You might look for ways to get your company off the ground as a new startup. One suitable option is pre-seed funding. But what is pre-seed funding? How to get pre-seed startup funding? How long should pre-seed investment last? And who funds pre-seed investments? This blog will answer these questions and any more you may have concerning pre-seed funding.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
The pre-seed funding round is an early-stage funding phase where investors provide capital to a startup company. This financial backing helps the new company run its operations to developing products and services. In return, a pre-seed investor get an equity stake in the company.
Pre-seed investments may follow bootstrapping funding. However, they precede seed funding.
Since pre-seed companies are relatively in the early stages, they often consist of the founders selling their business idea. At this stage, the company is all about doing market research to establish whether its product fits the target market and develop a minimum viable product (MVP) to convince investors to invest.
At this early stage, startup businesses are yet to make revenue since their idea is still in the conception phase. Pre-seed funding for startups pay for initial operation costs like hiring personnel and developing products.
Raising pre-seed funding typically comes from bootstrapping, close friends, family members, and supporters. Nevertheless, you can also get pre-seed funding from angel investors, venture capital firms, incubators, accelerators, and equity crowdfunding platforms.
The common terms in pre-seed startups are:
A pre-seed investor is interested in the company’s short- and long-term goals. They may ask:
Pre-seed capital validates the credibility of a startup idea before getting to the seed funding for the actual production of products. The money raised is often too small, so it is not considered an official funding round.
Pre-seed fundraising is small and often generates between $50,000 and $250,000. This is because securing pre-seed funding is challenging as it involves selling an idea, not an existing product.
There is no definitive answer to this since not much is happening in the pre-seed stage. Nevertheless, the valuations may range between $50,000 and $5 million.
Typically, a pre-seed investment has meant investors take a 5% to 10% equity stake, and the founder(s) hold the majority stake in the upcoming business.
It often takes 3 to 12 months to raise pre-seed money. Most pre-seed rounds have a runway duration of 6 to 9 months.
Pre-seed funding stage is followed by a seed round. The startup company moves from raising money to validate its idea to creating the said product.
Early-stage companies have difficulty convincing investors to invest in their new business venture. The absence of actual financial figures and data to support the potential impact or success of the idea limits most startups.
To succeed in acquiring pre-seed funds, here are three preparation steps you should take.
In order to boost your odds of raising capital in the pre-seed round, avoid the following mistakes:
Both seed funding rounds are critical to a business, but they differ. Pre-seeding is not regarded as the first official round of funding, but the seed round is. Plus, pre-seed receives less financial resources than seed and occurs before product development and growth traction.
It is thrilling to work at a pre-seed startup as it is the birthing phase of a successful upcoming business. However, attracting investors to fund an idea rather than an existing product with a customer base and growth traction is a challenge.
Pre-seed phase involves raising pre-seed funding from investors. There is little or no money to hire or pay employees at this stage. However, once the company receives pre-seed capital, founders may receive about $50,000 a year.
Pre-seed funding helps actualize a business idea into an operational business. To guarantee your success, conduct market research on how your product will fill a gap in the market, craft a compelling pitch deck, and offer a captivating presentation to your investors.
Additionally, only choose investors aligned to your niche who have proven successful in their previous pre-seed projects.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
