Pre Seed Funding for Startups: What Is It & How Does It Work?

A startup's genesis is often found in a novel and potentially disruptive concept. Of course, not every good concept ends up in a successful company, and those who don't achieve their goals are quickly eliminated from the system. The startup idea, however, has to be validated to ensure that it can potentially turn a profit for the entrepreneur. The startup usually has to pay the expenses for this validation.

This is when pre-seed funding comes into play.

In this article, we talk about pre-seed funding. Here, you'll find the answers to questions like:

What is pre-seed funding? How does it work?
What are the types of pre-seed funding?
Why is pre-seed funding important for startups?
How is pre-seed funding different from seed funding?
When should you get funding before you start?

The Definition of Pre Seed Funding

In the pre-seed investment round, investors offer a startup firm funds (often up to $2 million) to develop its product in exchange for stock in the company. Initial funding, or "pre-seed money," is essential for laying the groundwork for launching a firm and establishing its viability for its founders. To set this foundation, we need to:

Customers, demand, and the proposed service are studied and analyzed via surveys to ensure that our theories are correct.

Recruiting essential people to work on developing the concept into a marketable product or service, such as a chief technical officer, chief financial officer, etc.

Securing the company's future by registering essential intellectual property such as patents, trademarks, and designs.

The amount raised during a pre-seed investment round is often not significant enough to be counted as a true seed round. However, for other entrepreneurs, this is a necessary injection of funding to lay the groundwork for something revolutionary that has the potential to revolutionize the whole sector.

How Does it Work?

You should follow these guidelines while launching your pre-seed funding campaign for your small company.

Finding the Right Investors

Finding the most significant and appropriate investor for your business is essential. Numerous people are looking for new companies to spend their money and effort on. These investors must be committed to standing by your side and your business through thick and thin.

There are many different types of investors, including:

Angel Investors who are self-reliant small investors
Accelerator Programs need validation from the startup community before investing.
Venture Capital Funds, which are large institutional investors, can give massive amounts of investment.

Impress The Investors

To attract investors, you need to demonstrate that you know what you're doing and are comfortable discussing every aspect of your business. You must convince them you have an excellent vision for the company's future.

Teamwork. You need a group of reliable individuals who share your values and objectives.

Skilled workers who can contribute significantly to the success of your business. These will demonstrate your company's value to potential investors.

Check the investor's background. Investors will be more likely to put their money in your firm if they are impressed by your background and the successes you've had in your personal life.

The Importance of Pre-seed Funding for Startups

You may be thinking, “Why to bother asking for pre-seed investment if getting it is so difficult?”

To turn a profit, startups need to multiply quickly. Most new businesses struggle because they lack the capital to compete with well-established ones. Pre-seed investment is crucial for new companies since most funds will be used to establish a solid foundation.

Considering the whole product development process is crucial, and it is essential to take a prototype and make a mass-produced version. It would help if you looked for pre-seed capital for your startup to hire new employees, locate an office, and advertise to your first few consumers. You will have a tough time making ends meet without this money.

The need for startup capital is not universal, and Pre-seed funding is the most effective in sectors where the initial investment is sizable. Tech firms focusing on hardware production, for instance, would need more financial resources than software firms planning to create apps.

Raising capital is difficult for new businesses, and getting pre-seed funding is significantly more challenging since you have no track record for your claims. Securing the backing of pre-seed investors will be a lengthy, difficult, and complicated process, but it can turbocharge a company's development.

Types of Pre-seed Funding

Bootstrapping is the initial option when trying to get pre-seed funding. When a startup company can no longer pay its way, it often looks for funding elsewhere. Let's look at the types of Pre-seed funding:

Family & Friends

Pre-seed funding often comes from friends and family who have faith in the founders more than the concept itself and are willing to invest a small amount of money. Those who expect huge profits from investing in startups in the startup stage without considering the possibility that they would get nothing are fools.

Pre-seed VC funds

VC firms often provide equity funding for businesses in the Series A round. However, pre-seed VC funds can do so as well. However, prominent VC firms have recently been allocating resources into pre-seed rounds to access superior prospects later in a startup's life cycle.

Incubators

Business incubators are charitable organizations that help startups get off the ground. They have an innovative bent and aid young companies in developing their business plans. They provide support, a location to work from, and connections to other professionals. There is no set duration, and it may continue for many years, giving a firm the time to develop a sustainable business strategy. In most cases, they will not need a large amount of initial capital.

Angel Investors

Angel investors are wealthy people who invest their money in a company for a stake in the business. Typically, their investments range in size from $25,000 to $100,000. Moreover, as highly accomplished businesspeople, they can connect you to a vast resource of knowledge and information.

Check out our latest article about angel investors.

Crowdfunding

The term "crowdfunding" refers to soliciting monetary contributions from many people over the Internet. Here, the firm may reach many potential backers and benefit from the feedback of thousands of customers who can point out areas for improvement. Equity-based, rewards-based, donation-based, and debt-based crowdfunding are all viable options. Reward-based crowdfunding is the most applicable for the pre-seed round since it does not require an existing company or product.

Pre-seed vs. Seed Funding: What's the Difference?

Farming is a good model for how startup funding rounds work. In the pre-seed stage, the founder sets the foundation for planting the seed. On the other hand, the seed stage is when the founder plants the idea and turns it into a business.

The main difference between pre-seed and seed funding is that pre-seed happens before the first "official" funding round and at the beginning of a company's life. In the past, the seed or series of A funding rounds was the first time a startup company got money from formal investors or a venture capital firm. Pre-seed venture capital is more common and is seen as a total round of funding.

During the pre-seed funding round, startups need to show that they are meeting a need in the market that no other business can encounter. Next, the goal of the seed or series A funding round is to show that the product or service is a good fit for the market.

To clarify this concept further, pre-seed venture capital investments are money that is raised to prepare for future possibilities to raise money. Pre-seed happens at the beginning of early-stage product development, while seed startups in the seed funding round should have already proven their value proposition.

If you want to get information about seed funding, you can visit this blog.

When Should You Start Raising Pre-seed Funding?

"Right place, right time" is a phrase that every business owner knows is important. You must understand that your new business is ready to seek funds. Don't forget that investors meet thousands of new business owners each year. If you don't have everything you need, you'll be turned away right away.

Any time is good for pre-seed funding during the first 12 to 18 months of a company's life. This is because operating capital can be hard to come by when a company is just starting. A startup may need pre-seed funding for a variety of reasons.

Starting-Up Costs

Pre-seed funding is good if the company hasn't released an MVP and needs more money for day-to-day operations. Even though an MVP or clearly defined revenue streams are beneficial, they are not required for firms to get funding in this round.

For New Employees

Any business that wants to do well needs to hire people with skills. In the early stages of a startup, when you need a viable product as soon as possible, you need a core group of experts in the field. Companies need a lot of money to hire the best employees or freelancers.

To Sum Up

Reading this essay gives you a clearer picture of what pre-seed is and how it works. Setting achievable goals and having a solid understanding of the benchmarks is essential for a successful pre-seed round. This way, the startups, and the investors can build a solid foundation of mutual trust. Pre-seed venture capital firm's increased focus on investing in startups at an early stage improves the prospects for these companies receiving the funding they need to quickly advance their growth.

If you have a great idea and need capital to grow your startup, let's check out the Eurokick website.

Eurokick is a venture capital firm based in Turkey that invests in and consults on cutting-edge digital startups with global aspirations and high standards of quality and reliability.

The Eurokick team is dedicated to taking calculated risks and doing their research. We always keep our partners' best interests in mind and strive to get the most out of every project we launch. Contact us for pre-seed funding!