If you’re an entrepreneur gearing up to start a business, you have probably heard of the various types of funding available to startups. One type of funding that you may encounter on your journey is pre-seed funding. But what exactly is pre-seed funding, and how can it help your business? Here, we’ll explore the definition, benefits, and sources of pre-seed funding to help you determine if it’s right for your startup.
As a startup accelerator ourselves, we encounter so many first time founders googling up every new term and getting all confused about the already complex station of funding. Let’s take it upon us to demystify the types of funding from the basics.
Starting a business is not easy, and one of the most challenging aspects is finding funding to get it off the ground. Pre-seed funding is the initial round of funding that a startup can receive, and when we say initial, we mean before seed funding, which is the next stage of fundraising. Pre-seed funding is used to develop business ideas and bring products to the minimum viable product (MVP) stage.
Pre-seed funding is commonly used to validate business ideas and build a prototype. Startups can use this funding to hire talent or contractors to build the prototype and run early market tests to verify their business model. The goal is to get the startup from an idea to a functioning prototype that is ready for its next round of funding.
The goal of pre-seed funding is to help startups build out their business plan, prototype, and initial market traction. It’s generally challenging to raise more substantial sums if a business has not shown any market validation.
Pre-seed funding is crucial in the early stages of a startup’s life, as it provides the necessary resources to help the business grow. It allows entrepreneurs to take care of the following roadblocks:
The pre-seed round is often the most challenging to secure, as it is difficult to convince investors to invest in an unproven idea. Imagine someone showing trust in your idea without it having any tangibility to it, that’s what pre-seed funding is all about.However, if a startup can secure pre-seed funding, it greatly increases their chances of success in the long run. As if the founder can sell the idea, the outcome is bound to be great.
Pre-seed funding is similar to seed and series A funding as they all represent different levels of investment fundraising. The main differences seem to be the size of the investment and the stage that the business is in. In general, pre-seed is the smallest type of funding source, followed by seed, then series A.
Pre-seed funding is focused on product development and basic market testing, while seed funding is more about building a team and scaling. Series A funding is designed for startups that have built out the team and want to take their business to the next level.
On average, pre-seed funding amounts to roughly $500,000 or less, making it an initial injection of capital to kickstart a startup’s operations.
Moving on to seed funding, according to data from Crunchbase, the average seed round is $4.6 million. Seed funding is typically raised from angel investors and venture capitalists (VCs) who are willing to invest in early-stage startups with promising growth potential.
When a startup progresses to the Series A stage, the average funding amount increases significantly. In 2022, the average funding amount for a Series A round was nearly $20 million, according to data from Crunchbase. Series A rounds are typically led by VCs as startups are raising millions of dollars to further scale their operations.
Pre-seed funding is typically used to support the development of a product or service before it is launched in the market. This funding round is typically used to assist the firm in forming a team, developing a prototype or proof of concept, conducting market research, and validating its business plan.
One of the main benefits of pre-seed funding is that it accelerates product development. The money raised from pre-seed funding can be used to hire developers or other technical staff to help get the product to market quickly. In addition, the funds can be used to rent an office or lab space to complete the required research and development.
With a functioning prototype, startups can showcase the potential of their product. Investors are more likely to invest in an idea that has already been validated in the early stages. By having a product that is ready to go to market, startups can save time and money on development costs and focus on marketing and sales.
A strong crew is critical to the growth of any startup. Pre-seed funding can help attract and retain a talented team. Investing in talent can help build out the startup’s skills gap. Moreover, it can help build out the core team that will eventually lead the company to success. The funding can also be used to hire a senior team member or consultant to help mentor the founding team.
With this, startups can attract top talent and build a team that is dedicated to the success of the company while ensuring that they have the right people in place to execute on its vision.
Pre-seed funding helps to gain market validation, which boosts the probability of attracting future investors. Startups need validation of their product or service and its viability in the market to appeal to venture capitalists. In addition, early investors may become brand evangelists, enabling the startup to expand its reach. With profits evidenced through pre-seed funding, startups gain better leverage for future funding.
