What is Pre Seed Funding and How Do you Raise It?
Angel Funding —8 min read
Finding adequate funding is one of the biggest challenges many entrepreneurs face in the course of building their businesses. Lack of resources is an even more glaring issue at the very early stages of the startup journey — you have a fantastic idea, the perfect team, and you’ve done your homework, but you need someone to take a chance on you before you can get the ball rolling. That’s where pre-seed funding comes into play.
Pre-seed funding is the very earliest type of funding a business can receive (besides bootstrapping). Pre-seed funding occurs even before seed funding, which occurs before series A, B, etc.
The purpose of pre-seed funding is to provide startup founders with the resources to begin developing their ideas. When a founder comes to an investor seeking pre-seed funding, they usually have little more than a concept, a team, some research, and perhaps a prototype.
What’s the Difference Between Pre-seed and Seed Funding?
At first glance, the distinction between pre-seed funding and seed funding may sound insignificant. However, they are actually very different stages of the fundraising process that each require their own unique approach.
Obviously, pre-seed funding comes before seed funding. But more specifically, pre-seed funding usually happens before product development begins while the startup is still just a promising business idea. Most investors want to see some kind of proof of traction before they’ll invest in a seed round.
The amount of capital invested at the pre-seed stage is usually much lower than at the seed stage. A successful pre-seed round may generate a few hundred thousand dollars, whereas it’s not unusual for successful seed funding rounds to raise several millions of dollars.
A pre-seed round is a much riskier investment than a seed round since investors are betting their money on a totally unproven business idea rather than a young company showing signs of early traction. This can make it tricky for founders to persuade investors to provide pre-seed funding — luckily, pre-seed rounds are starting to become more commonplace, whereas little more than a decade ago they were very much the exception.
When Is the Right Time To Raise Pre-seed Funding?
There is no definitive perfect time to begin seeking a pre-seed funding round. It depends heavily on your startup’s unique circumstances and what you need from investors at the pre-seed stage. Some indicators that you might be ready to pursue pre-seed funding include:
You Have a Pitch Deck
Since your startup hasn’t grown much further beyond an idea at this point, your pitch deck is one of your most important tools for winning over pre-seed investors. Your pitch deck should help you clearly articulate the idea behind your startup — most importantly: what problem it solves, how it does so, and for whom — and provide a concise breakdown of your market research and financial projections thus far. It should also contain an overview of your team and the history of your startup (however short it might yet be).
You Have a Prototype
Even if you haven’t launched or have a minimum viable product yet, being able to show investors a working prototype is a huge advantage at the pre-seed stage. It doesn’t need to be a finished product at this point — just enough to demonstrate key features and capabilities. Depending on the type of product you’re proposing, some investors may not even need to see a prototype at all at the pre-seed stage. If it’s not practical to build something yet, try to have at least a blueprint or detailed design of some kind ready for your pre-seed pitch.
You Have a Strong Team
Many investors would rather bet on a fully assembled core team than a lone founder — no matter how promising their idea might be. Showing pre-seed investors that your startup has the right talent on board to actually build the product and put the business plan directly into action can go a long way toward persuading them to invest.
You Have Evidence of Early Interest
If you have any positive reviews from early supporters, highlight them in your pitch to pre-seed investors. Though you likely haven’t yet built up a significant customer base, you can use any initial enthusiasm for your product to your advantage — even if it’s just a vote of confidence from a friend or family member who has tried your prototype for free and benefited from it.
You’ve Created a Revenue Model
Investors like to see hard evidence of growth potential in the form of numbers — but since you don’t have those numbers yet at the pre-seed stage, the next best thing you can provide is projections. Coming to a pre-seed funding pitch prepared with an ambitious yet realistic revenue model is a great way to tip the scales in your favor.
How to Find Pre-seed Investors
There are generally fewer sources of capital available to founders at the pre-seed stage than at later stages due to the inherent risks of pre-seed investments. This makes it especially important to know where to look for investors during the pre-seed stage.
