Pre Seed Funding: The Ultimate Beginner’s Guide

Written by Peter Keszegh

Launching a startup is an exciting milestone for budding innovative entrepreneurs, but one of the biggest hurdles in getting it off the ground is trying to secure the funding for it. To kickstart your startup journey, it’s essential that you get the money you need, which can come in different forms, including pre seed funding.

In this article, we’ll dive into what pre seed funding entails and how entrepreneurs can make the most out of it.

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What is pre seed funding?

Put simply, pre seed funding is the earliest stage where a startup can secure financial support. This is crucial for entrepreneurs to cover all the basic needs in the early stages of your business, such as market research, product development, and forming a team.

Pre seed funding also often entails giving up equity or shares to anyone who’s invested in your business.

What sets pre seed funding apart?

Compared to later stages of funding such as seed or Series A funding, pre seed investments are typically smaller. Pre seed funding also comes from more personal relationships, such as friends, family, and angel investors.

The critical role of pre seed funding

Securing pre seed funding is important for startups because it not only validates a business concept, but it also empowers entrepreneurs to finally get their idea off the ground. It helps cover the funds needed for product development and exploring the market.

This investment makes it easier for startups to achieve key milestones and to make themselves more attractive to future investors.

Navigating the pre seed landscape

Because pre seed funding is the first chance you get at securing the money you need for your business, it’s important that you make sure potential investors have a clear understanding of what your business is.

During the pre seed funding stage, potential investors typically look for innovative ideas solving specific problems as well as startups with committed teams, a deep understanding of their market, and a strong potential for growth.

Laying the groundwork for success

More than the financial security it provides, pre seed funding symbolizes the beginning of a startup’s journey to success. Once you manage to secure the initial funds you need, you can start taking concrete steps towards setting your business up for success.

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What to expect for pre seed funding

Pre seed funding may feel less formal compared to the funding rounds to follow, but understanding what it entails is essential for entrepreneurs to get their business up and running.

Here’s what you need to know:

Typical sources of pre seed funding

As mentioned earlier, pre seed funding is usually more personal and can come from friends, family, angel investors, and even crowdfunding platforms.

Depending on your funding sources, you might have to deal with a specific set of expectations and professional dynamics. For instance, if you’re securing funds from angel investors, they might need more details about your business compared to family and friends who would have more trust in you from the get-go.

Average amounts and what they cover

Pre seed funding can cover financial needs that can range from a few thousand dollars to upwards of $500,000. These funds usually cover expenses for product development, market research, and building a minimum viable product.

Investor expectations at the pre seed stage

Because pre seed funding happens at an early stage, investors understand that budding startups won’t have organizational frameworks that are fully fleshed-out. At this stage, investors are looking for startups with a clear vision more than anything, as well as potential for scalability and profitability.

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Is pre seed funding for me?

It’s important to evaluate whether or not you’ll need pre seed funding for your startup. It’s not a one-size-fits-all solution, so here’s how to make sure pre seed funding aligns with your specific needs and goals:

Understand your startup’s stage

Pre seed funding is typically for startups in their conceptual or early development stages. If you need to validate your business idea, develop a prototype for your product or service, or conduct initial market research, pre seed funding may be helpful for you to achieve those goals.

Evaluate your financial resources

Ask yourself: can you successfully launch your startup without securing external funding? Pre seed funding typically involves giving up equity to investors, so double check whether it’s worth asking friends, family, and investors for funds in exchange for equity, or if you can get by just fine with personal savings.

Consider the speed of market entry

There are some industries that require you to quickly launch your products and services into the market. If you’re working in a fast-paced industry where early market entry can set you apart from competitors, you might find pre seed funding useful to help accelerate development.

Assess your long-term funding strategy

How will pre seed funding fit into your broader funding strategy? This initial investment can be a stepping stone to future funding rounds, so you need to make sure that accepting pre seed funding – which means giving up equity – aligns with your long-term goals for your startup.

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Preparing for pre seed funding

Ready to take a stab at securing the funds you need? Of course, it’s important to make a good first impression for investors so they immediately see the potential of your business!

Here’s how you can prepare for pre seed funding:

Develop a compelling pitch deck

Create a strong pitch deck that makes your business idea attractive to potential investors. Make sure it contains all the information they need, such as what your business plans to do, the market opportunities it aims to address, and relevant financial projections.

Your pitch deck should mention the exact problem your startup aims to solve, and why your product or service is a viable solution. To make your pitch deck more compelling, include data-driven market analysis to back your claims, and highlight your startup’s potential for growth and profitability.

Build a strong team

Investors don’t just invest in great ideas - they also invest in great people. Form a dedicated and skilled team that believes in your startup’s vision, and make sure investors know what your team members can do and the concrete ways they can contribute to the success of the business.

It’s also ideal to make sure your team is well-rounded and possesses a wide variety of skills and responsibilities.

Show market validation

A good business idea is one that solves a specific market need. It’s crucial to show that there is a demand for your startup’s product or service.

You can conduct market research through customer interviews or surveys that offer concrete evidence that your startup plans to address a particular need. This will help your business idea become more attractive to potential investors as well.

