What Is a Seed Investment Round?

October 26, 2022

Transforming a startup from a business idea into an actual company takes hard work and luck. It also takes money. Founders and entrepreneurs at early-stage startups usually get the money they need to survive by bootstrapping. They hit up friends and family, try their hand at crowdfunding, and (most likely) empty their own bank accounts to stay afloat. But once a startup has gained traction and shown the promise of exponential growth, it may be ready to raise money from external investors in a seed investment round.  

Seed funding is generally considered to be the earliest stage of venture capital investment. In any case, a seed investment round marks the first time a startup raises a significant amount of money from outside investors

We’ve helped a lot of founders navigate the fundraising process, and we can safely say that no two seed rounds are exactly alike. The amount of money you raise and the types of seed investors you attract may depend on factors such as your industry and your traction within that industry. In this guide, we’ll review everything you need to know about seed investment rounds so you can focus on building a winning pitch deck for investors.

  • What is a seed investment round?
  • Who participates in a seed round?
  • How do investors participate in a seed round?
  • What is the average seed investment?
  • What happens after a seed investment?

What is a seed investment round?

A seed investment is an infusion of capital intended to help a startup build on its early momentum. 

This is a key point, as many founders mistakenly believe that raising money in a seed investment round should be their first order of business—even before building a concept and establishing a product-market fit. In reality, the institutional investors who typically participate in seed rounds tend to gravitate toward startups that have already planted the seeds of growth, so to speak.

Prior to considering a seed round, you will likely need to establish a track record or proof of concept that shows investors why they should take your startup seriously. The most promising startups are usually those that can do a lot with a little, which is where bootstrapping and pre-seed funding come into play. 

All of this is to say that seed investment typically takes place at a particular point in a startup’s lifecycle. It’s not the first thing you should think about as a founder, but it is an important milestone on the way to future funding rounds (Series A, Series B, etc.) and perhaps an eventual IPO.

Understanding funding rounds

Before we go further, let’s familiarize ourselves with the basics of startup funding rounds. After all, the seed investment round is the first of several possible funding rounds your company may go through.

In simple terms, a funding round is an event in which investors give a startup money to help that startup continue growing. In exchange for their cash, these investors receive an ownership stake in the company in the form of equity.

Following seed funding, funding rounds proceed in alphabetical order, from Series A to Series B to Series C and so forth. A company may raise funds in later stages beyond Series C, or it may begin to prepare for an IPO. Not every company progresses through all of these funding rounds; for some, a seed investment represents all the external money that’s required.

Who participates in a seed investment round?

One of the defining features of a seed round is that it involves institutional capital from outside investors. But who exactly are these investors, and why would they be foolish (or brilliant) enough to invest in your startup? 

Most of the investors who participate in a seed investment round are private equity investors or private equity firms. This means that they specialize in investing private money in private companies, as opposed to public stocks. 

A particular type of private equity dominates investing at the seed stage: venture capital. Venture capitalists and VC firms may specialize in specific industries (e.g. Web3 and crypto), but they tend to have a few things in common. For example, most VCs are keenly interested in hyper-growth startups with a large market opportunity. VCs may also prioritize finding a great founder or founding team that they can continue to support in subsequent funding rounds.

Startup accelerators are another important type of institutional investor at the seed stage. Accelerators offer up cash like any other investor, but they also provide a more hands-on, immersive experience that may include everything from a physical office to mentorship and networking opportunities. You may already be familiar with top-tier incubators/accelerators such as Y Combinator and TechStars, but dozens of others have played a role in funding successful startups.

What’s the difference between seed and angel investors?

We’ve already discussed several important types of seed investors. Another type you’ve probably heard of is the angel investor. These are typically high-net-worth individuals who invest their own money into early-stage startups. They may have industry expertise to share with founders, or they may just be rich.

Unlike angel investors, venture capital firms don’t simply put up their own cash. Instead, they raise a pool of money from limited partners, which they then invest (sometimes alongside their own money in a co-investment vehicle) into various startups operating within their industry niche. 

Another key difference involves timing. While an angel investor can participate in a seed round, angel investing often begins at the pre-seed stage—sometimes when the startup is little more than a concept. Venture capitalists and other seed investors, on the other hand, enter the picture only after a startup has proven its traction. 

How do investors participate in a seed round?

We mentioned above that investors receive an equity stake in exchange for the cash they provide in a funding round. While this works just fine in later stages when the startup already has a valuation, it presents a bit of a dilemma at the seed stage. 

You see, a startup company in its earliest stages may not be ready for a valuation. And if it doesn’t have a valuation, it can’t offer straight-up equity to potential investors. So what can it offer instead?

One option is to use a convertible debt instrument, such as a convertible note. Instead of giving the startup cash in exchange for equity, the investor can loan the cash and receive a note that can be converted into a certain amount of future equity in the company. If you’re interested in learning more, check out our guide to convertible notes

Investors who participate in seed funding rounds may also do so via SAFEs, or Simple Agreements for Equity Funding. Y Combinator created the SAFE in 2013 as an easier, less lawyer-dependent alternative to the convertible note, and SAFEs remain a popular investment vehicle at the seed stage. You can learn more about SAFEs by reading our guide to pre-money SAFEs vs. post-money SAFEs.

What is the average seed investment?

Seed capital comes in all shapes and sizes. There’s no “magic number” to point to when figuring out how much seed capital you’ll need to raise in a seed investment round. 

If you’re looking for a ballpark figure, Y Combinator invests $500,000 per company as part of its accelerator funding model. But seed funding rounds can include half that amount, twice that amount, or four times that amount. 

What matters more than the specific number is the objective. All too often founders make the mistake of putting an artificial (read: arbitrary) target on their seed round. Instead of thinking about nice, round numbers, it’s better to think about what you actually need to take your business to the next round of funding—Series A, in this case. 

As a general rule of thumb, any money you raise in a seed round should be enough to set you up for Series A funding one or several years down the line. 

What happens after a seed investment?

Here’s the short answer: You work. You build. You’re a founder, after all.

But the reality of startup equity is that things only get more complex from here, as you take on new investors and your company’s cap table continues to grow. The good news? We built Pulley specifically to help founders like you

Pulley’s fundraiser modeling can help you avoid costly cap table mistakes, such as giving VCs the wrong number of shares at SAFE or convertible note conversion. We can even help you issue SAFEs with ready-made templates and automatically add them to your cap table. And as you progress through Series A, B, and beyond, our pro-forma tools can help you double-check the math across multiple funding rounds.

Ready to grow from seed to sapling? We’re ready to help.

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