As a relative newcomer to the startup fundraising scene, pre-seed has grown drastically in popularity over the years. According to a DocSend report, the average amount of pre-seed money raised in the US is ~$500k per round. Globally, the average amount is ~$415k.
For budding entrepreneurs, there are many benefits to raising a pre-seed round. Pre-seed investment can help you secure successful mentors, while providing a cash infusion to fund your company’s growth.
Plus, unlike business loans, pre-seed investments don’t need to be paid back. Instead, your investors will gain wealth as your business increases in value — a potential win-win situation.
What is pre-seed funding?
Pre-seed funding is commonly thought of as an unofficial “friends and family” funding round, though investors could include incubators, angel investors, or venture capitalists (VC).
It is often the earliest funding in a company’s history, taking place before more sizable series funding.
What is a pre-seed round?
The pre-seed funding round is an often necessary financing strategy to help get a venture off the ground. At this stage, a company may have an idea for their business, a problem they’re trying to solve, or even a functioning beta product with revenue.
This round will look different from founder to founder, but you can expect it to happen somewhere between bootstrapping and raising seed round funding.
Pre-seed vs. seed
During pre-seed funding, your goal is to demonstrate that your business solves a customer need. Pre-seed funding will help support your early-stage product development. It’ll build the foundation of your business by funding an early team, operations, and the creation of a minimum viable product (MVP).
The seed round, on the other hand, focuses more on developing and proving product-market fit. Companies at this stage should have validated their value proposition. The purpose of seed funding is to help founders identify key growth strategies and enable opportunities to scale.
How does pre-seed funding work?
Since pre-seed funding is less formal than seed funding and series rounds, an entrepreneur must customize their own approach. Here are three steps to help you get started.
1. Prepare your ask
The first step in any fundraising round is to set a target amount and write your ideal agreement. Fundraising goals will look different from business to business, but a typical range is between $50k and $500k.
A fundraising agreement is a written contract between your company and an investor. It should state the amount of money being invested in return for a specified stake in the company, along with other details and stipulations.
Brennan Woodruff, co-founder and COO of artificial intelligence tool GoCharlie.AI, recommends using a Simple Agreement for Future Equity (SAFE). This contract gives the investor rights to future equity with a specific price per share.
Under this agreement, an investor will receive their future shares when a funding round or liquidity event (such as a business acquisition) occurs. SAFE contracts are typically viewed as more founder-friendly, which is why they’re recommended during the pre-seed investment stage.
2. Identify potential investors
Once you’ve set your goals and terms, it’s time to identify investors. Woodruff recommends looking to angels, friends, and family for pre-seed fundraising.
Henni Roini, an investor at Balderton, adds that venture capital firms are often focused on a particular company size, age, and/or funding round. She recommends seeking out VC firms that specialize in investing in pre-seed companies.
You may also want to look for a lead investor — an individual or organization that will lead the funding round. They will typically be the first to invest and offer their time and expertise to help complete the funding round.
While not strictly necessary for a pre-seed round, bringing on a lead investor can be an asset.
3. Pitch your company
After you’ve identified your target investors, you need to pitch your company. Consider starting out with a masterful elevator pitch — a short, memorable description of what you do and/or what you sell. The goal here is to earn a second conversation with your prospective investors.
If your prospective investor is interested, they’ll invite you to continue the conversation. Build upon your elevator pitch to prepare a comprehensive presentation. Roini recommends focusing on three key questions:
- What customer pain points and gaps in the market does your business solve?
- Why is your founding team the best prepared to win your product category?
- What are your long-term vision and key milestones that you need to hit to get there?
How to raise pre-seed funding
There are multiple options available for raising pre-seed funds. Here are some methods to help get you started.
Friends and family
Getting friends and family to invest their personal wealth is the most common pre-seed funding strategy. But combining business and personal relationships can be difficult.
Consider prioritizing friends and family whom you trust and respect. While you may have a close connection with this group, approach fundraising like you would with any other investor. Keep communication professional, clearly pitch your company, and get every deal in writing.
Leverage platforms like Indegogo and SeedInvest to spread the word about your business and raise money from individuals eager to support your idea. While crowdfunding platforms provide great exposure, create a heavily marketed campaign to stand out from the crowd.
Keep in mind that most businesses will offer some type of reward to investors. Be prepared to provide a product at a significant discount or other perks like gift swag.
Business incubators, like Idealab, CodeBase, and The DMZ, can be a good funding option for early-stage startups. In addition to money, they usually provide expertise and training to help founders launch their ventures.
Acceptance into an incubator starts with a written application followed by an interview process. Review your target incubator’s website for more details on the application process.
Accelerators are one step up from incubators. They focus on growing ideas with proven potential, so it’ll be ideal to have some sort of prototype before applying. Well-respected accelerators include Y Combinator, TechStars, and 500 Startups, just to name a few.
To choose the right accelerator, consider what gaps you’re hoping to fill. For example, do you need technical support? Are you looking for an accelerator with demonstrated success in your industry? How much time are you willing and able to commit? Questions like these will help point you toward the right direction.
Wealthy individual investors are another source of potential pre-seed funding. They will typically provide capital to a startup in exchange for convertible debt or equity. They can also offer support and expertise to early-stage founders.
Consider joining networking platforms like AngelList or connecting with prospects on LinkedIn or Twitter to get your ideas in front of qualified investors.
To source venture capitalists who could be a good fit, research the firms’ investment philosophy and past deals to look for businesses at a similar stage or industry as yours. Once you’ve decided to reach out, find a colleague or connection who can make an introduction, if possible.
When is a startup ready for pre-seed funding?
There isn’t a single definitive moment when a startup will be ready to seek pre-seed funding. While the timing will look different from business to business, here are a few signs to look out for.
- You have a strong founding team: Not every company needs to be backed by celebrity co-founders or executives with decades of experience. Being able to demonstrate your team’s expertise in the industry will go a long way with potential investors.
- You already have a growing customer base: Many pre-seed companies won’t have many customers, if any at all. That’s OK! But if you already have a bunch of customers, it might be time to get some investor money to fuel that fire.
- You need to hire more people: If you and your co-founders can no longer keep up with the demands of the company, then it’s time to bring on new team members. Pre-seed investors can help get the people you need to continue growing.
What is pre-seed funding used for?
If you’re considering whether pre-seed fundraising is right for you, you should also think about how you plan to use these funds. Here are a few ways you can spend the cash.
- Product development: Bring your vision to life by building a product MVP, or evolve your existing design based on user research and feedback.
- Critical hires: Find and onboard core team members that can help further your mission.
- Launch operations: Set up the basic operational components of your business, such as manufacturing.
- Plan for future fundraising: It may seem redundant, but pre-seed funds can help hit core milestones necessary for achieving further seed and series funding rounds.
The advantages of fundraising pre-seed
Planning for pre-seed fundraising can result in a multitude of benefits for your business.
- Think like a VC-backed business: Shifting from a scrappy, bootstrapped startup to an investor-backed company comes with a learning curve. Mastering pitching your company, working with investors, and setting growth goals are critical skills all entrepreneurs must build.
- Build your reputation: Having a startup backed by reputable investors will legitimize your company in the eyes of prospective employees and customers.
- Future fundraising: Securing a great pre-seed investor could lead to additional seed and series investors. Additionally, by raising pre-seed funding, you’ll be familiar with setting terms and conditions for investments, which will give you a leg up in future rounds.
When it comes to raising pre-seed capital, who the investors are matters greatly. Make sure you do your due diligence and only bring the right people on board.