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.
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 investment tends 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.