Pre-Seed Funding Explained (And How To Raise It Successfully!)

Young Business People Presenting Startup

“The world of startups is a competitive place. With so many new companies starting up each day, it can be not easy to get your foot in the door. Pre-seed funding is often the solution for these emerging entrepreneurs looking to take their ideas and turn them into realities.”

It’s not always easy to get the funding you need for your startup. While some people rely on their savings, others turn to friends and family or even raise money through Kickstarter campaigns; there is another option that can provide an easier way for entrepreneurs in need of funding: pre-seed funding. Pre-seed funding allows startups with a great idea but little capital to show investors what they are capable of before taking any financial risks; this type of investment is typically done by angel investors or venture capitalists who want to see if the company has potential before committing more capital into it. Pre-seed funds are also less risky than traditional seed rounds because they’re smaller investments made earlier. 

cropped view of man stacking coins on table, investment concept
man stacking coins on table showcasing the concept of pre-seed funding

What is Pre-Seed Funding?

Pre-seed funding is a type of seed financing that provides pre-revenue startups with the capital they need to get their idea off the ground. According to Investopedia, pre-seed rounds are for companies “so early in the process that it is not generally included among the rounds of funding at all” (Nathan Reiff). Because pre-seeding allows entrepreneurs to avoid going through months of trying to secure initial investment from venture capitalists without having anything concrete yet proven about their company, pre-seed funding might be considered an alternative option compared with other types of startup fundraising.

A pre-seed fund is needed to clear the ground and set an atmosphere for business operations to begin and ensure the entrepreneur’s business is fruitful. This business atmosphere is attained by;

  • Verifying hypotheses relating to the unending demands of the customers and having a planned solution by carrying out survey analysis and research.
  • Introducing key stakeholders to the business.
  • Registering trademarks and copyrights to protect the business both now and later in future.

The pre-seed funding for a startup is often small to be considered an official round of funding. But for some startups, this is an essential inflow of capital to set the base and atmosphere for anything or any obstacle that can affect the industry.

Pre-funding can help build momentum towards securing future investments since it allows how much money your business can generate on its own. Angel investors provide Pre-seed funding, pre-seed venture capital firms, and accelerators using their pre-seed investment funds. According to the Wall Street Journal, pre-seed funding can range anywhere from $25 thousand up to six figures. 

Pre-seed rounds are typically lower than other types of financing due to their early-stage nature and should be considered a means for companies that have yet to make revenue or are pre-revenue. Entrepreneurs will need to consider how much money they’ll require before getting started with pre-seeding since this factor, along with others including valuation, ownership percentage, and milestones agreed upon by both parties involved in pre equity deals (Entrepreneur). Pre-seed funds don’t expect you’ll give up majority control over your business but do hold on more than traditional angel investors. There is no set amount. It is up to the pre-seed fund investor. 

businessman counts money
businessman counting money showcasing the concept of securing funds from a startup round

Purpose of Pre-Seed funding

Pre-seed funding serves multiple purposes; the first is that it allows a business to expand its product offering and customer base before obtaining any venture capital financing. Pre – Seed fundraising also helps the company gather data on customers so more accurate projections of future sales can be made. This means that when venture capitalists start taking an interest in your project, you already know how much money needs to be raised from them, making negotiations easier. In addition, having this information beforehand will allow founders to get better valuations from VCs because their company is selling it. In a broader sense, a startup raises a pre-seed startup capital to carry out various tasks that enable it to make its business idea ready. These tasks are grouped into three;

  • Getting key stakeholders
  • Hypothesis validation
  • Concept or invention ownership

Getting Key Stakeholders

Stakeholders are people who are needed in converting the idea into an actual reality. For instance, a non-tech founder who generated the idea will need a tech co-founder to convert this idea into reality. A startup will surely need to hire high-grade staff before the concept is even converted into a business. This task requires pre-seed startup funding to pay salaries and other related costs.

Hypothesis Validation

Carrying out some validation processes stands as a reason startups raise their pre-seed startup capital. To check the authenticity of their product, they carry out experiments based on already set hypotheses to review their offerings, the problems they want to solve, the value of their product, and the market. The idea is all about assumptions on the issue they are looking to solve and the possible chances of success. You can validate your idea through;

All these tasks require funding to be executed, where the pre-seed funding for a startup comes in.

Concept Or Invention Ownership

For the safety of your business as an enterprise, you’ll have to register your startup as a company. Aside from this, funds will also be needed for;

  • Licensing requirements 
  • Intellectual property rights
Businessman and his financial investment
Businessman and his financial investment showcasing the concept of pre-seed investors

How can I get pre-seed funding?

