When starting a business, your first thought is how to get your product out the door. Maybe you don’t even have a product yet, but you have an idea. You might also be thinking of how you’ll advertise your product, how much you’ll pay, or how you’ll create a dream team for your company. So many high-ticket decisions to make, but money won’t just come out of thin air. That’s where most founders turn to fundraising.
Pre-seed funding for startups is your first stop. This is the earliest cash injection your startup receives. Of course, it’s the smallest check possible because a pre-seed round typically comes before the official seed round. With pre-seed capital, you can validate your idea in the market, do customer research, and build a product prototype or an MVP (Minimum Viable Product).
This is what pre seed does for your business: it sets the stage for future funding rounds and scaling.
In this guide, we’ll break down the meaning of pre-seed funding for startups. By the end of the article you’ll understand:
What pre seed is;
How does pre seed work;
What typical pre-seed investors are;
How to get your pre-seed funding and how to use it effectively;
The differences between pre-seed and seed funding;
Peculiarities of pre-seed, seed, and Series A rounds.
Are the challenges of running a startup scaring you?
What is pre-seed funding?
Pre seed, meaning the first early stage startup funding round, is the smallest check possible to kickstart your company. At this stage, your business is just like a baby—it can’t walk, can’t talk, and needs a lot of support.
To translate this into the world of business, it’s not even a company yet, just a mix of an idea, a target market, and a team. At the pre-seed stage, you typically have no minimum viable product (MVP), no customers, no revenue, and no capital. When you decide to raise pre-seed funding for your startup, it means the time for your idea to convert into your future business has come.
Pre-seed funding for startups is a relatively new term. Not long ago, the fundraising journey started with the seed round. But because more and more early-stage companies were attracting big bucks, the so-called seed and Series A rounds started inflating. When seed rounds started exceeding $5+ million, early-stage investors squeezed their checks to $1-$3 million, making smaller investments before these larger rounds. That’s how a pre seed round was born.
There’s a joke in the investment world that pre-seed VC funding is more for non-famous, non-repeat founders (aka first-time founders). The reason is quite simple—a famous founder or one who has already achieved an IPO would probably go to secure a seed or even a Series A round, carving a large chunk of capital. Of course, VCs, angels, and, in fact, everyone adore supporting founders who have experience and have already built a business. That’s why pre-seed capital is more for a super novel idea from a young founder.
How much pre-seed venture capital to raise?
While the average amount of a pre-seed round ranges from $100,000 to $1 million and sometimes even up to $5 million, it’s better to raise less than $500,000. Why? Because you’ll give less equity and have fewer pre-seed investors jamming up your cap table. The point is that seed investors like clean cap tables. The cleaner the cap table, the higher your chances of securing a better deal with them.
The role of convertible instruments in pre seed funding for startups
Fundraising takes two to tango—a founder, who wants to get pre-seed funding, and an investor, who wants to get something in return, typically a stake in the company. However, at this stage, it’s too early to set your startup’s valuation to talk about giving actual equity. Luckily, a solution exists—convertible instruments, like convertible notes and SAFEs (Simple Agreements for Future Equity).
These instruments allow you to raise pre-seed funding for your startup without setting a valuation too early while still giving your investors an opportunity to own a stake in your company. Later, when your company grows, raises more capital, and establishes valuation, the investment of your pre seed funds turns into equity shares. This means they participate in your company’s future success while benefiting from perks during the conversion, such as discounts on the share price or even a valuation cap, getting a better deal on their equity compared to new investors.
What is the difference between pre-seed and seed funding?
To see the difference between pre-seed and seed rounds, you should look at who invests, how much, and how founders use this money. Let’s have a closer look at each funding round.
Pre-seed round
Who invests: Angel investors, friends and family, accelerators, incubators, and some venture capital firms.
How much: During a pre-seed round, you may raise between $100,000 and $1 million. In some cases, you may get up to $5 million. We had one client who landed a massive $3 million pre-seed deal, and another one secured $500K when they went only for $400K. However, you’d better target less than $500,000.
