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You may have heard of seed funding and know how it works. But before you even proceed to seed funding, you have to get through pre-seed funding first. If you’re already a startup or are still planning on becoming one, then this read will be very helpful to you.
What is Pre-Seed Funding?
Pre-seed funding is the capital used to produce a minimum viable product or MVP. To produce this capital fund, startups usually shell out or raise money ???? themselves. They may also ask the people closest to them to help fund their MVP during the initial stages until it’s ready for the market.
The Difference Between Pre-seed and Seed Funding
People sometimes get these two terms confused. So, here’s a list of the key points to help you understand the differences between pre-seed and seed funding.
|Pre-seed Funding||Seed Funding|
|Funding Round||Not an official round of funding||The official start of the series of funding rounds|
|Type of investors||Startup founders and their closest circle of people, but external investors can also provide pre-seed funding||External individuals and sources such as Angel Investors, traditional investing companies, crowdsourcing, etc.|
|Funding Amount||* Around $10,000 to 250,000||* From $400,000 up to millions of dollars|
|Requirements||Does not require a business pitch but may come in handy||Requires a well-crafted and confidently-delivered business pitch|
|Valuation||Independent of startup valuation||Dependent on startup valuation|
*Actual values vary per year, depending on the overall performance of the startup industry
Is Pre-Seed Funding Good for Me?
Your MVP shouldn’t stay hidden in your headquarters for too long. You, as its founder and developer, should be able to get it out and show it to the world ???? as soon as it’s ready.
So, how will you know if pre-seed funding applies to your business? And, when is it time to get competitive and take part in the funding series?
Well, here are some factors for you to consider that will help you decide.
- Stage. Are you still in the MVP stage? Or in the Software Development Life Cycle or the Software Testing Life Cycle? Pre-seed funding is usually used in the MVP stage. Past that, you should consider joining the funding round series.
- Target market. If you’re still looking for a niche or a specific market segment to introduce your MVP to, then you need pre-seed funding. This suggests that your MVP may not have enough ammunition yet to brave a market segment and external investors may not put as much faith in you as others who are more ready.
- Operating expenses. There will be bills to pay and people to hire on top of the equipment outlay to produce your MVP. You’ll want to be able to provide and pay for these requirements. In this case, getting pre-seed funding is no longer just an option but a need.
It’s okay if your MVP is not yet ripe for product launch based on the factors we’ve listed above. But you should do everything in your power to help it penetrate the market and gain traction.
Is Your Startup Ready for Pre-Seed Funding?
Now that you have considered the critical factors, let’s answer the next question. Is your startup ready for pre-seed funding?
If your startup is experiencing one or more of the following situations, it’s a good sign that it is ready to get pre-seed funding:
- Getting or gaining steady traction
- Achieving outstanding results in several software testings
- Earning revenue, despite not being completely introduced to the market
- Requiring more people to become part of the team
They say that if you’re still asking if you’re ready, then you may not be ready yet. But with these concrete examples for you to refer to, you won’t need to second-guess your decision to get pre-seed funding any longer. It’s time to take the next step and watch your business soar to greater heights!
How to Get Pre-Seed Funding
Any ultimate guide is incomplete without a step-by-step process. So without further ado, here’s how to get that sought-after pre-seed funding. ????
Step 1: Find the Right Investors
The first step in almost anything is to do research. When you decide to get pre-seed funding, you first need to know your potential investors.
There are five general types of investors that you should know about. You can start with traditional investing companies, banks, and Angel investors for loans. They can usually offer more than peer-to-peer lending. But if you deem your MVP as very promising, then you might also find personal investors, aside from Angel investors, who are very interested to help.
Step 2: Learn How to Attract Potential Pre-Seed Investors
We say this is the second step to get pre-seed funding, but you should always make it a point to learn how to attract your MVP’s potential investors. They can come in many shapes and forms, and can come from anyone or anywhere. Like a nice old man in the coffee shop, or an old high school classmate.
Here’s a friendly little tip: Prepare a killer elevator speech and know it by heart. You’ll never know, maybe the person next to you is looking for a new investment and only needs a little nudge to convince.
Step 3: Prepare Your Pre-Seed Funding Pitch
At this point, you should be banking on your elevator speech to work and get your startup a very willing investor.