Pre-seed funding is a great way to get your app off the ground. But how do you go about getting this funding? Hold on tight as we’ll uncover ways you can get hold of this funding today and promote your businesses.

From Friends and Family Members

Seed funding is often given by friends, family members or angel investors looking to take a small part of the company’s future profits in return for their investment. They tend to be at higher risk with potentially high rewards that make them attractive to most entrepreneurs and startups out there. 

Through Crowdfunding

Crowdfunding is an easy way for entrepreneurs to raise money without giving up equity in their company or putting pressure on themselves financially. It’s also a great way for companies just starting and have little capital to break into product markets. 

There are several other ways entrepreneurs can get pre-seed funding. Crowdfunding is one such option where you sell your product or service to raise money from the general public. It’s an excellent way for startup businesses that may not have had much exposure yet and need that initial capital boost to get going. 

Direct approach

Another way is to approach potential investors directly and seek their interest in your business. Most pre-seed funding arrangements usually entail a small amount of money, but you’ll benefit from the experience and connections that such seasoned entrepreneurs can offer. If they’re interested in what you have to say, then it’s probably worth giving this option serious consideration at least once. 

You could also approach a high net worth individual or family office that may be looking to invest in the next big thing and help them get their hands on it before anyone else does. The best way is through networking events where you’ll have time to discuss ideas with other entrepreneurs, investors and potential partners to make a difference to your business. 

From Banks

Not all pre-seed funding comes in the form of cash, either. It could be that your bank is prepared to give you an overdraft or loan facility while they see how well you can manage it, but don’t just take their word for it – put together a business plan and submit it with supporting documents, so you have something solid backing up your application. 

There are plenty of other options, but the key to getting pre-seed funding is preparation and research. You’ll need to show that you’ve got a good idea for an app or startup with some form of proof it will work before any investor commits their cash too. But if you can convince them then, they’ll be willing to help fund the development of your business and get it off the ground. 

Money bag in a hand
Money bag in a hand showcasing the idea of securing pre-seed funding from different avenues

What are the different types of Pre-Seed funding

Pre-seed funding is a form of financing that provides the opportunity for startup founders to raise money before their business venture takes off. The term “pre-seed” refers to any seed capital given before an official round of seed fundraising, which often comes in the form of angel investment or VC funds. As explained by a tech entrepreneur in a conversation with VentureBeat, “Pre-seed money is seed money that you get before going out to raise your official seed round”. Pre-seed funding can be considered an early form of venture capital financing. There are several types of pre-seed funding: for example, – Seed capital is a type of financing that allows for the purchase of assets. – Preference equity combines convertible debt and common stock in one instrument, which can be converted to shares under certain circumstances. There are more examples of pre-seed funding available on sites like FundedByMe.

How to find the right Pre-seed investors?

When you are fundraising, it is important to find the perfect investor for your startup. There are several different types of investors who may invest in a new business, but finding the right one can be tricky when it comes to pre-seed funding. Let’s take a look at some things that will help you choose! You need someone with an interest in your industry. 

Everyone has different experiences and knowledge, so it is important to find someone who understands the same things you do for your startup. It’s also helpful if they have experience with startups like yours, but this isn’t always possible because every business is unique! If any of these sound familiar, then finding a pre-seed investor might be a good idea for you! This is where it can get tricky because even though some investors will sound great on paper, they may not fit with your company. 

There are definitely people who share the same values and goals that you do who will make an excellent pre-seed funding partner, but if none of the investors you meet up with seems to fit, find someone else! You don’t want to tie yourself down to an investor who doesn’t understand what your company is about or how it works. They could even end up hurting your business instead of helping, which would be very unfortunate! Sometimes finding the right pre-seed investors can take a bit of time, but it’s worth the effort. This is why many people wait to fundraise until they have a fully developed product or service before starting! Pre-seed funding for startups can be very beneficial if you find someone who understands your business and its goals. 

Pre-seed funding is available online through websites that help connect pre-funding companies to potential businesses. This way, you can position yourself as a startup by getting your name out there before having an actual company or product ready to show potential investors.

beautiful advisor and investor in suits shaking hands at office
two people shaking hands showcasing the concept of securing a deal and becoming business partners

Wrap Up

Pre-seed funding is the serves as bedrock on which the whole company will be erected upon. So, every point in this stage has to be planned and carried out effectively with care and precision. As a startup, the way you generate and manage a fund leaves a mark in the industry. It also stands as a good trust-building exercise for the owner of the business. A good reputation builds confidence in pre-seed investors, and it, in turn, goes a long way for the company at large. No one would like to invest in someone that’s not trustworthy.

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