'Seed Money' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Seed Money refers to that capital which someone delivers to a business, initiative, or project at the beginning in order to get it started. This money is intended to be the seed that helps the upcoming project or company to grow and flourish. Offering such early stage funds can prove to be extremely risky. The project could completely fail, which would wipe out the initial seed money. Yet those investors who are in on the opportunity early on can make huge amounts in returns if the company or its project becomes a success.
A variety of sources exist for possible seed capital. There are also a range of financing choices for those new firms which require such Seed Money. This is why the seed raising prospects are often referred to as the “friends and family round” of funding. This means that much of this early startup capital literally does come from personal and close connections. Those family members and friends who personally know and would vouch for the entrepreneur could be better disposed to offering funds on a given project. If and when such a project fails, this can cause strained family relationships on the part of those who relinquished their funds only to lose them later in the project however.
Other traditional sources of Seed Money include some banks, venture capitalists, and sometimes various government agencies which may choose to invest in the entrepreneur once they get to know him or her. The money might be offered as loans or grants. Occasionally this money is offered in exchange for equity stakes in the company, as with equity financing. This provides the financiers with stakes in the new venture in return for their early stage investment. Later as the company develops exit events, the initial round investors may sell their stakes back to the firm or to another financier or investor.
It is in the earliest stages of research and development that seed money proves to be so very critical. There will always be entrepreneurs who deploy their own money for this stage in an effort to develop a viable project and saleable product before their seed money runs thin. With many others, they require outside-sourced funding in order to get them through that initial crucial timeframe for product development and launch.
This becomes all the more critical when a young company develops a project which proves to be time sensitive. It might be a computer software package that offers immediately useful applications and which may quickly run into competitors in the market place. Such seed money may actually increase the speed of the development process so that people still want and are interested in the new product when it effectively reaches market.
Obtaining seed money typically changes the project dynamics though. Entrepreneurs are no longer sole owners of the venture at this point. They will have to provide details and updates on the R&D progress in order to not only receive money, but appease their seed investors. It is no longer technically an exclusive or private project anymore at this point.
It gets difficult for some controlling entrepreneurs to let their projects go as they involve more and more investors. This can hurt the product development when the owners cannot make way for the new partial owners over the longer term. This is why it is so very important for the new investors to take on an active part in overseeing the project to ensure that the precious seed capital is being well- and carefully spent to further the project towards a timely product launch.