The First-Timer's Guide to Landing Your Pre-Seed Round

What Exactly is Pre-Seed Funding?

Unlike a seed funding round, which typically focuses on scaling an established viable product (MVP), pre-seed capital allows startup founders to lay the groundwork for transforming a concept into something tangible.

Founders leverage this capital injection to sustain operations while validating their ideas and demonstrating traction with potential investors to mitigate risks before seeking larger-scale seed funding through more formal channels.

Pre-seed rounds are generally smaller in size compared to seed and funding rounds - with amounts ranging from $100,000 $500k. These early stages of funds provide entrepreneurs with a head start in product development without requiring validation of their business model from the start.

How Pre-Seed Differs from Seed Funding

  • Stage of the Business - Pre-seed funding is utilized to develop ideas or establish a viable product (MVP). Seed funding is secured once the MVP is created to assist with team recruitment, product refinement, and obtaining customers
  • Amount Raised - Given the different stages, these amounts tend to be much smaller than seed rounds.
  • Risk Level - Pre-seed investors take on higher risks by funding raw ideas and prototypes. Seed investors fund startups with some traction and proof of concept, reducing risk.
  • Use of Funds - Pre-seed capital is used for product design, early hires, and building an MVP. Post-seed funding goes towards scaling manufacturing, sales, and marketing efforts.
  • Traction - Pre-seed startups have little to no traction, while seed-stage startups have some traction through early adopters and revenue. Traction helps prove market viability.
  • Metrics - Given the traction seed startups have, they can showcase user growth, conversion, engagement, and other metrics. Pre-seed startups lack these metrics and focus more on founders' capabilities.
  • Investors - Investors for Seed Funding rounds can include friends and family, incubators and accelerators that can provide business guidance and high net-worth individuals who invest in startups, known as Angel Investors. As the business progresses, it may attract funding from angels, venture capitalists, and sometimes even strategic partners. 

When to Start Raising Pre-Seed Funding

Timing plays a role when it comes to initiating your pre-seed or seed funding round. The best time to begin engaging with seed investors is as soon as you have an innovative concept or an early prototype that you're eager to launch.

Pre-seed venture capital can provide the funds to transform your idea into a minimum viable product and commence real-world testing with customers. It's unnecessary to wait until you have a developed product before initiating conversations and pitching your concept to seed investors. Many founders make the mistake of dedicating time to product development and perfecting their prototypes before embarking on the fundraising journey. However, the reality is that securing some venture capital now allows you to allocate resources and time toward converting your idea into an MVP.

Starting the fundraising process early on can help align pre-seed investors to your vision. As you iterate on product development, you want supportive angel investors along for the ride. They can provide invaluable feedback and start making introductions on your behalf. Having pre-seed capital in the bank also shows future investors you have some validation and allows you to focus on business growth instead of fundraising.

The key takeaway is to avoid delaying much before seeking pre-seed money from backers. It's essential to take advantage of the enthusiasm surrounding your idea early stage and use that momentum to secure your fundraising round. These initial pre-seed funds will support transforming your disruptive concept into an early prototype and MVP.

How to Get Started with Pre-Seed Funding

Start by tapping your network for introductions to potential venture capitalist and pre-seed investors. Competitions like Startup Battlefield or local university pitch events offer prize money for winning startup ideas.

The key is to get your initial prototype or MVP in front of people who can provide the seed stage funds you need to take your product to the next stage of development. With the right network and pitch materials, you can generate interest in those critical early days of startup funding and close that first pre-seed round.

Evaluating Pre-Seed vs Seed Funding

Determining whether you require pre-seed or seed funding largely depends on the stage of your product development and traction. Here are some key differences:

  • Pre-seed funding is meant for the ideation stage, when you may have an idea or prototype. Seed funding is for when you have an MVP and are ready to scale.
  • There is a difference in the amounts raised. Pre-seed rounds usually range under $500K, whereas seed rounds tend to be between $1M and $5M
  • With pre-seed funding, you will be at a very early stage, which means that investors assume more risk.
  • Check where you fall on key milestones like having an MVP, number of users, revenue, etc. The more traction, the more it points to being seed stage.
  • Evaluate the norms and round sizes in your industry. A $500K raise could be pre-seed in some spaces and seed stage in others.
  • If you are raising a smaller amount from friends, family, angels, and accelerators at an early stage, it likely falls into pre-seed territory.

