Pre-Seed Funding for Startups – A Detailed Guide for Founders

Equipment needs, office rentals, and employee hiring are all necessities for new businesses or startups. They’ll need outside funding to complete these tasks in almost all instances. This is where seed funding and pre-seed funding for startups enter the picture. 

In other words, one thing is necessary for the start-up process: money or capital. Without funding, there’s a good possibility that a business won’t succeed in bringing a product or service to the market. A lot of the language can be perplexing for first-time startups because there are multiple funding rounds.

The idea of seed funding is one that many new startup owners and entrepreneurs are familiar with, but pre-seed funding is just as crucial to comprehend. Pre-seed funding may take precedence over seed funding in the right situations as investors put money into a company’s business concept.

Want to learn more about pre-seed funding? Keep on reading. 

In this article, we will learn about the meaning and significance of pre-seed funding for startups, to begin with. Then, after discerning what is pre-seed funding, we will learn how it works and how to get started with it. We will also take a look at the difference between pre-seed startup funding and seed funding along with the information on how much pre-seed money you should raise and the various sources of the same. So, let’s get started. 

What is pre-seed funding to begin with?

Pre-seed investment frequently occurs at the beginning of the funding process, before seed-stage startup funding and further phases. Pre-seed investors provide firms money at this phase in exchange for an equity stake so they may start creating products or services. 

This stage could follow even earlier funding phases like bootstrapping with a company owner’s personal capital or the first round of angel investments.

Since most items haven’t yet been produced and businesses could only have a prototype, pre-seed investment mainly entails investing in an idea. Pre-seed fundraising typically isn’t large enough to qualify as an official round of funding. 

However, to provide the groundwork for anything significant that has the potential to upend the industry, it is necessary for some entrepreneurs to receive this infusion of funding.

Pre-seed fundraising is necessary to provide the groundwork for the commencement of the business operations and to guarantee the viability of the founders’ venture. This foundation is laid by:

• Through conducting surveys, research, and analysis, it is possible to confirm or refute theories about the market, demand, and intended product.
• Enlisting the support of important stakeholders, such as the chief technical officer and chief financial officer, to turn the concept into a functioning company
• Future-proofing the business by registering important patents, trademarks, and intellectual property.

What’s the ideal time to get funding for your pre-seed startup?

The phrase “right place, right time” is crucial knowledge for any business owner. You must be aware of your startup’s readiness to look for finance. Recall that every year, investors interact with thousands of entrepreneurs. Being underprepared will result in a swift rejection.

You must be more persuasive than other businesses in order to successfully raise money. This goes beyond just persuading an investor. The figure below specifies some of the indicators that provide you with the sense of readiness to raise pre-seed funding.

Some indications that your pre-seed startup might be prepared to start meeting pre-seed investors are listed below:

• You’ve already established that your product fits into the market you’ve selected. Though they may not have tested their findings with a finished product yet, founders will have conducted their research.
• Building a revenue strategy that is both ambitious and feasible should be the main emphasis of entrepreneurs. Investors are interested in your plan for generating profits for them.
• Only a handful of investors will take solely a concept seriously, therefore you need a prototype. You ought to have a prototype that at the very least shows the main characteristics of a product (a Minimum Viable Product/MVP). A finished product is not necessary for pre-seed firms.

The fact that pre-seed investors are entering the competition at the earliest possible stage does not guarantee that they will back a simple concept. Even if your company might not be as established as a startup looking for seed money, you don’t have to arrive without anything. Be prepared with whatever data and numbers you may have.

One of the simplest ways to determine when it is appropriate to seek a pre-seed round is to amiably solicit investor input on your firm. Then, present them with your goal and presence and ask them if they believe you are prepared for funding. When several investors say yes, it’s generally a good idea to start your fundraising efforts.

Early summer, when investors are away on vacations, and the end of the year holidays are the worst seasons to raise money. During these parts of the year, investors usually take a break from searching for fresh opportunities. Thus, it would be wiser for you to concentrate on developing your pitch and obtaining those pathways for introductions.

Difference between pre-seed funding and seed funding

Similar to all fundraising rounds, there is some overlap in the parameters. Although there are some standards with regard to growth, product/market fit, etc., the primary distinctions between each round boil down to things like business valuations and investment level.

