What is Seed Capital?

Seed capital is money that is invested in a project or business that is in the process of being launched, or is in the early stages of its active operation. Sometimes referred to as seed money, seed capital is used to cover all expenses associated with the project until it has begun to generate revenue. Once the business or project becomes self-sustaining, investors are often paid back both the principal amount and an agreed upon amount of interest, an arrangement that allows everyone concerned to profit from the venture.

Seed financing is a common approach to starting a new business. Often, a single investor does not provide the total amount of investment money needed for the startup. Instead, the seed capital is generated by the participation of a number of individuals or other entities that contribute small portions of the overall capital required. This approach helps to minimize the risk to each investor, and makes it easier to allow the company a longer period of time to become established and begin generating revenue.

The repayment of seed capital may involve a simple arrangement in which the borrower repays the lender over time, including some amount of interest along with the principal. In other situations, the new company may offer investors shares of stock, once the business has reached a point where issuing stock become viable. Depending on the structure of the agreement governing the receipt of the seed capital, investors may have the option of being compensated in part by cash payments and by receiving a limited number of shares.

As with many types of investment, seed capital funding does come with some amount of risk. In the event that the new venture fails to reach a stage where it generates revenue and ultimately begins to be profitable, investors in the project may lose part or even all of the seed money. For this reason, it is important for investors to look closely at several aspects of the proposed operation. This includes how the venture is organized, the level of efficiency associated with the overall operation, and the viability of the business plan that serves as the blueprint for the venture.

At the same time, investors should look closely at the goods or services that are offered to consumers, and determine if the demand is sufficient to generate a steady flow of revenue once the business is established. Investors may also want to look closely at the markets where the business will seek customers, and determine if the venture has a reasonable chance of competing with businesses that are already established and meeting consumer demands. If investors feel that the overall chances for success are not sufficient to merit the degree of risk they must assume, they should refrain from providing the seed capital and look for a more promising investment.