The stage of your product and business model, along with the traction you’ve achieved, are major factors in determining whether your next round should be pre-seed or seed funding. Assess where you are objectively to ensure you raise the right funding at the right time.

Preparing a Strong Pre-Seed Pitch Deck

Your initial presentation deck holds significance when securing funding in the early pre-seed stage part of your startup. Focus your pre-seed pitch deck on the following:

  • Your team: Highlight the background, experience, skills, and passion that equip you to build this company. Introduce all founders and advisors. Investors invest in people first.
  • The problem: Explain the pain point or need your startup is addressing. Use data and examples to showcase the scale and urgency of the problem.
  • Your solution: Describe your product or service and how it uniquely solves the problem. Share your secret sauce. Outline the technology behind your solution.
  • Traction: Share any early traction, even if minimal. Highlight user or customer interviews, early adopters, waitlists, or interest metrics. Traction proves people want your solution.
  • Business model: Provide an overview of how you'll make money. Show your pricing strategy or revenue streams.
  • Competition: Mention competitors but emphasize how you're different or better. Show why there's room for your solution.
  • Funding needs: State how much you're raising and how you'll use the funds. Share future funding plans over the next 1-2 years.
  • Financial projections: Include 3-5 year projections, even if speculative. Show your vision for massive growth. With a compelling, concise pre-seed pitch deck focused on these key areas, investors will be excited to fund your early-stage startup.

Finding the Right Pre-Seed Investors

There are several potential sources to tap when seeking pre-seed funding:

  • Angel Investors - Wealthy individuals who invest their own money in early-stage startups. Look for those investors who specialize in pre-seed investing or have domain expertise relevant to your startup. Reach out through your network for warm introductions.
  • Accelerators - These fixed-term programs provide mentorship, resources, and often pre-seed funding in exchange for equity. Top accelerators can help validate your startup and introduce you to more investors after demo day.
  • Friends & Family - Those closest to you are likely to believe in you and your idea early on,  but it’s important to be transparent about the risks involved in your venture 
  • Pre-Seed Funds - New dedicated pre-seed funds are emerging to close the gap between angel and seed rounds. These make sense for startups not ready for traditional seed funding. Look at funds focused on your vertical and location.

The best pre-seed investors offer more than just capital - they can advise on products, make introductions, or help refine your business model at a critical time. The best pre-seed investors align with your vision and can support your startup not only financially but strategically.

Valuation and Terms in Pre-Seed Rounds

Offering more than 20% equity during a seed round might make it challenging to motivate employees and attract venture capital firms for future investments.

Typical terms for a pre-seed round include:

  • Convertible notes that convert to equity in the next priced round at a discount of 10-20% or a valuation cap. This allows founders to delay establishing a valuation until the next funding round.
  • Non-participating preferred shares so investors get priority, liquidation preferences, pro-rata rights, and other rights over common shareholders like founders.
  • Vesting of founder shares over 4 years to ensure long-term commitment.
  • Employee stock option pool of 10-15% to enable hiring key team members.
  • Board seats or board observer rights for investors.
  • Full ratchet or weighted average anti-dilution protections for investors against future down rounds.
  • Having the right of refusal for fundraising rounds is crucial for founders. They must familiarize themselves with the terms of seed funding to ensure fair and favorable deals.

Benefits and Risks of Pre-Seed Funding

When considering seed funding, founders should carefully weigh its advantages and risks.

On one hand, securing seed funding provides founders with the opportunity to bring their ideas or prototypes to life without having to invest a significant amount of their own money. The infusion of capital from seed investors enables founders to leave their day jobs behind and fully commit themselves to developing their product and testing its viability.

However, there is uncertainty surrounding whether founders can deliver on their promises with resources and experience. Market conditions may also change during product development, reducing opportunities for growth and scaling.

Essentially, pre-seed funding is the highest-risk, highest-reward investment opportunity for startup investors, and it allows founders to turn an idea into reality. 

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