Pre Seed Funding
If you just started a company and looking for funding to take your operations to the next level, pre seed funding may be the perfect fit! This form of startup funding is an increasingly popular way for early-stage companies to raise capital without giving up too much equity. In this post, we cover all the ins and outs of pre seed funding: what it is, what the requirements to qualify are, how much capital can be raised, how it compares to other sources of funding, and more.
What is the definition of pre seed funding?
Pre seed funding is often the first formal round of capital raised by a startup. This form of startup funding is often provided by angel investors, angel syndicates, or even the founders themselves and is typically proceeded by friends and family rounds. It’s a great way for startups to jumpstart the development of their product or service and build a foundation for future rounds of funding.
What are the requirements to qualify for pre seed funding?
While there are no specific or legal requirements to qualify for pre seed funding, there are some general guidelines. First, startups should have a clear business plan, an established team, and a product or service that’s ready for launch. It’s also important to have identified a market opportunity and have a strong understanding of the competitive landscape. Second, startups should have a well-defined strategy for growth and be able to articulate the value their product or service provides. Lastly, the startup should be filed with the governmental organizations where they intend to operate.
How do you structure a pre seed round?
There are a few things to consider when structuring a pre seed round, these include the amount of capital that you are looking to raise, the amount of equity that you are willing to give up, and the terms that you are willing to agree to.
The amount of capital that you are looking to raise will depend on the size of your business and the stage of your business. For example, if you have a product and have generated minimal revenue, you typically would be raising less than a company of ten people that has generated hundreds of thousands of dollars in revenue.
Similarly, the amount of equity you are willing to give up will vary based on your valuation and the quality of investors you attract. For example, some angels may have deep expertise in your space, others have connections to industry operators who will mentor you, and others may just offer capital. The first two sets of investors should hypothetically receive more equity because they offer more than just money.
How much capital do startups raise through pre seed funding?
The amount of capital that startups can raise through pre seed funding varies. Generally speaking, the capital raised from this form of startup funding ranges from $100,000 to $500,000. It is typically enough to cover the costs associated with launching a product or service, such as market research, hiring employees, and building a website, and is used in tandem with a SAFE.
How much equity do startups give up in exchange for pre seed funding?
The amount of equity that startups give up in exchange for pre seed funding also varies. It’s common for startup founders to give up between 5% and 15% of their equity in exchange for this form of funding, but it can sometimes be as high as 25-30%.
What are the typical terms associated with pre seed funding?
The typical terms associated with pre-seed funding vary based on the investor, the startup, the business model, and the market conditions. Generally speaking, investors will require a certain level of control over the company, such as voting rights or board seats. They may also require that the startup reach certain milestones before they can access the full amount of funding, or anti-dilution protection to protect their investment.
The other basic terms include:
- The sizing, or the amount of capital being raised
- The valuation, or the amount that the company is being valued at
- The equity, or the percentage of the company that is being exchanged for capital
Compared: pre seed funding vs friends and family funding?
Pre seed funding typically comes after a startup’s friends and family round is complete. The amount of funding raised is typically higher, around $100-500k compared to $50-250k, while the equity given up is lower at 5-15%, compared to 10-15% from friends and family rounds. Additionally, the terms associated with pre-seed funding are usually more stringent than those associated with the friends and family round.
Compared: pre seed funding vs seed funding?
Pre seed funding, as the name implies, precedes seed funding when raising capital. As such, the amount of capital raised via this form of funding is typically only $100-500k, compared to the $1-2 million raised from seed funding. Additionally, the terms associated with pre-seed funding are usually less stringent than those associated with seed funding, and the caliber of investors is higher with seed funding.
Compared: pre seed funding vs Series A funding?
Pre-seed funding typically precedes a startup’s Series A. As such, the amount of capital that a startup raises via this form of funding is typically much less: between $100-500k, compared to $5-20 million raised from its Series A. Additionally, the number of provisions included in the term sheet of pre seed round are typically much less stringent and straightforward compared to a Series A term sheet. Finally, the requirements for pre seed funding are much lower than Series A funding, which explains why only about 30-40% of companies that reach pre-series A funding raise their Series A.
What are the benefits of pre seed funding?
Pre seed funding has many benefits for startups.
- It can be raised quickly: Pre-seed funding can be raised relatively quickly compared to other forms of funding that require deep due diligence.
- It can be fairly straightforward: Pre-seed funding, may come with a fairly straightforward term sheet, with limited provisions.
- It can jumpstart operations: Pre-seed funding can provide the initial capital needed to hire a team, build, launch and sell the product or service, and add credibility.
What are the drawbacks of pre seed funding?
There are also some drawbacks to pre-seed funding that you should be aware of.
- It can be costly: Dollar-for-dollar, pre-seed funding can be some of the most expensive capital in a startup’s lifecycle. This is because the startup is the riskiest and as a result investors expect more equity.
- It can be restrictive: Investors may ask for more restrictive terms, such as the most favored nations clause, pro rata rights, and anti-dilution protection.
Tips following a successful pre seed round?
- Keep your investors updated: Make sure to keep your investors updated on the progress of your business, e.g. when you hit certain growth targets, launch a new product or secure a new partnership. These updates should be provided ideally on a monthly basis.
- Send regular financial reports: Investors want to understand how their portfolio companies perform over time, so make sure that you send regular, easily digestible, financial reports to them.
What are the top pre seed venture capital funds?
Many pre-seed VC funds invest in startups. Some of the top pre-seed VC funds include Y Combinator, Techstars, 500 Startups, and Seedcamp. These funds provide capital, mentorship, and access to a network of investors, which can be invaluable for startups looking to launch their product or service.
Final thoughts on pre seed funding
Pre-seed funding has become an increasingly popular way for startups to raise capital without giving up too much equity. It can be used in tandem with SAFE notes to hire new team members, launch a product or service, or scale operations. However, it can be difficult to find investors willing to provide pre-seed funding, and the terms associated with pre-seed funding can be more restrictive than other forms of financing. If you’re looking to take your jumpstart your growth, pre-seed funding may be the answer. Consider researching each of the top funds to see which one is right for your startup.