seed money

Type: Private
On the web: http://www.oxfordtechnology.com
Employees: 4

Oxford Technology Management, formerly Seed Capital, fertilizes the investment soil so that its venture capital trusts can bloom. The investment firm manages four separate Oxford Technology Venture Capital Trusts, which in all, have invested in over 70 development-stage technology businesses in the UK, generally within 60 miles of Oxford. The company typically places £100 to £150,000 per investment. Lucius Cary established the investment company in 1983.

Key numbers for fiscal year ending February, 2008:
Sales: $0.1M

Officers:
Chairman: John B. H. Jackson
Founder and Managing Director: Venture Capital

Competitors:
HgCapital
Permira Advisers
YFM Private Equity

The initial equity capital used to start a new venture or business.

Investopedia Says:
This initial amount is usually quite small because the venture is still in the idea or conceptual stage. Also, there's a high risk that the venture will fail.

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Real Estate: The initial capital contributed by a project developer. Also called front end money.

Venture Capital: The initial capital investment in a new company by venture capital. Venture capitalists generally retain rights or warrants to common stock, when the sponsored company issues stock in an initial public offering. This level of financing precedes intermediate Mezzanine Financing or second-stage financing. See also Start-Up Financing.

Amounts needed to begin a real estate development, prior to being able to borrow under a Mortgage loan. Required costs include those for a Feasibility Study, Loan Application and Loan Commitment fees, attorney and accountant fees, land Option costs, and others. See Front Money.
Example: To begin a $2,000,000 Condominium development, about 2% of the total cost is needed as seed money.

Seed money, or seed capital, is the financing an entrepreneur needs in the very early stages of launching a new business. It gets its name from the idea that early stage financing plants the seed that enables a small business to grow. Obtaining funding is one of the most critical aspects of starting a small business. In fact, many businesses fail or are prevented from even starting due to a lack of capital. Although obtaining financing can be difficult for any small business, it is particularly hard for new ventures; since they lack a track record, potential lenders and investors are often skeptical about their prospects for success. But the dedicated would-be entrepreneur, if armed with a sound business plan and the necessary skills, can usually obtain funding for his/her dream.

Many entrepreneurs approach their family, friends, and colleagues for seed money after exhausting their own finances. Since they know the entrepreneur, these investors are more likely to take a risk on funding a new venture than are traditional financing sources, such as banks or venture capital firms. "An entrepreneur needs vast quantities of commitment and enthusiasm in the seed-capital stage, since the venture has little else with which to entice investors," Reed Phillips III wrote in an article for Folio. "Because it is almost impossible to predict how successful the project might eventually become, the only outsiders likely to invest are those who respect the entrepreneur's judgment and abilities. And those are the people with whom the entrepreneur has had the longest relationships." By "getting in on the ground floor," the providers of seed money hope to participate in the entrepreneur's success and realize a healthy return as their investment appreciates over time. Still, Phillips noted, "Risking money in the early stages of a start-up is more like buying a lottery ticket than making an investment. Investors know the odds are against them and realize they may lose their entire investment."

In most cases, seed money takes the form of equity financing, so investors receive partial ownership of the fledgling company in exchange for their funds. As a result, it is important for the entrepreneur to take potential investors' personalities and business reputations into consideration when seeking seed money. Since these people will be part owners of the company—and may insist upon having some control over decision making—it is vital to ascertain whether their interests and personalities are compatible with those of the entrepreneur. Once suitable investors have been located, the entrepreneur must convince them that the new business venture has a good chance of success. The first step in this process is creating a formal, written business plan, including plausible projections of income and expenses.

The entrepreneur should also have a specific purpose in mind for the seed money. The purpose of seed capital usually involves moving the business out of the idea stage—by building a prototype product or conducting market research, for example—and gathering concrete evidence that it can succeed. In this way, seed money helps the entrepreneur to prove the merit of his or her idea in order to attract the interest of formal investment sources.

As far as the amount of seed money the entrepreneur should try to obtain, experts recommend targeting only what is needed to accomplish the business's initial objectives. Given its risk, seed capital is usually more expensive for the firm than later stage financing. Thus, raising a small amount at a time helps the entrepreneur to preserve equity for later financing rounds. Ideally, an arrangement can be made that links seed money to launch financing, so the entrepreneur can go back to the same investors for future funding needs. For example, the entrepreneur might set goals for a successful market test of a new product. If the goals are met, then the original investors agree to provide additional funds for a product launch. This approach protects the entrepreneur against the possibility of having a successful test and then running out of money before being able to launch the product. Even if the original investors cannot provide additional funds directly, their vested interest may encourage them to help the venture succeed in other ways.

