What Is a Seed round?

Jim B.
Jim B.
Man holding a globe
Man holding a globe

A seed round is a round of funding that occurs at the beginning of some sort of business undertaking. It usually helps a company either get its operations underway or it funds the manufacturing and marketing of the company's products. Those people who participate in the seed round of funding are usually entitled to a larger stake of the company's profits than those who come on board in later rounds. Depending on the amount needed, seed funding can be provided by friends and family, bank loans, or venture capital firms.

Most companies, even those that have risen to the top of the business world, come from humble beginnings. At the onset of any new company, the need exists for significant capital to cover the costs that accompany operations and product roll-out. Those funds can often prove to be more than the originators of the business can handle, especially since profits are usually only realized after time has passed. As a result, the business-owners often take on partners who provide the very first batch of funding, known as the seed round, necessary to get things started.

The scope of the business being planned usually determines what kind of funding is needed in the seed round. If the business plans to operate on just a local level and doesn't need an overwhelming amount of capital to open up its doors, the owners might seek out funds from friends and family members. This kind of funding provides a community feel to the business and it allows owners to work in tandem with people they know and trust.

If the company has broader horizons in mind for its business, it may need to extend the parameters of its search for funding. Bank loans are often used in the seed round of companies with aspirations to build a business on something larger than a local level. Having a bank as a business partner gives the owners of the company security in that they can be assured that the promised funds will be delivered. The owners must make sure their projected profits match the amount needed to pay back the loans.

Venture capital is a common form of outside funding used by a startup company in a seed round. The venture capitalists often share in the entrepreneurial spirit of the business-owners, and both groups can work toward a common goal of a successful company. But venture capitalist investors will often demand some authority in the company's future plans, so owners must relinquish some control in return for the provided funds.

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