Pre-seed funding is an early stage for startups that typically come from friends, family, and angel investors. Startups at this stage are usually pre-revenue and pre-product, focusing on building a team, developing a prototype, and validating their business idea.
Pre-seed funding can be used to cover a variety of expenses, including:
- Building a team
- Developing a prototype or MVP (Minimum Viable Product)
- Conducting market research and validation
- Securing initial customers or partnerships
- Attending startup events and networking opportunities
- Developing a marketing strategy
In summary, pre-seed funding can be a crucial step for startups as it allows them to develop their team, product, and market validation before seeking larger rounds of funding. With the right plan in place and initial validation, startups can use pre-seed funding to gain momentum and set themselves up for success in the future.
This article highlights how startups can use pre-seed funding to develop their business and gain momentum.
What is pre-seed funding?
Case Study: Amit and Amar are planning to begin a software firm. They have a basic idea of what apps they want to develop. Moreover, they have already prepared the basic model explaining the added features and ideas. But they need more funding to perform further research and take this idea.
They do not qualify for the seedling stage, as the idea is still nascent. However, they will require fundraisers ready to risk believing their concept. That brings us to the question, how can they get funding?
Jack and John do not have a properly developed prototype. Yet they have an idea that showcases potential strengths to grow further. For such startups, a pre-seed funding stage comes before the seeding phase.
A pre-seed funding phase is an early round before the actual stage that allows startups to gain funds. Then, the investors raise capital (which may amount to 20 lakh) to develop their product further. Herein, the investor will expect the equity in the company.
In synopsis, the pre-seed phase precedes the Seed and Series A round. It is often followed by funding from angel investors or the bootstrapping period who use their financial resources. These investors are ready to fund the idea, allowing the development of a product prototype.
However, there is a thin line between the pre-seed and seeding phases. Therefore, knowing the difference is imperative to understand how the pre-seeding stage works. So, proceed further to get a better insight into the differences.
Difference Between Pre-Seed and Seed Funding
Pre-seeding and seeding phases are very similar. However, there are a few key differences, which include:
- Seed funding is the official round of funding compared to the pre-seeding phase.
- The seeding phase involves formal investment and plays a crucial role in making development happen after the pre-seeding phase.
- The pre-seeding stage includes funding before the seeding stage.
- Startups get higher investment during the seeding stage compared to the pre-seeding phase
- For instance, a pre-seeding phase may generate funds worth $50,000 to $2,50,000. In comparison, a seeding phase may get funding up to $2 million.
The pre-seeding phase includes an ideation period. The seeding period requires the company to have gained a degree of traction.
The importance of pre-seed funding for startups
What is the necessity of pre-seed funding when the official funding process begins with seed funding? Well, the pre-seed phase assists users in growing faster. Imagine having an idea and basic structure but lacking sufficient funds will obstruct the process.
Pre-seed funding drives startups to develop their product or service. It includes devising the idea further. It allows entrepreneurs the flexibility to make organized decisions and lay the foundation of a full-fledged startup.
When to start raising pre-seed funding?
There is no particular rule to indicate when a business is ready to start a pre-seed funding phase. However, a few indicators can point out the right time to opt for pre-seed funding. Check out below:
Can you demonstrate product readiness?
Pre-seeding is the next step to choose when the product is in a stage that appeals to the target audience. That is the point when the product-market fit phase occurs. Again, investors will be more interested to know if the startup has an appealing idea that holds potential. It is the right time to opt for pre-seed funding if you can convince the financiers that the product meets the market need.
You have a minimum viable product that showcases potential growth
A minimum viable product or MVP is the basic version that needs more research and consumer feedback. An MVP is an initial version with sufficient features to gain the attention of investors and consumers. However, the final output will include additional features post-research.
You possess goodwill or a strong team with expertise
Suppose you are developing a mobile app for finding relevant matches. Furthermore, if you are liaising with the founder of a Matrimonial site, then you are probably ready to opt for the pre-seed phase. Herein, even though your team has less experience, investors still will be prepared to block funds. So, do assess your team before you pitch further.
You have already onboarded customers for your product or service
Does your startup have a limited customer base? Then you can attract investors who can see the potential for further growth.
Your initial product development is generating revenue
Revenue is the output the company generates through the sale of goods and services before subtracting expenses. If your initial product generates revenue, then it possesses the potential to attract funds from investors in the pre-seed phase.
What are the Different Types of Pre-Seed Funding?
The pre-seed funding stage may need more data to prove the concept. Everything depends on the investors to get convinced by the idea or existing condition of the company, willing them to put funds into the business. Based on the risks and potential growth, the pre-seed funding is divided into three types:
- Incubator Programs and Accelerator
Early-phase investors raise pre-seed capital in exchange for equity. Accelerators are pre-seed investors who like startup crash courses. Apart from investing, they also gain access to entrepreneurial communities providing networking opportunities, training, resources, etc. Herein, it includes founders accepting the application process and following the guidelines for completing the course.
- Angel Investors
They are investors who generally invest small amounts between $25,000 to $1,00,000. Besides, they are sole investors and decision makers who may be involved in the angel round to invest in the success.
- Seed investment venture capital
They include multiple partner investors. Venture capitalist funds may offer larger investments against having a say in the decision-making process.
- Community funding
These include platforms that offer small amounts of funds for a particular idea. However, they rely on how strong your brand marketing is to generate interest.
- Venture Capitalists
They are the pickiest investors specializing in funding startups during the early investment stage.
An efficient way to get instant funds is by connecting over 20 VCs and checking if they have been working with similar startups. Then, reach out to the partner with the most experience and a higher chance of raising funds.
How to Raise Funding in Pre-Seed Phase?
Raising funds in the pre-seed phase is the most challenging point. Although the pre-seed phase is the first time to acquire funds, it can be quite arduous. However, it is not impossible. Here are six ways to gain success in the pre-seed phase:
- Build your convincing power
It all depends on how well you convince your investors. The first step is to refine your storytelling and verbal pitching capabilities to sell your startup.
- List your investors
Make a list of angel investors possessing experience with similar businesses. They are more likely to invest in the pre-seed stage than venture capitalists.
- Research on accelerators and incubators
Researching incubators and accelerators are beneficial as they support the company with tools, networking, knowledge and guidance. However, they may require a large amount of equity upfront before you get in.
- Check company valuation
Calculate the company valuation and how much equity you will have to share in exchange for funding.
- Prepare term sheet
Prepare your deal terms to present them to the investors.
Find Investors for your Startup with Pepcorns
The amount raised during the pre-seed stage is lower than investment during the seeding or Series A stage. On average, a startup will receive pre-seed capital depending on the total investment avenue.
The crux is finding a good platform where startups can find investors with expertise investing in similar businesses. Pepcorns makes it easier for startups to raise funds within days as per conditions. Here are a few perks to gain investment through the platform. These include:
- Get an insight of the cap table and the amount available as an investment
- Gain investment irrespective of the phase with minimal compliance hassle
- Raise funds from the community to market your brand
- Onboard new customers through exposure
Enjoy numerous perks and find investors easily for your startups with Pepcorns. Visit the website to find your investors.