When it comes to your startup’s financial planning you’ve got a lot of things to take into consideration. If you’re just starting out your venture, you’re probably one-sidedly focused on pre-seed funding. First things first, right? But is this enough to secure your startup’s financial viability, till you get profitable? What other financial options will you be “forced” to explore in the not-so-distant future? Well, you need to be carefully prepared.
Before we get into presenting the funding steps to come, let’s have an overview of this first fundraising step you’ll be taking, to back up your venture. We need to; because, as you’ve probably guessed, this initial funding stage — pre-seed funding — somehow affects — if not defines — your next ones, in a chainlike manner.
Pre-seed funding: things you need to know
Since you’re here (reading our article), you’re probably already familiar with the term “pre-seed funding”. That’s either because you’ve already managed to get some capital for your startup, or you’re on the lookout to explore future options, in advance. In any case, let’s set the ground for our discussion, with the following FAQ.
What is pre-seed funding?
As previously explained here οn our blog, pre-seed funding — or pre-seed capital — is the initial amount of money you’ll raise, to start building your startup company. More specifically, it’s because of this capital that you’ll be able to bring your idea into being. With the money you’ll raise, you’ll be able to initiate basic operations and set the ground for your next steps.
And, by raising, we don’t necessarily mean following all the kinds of formal steps included in other funding rounds; that depends on the source of your funding. As Investopedia mentions, pre-seed funding “is not generally included among the rounds of funding at all”.
So, what are the alternative pre-seed funding paths you may take?
How do I get pre-seed funding for my startup?
Well, you’ve got three alternative resources you can make use of: your 3Fs, incubators/accelerators and angel investors.
Dig into your own pocket
As we have previously explained here, you may as well decide to finance your endeavor (or part of it) on your own. But, as expected, if you’re a first-time-entrepreneur, with no (successful) track record, that may not be an all that viable option for you.
Get your 3Fs into the game
In the same fashion, when it comes to financial resources from Friends, Family and Fools, though it may be easier to sell your initial idea to them, it would also be improper to risk their hard-earned money without concern. Note here that this is the case, most of the time, when it comes to pre-seed funding. They’re simply the best candidates as your first investors. But, even if you decide not to choose this path, it’s a great opportunity for you to test your determination and your faith in what you’re about to start building. To put it another way, if you don’t want to “trick” family and friends into investing in your idea, don’t trick yourself into starting something you don’t believe in.
Join a pre-seed accelerator or incubator
By joining a pre-seed accelerator — or incubator — you get the chance to secure some pre-seed funding (or seed funding; more on that later). That kind of capital is usually offered to alumni that complete the accelerator/incubator program; and then get support in another format. At least, that’s what happens most of the time. Throughout your participation in such programs, you’ll also get mentoring, training and access to a network of experts. A quick search will provide you with a list of programs that fall under this category; along with their prerequisites and offerings.
Alternatively, if you fit the description of our portfolio specialization, you could join our Venture Building program, which includes a pre-seed investment.
Angel and other investors to your rescue
Pre-seed funding may also be “angel funding”. And that stems from the fact that, most of the time, this type of funding — aiming to support startups of the pre-MVP stage — comes from angel investors. Another point worth mentioning here is a category of venture capital firms, called micro-VCs; they focus on pre-seed investments, too. Crunchbase offers a relevant list. Generally speaking, with pre-seed funding you’ll likely be able to finalize your PoC, develop your prototype or even build a pre-MVP version of your product. And, as mentioned here: “It’s also likely that investors at this stage are not making an investment in exchange for equity in the company.” In any case, that depends on your initial agreement with your investor; that will support your venture and will fuel it with capital.
How much pre-seed funding can I get?
Though it would be much more helpful to try and answer the “How much pre-seed funding do I need?” question, instead, let’s give it a try, all the same. In short, the money you’ll get, greatly depends on who you’re approaching and on what terms. In any case, pre-seed funding tends to be small, because the expectations on your delivery are still kept low. Simply put, you’re only testing the waters; and your investors are fully aware of the risk they’re taking.
Again, here, with a quick search you’ll find various answers regarding the numbers involved in pre-seed funding. However, you need to keep in mind that, as it happens following the valuation process, the numbers you’ll find in competitive geographies, such as Silicon Valley, may greatly differ from what you’ll find in other startup hubs. And, for the record, as TechCrunch mentions, seed is the new Series A; and pre-seed has emerged to fill the gap.
A note about pre-seed funding and other stages
As noted earlier, there are different views with regard to pre-seed funding. Some may say that if you’re raising money from investors, that makes it a seed round. To put it another way, it depends on who you’re approaching to get your funding; is it your 3Fs or angel investors? If it’s the latter, you’re on the seed stage. In any case, as you’ll find out for yourself, the boundaries between funding stages are, sometimes, kind of blurry. And that comes as no surprise; especially since the startup fundraising landscape changes dynamically.
On to the burning question now.
What are your startup’s needs? What comes afterward?
Trying to answer these questions will help you understand exactly what’s essential for your startup, at this stage; and also what will be essential for your venture, later on.
Funding stages that follow
Speaking about funding stages, we have previously elaborated on that aspect, in this article; where we analyzed in detail all the funding stages a startup may go through, from day one. In particular, for the pre-seed funding stage, we mentioned that you need to have a product/business idea at hand; and that the capital you’ll get will help you finalize your PoC — or build a pre-MVP version for your product. Likewise, for the seed funding that follows, you’ll get the time you need to conduct your market research; and, of course, start your product development.
Balance your needs and set your priorities
As you can see, each funding stage serves a specific (and of great importance) milestone. So, based on your own startup’s specific needs, goals and potentials, you’ll be wise to set your sights on getting funds from the right source. To elaborate, you’ll need to evaluate what’s more important for you and choose accordingly.
Are you confident enough to work on your idea without expert help? Then you’ll be OK to focus on funding entirely; and thus, go after resources that provide exactly that.
Does mentoring and hands-on support sound more appealing to your startup’s needs? Then you’ll probably be OK to approach an incubator/accelerator (or us), for pre-seed funding.
Closing thoughts
Funding is a tool that helps get access to resources essential for your startup’s development. Be it because you need to buy some time to conduct your market research and finalize your PoC, or because you need to expand your team further to get to the next level, you’ll need to get some capital. In the same fashion, when you’re looking for pre-seed funding, you’ll need to decide, based on what’s currently more crucial for your endeavor. In any case, keep in mind that you’d be wise to make sure that your decision is aligned to your startup’s mission and vision.
