Venture Capital vs Seed Capital: What’s the Difference?
For a company looking to get started, both seed capital and venture capital can be valuable sources of funds.
But while they’re often talked about in the same context, there are significant differences between the two.
What is Venture Capital?
Venture capital is money invested in startups and small businesses that show strong potential for long-term growth.
Raised by venture capitalists through substantial investment funds, it is provided in exchange for shares in the business.
It’s used to start or grow a new company.
The defining purpose of venture capital is to provide a high return on investment for the people investing in the fund.
It is often invested in tech companies, as these are widely seen to have strong potential growth.
What is Seed Capital?
Seed capital is provided for a related but narrower purpose – to get a company started.
While venture capital is often invested in a company that has recently started up, seed capital is there to get the company going.
It’s the first source of funding for many companies and is critical to the existence of startups.
Seed capital comes from a variety of sources.
The most common are family, friends, banks, and angel investors.
It’s often a more personal form of lending and its defining purpose is to get a new company started.
Similarities Between Venture and Seed Capital
As you can see from the definitions above, venture and seed capital have a lot in common.
This is why they’re often brought up in the same conversations and are even confused with each other.
Both aim to provide funds to get a business going.
They invest in the early stages of a company, expecting that it will deliver on promises of success that can’t yet be fulfilled.
In the right circumstances, either can provide an entrepreneur with the starting money they need to create their company.
This interest in startups provides the distinction between venture capital and private equity funds.
Both of these gather funds to invest in businesses, but private equity firms target established companies with room for improvement, while venture capitalists are looking to get in early on.
It’s even possible for the same people to provide both seed and venture capital. So what are the differences?
Sources of Finance
The differences between these sorts of funding are all shaped an organisational one – where their money comes from.
Seed money usually belongs to the individual who gave it.
This can be a private individual such as a relative or a single high wealth investor.
It can also be a corporate individual such as a bank or investment company, such as Al Sana.
The risks and profits from the investment will fall upon the lender themselves. Venture capitalists, in contrast, are investing other people’s money.
Their funds are drawn from the pool of a professionally managed fund.
They are answerable to the investors who have provided that money, who will share in the risks and rewards.
Scale of Finance
To the recipient of the investment, one of the most obvious differences is the scale of the money available.
Venture capital tends to provide smaller amounts than private equity.
The sums stretch into millions, but not the hundreds of millions that private equity firms sometimes invest.
Yet the investments of venture capitalists often dwarf those of seed investors.
Seed capital is usually counted in the tens or possibly hundreds of thousands of pounds. It’s the little bit needed to kickstart a business, not enough to keep it going.
Venture capitalists are the big investors in the startup game.
Scale of Business
Connected to this, venture capitalists are interested in larger scale businesses.
With their purpose of maximising returns, venture capitalists don’t want to waste their time on small fry. They’re looking for larger startups or ones that promise substantial growth.
Seed money can go to such businesses, but it’s also invested in the small startups, the one-person craft companies, and the small team creations.
It’s individuals lending to individuals. Often with a high level of interest in the project.
Level of Risk
The earlier someone invests in a business, the more risk they take.
In the very early stages, there’s no evidence of how the business will perform in reality, so its potential has to be taken on trust.
Because they’re always investing at the very start and in a wider range of companies, seed investors face a higher risk.
They’re not investing because they can see that they’re onto a sure thing. They’re investing because they have faith in the people and the product.
Venture capitalists look for more security, as they have to justify their decisions to investors in the fund.
They usually want to see a proven revenue stream first, which is why they’re less likely to invest at the very start.
Venture capitalists also may not provide regular advice.
Seed capital provides funds for the very beginning – but if you find a good, committed seed investor who really believes in you, then the sky is the limit.
And you may never actually need venture capital.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
