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What Is Seed Money?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 07 July 2014
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Seed money is capital which is provided at the start of a project or initiative to help it get off the ground. As the name implies, the money is the seed which is supposed to help the project grow. Providing funds to a project at the start can be very risky, as the project may fail, taking the seed money down with it. Conversely, investors who get in with the first round of investment stand to gain a great deal if they invest wisely and a project takes off.

There are a number of potential sources for seed money, along with an array of financing options for companies which need seed money. Some people refer to the call for seed money as the “friends and family round,” referencing a common source of startup capital. Friends and family, knowing the entrepreneur, may feel more comfortable providing funds for a project. Of course, if the project fails, it can strain relationships with people who contributed money.

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Venture capitalists, certain types of banks, and even government agencies can also provide seed money if they think that a project has merit and that the entrepreneur has demonstrated the ability to follow through. This money can come in the form of loans, but it may also include grants. In some cases, people who provide funds are provided with equity financing, obtaining a share of the venture in exchange for their investment. They can later opt to sell that share back or to sell it to someone else.

Seed money is used during the early development and research stages. Some entrepreneurs try to use their own funds for this, hoping to have a viable project by the time they need capital. Others find that funds from outside sources help get them over the initial hurdles of development. Especially when someone is developing a time sensitive project, such as a computer program which has immediate applications and may have competitors, seed money can also accelerate the process of development to ensure that people will want the product when it is released.

Getting seed money can change the nature of a project. Entrepreneurs must share the nature of the project with others in order to receive seed money, and may start thinking of it as part of a larger whole, instead of a private and exclusive project. Some entrepreneurs have trouble letting go of their projects as more people get involved, wanting to control every aspect of the process, and this can be harmful for project development in the long term. This makes it important for investors to take an active role in monitoring the project, to confirm that it is being handled well.

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