Seed stage financing typically goes toward the development of a product, initial market research, business plan preparation, and management team building. At this stage, the product has not yet been sold commercially. An initial investment in a seed company ranges between $50,000 and $500,000.
Angel investors have been the largest source of capital at this stage, followed by the venture capitalists; the number of angel investments at this stage is 50 times as big as those made by professional venture capitalists. At the seed stage the risk of losing the investment is quite high, only 20% make it to the second round of financing. Consequently, the angels demand a large share in the seed company.
Recently, there has been an increase in the number of angel groups, that is, a few angel investors (generally, two to five angels) pulling together to invest in seed companies. The advantage of angel groups is that they pull together capital, expertise, and business contacts. The downside, however, is that angel groups can impose more restrictive terms on the newly founded company.
|Seed Stage Financing|