Securing funding is usually essential to the success of any startup business. There are exceptions of course but in most cases, you will need funding in one way or another.
One of the first decisions you’ll have to make is what type of funding to pursue, but there might be more to it than you thought.
This blog post will compare pre-seed vs seed funding rounds and explain how each works. We will also help you decide when your start-up is ready for each funding stage.
What Is The Pre Seed Funding
Pre-seed funding is the first step in getting your business started. It’s essential to have a solid pre-seed funding strategy before you start looking for investors.
Investors set the bar relatively high, and you can only catch their eye if your company has started to generate some revenue.
You can use the pre-seed rounds to cover the costs of market research, product development, and hiring initial employees.
Typically Pre-seed funding comes from family members or close friends even before you create a minimum viable product. Other sources in pre-seed financing include personal budget and some rare cases, angel investors.
What Is The Seed Funding
Seed funding is when investors give you money for an equity stake in your company. It is done after the pre-seed stage when the business has achieved some traction.
The idea is that seed stage will help get your Minimum Viable Product started and then you can use that to raise more money down the road.
During the seed round, you are usually aiming at raising about $1-$4 million to:
- Increase the business valuation and get it ready for Series A and B funding rounds
- Support comprehensive research to help focus on the target market
- Hire staff to help you achieve this goal.
- Helps fine-tune and develop the product for more viability.
What Is The Difference Between Pre Seed Vs Seed Funding
Start-up companies typically have to go through pre-seed and seed funding rounds before becoming profitable.
Pre-seed funding is the money a start-up company raises to get started. The funds may come from personal savings, credit cards, or crowdfunding.
Seed funding is the money that a start-up company raises to grow. The funds may come from angel investors, venture capital firms, or government grants.
The pre-seed stage pays for initial expenses, such as office space and salaries. In contrast, the seed stage pays for more growth-oriented expenses, such as marketing and product development.
The money raised in a pre-seed round is typically much less than in a seed round. Pre-seed amounts are usually less than $500k. Seed round ranges from $1-$4 million.
Finally, the focus of a pre-seed investment is often on the team and the idea, while the focus of the seed stage is often on the product and the market.
Examples Of Recent Startup Funding Of Pre Seed And Seed
So what exactly is the difference between pre-seed and seed round? To help demonstrate the difference, here are examples of recent start-up funding rounds.
Pre Seed: $200,000 raised by Acme Corp for a 10% equity stake
Seed: $1.5 million raised by Foobar Inc for a 20% equity stake
You can check our monthly most active investor report here
Why Is Seed Funding Becoming So Popular?
Seed funding is typically given to startups to further validate their idea and to get them closer to their MVP and initial traction.
There are a few reasons why Seed funding is becoming so popular as you can see from the chart below. First, there’s been a recent influx of capital into the start-up ecosystem. It has made it easier for start-ups to raise money as they have more options.
Investors are more willing to take risks on early-stage companies enabling start-ups to get the money they need.
How Much Money Can You Raise With Pre Seed Funding?
Pre-seed funding can be pretty lucrative. The average amount raised during the pre-seed round is around $50-500k. The amount can be more depending on the product.
It is essential to correctly estimate the amount needed during the pre-seed funding to avoid asking for too little or too much.
To arrive at the amount, think of goals that you need to achieve and calculate the money needed for each goal.
It would help if you also calculated how much your start-up would spend per month and aimed at getting enough money to give you a runaway of at least six months.
Remember to manage your expectations, though, and have a realistic gauge of how much money investors will be willing to give without an MVP.
Types Of Pre Seed Funding
Raising pre-seed funding can be challenging, but many different options are available to entrepreneurs.
- Family and friends are often the most accessible source of pre-seed funding, but they may also be the least likely to offer unbiased feedback when needed.
- Micro Venture capital firms tend to be more picky and hands-off than other investors, but they can also provide valuable resources and connections.
- Angel investors are individuals who invest their own money in early-stage businesses. They typically provide smaller funding than venture capitalists but are often more approachable.
