages

Investments made only during the early stages of a venture will often produce less return than venture capital investments that are spread out over time. Most often, this is because the seed capital is among the first debts that are settled as the company begins to generate revenue. One way to maximize the return is to accept shares of stock in the company rather than requiring a repayment of the seed capital plus some rate of interest. Assuming that the company launches successfully and builds a solid client base within a reasonable period of time, owning stock in the company may produce long-term benefits for the seed investor while still requiring little to no additional investment after those first stages.

Seed Versus Angel Investor

While a seed investor contributes finances to a company only during the start-up period, an angel investor may give contributions to help start a company, to support an already established company, or both. When compared to seed investors, angel investors who continue to invest money in the firm over several months or years may take on considerably more risk, with that risk possibly increasing with each succeeding contribution to the business. In most typical cases, seed investors tend to invest a smaller amount of money than angel investors as a business start-up can require a minimal $50,000 US Dollars (USD), while investing over the course of years, as many angel investors do, may require anywhere from $300,000 USD to $5 million USD.

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