By this, startups can demonstrate that there is demand for their product or service in the market. This can help attract future investors and increase the likelihood of success.
Pre-seed funding can increase investor interest and help startups secure larger investments in the future. By securing pre-seed funding, startups can build momentum and demonstrate that there is interest in their product or service among customers and potential investors. Investors are more likely to get involved if they can see a business that has proof of concept and market traction.
Having pre-seed funding can help startups build momentum and attract larger investments in the future. With a proven track record of success, startups can demonstrate to investors that they are a viable investment opportunity.
Starting a business is a dream for many entrepreneurs, but it often requires a significant amount of money to get started. Pre-seed funding is a type of funding that helps entrepreneurs get their businesses off the ground before they can attract larger investors. Here are some sources of pre-seed funding:
Friends and family are one of the most common sources of pre-seed funding. People who are close to entrepreneurs are often invested in their success and willing to invest in their vision. This type of funding is known as “friends and family funding.”
Friends and family funding can help startups get off the ground and get to the next funding stage. It’s an excellent way to gain early-stage traction, and this type of support can be an excellent addition to other funding sources.
However, it’s important to note that mixing business and personal relationships can be tricky. Entrepreneurs should be clear about the risks involved and the potential outcomes of the investment. It’s essential to have a clear agreement in place to avoid any misunderstandings or conflicts in the future.
Angel investors are typically experienced entrepreneurs or business people who are willing to invest in startups in exchange for equity. Angel investors also typically invest at the pre-seed stage, with the primary goal of supporting the startup through the early stages of development.
To attract an angel investor, startups must explain their idea, provide a solid business structure, and demonstrate the potential for growth. Angel investors can provide valuable mentorship, connections, and expertise to help startups succeed.
Incubators and accelerators are a type of pre-seed funding that provide mentorship, resources, and small amounts of capital to help startups grow. These entities can provide access to a network of mentors, potential customers, and investment funds.
Incubators and accelerators can be valuable for startups that need guidance and support in the early stages of development. They can help entrepreneurs refine their ideas, develop a business plan, and connect with potential investors. However, it’s important to note that incubators and accelerators often take equity in the company in exchange for their services.
Crowdfunding platforms are a great source of pre-seed funding. Crowdfunding platforms are online platforms that enable individuals to invest in or donate to startups in exchange for equity or perks. Crowdfunding is an excellent way to test the market and build a community of invested customers and advocates.
Launching a crowdfunding campaign can help validate the product or service while attracting a following that can help bring in larger investors down the road. However, it’s important to note that crowdfunding campaigns require a significant amount of time and effort to be successful. Entrepreneurs must have a compelling story, a clear value proposition, and a solid marketing plan to attract investors.
Government grants and programs offered by local and state authorities and federal organizations offer pre-seed funding. Government grants and programs usually have specific guidelines and eligibility requirements, making the competition challenging. However, the main advantage of government grants is that they come with free funding, which can be crucial in the early stages of startups.
Government grants and programs can provide valuable resources and support to entrepreneurs who meet the eligibility requirements. However, it’s important to note that the application process can be time-consuming and competitive. Entrepreneurs must have a solid business plan and a clear understanding of the requirements to be successful.
Pre-seed funding can help startups get past the initial hurdles of product development and market validation. By securing pre-seed funding, startups can scale their businesses while securing the resources required for their success. The key is to invest the funds wisely, gain market validation, and build a competent team. Ultimately, if you can successfully bring your idea to life with pre-seed funding, you will likely have more leverage to signal investor interest in the market.
Ready to take your startup to the next level? Contact us today and discover how KiwiTech’s expertise in tech services and raising funds can help fuel your business’s growth. Whether you’re looking for pre-seed funding or comprehensive support for your startup, our team is here to guide you every step of the way. Let’s turn your ideas into reality together!