Research Investors Who Have Invested in Startups Similar to Yours
The best way to do this is with tools like Crunchbase or AngelList. Make sure you specifically search for pre-seed investors, because many formal investors like VC firms are not interested in providing money at the pre-seed stage.
Know What You’re Looking For
Just because a prospect may have the ability to invest doesn’t mean they’re the right fit. It’s important to find a pre-seed investor who’s in sync with your startup’s goals and values. When you’re evaluating investors, you should consider factors like their level of experience, their professional background, and what industry or industries they normally invest in.
Types of Pre-seed Investors
Here are a few of the most likely sources of pre-seed funding for most startups:
Angel investors are some of the most popular sources of initial capital for startups. These investors are generally wealthy individuals who use their money to help startups in which they personally believe get off the ground. Angel investors are usually comfortable with accepting the big risks that come with pre-seed investment for the chance of getting a slice of a success story.
Crowdfunding is a newer form of pre-seed funding that has gained enormous popularity over the past couple of decades or so. Using crowdfunding platforms like Kickstarter, GoFundMe, Indiegogo, or many others, founders can publicly present their business ideas and accept donations from individual users who want to see them realized — often in exchange for incentives like early access to the product, extra features, additional merchandise, or just about anything else the founders can think of.
Startup accelerators are another source of pre-seed capital for founders. Accelerators like Y Combinator offer significant monetary investments in addition to other valuable benefits like connections and mentorship. However, acceptance into these programs can be extremely competitive.
Pre-seed Venture Capital Firms
Pre-seed VC firms are venture capital firms that specialize in funding very early-stage startups. Most VC firms aren’t interested in investing until the seed round or later, but pre-seed VC firms cater to founders who are still in the pre-seed stage. They usually offer larger investments than angel investors but also have a longer, more complicated decision-making process.
Friends and Family
Friends and family are some of the most common initial sources of funding for founders. Reaching out to your personal support network is a great way to get started and take stock of what resources you have available to you up front.
How to Use Pre-seed Funding
There’s not one right way to use pre-seed funding. The purpose of a pre-seed investment is to help a business bridge the gap between idea and reality, so the best use of the money depends on what your business needs to get started. Here are a few of the most common ways startups use pre-seed funding:
Setting Up Infrastructure
There are numerous initial expenditures required to get a business up and running, including establishing a legal entity, acquiring office space and equipment, licensing software, and more. These up front costs of building a startup are a perfect use for pre-seed investment funds.
Building the Product
By the time your business receives a pre-seed investment, you may or may not already have a minimum viable product ready. It’s good to create a prototype as soon as possible, but if your product is more complex and expensive to produce, pre-seed funding can provide the means to finalize the designs and actually build a working product for the first time.
Producing Marketing Materials
At the pre-seed stage, your customer base is either very small or nonexistent. Pre-seed money can fund the first round of sales and marketing materials that will help you get your product in front of your target audience and gain a foothold in the market. Pre-seed investors don’t necessarily need to see traction, but it will become much more important in later stages, so many startups use their pre-seed funding to establish that pivotal initial traction that will pave the road to further investments.
Hiring Key Roles
A strong founding team is important from the very start, but there may still be important team members left to hire after you’ve accepted a pre-seed investment. For example, a non-technical founding team might use pre-seed money to hire someone with the technical know-how to help them build their idea for real — conversely, a technical team with little business experience might use pre-seed money to hire someone with a marketing background to help them establish a customer base.
Navigating the Pre-seed Stage
The pre-seed funding stage is often misunderstood and sometimes overlooked altogether — but the right pre-seed investor is often what launches a great idea into a successful business with real customers.
The earliest stages of the fundraising process are often the hardest, especially for first-time founders. If you’re having trouble navigating any part of the pre-seed stage, like validating your business idea, assembling a team, or building a pitch deck, consider partnering with a mentor to give yourself an extra advantage.