How startups use pre-seed funding: For startups, pre-seed funding means money they can use to develop an MVP or a prototype, find team members, do market research, and pay for basic operations.
Seed round
Who invests: Angel investors, venture capital firms.
How much: When you go to win a seed round, think about getting from $1 million to $5 million. This is the sweet pot of this stage. To get more than $5 million, you must show cool traction, a huge market opportunity, and a rock-solid path to growth. Sometimes, seed investors can go more than $5M. This happened with one of our clients, who won a whopping $12 million seed deal because of our pitch deck.
How startups use seed funding: Seed stage startups typically use this money to develop and refine their product, make the team bigger, arrive at a product-market fit, validate the business model, and scale marketing and sales operations.
While pre-seed funding can help get your idea off the ground, seed funding will push growth and market validation.
Types of pre-seed investors
As a pre-seed startup founder, you have several options to get funded.
Venture capitalists (VCs)
When talking about startup funding, pre seed VCs are probably the first ones you’ll think about. This type of investor pours capital into a startup for equity. In other words, they give you money, and you give them a part of your company. VCs invest at different stages of startup development, even at pre-seed.
However, many pre-seed funds hesitate to allocate a single dollar of capital until you create a minimum viable product (MVP). And here’s a thing. You need money to build your MVP, but VCs refuse to give it to you. What to do in this situation? Ask other investor types for pre-seed funding for startups.
Family and friends
The first stop to seek pre-seed funding for startups might be family and friends. These “personal” investors will typically hand over cash with no conditions, or they may give it to you as a loan, expecting you to return the money and pay some interest. Anyway, you take this cash and go build your business.
But what if your family and friends want to become shareholders? What if they want equity in exchange for their pre-seed capital? At this point, things may get very complicated. The matter is that you can’t apply metrics typically used by investors to calculate a startup’s valuation—you neither have an MVP nor revenue or maybe even customers.
In this case, you may turn to convertible instruments (as we mentioned earlier convertible notes or SAFE notes). These instruments will allow your family and friends to buy shares in your company without a set price. And the conversion rate will be decided later (after pre-seed VCs and angel investors step in).
Angel investors
Angel investors are perfect if you seek professional expertise and network, more pre-seed venture capital (compared to family and friends), or want to add credibility to your startup. However, these wealthy individuals don’t channel pre-seed funding to any startup; you must check most of their boxes. What are these boxes?
First of all, many angels prefer investing in a pre-seed startup with two or the best three founders. In such a way, they minimize a subjective impact. If one founder has a bad idea, others may correct them. However, if there are four or more, it may turn out to be a mess, which is also not good for pre-seed investors.
Second, your professional achievements and life experiences matter. Attending a prestigious university, having leadership skills, or working as an executive or a consultant—all these work in your favour.
Third, angels can easily get attached. They trust their gut when choosing a pre seed startup in which they’ll invest. Founders with no charisma or passion are less likely to catch angels than founders with confidence and the ability to get everyone excited about their product.
Finally, angel investors focus too much on the business itself and the market it’s going to enter. If angels aren’t sure that the product is viable and they don’t see an opportunity in the market, they won’t invest.
Angel syndicates
Apart from angel investors, there are angel syndicates. These are groups of angels who decided to pool their resources and collectively pour early stage startup funding. If you’re wondering why angels choose to invest together, the short answer is safety. By pooling resources, angel investors reduce individual risk. Even if they lose out on some deals, they can still benefit from the others.
Pre-seed startup founders usually go to angel syndicates if they seek more substantial capital and more diversified expertise and networks. That’s where the proverb “Two heads are better than one” works best. Indeed, if you turn to a group of angel investors, you’re more likely to get funded and well-advised.