1. The first ‘official’ round of fundraising is frequently referred to as seed funding. This fund is primarily used to create a minimum viable product.
2. Pre-seed investments typically do not provide founders with as much money as seed investments do.
3. Pre-seed funding can occur prior to any product development, but seed investors typically demand that the company demonstrate some sort of traction.
4. Pre-seed funding for startups typically raises between $50,000 and $250,000. In contrast, seed funding can raise as much as $2.5 million to $7.5 million. Founders often receive more contributions through seed funding than pre-seed funding.
5. Pre-seed funds are normally funded by friends, family, or startup incubators, whereas seed funding is sourced from venture capitalists and startup accelerators.
6. To source the pre-seed funding, merely the idea works, however, for seed funding, investors are keen to evaluate the reports indicating growth tractions.
7. As pre-seed funding is utilized for MVP development, it is raised for a targeted timeline of 3-9 months. In contrast, the seed funds are utilized between 12-18 months before seeking the next round of funding.
8. The seed funding stage requires the company to present the developed MVP, whereas the pre-seed funded firm seeks funds to complete the prototype of the product, build the team, and more.

To put it another way, pre-seed capital is raised to show whether a product can satisfy the demands of the intended market. However, seed capital is utilized to launch complete operations for a business strategy that has already been approved. 

When a firm has already experienced some product traction, it is time for the first official financing round. As a result, institutional investors are more willing to support a startup during its seed round than they would have been in a pre-seed stage.

What should you aim for when trying to raise pre-seed funding for startups?

First, a strategy is created that outlines the quantifiable milestones that must be accomplished as well as the funding needed to do so in order to settle on the amount to be raised. Typically, a pre-seed round raises between $50,000 and $250,000. 

Investors won’t be interested in requests for too little money because it will be pointless for them to listen to proposals for such a small sum. However, without an MVP, it will be challenging to generate a significant amount of money.

How to build an MVP that raises money for your startup?

Start with conducting a thorough market research. Identify your target audience and user persona. Try to get answers to questions such as ‘Who is your target user?’, ‘What are their needs?’, and ‘Why would they use your solution?’

Once all replies are found correctly, outline the key MVP features of your product that address the needs of your target audience. Once decided on the features, it is time to build the MVP. After the MVP is launched, analyze feedback and continue working on your product to scale your business in the future.  

How Appinventiv helped JobGet bag $52 million funding?

Appinventiv helped JobGet build a job search platform that made the recruitment process for blue-collar workers easier. Our team of experts kicked off the project by having a clear understanding of the client’s vision for the product and integrating MVP features that would help achieve the objective.

Our team used technologies such as artificial intelligence to make the entire job-seeking process time-friendly and user-friendly.

Our efforts led to reducing the job search time for blue-collar workers from days to minutes. Our efforts also helped JobGet bag funding twice of $2.1 million and $52 million, respectively. 

The steps you should follow as a pre-seed stage startup founder to raise pre-seed capital

Financing for pre-seed rounds is quite similar to funding for seed rounds. The distinction is that it takes more effort to persuade an investor that an unproven product can have an impact. Keep in mind that, unlike a seed firm, you have not yet determined whether your idea has any commercial traction.

Following are the steps you should follow for your pre-seed funding for startups: 

Step 1 is to create your pitch deck

Even at this early stage, raising funding requires a pitch deck. Pitch decks provide investors with all the information they require regarding your firm, the product, the market, and your short- and long-term financial projections.

Investors will learn about the product /service and the issue it addresses from a pre-seed presentation deck. It should contain details about the history of your company and you, the founder.

Even though you are unable to demonstrate current traction in terms of market research, you can nonetheless carry it out. In the lack of market experience, focus groups are essential at this point for establishing client interest.

