Is Seed Capital Different From Startup Capital?
Another email came in over the weekend asking what the difference is between seed capital and startup capital.
To be honest, it’s a bit of a gray area where people tend to disagree over the definitions. Some claim that both terms point to the same stage of funding and are, therefore, interchangeable.
I prefer to make a distinction as follows:
Seed capital is defined as the initial money provided to an entrepreneur at the concept stage so that he or she can conduct a more thorough research and investigation. For example, it’s quite common for an entrepreneur to conclude that an opportunity exists based on free data available to the public. However, to maximize certainty one sometimes needs to purchase copies of expensive studies and reports from investment banks and specialty research firms. An investor who has an interest in the project but isn’t yet sold on it, may offer to provide money to purchase a few of these documents to settle the question. The investor’s unspoken attitude is that the provision of seed capital is a roll of the dice. He’s fully prepared to lose it all and indeed probably expects to, however the potential opportunity is attractive enough to warrant the seed capital gamble.
Startup capital is defined as the money provided to an entrepreneur so that he or she can begin to implement the idea. Startup capital is no longer a mere roll of the die. For one thing, it’s usually a larger sum of money. Furthermore, with it comes the expectation of results. The entrepreneur is usually expected to use the money to register the company, put up the website, set up an office, buy the office equipment and furnishings, and perhaps most importantly, get something to sell in order to truly test the waters and hopefully gain traction.
As you can readily see, startup capital follows seed capital. They are not the same thing.
Seed capital vs startup capital
3 Responses to Seed Capital vs. Startup Capital: What is the difference?
Leave a Reply to Tom Cancel reply
Funny, I always thought they were one and the same thing. Looks like I am seeking startup capital not seed capital.
Seed capital is a kind of startup capital, but not all startup capital is seed capital – I guess is what I was going for.
Venture capital is another kind of startup capital which you would see coming in after seed capital… although there’s not always a clear distinction between seed and venture capital (for example: if you are allowing the use of the term ‘venture capital’ to include friend/family/personal investment which is usually seed capital and not usually considered vc).
You could also conceive of the term venture capital being applied to investments in companies that you’d not necessarily consider a startup… (Was Twitter still a startup in 2011? If not, would you consider an investment made in their venture rounds that year venture capital? If not, what is it? Private placement?)
The $50k you get clearing out your savings and IRA to fund your startup is definitely seed financing… as is the investment your parents and friends make… as is the money you get from a startup incubator or an angel investor… although in the latter two cases you’d be able to call it seed capital or venture capital without confusion.
Once you are delivering goods or services or whatever it is you do to customers you’re not really in a ‘seed’ stage anymore… but you’re still a startup.
The two terms are used differently.
The term seed capital when a potential investor gives an entrepreneur a small amount of cash to test their ability to make money with their product in the short term. This is a good test for the investor as they can then decide whether it would be worth making a larger investment in the form of startup capital should the entrepreneur leverage their seed capital into a form of profit. This demonstrates the value of their ability, product and business.