Crowdfunding
Crowdfunding is a completely different approach to securing pre-seed funding for startups. Here, you may get small amounts from a large pool of individuals via online platforms like Republic and Kickstarter. There are four types of crowdfunding: based on equity, based on reward, based on debt, and based on donation. Reward-based crowdfunding is the most relevant type for pre-seed startups. Why? Because it doesn’t require you to have a product. Investors contribute to your business, and, in return, they expect a reward from your services later on.
Accelerators and incubators
Finally, there are pre-seed accelerators and incubators where you can get trained and funded. While accelerators offer short-term, intense programs, which typically last for three– to six months, incubators provide long-term programs, which often don’t have a fixed end date. Both give pre-seed funding for startups, resources, mentorship, and networking opportunities.
If you choose an accelerator, you have a demo day at the end of the program, during which you’ll pitch to pre-seed investors. Remember, the purpose of an accelerator is to scale your business rapidly—an intense push towards a subsequent funding round. Conversely, incubators nurture startups over a longer period until you are ready to scale or seek further investment.
It’s worth noting that just like pre-seed VCs, accelerators and incubators take a stake in your company (but not so big).
Preparing to raise pre-seed funding for your startup
The times of checks written and deposited in just four weeks have faded away. Today, raising pre-seed capital takes around six to nine months on average. Standards are higher, terms are stronger and more rigid, and founders are expected to do more. A tough environment. However, it’s not all doom and gloom, and you still have the opportunity to sign the best pre-seed funding deal for your startup.
There’s no one-fits-all solution for how best to secure pre seed funds, but there are some steps you may consider taking to reach your destination quicker.
Networking
Before actually raising pre-seed funding for your startup, you need to find from whom you can get this money. Maybe you can surf the Internet and find investor lists, or you can build relationships with fellow founders and get some contacts from them, or attend different events where you can get acquainted with potential investors. All these options work. Just find the one, or a combination of several, that works best for you.
It’s always a good idea to go to industry events, pre seed and seed stage startup meetings, conferences, and summits, and simply start talking to people. Have business cards or set up QR codes on your phone to share your personal information with potential pre seed VCs. Don’t be shy to start a conversation first and meet with people. Shake their hands. Tell them about your business. Remember, even if many seem hesitant or not interested, there will be some who can get truly excited about what you’re going to build and be ready to help with pre-seed funding for your startup. That said, fortune favors the bold.
Note that if you think about searching for investors on the Internet or social media, do a comprehensive analysis. Find those who invest in pre-seed startups; otherwise, you will just waste a whole lot of time.
Market research
Often, pre-seed startups have very little to show investors as there’s no product, revenue, or traction. Yet, what founders can really do is delve deep into their target market. There’s typically a big knowledge gap between founders and pre-seed investors in terms of market and fundraising environment (of course, if we’re talking about first-time founders, not seasoned ones).
To bridge this gap, you must provide comprehensive market research to show investors that you have explored the market you’re entering inside out. Learn about the usual valuations and funding sizes for startups like yours. Deep market research helps you understand your target audience, spot competitors, and validate your product idea. Your chances of raising pre-seed funding for your startup depend on your ability to research and show your knowledge to investors.
Pitch deck for pre seed startup
One of the secrets of how to get pre-seed funding is a killer pitch deck. Creating a deck that would raise money takes meticulous effort. Why is it so important? Because this is the first impression pre-seed investors would get of your business. That’s why it must be unforgettable (in a good sense, of course).
If investors find your deck boring, hard to digest, or lacking key metrics and details, they won’t know how amazing your product or solution is. Thus, make sure your pitch deck communicates your investment narrative in a compelling way. Here’s a short breakdown of key aspects your deck should include:
The problem you’re solving and your unique solution;
Market opportunity and growth potential;
Competitive advantage;
Team background;
A revenue model and monetization strategy;
Realistic financial projections and use of funds.
If you want to get more information on a pitch deck for your pre seed startup, how to build it, and what to include, check out the following articles:
Remember, the success of raising pre-seed funding for your startup rests on your pitch deck, which, in turn, rests on four pillars: a product itself (pre-seed investors won’t back a non-viable solution even if a pitch deck is really cool), your investment narrative (how well your slides communicate the messages, how concise and sharp your headings are, etc.), numbers (support your claims with relevant data and sound financial forecasts), and design (poor design spoils the overall experience).