There are other sources of seed money available to entrepreneurs besides friends and family members. For example, some venture capital firms reserve a limited amount of funds to finance new ventures or business ideas. Since start-ups involve greater risks than established businesses, however, the venture capital investors generally require a larger equity position in exchange. In his book The Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital, W. Keith Schilit estimated that venture capitalists providing seed money would expect a 50 to 100 percent higher return than in a standard venture capital arrangement. There are also nonprofit organizations dedicated to providing seed capital for new businesses. In many cases, these organizations will also assist the entrepreneur in creating a business plan or marketing materials, and establishing cash flow controls or other systems.

Further Reading:

Fraser, Jill Andresky. "Seeking Seed Money." Inc. December 1995.

Phillips, Reed III. "Raising Seed Money Is a Critical First Step." Folio: The Magazine for Magazine Management. February 15, 1995.

Schilit, W. Keith. The Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital. Prentice Hall, 1990.

Weinstein, Bob. "On the Money: Figuring Out How Much Cash You Really Need to Start Your Business." Entrepreneur. September 1998.

"Where the Seed Money Is." Industry Standard. February 26,2001.

This article is missing citations or needs footnotes. Please help add inline citations to guard against copyright violations and factual inaccuracies. (January 2007)

A seed round, sometimes known as a friends and family round or seed funding, is a securities offering whereby one or more parties that have some connection to a new enterprise invest the funds necessary to start the business so that it has enough funds to sustain itself for a period of development until it reaches either a state where it is able to continue funding itself, or has created something in value so that it is worthy of future rounds of funding. Seed money refers to the money so invested.

Usage

Startup Financing Cycle

Seed money is typically used to pay for such preliminary operations as market research and product development. Investors are often the business founders themselves, using savings, mortgage money, or funds borrowed from family and friends. They may also be outside angel investors, venture capitalists or accredited investors who are acquainted in some way with the founders. Seed capital is not necessarily a large amount of money. Many people start up new business ventures with $10,000 or less.

Seed money can be distinguished from venture capital in that venture capital investments tend to involve significantly more money, an arm's length transaction, and much greater complexity in the contracts and corporate structure that accompany the investment. Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing project to evaluate for funding. Hence the investments made are usually lower (in the tens-thousands to hundred-thousands of dollars) as against normal venture capital investment (in the hundred-thousands to millions of dollars), for similar levels of stake in the company.

Seed money may also come from financial bootstrapping rather than an offering. Bootstrapping in this context means making use of the cash flow of an existing enterprise.

Investors make their decision whether to fund a project based on the perceived strength of the idea and the capabilities, skills and past history of the founders.

See also

• Private equity
• Investment
• Corporate finance
• List of finance topics
• Angel investor

This private equity or venture capital-related article is a stub. You can help Wikipedia by expanding it. v • d • e

v • d • e Topics on private equity and venture capital Basic investment types Buyout • Venture • Mezzanine • Growth • Secondaries • Equity co-investment History History of private equity and venture capital • Early history of private equity • Private equity in the 1980s • Private equity in the 1990s • Private equity in the 2000s Terms and concepts Buyout Financial sponsor • Management buyout • Divisional buyout Venture Seed money • Startup company • Angel investor • Venture capital financing • Pre-money valuation • Post-money valuation • Venture round • Venture debt • Bootstrap funding Structure Private equity firms and funds • Limited partnership • Limited liability company • Carried interest  • Management fee • Publicly traded private equity ( Business Development Company, Venture Capital Trust) • Private Investment in Public Equity (PIPE) • Pledge fund Investors Institutional Investors • Pension funds • Insurance companies • Fund of funds • Endowments • Foundations Investment Banks • Commercial Banks • High net worth individuals • Family offices • Sovereign wealth funds Related financial terms Undercapitalization • Initial Public Offering (IPO) • Mergers and acquisitions • Leverage • High-yield debt • Capital structure • EBITDA Private equity and venture capital investors • Private equity firms • Venture capital firms • Portfolio companies

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