Looking for Pre Seed Funding?
What does pre seed funding mean?
What’s essential to know?
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Table of Contents
What Is Pre Seed Funding
You have found a great business idea that can potentially generate awesome revenues.
If you had enough money to start the business, you know you will make it big.
This is where pre-seed funding becomes an interesting topic to discuss…
Keep reading as I will tell you what pre-seed funding is all about, why it’s important, where you can find it, how much you can get, and more.
But first, what is pre seed funding?
Pre seed funding refers to the earliest round of funding that you get for a startup where you are looking to raise money to validate your business idea.
The objective of pre seed capital is to establish a minimum business operation and determine whether or not your business idea is viable.
Using your pre seed capital to validate your business market, to ensure there’s demand for the product and services you’re looking to offer, or to perform more in-depth research on your business model helps you confirm the viability of your business idea.
Keep in mind that not all business ideas can be successfully turned into a business.
For most investors, pre seed funding is not considered a formal round of funding for the startup as the amounts that are given are generally not very high.
Nonetheless, if you have a great business idea that you want to get off the ground, getting pre seed funding may be the right approach.
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Why Pre Seed Funding Is Important
Pre see funding is a very important step in the life of a startup.
When you raise pre seed money, your objective is to ensure that your business idea has the potential to be turned into a profitable business.
Typically, your pre seed funding will be used to validate your business hypothesis, find key stakeholders, and formalize your business and business concept ownership.
Business Hypothesis
An important reason why you may need pre seed funds is to validate your business hypothesis.
Business owners will conduct market research to validate whether or not there’s a market for their business and if it’s worth pursuing it.
The hypothesis validation is typically done through market research, interview with prospects, and prototype creation.
Finding Key Stakeholders
Another important use of pre seed funding is to find the right business stakeholders to take your business idea to the next level.
A founder may look for someone with skills and competencies that he or she does not have.
For example, a technology founder may want to find someone who excels in sales and marketing.
It’s also possible to use the pre seed funds to hire the right type of employees to be able to further develop the business idea into a concrete business.
Business Ownership
You have developed a new product or have found a proprietary method of achieving certain results more affordability or more quickly.
Now, you need to make sure you own the rights to what you have created.
Most entrepreneurs and startup founders will choose to form a corporation to benefit from the limited liability protection it offers them.
Once the legal entity is formed, you will need to ensure you get the proper business licenses and permits for your business.
Then, you’ll need to consider your intellectual property strategy.
Do you need to file for a patent?
How will you protect your trade secrets?
You may need to use your pre seed funding to pay attorneys or qualified professionals to steer you in the right direction.
When Should You Look For Pre Seed Funding
Getting funding for your startup at the right time can help you take your business to the next level.
There’s the saying that goes “to be at the right place and at the right time”!
Although there’s no cookie-cutter answer to this question and every startup should evaluate its own funding needs, here are some milestones that can suggest that you’re ready to get pre seed capital:
- You validated your product through market research and have confirmed that there’s a viable market for it
- You have already built a prototype and now you need to hire more people to further develop your product
- You have your product ready and now need a team to start selling it
- You were able to find some clients and are receiving more orders
Finding investors to invest in your business at the pre seed funding stage can be challenging.
Investors want to see that there’s something special about your business and that it has the potential to become profitable if the founders execute things the right way.
The moment you start searing for investors is the moment that you have something to show for your business, a story to tell, and something to brag about.
Generally, pitching for pre seed funding when you’re empty-handed may not produce the best results for you.
Types of Pre Seed Funding
What are the different sources of pre seed funding that you can tap into?
Bootstrapping
Many entrepreneurs will use their own money to start funding the business.
You’ve heard of the term “bootstrapping” which means that the entrepreneurs use their own personal savings to fund the business.
If you need more money, that’s when you can start looking within your inner circle.
Family And Friends
When you need more money than you have saved up for yourself, it’s very common for founders to ask for pre seed money from their family and friends.
Family and friends are likely to provide you with the necessary funding since they trust you.
They may not know much about the business but they trust that what you say you will do is exactly what you will do.
Generally, the amounts given by friends and family are not high.
Incubators
You used your own savings and got money from your family and friends, but you need more.
This is when you can start going outside of your inner circle.
The first stop is to reach out to incubators.
Incubators are typically non-profit organizations supporting entrepreneurship and small businesses.
Incubators may provide access to a network of professionals who can help you in your business.
They may also provide you with some assistance like giving you the right to use their office space for meetings and presentations.