We mentioned before that a business pitch isn’t a need to get pre-seed funding. But, it may come in handy when you encounter external investors. You can pitch to them even if you’re not yet taking part in the series of official rounding. Think of it as a chance encounter that you should do your best to prepare for.
This is when you should consider reading the ultimate guide on how to pitch an idea to investors. It has all the actionable steps that you’ll need to learn and do to prepare your pitch.
Three steps in an ultimate guide might not look like much. But they’re the core actions you need to carry out to help your startup hit the market ground running.
Raising Pre-Seed Funding for Startups
When you start to raise pre-seed funding for your MVP, you’ll need to dial up your marketing efforts. These include:
- Dolling up your MVP to make it more presentable and eye-catching to investors
- Highlighting your pre-launch performance statistics like your Instagram insights, and social testing results
- Polishing the business model to help investors gain more confidence in your company
This isn’t to say that you only need to focus on your marketing strategy. This is simply to remind you that it’s not enough to have a functional and technically-sound MVP.
You see, the key to enticing investors is to keep them engaged and interested. So, show them how well you perform in many, if not all aspects. You’re bound to get that much needed pre-seed funding sooner rather than later.
How to Choose Pre-Seed Investors
It’s no secret ???? that startups will always need to raise funds to develop and do more with their MVPs. Thus, investors will always be sought after. But this doesn’t mean that you should always choose the first investor who reaches out to you.
Here’s a shortlist of things to consider in choosing a pre-seed investor.
- Individual or group investors. Sole decision-makers are easier to negotiate with than many decision-makers. If you’re in a make-or-break situation with your MVP, time is gold. So, it’s better to seek individual investors like angel or personal investors.
- Current skill set and available resources. You might be in need of more training, or lack exposure to different equipment, software, and people. In this case, look for investors who can offer enrollment to startup crash courses in exchange for company equity.
- Amount of investment money. Sometimes, it can boil down to who can offer the heftiest amount of money to grow your MVP. It’s okay to choose money over other benefits sometimes. But make sure that you’re still fully aware of everything that you have agreed to. Otherwise, you might be selling your MVP’s heart and soul without you knowing.
It will be hard to decline an offer, but knowing what you need and what you can offer to an investor will make it a bit more manageable. Remember to present yourself well and suit up during meetings.
You Might Ask
What is pre-seed funding used for?
Pre-seed funding sees to it that a startup survives the MVP stage. This will make it more capable of participating in the official funding rounds.
What is pre-seed vs seed funding?
Pre-seed funding is not part of any series funding. Its goal is to help startups stand on their own and prepare for market penetration. Seed funding is the official start of the series funding. This enables startups to brave through the market competition and gain traction to move forward along the funding series.
How does pre-seed funding work?
Pre-seed funding can turn an idea into a potential market-viable product. Pre-seed funds help startups to conduct product development until their MVP is market-ready. It’s often hard to get a hefty sum of investment from strangers, so pre-seed funding usually comes from the developers themselves, and their closest circle.
How much is pre-seed funding?
In 2020, the median pre-seed money valuation was at $10.9M. A startup value typically starts at $10,000 to $250,000. But depending on how promising your MVP is and how realistic your projected track is, you might also become a unicorn startup valued at a million dollars.
How much equity should I give up pre-seed?
With seed funding, the average percentage of equity on the table is around 10 to 25 percent. This gives the startup team more than half of the MVP, so they still have more control over it. So for pre-seed funding, you’ll want to give up less than that. Otherwise, you might end up losing more and more power over your brainchild through time.
How long does it take to get pre-seed funding?
Fundraising isn’t something that happens in a blink of an eye. At the very least, it could take a few weeks to secure funding. On average, a startup has to fend for its own for three to six months before finally landing an investor. But, for some MVPs, six months is the shortest time it takes for them to even have an investment meeting. It’s tough, but the wait will be worth it.
Seed-funding may be more than your pre-seed funding. But you can’t discount the fact that without a pre-seed fund, you may not even reach the seed funding stage. Let alone the official series of funding.
This is why you first need to know what pre-seed funding is and how to obtain ???? it. With it, you can see how well you’ll be able to handle all the expenses on top of running the operations in your company. Think of it as pilot testing before you completely commit to participating in the series A, B, and C funding.
Don’t think of pre-seed funding lightly though. It could spell the difference between your startup staying afloat or sinking into the sea of startup failures.
So, are you ready to get that funding?