What Is Pre-Seed Funding?

Pre-seed funding is the earliest stage in the funding cycle of a startup, allowing startup founders to turn their idea into a tangible business. The pre-seed stage comes before a seed round and before any series funding rounds (e.g., Series A, B, C, etc.).

At the pre-seed funding stage, the startup is often in its infancy, sometimes not more than a concept or a basic prototype. The primary focus during this phase is on developing the idea, conducting research, building a prototype or minimal viable product (MVP), and laying the groundwork for the business structure.

Pre-seed funding is essentially the groundwork phase. It's about proving the feasibility of the idea and setting the stage for future growth and additional funding. Following the pre-seed stage, a startup typically enters the seed stage, where it might have a working prototype and some level of user validation. Seed funding is often larger in amount and involves more formal investment terms, possibly from angel investors or early-stage venture capital firms.

There are several key differences between a pre-seed funding round and a seed funding round, including the:

• Startup stage: A pre-seed round is typically raised when the startup is at the very early stages when it is still being conceptualized or developed. Seed funding, comparatively, is still early stage but is raised when the start is working on a prototype or has some forward momentum.
• Funding purpose: The focus of pre-seed money is on validating the business idea and conducting market research, whereas a seed round is about taking the validated idea and growing it into a viable business.
• Funding amount: Pre-seed rounds are generally smaller than seed rounds, ranging from a few thousand dollars to a few hundred thousand dollars.
• Funding source: Pre-seed investors are commonly the founders’ friends and family, or sometimes angel investors. It may also be taken from the founder's own financial resources. Seed rounds, however, can be acquired from all of these sources, as well as pre-seed VC firms.
• Equity and valuation: It is possible that startups may not have a formal valuation at the pre-seed stage. Investments might be made in exchange for a small equity stake or as convertible notes.
• Level of risk for investors: The pre-seed funding stage is considered a higher risk for investors. Seed-stage investments are also risky but less so than a pre-seed round.

As the startup progresses beyond the seed stage, it enters various rounds of venture capital funding, where larger sums of money are invested, and the focus shifts from proving the concept to scaling the business, expanding market reach, and increasing revenue. Pre-seed funding, therefore, is crucial as it helps a startup transition from an idea to a viable business entity capable of attracting more substantial investments. 

Pre-seed funding typically involves smaller amounts of capital, usually less than $1 million, with the average pre-seed in the US just above $500,000. The exact amount can vary significantly based on several factors; however, these are the most common:

• Geographical location
• Nature of business and industry
• Founder experience and background
• Stage of product development
• Market size, competition, and market validation
• Strength of business plan and pitch
• Regulatory environment

Each of these factors can influence investor perceptions of risk and opportunity, ultimately affecting the amount of capital a startup can raise during its pre-seed funding round.

Startups should consider raising pre-seed funding primarily to validate their business idea, develop a minimum viable product (MVP), and lay the foundational elements of their business. This stage is crucial for entrepreneurs who have a business concept but need to assess its viability in the real world. Pre-seed funding enables them to conduct thorough market research, create prototypes, and test their products or services with early users.

It may also be time to build a small core team or bring on additional co-founders, especially by bringing in essential skills that the founders might lack. This initial team is key to developing the product, establishing basic business operations, and setting the stage for future growth. 

Securing pre-seed funding is a critical step for startup founders, and it involves a series of strategic and well-planned actions. Here’s a roadmap outlining these steps:

Begin by solidifying your business idea. This includes understanding your product or service, the problem it solves, and your target market. Conduct initial market research to validate the need for your solution.

Develop a comprehensive business plan that outlines your business model, market analysis, financial projections, and long-term vision. A compelling pitch deck is crucial for presenting your idea succinctly and effectively to potential investors. Practice and refine your pitch. It should clearly convey your business idea, the market opportunity, your unique value proposition, and the potential return on investment.

Start networking to connect with potential investors. This includes angel investors, early-stage venture capitalists, and other individuals or entities interested in pre-seed investments. Attend startup events, join entrepreneurial communities, and leverage online platforms.

Start reaching out to potential investors. This can be through direct pitches, introductions from mutual connections, or at pitching events. Be prepared to follow up and provide additional information as needed.

Once an investor shows interest, negotiate the terms of the investment. This includes the valuation of your company, if applicable, the amount of equity you’re willing to give up, and any other conditions of the investment.

Engage in the due diligence process, where investors will examine your business’s legal and financial aspects. Ensure all your documents, such as incorporation papers, patents, financial statements, and contracts, are in order.

Once due diligence is complete and terms are agreed upon, finalize the investment. This usually involves signing a term sheet and legally binding documents.

After securing the funding, focus on using the funds effectively to reach the milestones you’ve set. This can include further product development, hiring, and early marketing efforts. Also, start planning for future funding rounds based on the growth and milestones achieved with the pre-seed funding.