Accelerators
Next in line is the accelerators.
Accelerators provide startups with both funding and mentorship.
However, in exchange for the pre seed funding and mentorship, they will take an equity stake in your business.
Not all startups can qualify for funding with accelerators.
In general, you need to have a minimum viable product to consider going to accelerators for funding.
You can expect to receive between $10,000 to $150,000 in funding and you may have to give away up to 10% of your shares in the business.
Crowdfunding
Crowdfunding could be an interesting way for a startup to raise the necessary funds to get the business off the ground.
With equity crowdfunding platforms, you can get many investors to invest a small amount of money into your business.
The advantage is that you can get the funding that you need whereas the investors dish out a small amount of money thereby taking less risk.
Angel Investors
Angel investors are investors who have access to capital and are generally wealthy.
In many cases, angel investors will not only be able to provide you with the funding that you need but they may also present you to key contacts within their network.
Having wealthy investors in your startup circle can be an interesting path for startups as you can not only get capital but also add a key stakeholder to your business.
VC Funds
VC firms, or venture capital firms, are a type of business that provides financing to startups in exchange for an equity interest.
In most cases, VCs will provide official funding rounds like Series A to Series C, D, or more.
However, you may be able to find some VCs who provide pre seed funding.
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How To Raise Pre Seed Funding
The first thing that you should keep in mind when looking to raise pre seed funding is that you are in the very early stages of your business and investors may find it risky.
When an investor provides you with pre seed money, they are taking a high level of risk.
In essence, they are taking a leap of faith in the startup founders hoping that they will deliver the merchandise.
For this reason, be sure to target investors with the appetite to invest in early-stage startups.
Otherwise, you’ll be disappointed with the constant rejections.
Once you have targeted the right investors (could be angel investors, accelerators, or VC firms), you should then prepare yourself.
Try to find as much information on your investor as possible.
What type of businesses have they invested in already?
What type of management team are they looking for?
How much are they expecting in a return on their investment?
Once you have carefully researched your investors, you should prepare your pitch deck.
The pitch deck is where you will provide crucial highlights about your business with the objective of getting a favorable investment decision from the investor.
You have to be ready to pitch your business to dozens and dozens of investors and get rejected every time.
Don’t expect to get funds when you pitch your first investor.
With every pitch that you make, try to enhance your pitch deck, bring slight adjustments to it to make it more on topic, and just be creative.
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How Much Can You Get In Pre Seed Funding
At the pre-seed stage, the amounts that you can raise can vary quite a bit depending on the nature of your business.
You can potentially raise anywhere between $10,000 up to $250,000 in pre seed capital.
If you are starting a technology company with a promising new product, application, or software, you may be looking at the upper end of the spectrum.
If you are in a more traditional field with fewer bells and whistles, you may get the lower end of the spectrum.
What’s important is that you determine how much money you need for your business.
As an entrepreneur, you must know where you are and where you are going.
Consequently, you must know how much you’ve spent to get to where you are and how much you need to get to the next level.
Establish the amount based on logical and explainable financial models or forecasts.
You should be able to easily explain how much you need and what the money will be used for.
Make sure you think about how much money you will ask for so you don’t regret it later.
If you ask for too little, you’ll be disappointed.
If you ask for too much, investors will not invest.
You should ask for just the right amount.
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Pre Seed Funding vs Seed Funding
What is the difference between pre seed funding and seed funding?
As you can see from the terms used, “pre seed” and “seed” both relate to agriculture and farming.
When you are at the pre seed stage, you are putting in place the foundation to sow the seed.
When you are at the seed round, you are sowing the seeds.
In other words, pre seed funding is when you are at the stage of validating your business idea whereas the seed stage is when you’re launching your business based on the idea.
You will use pre seed funding to prove that your business idea is viable, incorporate your company, register your patents, put your team in place, and lay the groundwork to get the business started.
You will use the seed funding to start turning the business idea into a profitable business venture.
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Takeaways
So there you have it folks!
What is pre-seed funding?
How do you raise pre-seed funding for your startup?
Pre-seed funding is a type of financing that startups seek in the very early stages of their business journey.
Many business founders will ask their friends and family for pre-seed funding.
If they need more, they’ll go to incubators, accelerators, angel investors, crowdfunding sources, or even VCs.
It’s important that you are able to show the viability of your business idea so you can pitch your business idea to investors and get pre-seed capital.
This article is intended to give you a general idea or framework to guide you in your business journey.
I hope you are able to raise the funds you need for your business, stay strong!
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