Step 2 involves making a list of investors

Pre-seed startups may not receive funding from all investors. Utilize your professional contacts to identify investors who are intrigued by companies at this point in their development. Investigate potential investors using these key traits:

• Investing style – What kind of investor are you looking for? Some firms require funding, while others also require knowledge and contacts.
• Choose the investors whose investment amounts correspond to your needs for finance. While some investors only contribute little sums of funds, others specialize in making substantial investments.
• What level of industry knowledge does an investor possess? If investors are helping to expand and scale your startup, they need to be aware of your industry.
• Experience – Look into a potential investor’s prior experience working with pre-seed firms. Experiences before seeds are quite different from those after seeds.
• Integration: The effectiveness of your working connection with an investor will depend on that partnership’s overall outcome. Check out an investor’s track record to see how they’ve impacted other pre-seed firms in the past.

At this point, it’s important that the investor possess knowledge about pre-seed companies in particular.

Step 3: Showcase to investors

Before investing in your company, the majority of investors will need to see a presentation in person. It goes without saying that presenting your company is the most nerve-wracking step in the process.

You can showcase your true self during presentations. As the founder of a startup, you must project both confidence and humility. For pre-seed investors, conceit and arrogance are key caution signs.

The places to look for your pre-seed funding

Pre-seed funding for startups can originate from a range of sources, in contrast to later fundraising rounds (such as Series B and so on) which are often more or less exclusive to venture capital companies.

Even though the specifics of your agreement will differ depending on you as a person and the type of investor you choose to work with, you can anticipate making a concession in exchange for the investment.

The most typical pre-seed capital sources are broken down as follows:

1. Pre-seed angel investors

When it comes to pre-seed investment, pre-seed angel investors are the most prevalent category of investor.

Angels are essentially affluent people (as opposed to a whole company, which we’ll discuss later). These individuals often have some experience expanding a business, even if that experience is not always vast.

You are more likely to locate an angel investor to supply pre-seed capital because these investors have a tendency to be more interested in riskier initiatives than your typical VC business.

Angel investors often support amounts up to $100,000, so they might not be the greatest choice if you require a significant upfront sum of money. Due to the fact that an angel investor is the only decision-maker, working with them is typically much faster and more fluid.

Also Read: How to Get Angel Funding on Your Mobile App Prototype?

2. Incubators 

They encourage creativity and assist companies in honing their company concepts. They offer help, office space, and networking possibilities, among other things. There is no set duration, and it may go on for a number of years, allowing a firm the opportunity and time to attempt to develop a strong business plan.

3. Accelerators

A startup accelerator is a cohort-based, mentorship-driven business program that offers funding and training to early-stage firms. 

Typically, it lasts three to six months. Startups must at the very least have an MVP to be accepted into this program. In exchange for funding, often between $10 to $120,000, accelerators take 7 to 10 percent of the equity.

4. Crowdfunding

Crowdfunding is a method of getting small donations from many people online. Here, the firm has access to a large investor base and is exposed to thousands of people’s inspections, which can help reveal product flaws. 

Equity-based, rewards-based, donation-based, and debt-based crowdfunding are all possible. Reward-based crowdfunding is especially pertinent for the pre-seed round because it doesn’t necessitate having a proven company or product.

What role can Appinventiv play in raising funds for your business?

A rapidly expanding IT consulting company, Appinventiv can help you create/ideate a product prototype or a minimum viable product that can lead to successful fundraising rounds as we did for JobGet and Vyrb, a voice-controlled social media app. 

Over the years, Appinventiv has collaborated with innumerable entrepreneurs and our software development services for startups have helped them establish themselves as industry leaders and strengthen their fundraising rounds at every stage of their business.

FAQs

Q. When should I get pre-seed funding for my startup?

A. You know you are ready to raise money for your startup through a pre-seeding funding round when you have established that your product fits rightly into your chosen market, you have a prototype or an MVP ready that shows the main characteristics of a product, and you have a revenue strategy in place.

Q. How do you get pre-seed funding for startups?

A. To get pre-seed funding for startups, you should follow the below steps:

• Create your pitch deck in step one. Even at this early stage, you still need a pitch deck to start raising funds.
• Create an investor list in step two. Pre-seed startups may not receive funding from all investors.  Present to investors in step three.
• Successfully negotiate.

Q. How much is pre-seed funding usually?

A. Pre-seed rounds often raise between $50,000 and $250,000 in total. It will be futile for investors to listen to demands for such a small sum, thus they won’t be interested in requests for too little money.

THE AUTHOR

Sudeep Srivastava

Co-Founder and Director