Related article on pitch deck design:
Engaging with investors
Once you’ve built a pitch deck for your pre seed startup and established some investor connections, it’s time to deepen them. Why? Because you would surely want to close your round as soon as you start getting term sheets.
Host informal coffee meetings or lunches, seek advice and feedback on your pitch deck, or simply be active on their social media platforms like LinkedIn or Twitter. Make pre-seed investors remember you. This will allow you to refine your pitch deck if necessary before starting your official raise. Also, it will help you convert those “cold calls” into “warm leads,” as these investors will already be familiar with you and your vision, so they are more likely to say “yes” and offer pre seed funding for your startup.
Accelerator applications
Applying for accelerator or incubator programs isn’t a must but rather a possible boost for pre-seed startups to attract capital faster. These programs are a good chance for you to find mentorship, funding, and community. Accelerators and incubators may also increase your startup’s credibility, making securing subsequent rounds easier. Y Combinator and Techstars are top-rated accelerators and can become true partners in reaching your goals. Yet, don’t overlook other options, adding some regional names to your list.
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Pre-seed funding for startups: how and where to use
If you’re asking ‘how does pre seed work’ and wondering how you can use this money, this is where you’ll get the answer.
Pre-seed capital helps to kick off the product and get your company officially up and running:
Company setup: Create your company officially. Pay for incorporation and legal fees to make sure that everything is legally sound right from the start.
Market research: Pinpoint your customers and understand their needs. When you know the exact pain points of your target audience, it’s easier to provide a relevant solution. Also, when investors see that you understand the market well, they’re more likely to inject pre seed funding into your startup.
Product development: Build your MVP. Focus on developing a basic version of your product that works well enough to solve a real problem. Don’t worry about making it perfect—just make sure it functions and can be improved later.
Early hires: Many seasoned entrepreneurs say that you must get married to your team, so choose your employees wisely. These people can either boost or bust your pre-seed startup’s growth. Note that it’s better to start by hiring employees for critical roles first.
Milestones and traction: Reach your key targets that prove your idea works. Whether you’re gaining early customers or building a working prototype, any of these can help you get seed funding later.
Pre-seed funding for your startup is like laying the groundwork for a building. If you want to have a long-lasting structure in the future, you must get the basics ready today.
Early stages of startup funding
It’s difficult to sustain operations without outside funding, let alone grow your startup, make it autonomous, and secure market share. When you decide to turn to VCs, angels, or other investors, you must know all these financing options well. And it’s better to start with the early stage startup funding you’ll go through.
Distinct points of each funding stage aren’t set in stone—they may vary from company to company and from industry to industry. But the general picture stays more or less the same. Below, we’ve spotted the difference between pre seed, seed, and Series A rounds.
When you know what to expect in the future, you can get more prepared for hitting those milestones. In this chart, we’ve compared only the early stages of startup funding rounds. If you want to learn about other rounds, check out our Startup funding stages guide: From pre-seed to IPO.
Wrap-up: Set the future success for your startup with pre-seed funding
To win pre-seed capital means to know your market, build your team, target the right investors, and clearly communicate your vision. Easier said than done. In practice, you have to dedicate much time and attention to hit this pre-seed milestone.
You must know your market inside out. If you’ve done the right research, you won’t find it hard to answer all the tricky questions investors might ask. Try to find your pre-seed investors. Your investors will be those who match your industry and stage and also feel your vibe.
But even if you know your market well, have a cool idea, and have found your investors, it won’t work without a killer pitch deck for your pre seed startup. If you can’t prove your case to investors, pre-seed funding for your startup might not come through.
Need assistance? Reach out to our Waveup team. We’ve helped our clients secure $3+ billion in funds, and we know how to help you reach your pre seed funding (and not only pre-seed) targets.