Craft your financial narrative

Convince potential investors that your business idea will be a worthy investment by giving them concrete milestones for your overall financial strategy.

Let them know the specific ways you’ll be spending the funds secured at the pre seed stage, and what you’ll be achieving as a startup before seeking more funding in future rounds.

Engage with potential investors early

You don’t want to be that utilitarian entrepreneur - it’s important that you build and foster relationships with investors well before you need to ask them for funding.

Put yourself out there by attending industry events, or by networking online via digital platforms. Connecting with angel investors and early-stage venture capitalists will give you a better idea of their investment philosophies, allowing you to tweak your pitches that resonate with them better.

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Crafting your pitch: Standing out to investors

Now that you’ve done all the work you need to do to prepare for pre seed funding, it’s time to prepare your actual pitch. More than presenting facts and statistics, you need to be able to tell a compelling story which will make your business idea stand out to potential investors.

Here’s how you can go about crafting your pitch:

Start with a clear problem statement

Be explicit about the exact problem your startup wants to solve. This needs to be a relatable issue that resonates with your audience, so that investors know investing in your startup means investing in an innovative solution. 

Frame your business idea around that problem to create a narrative that investors can buy into.

Highlight your unique solution

What sets your solution apart from other solutions? This is your chance to show how unique your product or service is and why investors should specifically choose your business over everyone else’s.

Highlight your competitive edge in the market and focus on the unique traits and benefits your product or service has.

Showcase your team’s expertise

Give investors a reason to believe in your team and your skillset. Make sure investors know the backgrounds, expertise, and experience of your team members. Your team should not only be skilled, but passionate as well.

Present market opportunity and validation

Provide investors with concrete evidence and data-backed analysis that shows there is a need for your product or service. You can show this using statistics, customer testimonials, or case studies.

Define your business model

At the end of the day, your business needs to make money for it to be sustainable. Let investors know what your business model is as well as the strategies you’ll be using for pricing, sales, and customer acquisition. Your business needs to be viable and sustainable for investors to consider providing you with funds.

Discuss financials and use of funds

Be transparent about your current financial situation, future projections, and how you plan to use the pre seed funding. Include key milestones in your pitch as well, so that investors know you’ve really thought about how you plan to go about budgeting and allocating resources.

Have a powerful closing

It’s important to leave potential investors with a lasting impression. Make sure they remember you and your business idea by reiterating the potential impact of your startup and your vision for the future. Convince potential investors by letting them know why now is the perfect time for them to invest in your business idea.

Creating a compelling pitch requires good storytelling, data-driven analysis, and clear communication. You need to show investors why your business idea is worth it, and that it aligns with their goals and interests and relevant market needs. 

Your pitch isn’t just a presentation – it’s an invitation for investors to join you on your journey to success and innovation.

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The legal aspects of pre seed funding

Understanding the legal parts of pre seed funding can get tricky, so it’s important that budding entrepreneurs like you know how to navigate the legal landscape for startups, and how to avoid complications down the line.

Important legal documents

Familiarize yourself with key legal documents involved in pre seed funding. These typically include:

  • Term sheets: These contain an outline of the terms and conditions under which an investor will make an investment.
  • Shareholder agreements: These define the rights and obligations of the shareholders, including the founders and investors.
  • Convertible notes or SAFE (Simple Agreement for Future Equity) agreements: These are used for early-stage funding, and they specify the terms under which the investment will turn into equity during future financing rounds.

These documents will set the groundwork for your relationship with investors as well as the future of your startup.

Protecting your intellectual property

Make sure you secure intellectual property (IP) rights for relevant materials created by founders, employees, and contractors. This will assure investors that your assets are legally protected.

Equity and dilution

It’s necessary to be transparent with investors about the equity you’ll be offering, and how it affects the ownership structure of your startup. Also, as you onboard more investors, you’ll have to deal with dilution, which reduces the percentage of ownership of existing shareholders.

Be clear about all these terms from the get-go so you can maintain trust with all relevant stakeholders.

Compliance with regulations

Startups need to comply with many legal and regulatory requirements, such as laws that deal with equity and registration. Consulting with a legal professional for regulations will be helpful for your startup, so you don’t run into any legal issues down the line.

Negotiating terms with investors

Of course, you need to make sure your terms with investors are fair for both parties and protect the long-term interest of your startups. Make sure to strike that balance between securing the funding you need and maintaining control over your business trajectory.

Understanding the legal aspects of pre seed funding can get a little complicated, but it’s necessary for making sure you lead your startup to success. Abiding by all the legal complexities for startups will help you confidently build a strong foundation for your business.

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Beyond pre seed funding: Planning your next steps

If you’ve already secured the funds you need via pre seed funding, congratulations! But that’s just the beginning of your startup’s financial journey.

Here’s how you can strategically plan the next steps for your startup, following pre seed funding:

Set realistic milestones

So you’ve secured the initial funds you need – what are the next steps you need to take? Establish clear and achievable milestones that will demonstrate progress to current and potential investors. These milestones are typically focused on product development, market entry, user acquisition, and revenue targets.

