Seed funding refers to an early stage of financing for a start-up. During this phase, the company receives capital to further develop a business idea that has already taken shape, to test the product on the market and to lay the foundations for growth.
The term „seed“ literally means „seed“. The capital is intended to enable the start-up to develop a marketable and financially viable business from an initial, validated idea.
Seed capital is often used for:
- Further development of a prototype or minimum viable product
- Attracting the first paying customers
- Recruitment of key staff members
- Development of marketing and sales
- technical infrastructure
- Market and competition analyses
- Protection of trade marks, patents or technologies
- Preparing for the next round of funding
Typical investors in the seed phase are:
- Business angel investors
- Venture capital companies
- Early-stage fund
- strategic corporate investors
- publicly owned companies
- Funding schemes
- Accelerators and incubators
- Crowdfunding platforms
In return for their investment, investors often receive shares in the company. The size of this stake depends, amongst other things, on the amount invested and the start-up’s pre-money valuation.
A simplified example:
| Key figure | Amount |
| Pre-money valuation | €3 million |
| Seed investment | €1 million |
| Post-money valuation | €4 million |
| Involvement of the new investors | 25 % |
In this example, the new investors invest one million euros and receive 25 per cent of the company’s shares in return.
Seed funding usually follows the pre-seed phase:
| Pre-seed phase | Seed phase |
| Initial business idea and problem validation | Further development of a validated business model |
| Prototype or early MVP | market-ready product or advanced MVP |
| initial discussions with potential customers | first use, revenue or pilot projects |
| often smaller amounts of funding | usually a higher capital requirement |
| Focus on problem-solution fit | Focus on market entry and product-market fit |
Before committing to seed funding, investors often consider:
- The quality and experience of the founding team
- Relevance of the problem solved
- Size and growth of the target market
- Stage of development of the product
- Initial traction and customer feedback
- Scalability of the business model
- Competition and distinguishing features
- Financial planning and capital requirements
- potential exit strategies
Seed funding offers start-ups the opportunity to accelerate their growth. At the same time, founders give up shares in the company and often grant new shareholders rights to information, control or a say in the company’s affairs.
Typical challenges include:
- an unrealistic company valuation
- an unclear capital requirement
- lack of measurable milestones
- dilution that is too early or too severe
- a financial runway that is too short
- Mismatched expectations between founders and investors
- lack of preparation for due diligence
Founders should therefore be able to clearly set out how much capital they require, what it will be used for, and what specific progress is expected to be achieved with it. Where possible, the funding should cover the period up to the next relevant milestone, such as achieving product-market fit, generating recurring revenue or preparing for a Series A round.
innoWerft helps founders to review their business model and funding requirements, prepare relevant key figures and documentation, assess the ownership structure, and approach suitable investors for the next stage of development.