Seed Round

Anyone founding a company needs money before they can sell anything. Salaries, computers, rent, and computing time all have to be paid for. The seed round is the first major fundraising with which founders bridge exactly this early period. “Seed” means just that: the money is the sowing, the harvest comes much later. Whoever pays in doesn’t get a loan back, but a stake in the company. If the company later rises in value, that stake is worth much more; if it fails, the money is gone.

What’s at stake: equity for startup money

For founders, the seed round is often the decision of whether the company exists at all. Without money, they cannot work full-time or hire anyone. Typical seed rounds today range from a few hundred thousand to a few million euros. The goal is for the company to survive for one to two years on this. This period is called runway in the industry, i.e. the runway until takeoff.

The price for this is equity. Anyone who gives up 15 percent of their company also gives up 15 percent of all future profits. Founders therefore negotiate hard over the valuation, meaning the value attributed to the entire company. At a valuation of ten million euros, a ten percent stake costs exactly one million. At the beginning, this figure is purely a matter of negotiation, since there is usually no revenue yet.

For investors, the seed stage is the riskiest field of all. Most of these young companies disappear again. That’s why financiers count on a single big success to offset all the losses. This logic explains why they bet almost exclusively on very fast-growing ideas.

From pitch to term sheet

It starts with a presentation, the pitch. In a few minutes, the founders explain the problem, their solution, and the potential market. After that, investors examine the team, the technology, and the numbers. This examination is called due diligence and often takes weeks.

If both sides agree, there is a term sheet. This is a short letter of intent with the most important conditions: amount, valuation, investor rights. Only after that does the actual contract follow at the notary’s office. Often one investor leads the round and sets the terms, while smaller financiers agree to these conditions.

It is important to distinguish this from related terms. Even earlier lies the pre-seed round, often funded only by family, friends, or very small funds. After that comes Series A: there, investors already want to see real customers and growth. A common misconception is that seed money is a loan. It is an equity stake, and afterward the investor has a seat at the table.

Seed rounds in tech news

Headlines like “AI startup raises 4 million euros in seed funding” are read almost daily. Behind these are usually venture capital funds, as well as business angels. A business angel is an individual, often a former founder themselves, who contributes their own money and experience. In Germany, government funders such as the High-Tech Gründerfonds are frequently involved as well.

In AI companies, the amounts have risen noticeably in recent years. The reason is simple: training models costs an enormous amount of computing time, and that has to be rented. Some teams therefore already raise double-digit million amounts in the seed round, even though they only have a handful of employees. Critics see this as a sign of overheated expectations.

For readers of business news, the seed round is an early indicator. It shows which topics investors currently consider important for the future, long before products appear on store shelves. When the seed rounds of an industry dry up, a decline of the entire industry often follows a few years later.