Prepare for seed funding

Compared to pre seed funding, seed funding usually requires more substantial evidence of how viable your business model is. This means providing concrete evidence that you’ve sufficiently engaged with your target audience, and good revenue numbers.

You can prepare for seed funding via product refinement, market validation, and improving customer acquisition strategies.

Refine your business model

During pre seed funding, you might’ve received feedback and constructive criticism that can help you improve your business. Tweak your approach and strategies as needed - this can include scaling operations to meet increasing demand, or even exploring new markets.

Build relationships with future investors

Networking doesn’t stop with pre seed funding. Keep building relationships with new potential investors for seed funding stages and beyond, and nurture the relationships you have with the investors with whom you’ve already developed professional dynamics.

Show off your achievements

Let your investors and network know once you’ve hit key milestones in your startup journey! Use success stories, user growth statistics, and positive market feedback to make your business look attractive to future potential investors.

High five

Sample case studies and success stories

The journey from pre seed funding to startup success has its own set of challenges. In this section, we’ll explore case studies of four hypothetical startups, where entrepreneurs can glean insights and inspiration for their own business journeys.

Startup A: Transforming vision into reality

Startup A is a tech-driven health platform that plans to revolutionize patient care through innovative technology. They secured pre seed funding by highlighting a compelling problem statement relevant to the current state of the healthcare industry – which also showed that they had a deep understanding of their market.

The funding they secured allowed them to enhance their platform, conduct market research, and solidify their business model. Today, Startup A has expanded its services across multiple states, which proves that putting in the work during a pre seed funding stage can lead to great success.

Startup B: Leveraging market validation for growth

Startup B is a mobile app designed to simplify local shopping. To attract pre seed investors, they presented early user feedback and conducted thorough market research to show audiences why their innovative solution addresses a pressing market need. They also highlighted their startup’s potential scalability.

This allowed Startup B to secure the funds they needed to expand their offerings and cover wider markets. Highlighting market demand will give your business idea a strong case and will make your startup attractive to investors.

Startup C: Navigating challenges

Startup C, which focused on sustainable energy, had a hard time convincing investors of how feasible their business idea was. They eventually managed to secure their pre seed funding when they highlighted their commitment to solving a global problem and their innovative technological solution.

The funds they secured during the pre seed stage allowed them to launch their products and services in select markets, which helped them gain the traction they needed for future funding stages.

Startup C’s story highlights the importance of articulating a clear vision and your competitive edge to win over investors.

Startup D: The role of strategic partnerships

Startup D is a platform that connects freelancers with businesses. What helped Startup D’s founders secure initial funding was the partnerships they forged with investors during the pre seed stage, as they strategically connected with industry leaders and gained credibility.

The funding Startup D secured helped them accelerate their platform development and also allowed them to expand their professional network, which made it easier for them to attract more investors for future funding rounds. 

Startup D’s story shows the importance of building strategic partnerships early on in your startup journey.

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Common mistakes to avoid in pre seed funding

Figuring out how pre seed funding works isn’t easy. It’s good to be aware of common mistakes that you can avoid during this stage of funding, so that you don’t run into bigger problems later on in the lead-up to launching your startup.

Here are some critical mistakes to avoid:

Overlooking the importance of a solid team

Investors often say they invest in people first, ideas second. It’s important you have a solid team composed of members with a good mix of skills that are relevant to your startup. 

This means making sure your team members have the technical expertise, business know-how, and industry knowledge to get your business up and running.

Failing to validate your market

Don’t immediately assume that there’s a demand for your product or service if you don’t have the evidence to back it up. Before you approach potential investors, validate your market via customer interviews, surveys, and/or beta testing.

Underpreparing your pitch

You need to make a good first impression for potential investors, so this means making sure your pitch is solid and compelling. Make the time to craft a compelling narrative that clearly explains the problem your startup plans to solve, and your innovative solution.

Make sure to mention the market opportunity for your solution, and to practice your pitch beforehand.

Ignoring the competition

You need to know who you’re up against. Make sure you have a good understanding of your market and are aware of the businesses who might be seen as competitors. Investors need to know you have a clear competitive edge and that you know what sets your business apart from others.

Misunderstanding the use of funds

Investors won’t bother investing in a startup that has a vague or unrealistic plan for the funds. Be specific about how you’ll be using that investment by listing key milestones and other relevant details. This will show investors that you’ve put a lot of thought into resource allocation and growth.

Neglecting legal and financial preparations

Make sure you have the right legal structures in place and that you consult with legal and financial experts. This will show investors that you’re professional and have taken all the right measures to avoid legal and financial complications.

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Embarking on your pre seed funding journey

While securing pre seed funding can be challenging, it’s also a great opportunity for you to show investors and relevant stakeholders why your business idea matters. It’s about telling a story that sets your business apart from everyone else, and building the right relationships with people who believe in your vision.

If you take the right steps to prepare for your pre seed funding journey, you’ll be able to pave the way for your startup’s success and growth. Best of luck with your pre seed funding journey!

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