At the very early stage of a startup, funding is the most critical requirement for growth. Funding is needed to build, operate and scale the business from scratch. Without funding, the probability of a business moving from a product/service development phase to the market is highly unrealistic.
Seed funding or Seed Capital is a more familiar concept for fundraising as it refers to a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. Pre-seed funding on the other hand is often the earliest stage of funding, before seed funding. At this stage, investors provide startups with the capital required to begin developing products in exchange for equity.
What is pre-seed funding?
As the name entails, pre-seed funding is the funding received before seed funding. It comes at the earliest stage of the company, typically when the company is still at its ideation or prototype stage and is yet to evolve into a solid company. It’s usually a very small form of capital that is required to kick off the business and can come from close-knit relationships such as family members, relatives and external investors such as incubators and accelerators. Appinventiv describes pre-seed funding as necessary to provide the groundwork for the commencement of the business operations and to guarantee the viability of the founders’ venture.
How to identify the need for a pre-seed funding
Prototype Development: Ideas are great and awesome, however, a working prototype shows that you are willing to bring an idea to fruition. Pre-seed investors will be interested in seeing a minimum viable product (MVP) that you are willing to test in the market.
Market Identification: Once you’ve been able to identify the market size for your product after thorough research or a/b testing, you are prepared to start talking with investors as you’ve been able to garner enough insight to persuade them to invest in your idea or prototype.
Revenue Plan: Are you able to identify a concrete stream of revenue for your company based on the ideas and prototypes you’ve generated? If this is properly clarified, investors will be willing to discuss it with you. You do not necessarily need to have revenue traction but be able to show how revenue will be derived.
4 Tips to raise a pre-seed funding
Build your team & MVP: The first step is to build your product/business team. Who manages what for the development of the idea and what’s their skillset or experience to bring the idea into a reality? How can you work together to create a prototype of this idea that can be shared with investors? Most tech-oriented startup founding teams usually comprise a Chief Executive officer (CEO), a Chief Operating Officer (COO), a Chief Technology Officer (CTO) and a Chief Product Officer (CPO). In some cases, depending on the type of product or service, some startups decide to have a Chief Finance Officer (CFO), and Chief Marketing Officer (CMO) at the very early stages of team building.
Have a pitch deck: A pitch deck solidifies everything important to know about your company. From the problem findings to the solution you’ve built (concept of the product) to its target market, market research the competitive landscape, the business team and experience so far in actualising this vision, the financial projections and other current state assessments. A pitch deck is a significant piece of information that’s necessary to convince an investor to invest in the business at its pre-seed stage. Your pitch deck is an avenue to share a compelling story with an investor.
Do a pre-money valuation: A pre-money valuation typically refers to the value of a company before the company fundraises (receives external funding or financing). Pre-seed investors will be highly interested in knowing the value of a company before they invest. And at this stage, they also often prefer a lower value that promises a higher return on investment (ROI). Learn more about kickstarting a pre-money valuation
Reach out to likely investors: Who are the investors that are interested in your market and will be willing to also invest in a pre-seed company? Create a list of potential investors and begin to reach out to them one by one, share your pitch deck with them or present physically/virtually to convince them of your ideas. At pre-seed rounds, companies often raise between $50,000 and $250,000 in total.
In most cases, pre-seed funding typically lasts for about 9-18 months from the day you launch your product/company. However, you can tailor your pre-seed funding to the duration of time that best suits your company.