The Basics Of Pre-Seed Funding For A Startup

The Basics Of Pre-Seed Funding For A Startup

Sadaf Abbas

Every business requires funding through which they start their operations at the earliest stages. One can’t possibly start a business without any initial capital. This is where pre-seed funding comes in, also known as pre-seed round. It is essential to raise capital as you venture to start a new business. Doing so allows you to meet the initial outlay for your business early-stage company. However, obtaining the right pre-seed money and gauging a median valuation is a task on its own, as there is a lot of detail that goes into financial projection.

Pre-seed funding is vital for every startup founder at the pre-seed stage. Therefore, it should be planned out properly, especially when eyeing the market opportunity. Here, you’ll delve deep into pre-seed startups and their needs. You will learn about pre-seed funds, their importance in product development, the ideal timing for pre-seed investment, and how potential customers perceive the product market fit. So, before any further ado, let’s understand all there is about it.

What Is Pre-Seed Funding?

As a startup, it is necessary to have access to the right pre-seed capital at the start. Pre-seed funding rounds help businesses at the pre-seed funding stage to get off the ground. Pre-seed funding holds significance to your business as it becomes the starting point for it. By raising these funds in exchange for equity stake, you can ensure proper business development and a more accurate product, business plan, and financial model.

To understand what pre – seed funding is exactly, let’s take a look at a few examples. Imagine you starting your business and trying to find initial funds for it. What did you think of? The first thing that you picture is the savings you might have in cash or asset form. Moving on, you are sure to reach out to your close ones and ask them for similar funding. Your relatives or close friends may contribute to your business idea and offer you funds such as cash or assets. This is one way to go about pre-seed funding.

Things aren’t this easy all the time as your relatives or close friends might not have funds to provide you with. So, where do you go next? Over the years, as more and more startups have come into the market, the number of pre-seed investors has increased. Therefore, there are platforms and individual investors present to help you obtain for your business. However, it is not as simple as it sounds, so you should be prepared to offer something unique to avail of this option for your business.

Difference Between Seed And Pre-Seed Funding

People often confuse pre-seed and seed funding. They might seem like they are the same thing, but in reality, they represent different funding rounds. Pre-seed funding is typically about raising hundreds of thousands to help startups reach product-market fit and develop a robust customer base. For instance, pre-seed funds would go up to a maximum of $250,000. On the other hand, seed funding is for when the entrepreneurial community sees a viable market strategy in play, and you may secure larger investments. So, why are these funding options different? Let’s take a look at the specifics.

Seed funding is essentially when you have grown out of the developmental phase and have something viable to show to potential investors. Once you have your product and team ready, you can get seed funding and avail of funding of larger proportions. Keep in mind that this is once you have done the basic research and have developed a product that satisfies your target market’s needs.

On the other hand, pre-seed funding happens before you have fully developed your product. Here, you are at the developing stage, where you create a minimally viable product to get funding. This product doesn’t have excessive or detailed features. Instead, it incorporates the basic features that the target market would like in the product. To be able to work on this product further, you will need funding. For this, you will turn to pre-seed funding as it offers you enough inflow to help you meet your expenses and develop your product further.

The Ideal Time To Seek Pre-Seed Funding

When it comes to pre-seed funding, you need to make sure that you have a specific timeline in mind for it. You can’t wait till you exhaust all your resources and then start to look for funding. Instead, make a plan for your business to know at what point you should seek pre-seed funding. Professional investors and venture capitalists advise keeping an eye on future funding rounds.

Place a limit on your fund usage. Once your expenses reach this limit, it is time for you to start working on getting pre-seed funding. However, you need to make sure that you have a clear understanding and planning of how to pitch this to your investors. For pre-seed funding, you will be searching for close connections to offer you funds. To be able to obtain the funds, you need to create a compelling elevator pitch.

With your elevator pitch, you can wow your potential investors and make them see what your unique selling point is. You need to give your investors something viable throughout your pitch if you wish to get the funds you’re looking for. So, be sure to have a realistic and strong elevator pitch ready for your investors.

While you pitch your product to your potential investors, you will also have to explain the costs associated with it. The more detailed and thorough you are at this point, the more they will be able to understand why the funding is crucial. Don’t skip out on the financial plan, as it will cover the expenses bit, which will help your investors understand the funds required to cover expenses.

How To Find The Right Pre-Seed Investors?

Once you analyze the right time for seeking pre-seed funding investors, you will have to figure out how you can find the right type. Identify the type of investor who shares the business model aspirations and understands the pre-seed company’s potential. You will not get funding from just any pre-seed investor. You will have to make sure that they are the right ones for your business. They should be familiar with equity financing and possibly have experience with private equity or hedge funds. When you discuss pre-seed capital requirements, emphasize the value of your intellectual property and the vision for business development. So, let’s take a look at what you can do to find the ideal investor.

1. Investors With Similar Aspirations

The first thing that you need to see is whether or not the investors share the same passion for your work as you do. While it may not be at the exact level, your pre-seed investors should believe in you enough to stay throughout the process. Finding ones that have similar aspirations and beliefs is essential so that you can rely on them. Otherwise, there is a possibility that they might back out.

There are a lot of ups and downs when it comes to starting a business. You want to have investors who are determined to see your business make it through everything. If they don’t believe in your ideas, then you will surely lose them once things start getting a little difficult.

2. Investors With Experience

Startups go through various stages initially. Things will not always look up, and there is a fair chance that expenses will run high. Investors who are new to this might get scared and withdraw if they see things going down. You want to ensure that you bring onboard investors who have some experience in this area. In case you go for an inexperienced investor, there is a high possibility that they might back out from the funding.

Moreover, investors with experience have knowledgeable insight into your business. You won’t have to explain the startup pattern or other unnecessary issues with experienced investors. The investors will be prepared for what’s to come. And, at times, they might also have some reasonable input for you to improve your situation.

3. Compatible Investors

Lastly, you want to finalize the deal with compatible investors. There should be a clear understanding between you and your investors as to where to draw the line. If you’re not one who likes excessive input from the investors, you should make it clear from the get-go. At times, investors might want to put their thoughts and ideas into the business, especially if they’re close to you. If you’re not comfortable with this, then you must back out from such funding.

You want to make sure that you operate your business the way you want to. If the person funding your business is too hands-on, then your business idea may get derailed. So, assess the situation beforehand and get into a deal that allows you to work how you want to.

Pre-Seed Funding Sources

Lastly, if you wish to get funding for your startup, you can reach out to a range of individuals or platforms. While many people get their pre-seed funding from their relatives or close friends, many don’t. Luckily, there are more options available for you to try to get funding for your business. These include:

• Relatives or friends• Crowdfunding•Angel investors• Venture capitalist• Government grants

Depending on your situation and how effective your elevator pitch is, you will get the desired funding. Make sure that you’re networking enough throughout the process to make it easier to avail of pre-seed funding. If you’re unsure how to go about this, then some platforms can make this easier for you.

We at Oak Business Consultants are experts in offering consultation on such matters. Develop business plans and understand the various ways you can avail of 9-0\

pre-seed funding with our expert business solutions. Visit our website at Oak Business Consultants and get a free consultation.