Pre-seed Funding: What, When and How?

From the differences between pre-seed and seed funding, to how much is too much funding; Check out our comprehensive guide to pre-seed funding, from experts at Angels Partners.

At the start of any successful business, there lay a simple idea. An idea that, like a seed, when given the opportunity to take root, blossomed into a valuable product with a certain level of financial prosperity. When founders are trying to get their product up and running, paying for advertising, marketing, or even contractors and team members, is an expensive endeavor. And unless you’re Elon Musk or Jeff Besos, with rather deep pockets, you're probably going to need some sort of funding. 

So, how do companies transform their vision into viable products? In this article we go through the ins and outs of pre-seed funding to help founders discern if their startup is ready or not, and to give founders all the more chance of getting their business off the ground. 

What is pre-seed funding?

We’ve already touched on the fact that if you’re developing a business idea, you’re likely in need of financial support. So, what exactly is pre-seed funding in the world of startups? Pre-seed funding is the initial stage of funding on the timeline of a startup. This type of funding usually comes before the ‘official’ rounds of capital investment, where startups receive capital to actually begin developing their product, which, up until this point, has just been an idea or an early prototype. Early-stage investors, family or friends take a leap of faith and invest capital into an idea they think might just take off. Of course, investors will request something in exchange for this initial injection of capital, which usually comes in the form of equity. 

Pre-seed funding, as the name suggests, comes before seed funding and differs in that it helps translate a startup’s idea into a product and get the business off the ground, whereas seed funding helps to develop an established product into a minimum viable product (MVP) and validate the business model. Pre-seed funding used to represent capital between $50,000 and $250,000, however, in the ever-exploding landscape of startups, pre-seed investments can be anywhere up to $2 million. On the other hand, seed funding is usually higher, anything up to $5-10 million, depending on the industry and location. Capital awarded from pre-seed funding can be used to conduct market research, bring in more skilled team members and identify distribution channels. Some common pre-seed funding sources include:

• Personal savings
• Family and friends
• Crowdfunding
• Early-stage investors
• Incubators
• Accelerators 
• Loans or government grants

Whichever avenue a startup chooses to embark on, one thing remains the same: seal the deal with a terms sheet and a detailed contract. After negotiating the terms and conditions and ensuring the legality of your position, it's imperative to close the pre-seed funding round with signed contracts and legal documents.

When is pre-seed funding needed?

Just as we grow, develop and evolve into different versions of ourselves, the fundraising process also steers through many states, with each chapter requiring different needs and priorities. Understanding at which chapter a startup is undertaking, can help founders decide on which type of fundraising to aim for and what tasks are required. Typically, startups seeking pre-seed fundraising have addressed, or already satisfied, the following factors:

• Developed a pre-product prototype - Even if a startup hasn’t fully developed their product into an MVP, having an early-stage prototype that demonstrates some functionality will help illustrate your vision to potential investors.
• Established an experienced team - Getting an investor to supply you with capital on the basis of an idea is tricky, but if the founding team is composed of experienced and skilled individuals, investors may already be convinced.
• Identified a strong market fit - By demonstrating that a product appeals to your target market, founders are more likely to persuade investors that there is a demonstrable need for the item in question. Founders should showcase there’s a genuine need or desire for their product, so that investors will be more enticed to back the project. 
• Have customer interest or early adopters - Even if a startup has not fully developed their product, if founders can show that customers are already engaging with an early prototype, the more appealing your product is to investment.

You can check out our comprehensive article on all the other stages of fundraising: The 5 Fundamentals for Startup Fundraising. 

How hard is it to get pre-seed funding?

If you’ve ever tried to convince someone of how good an idea is, without having any real data or information to back up your claim, you’ll know just how tough it can be. And that's exactly the catch when it comes to securing pre-seed funding; founders essentially have to persuade individuals, such as investors or small scale VCs, to provide financial support (usually) based on one simple thing: an idea. So, exactly how hard is it to acquire pre-seed funding? As you can imagine, getting pre-seed funding is no easy task, however, with certain tools, raising this type of funding can be made more achievable if founders:

1. Design a strong business plan - The building blocks to a successful business starts with a solid business plan. Included in the plan, founders should indicate what problem the company is attempting to solve, explain how it works, identify its place in the market and outline a solid financial forecast. This process not only aids founders with understanding their market, but identifies any potential competition and how financially viable the product could be. In addition, since concrete data is less abundant in this phase, founders will have to rely on connecting emotionally with investors, so incorporating a strong narrative and story will help transmit the company’s mission and values.
2. Put together an impressive team - Investors want to see how the people involved in driving the company forward will achieve just that, by judging whether your team has the skills, expertise and experience to carry out the company vision. 
3. Get involved with networking events - Ever heard the saying, “you become who you surround yourself with”? Well, surrounding yourself with like-minded, entrepreneurial individuals will not only inspire and provide valuable insights for you and your project, but they may also have useful contacts for potential co-founders or investors. 
4. Reach out to investors - Before contacting and connecting with investors, it’s imperative that founders do their due diligence by identifying who is actively investing in their industry and stage. Founders should seek out investors who have a history of investing in their field and stage. a rather lengthy and time consuming process. Fortunately, at Angels Partners, we’ve streamlined the entire process so that founders can easily filter their search to identify, connect and reach out to relevant investors. You can check out more info on our Investor Database. 
5. Applying for incubators, accelerators, competitions or programmes - If founders are struggling to raise funds from investors or family/friends, applying to incubator or accelerator programs may be an appropriate avenue to pursue. These services can help get an idea up and running, but they won’t do it for free; usually a share in equity or fees are applied to startups on these programs.
6. Perfecting your pitch - First impressions count. No seriously, they really count. Perfecting your pitch to include all the relevant details, such as the amount of funding required, how it will be spent and potential financial returns for investors will have an astronomical impact on whether an investor is going to take the bait or not. In any case, founders need a strong pitch as they most likely won't have an actual product at this point. Members of Angels Partners can enjoy access to our pitch deck templates, as well as 90+ legal templates and startup documents, to help founders with this process and save money on lawyer fees.

Check out our previous article on how to Pitch Perfect.

How much equity should you give up at pre-seed funding?

Knowing how much capital to ask for is like asking someone how long a piece of string is; there are an infinite number of possible answers. Ultimately, the amount will depend on a combination of factors, including the type of industry, business and the long term goals of the company. However, to offer some practical and tangible advice, founders ought to raise enough capital to fund the business for at least 18-24 months. This means founders need to carefully calculate their burn rate to include a comprehensive financial plan that will enable successful product development, as well as covering all the other costs of an evolving business. 

But investments come with a catch - investors usually provide financial support in exchange for equity (a piece of the company pie). But how much equity can a startup expect to give up at pre-seed funding? As a general rule of thumb, founders can expect to give up between 10 and 20% of their company at the pre-seed funding stage. It's important for founders to find the right balance between retaining control of the company and giving up enough to allow for investment.

Another factor to approaching how much capital your startup can expect to attract is by analyzing the company valuation (the process of determining a company's financial value at a specific point in time). When investors buy equity, it is done at a specific price per share. This means that if the company valuation is high, each share price increases, and, in turn, founders can raise more money. 

As we have seen, pre-seed funding might just be the golden ticket to creating a standout MVP, gaining early traction and laying the groundwork for future growth, development and investment of the company. For more help with startup fundraising, you can check out Angels Partners’ services that have been designed by founders for founders, to streamline and automate this process.