Seed Funding

Anyone who starts a company needs money at the beginning, before anything is even sold. Rent, salaries, computers, first tests – all of this costs money, even though no customer has paid yet. Seed funding is the first major round in which financiers provide exactly this starting capital. The English word “seed” fits the picture: you put something into the ground without knowing whether it will grow. In return, the financiers receive no interest, but a share in the company. If the company later increases in value, the value of this share increases too.

The leap from idea to first product

Without this early round, many ventures remain stuck in a drawer. A bank is reluctant to lend money to a company that has neither revenue nor machinery to offer as collateral. Anyone who has nothing to show does not get a normal loan. Seed funding fills exactly this gap, because the financiers deliberately take on a high risk.

For the founders, the money is above all bought time. Typical amounts range from a few hundred thousand to a few million euros. This is meant to allow the team to work for about 18 to 24 months. During this time, they must prove that someone really wants the product.

The price for this is shared ownership. Anyone who gives up 15 percent of the company no longer decides everything alone afterward. Some investors want a seat on the supervisory board or regular reports. That’s why the question is not just how much money comes in, but from whom.

How a seed round works

At the start there is a valuation: how much is the company worth today? For a company without revenue, this is an estimate and a matter of negotiation. Let’s assume the parties agree on four million euros. An investor adds one million and afterward holds a fifth of the company. The founders keep the rest, but own a smaller percentage than before.

The money rarely comes from a single source. Often several parties participate at the same time: experienced individuals, so-called business angels, and specialized funds that put other investors' money into young companies. One investor usually takes the lead in the round and negotiates the terms. The others join these terms.

Before the seed round, there is sometimes an even smaller phase in which friends, family, or a funding program help out. If successful, larger rounds follow, called Series A, Series B, and so on. Each round requires a higher valuation. If success does not materialize, there is often no next round at all, and the company runs out of money.

Seed rounds in tech news

Headlines like “AI startup raises 5 million euros in seed round” are read almost daily. Around artificial intelligence, these amounts have risen sharply in recent years. One reason is mundane: training large AI models consumes a huge amount of computing power, and that has to be paid for. Some AI companies therefore start with seed rounds that would have counted as Series A in the past.

A common mistake is to mistake such figures for profit or revenue. Capital raised is not earned money, but a sold company share. It reflects what investors expect, not what the company achieves. Most companies with seed funding do not make the leap and disappear again.

For readers of financial news, the size of seed rounds is nevertheless a useful mood indicator. If a lot of money flows early into an industry, professionals expect growth there. If the rounds become smaller and rarer, caution is growing. This is exactly why these figures appear so often in reports on technology trends.