- Crowdfunding is raising money by asking many people for small contributions. It’s typically done through platforms like Kickstarter or Indiegogo. If you’re able to run a successful crowdfunding campaign, it can provide a significant amount of funding for your business.
- Incubators can provide start-ups with office space and mentorship, but they may also take equity in the company.
- Accelerators provide funding and mentorship primarily for start-ups that are already growing.
How To Pitch Investors For Pre Seed Funding
If you’re looking for pre-seed funding, you’ll need to make a good impression on potential investors. Here are a few tips on how to do just that:
1. Do your homework: Before you even start talking to investors, you need to understand your business and what it will take to succeed. It would help if you had a well-researched business plan and financial projection.
2. Put together a pitch deck: This document should briefly outline the problem the start-up is solving, the proposed solution, the market opportunity, the team, and the financials. The goal is to give investors a snapshot of the business and convince them to invest.
3. Be clear and concise: When pitching your business, it’s essential to be clear and concise. Investors want to know what your business is and what it does, but they don’t want to hear a long, drawn-out explanation. Get to the point and explain why your business is a good investment.
4. Make it personal: When you’re talking to investors, make sure you focus on them and their needs. What are they looking for in an investment? How can your business help them achieve their goals? If you show that you understand their needs, you’ll be more likely to earn their support.
5. Be prepared for questions: Investors will likely have questions for you after making your pitch. Be prepared to answer them in a way that shows off your business knowledge.
When Should I Raise Early Stage Funding?
The answer to this question depends on several factors, including the amount of money you need and the amount of equity you are willing to give up.
If your start-up is still in the Ideation stage, it may be too early to start seeking investment. Instead, focus on perfecting your business model and developing a solid pitch deck.
Once the pitch deck is created, it’s time to start meeting with potential investors. These meetings can be informal, such as coffee chats, or more formal, such as presentations at investor conferences.
During these meetings, start-ups will attempt to secure funding from investors. If an investor is interested in investing in a start-up, they will provide a certain amount of money in exchange for equity in the company.
How much equity an investor receives depends on several factors, such as how much money they’re investing and how early they’re investing in the company.
Once you understand your startup and have estimated the funding you need to get started, you can approach investors.
When asking for early-stage funding, be prepared to give up a significant portion of equity (usually 20-40%). Keep in mind that early-stage investors are taking a risk on your company, and they will want to see a high potential for return on their investment (ROI).
With a strong case and a bit of negotiating, you should be able to secure the funding you need to get your start-up off the ground.
Are You Eligible To Raise Venture Capital?
If you’re a start-up founder looking to raise venture capital, there are vital factors investors will be eyeing.
First and foremost, you need to have a compelling value proposition. Your product or service needs to solve a problem that people are willing to pay for.
It would be best if you also had a solid team with the skills and experience necessary to execute your vision.
Your market opportunity needs to be large enough to justify the amount of capital you’re looking to raise.
In addition, investors want to see a road map for how the company will achieve its financial goals.
To help you better understand whether your start-up is ready for venture capital, try the “Venture Capital Quiz“. It will help you understand if you are qualified for venture capital in less than 10 minutes.!
FAQs
Who Is An Angel Investor?
Angels are individuals who invest in start-up companies in exchange for an equity ownership stake. They are typically wealthy individuals who have made their money in another industry and are looking to invest in high-growth businesses.
In some cases, the investors may also receive a seat on the company’s board of directors.
How Long Is The Pre-Seed Stage?
Pre-seed funding can last anywhere from 12 to 18 months. One can however stay longer at this stage until the startup has validated its hypotheses and assessed the potential of its idea.
The stage should also last until the business can cover the costs of prototype testing, market research, and MVP development.
Before exiting the pre-seed stage, the startup should cover the costs of licensing requirements and other early-stage expenses.
Pre-seed funding should be the key to attracting additional investment and taking a startup to the next level.
Final Thoughts
With the rise of early-stage investment by venture capital firms, start-up businesses now have a greater chance to get the funding needed to accelerate growth.
To be successful in both pre-seed and seed rounds, you must be very clear about what you want to achieve and set realistic goals. This is likely to instill confidence in investors.
