A friend asked me: What about seed capital? Good thing or bad?
For the uninitiated, here’s how I defined “seed capital” for the bplans.com glossary:
Seed capital is investment contributed at a very early stage of a new venture, usually in relatively small amounts. It comes even before what they call “first round” venture capital. How much is that “relatively small amount?” We’ve heard some high-end high-tech ventures in the heart of Silicon Valley call an investment of $500K seed capital, and we’ve known of other ventures that called $35K investment seed capital, and the following $300K investment the first round. It depends on the point of view.
My answer:
- It’s not easy to generalize. Notice even in the definition how much the terminology depends on the point of view.
- I like the reminder, in the name of seed capital, that it’s supposed to be like seeds, something that makes something grow. If it’s just a small amount of money but isn’t supposed to lead to more investment later, then it’s just a small investment amount, not seed capital.
- If by seed money you mean just a small amount, but you’re not sure that will be followed by a larger amount later, then I’d always recommend that you at least consider bootstrapping instead. I’ve posted before my reminders that owning it all by yourself, if that’s an option, is good, and working with investors as partners involves a lot of compromises. For example, here last month, and here on my main blog.
- Seed capital from good partners, professionals who add value, is almost always good. Subsequent investors from later rounds expect that and will like their participation.
- Seed capital from bad partners, incompatible partners or unsophisticated partners who get in the way of future rounds, is bad.
So it’s easy to summarize with a reminder that startup funding isn’t as simple as just finding investment–which, as I think of it, is not that simple anyhow–it’s getting the right kind of investment, from the right investors, to match your long-term goals, strategy and practical reality.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
