Seed money is the initial funding needed to start a business. This is typically among the earliest funding rounds that a business receives, where the intent is to fund a proof of concept. Thus, the funds are used for market research, product development, and other early-stage operations. If the proof of concept looks viable, the firm is then ready to accept additional (and usually larger) rounds of funding. Seed money may be invested in exchange for common stock, but it can also be invested in exchange for debt or preferred stock.
Seed money, given its small size, can come from any source, including friends and family of the company founders. Later rounds of funding tend to come from larger investment institutions, such as venture capitalists. The risk level of a firm is at its highest when seed money is needed, so there is an excellent chance that this money will be lost by investors.