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December 24, 2018

What Is Pre-Seed Funding?

Pre-seed round of funding, or pre-seed money, is the capital that a business needs to get itself started. The business or startup is mostly in the idea stage when it receives the pre-seed round of funding.


What is Pre-Seed Round of Funding?


The pre-seed round is, generally, the first capital a startup receives, when it is still in the true “idea stage” of the business. At this stage of the game founders are trying to sell investors on the idea of the business without typically having a product or revenues.


Pitches typically include the story of how the business idea came to be, the purpose it serves, the market size opportunity, the value it will add for customers, and the overall plan of the startup’s founders. At this point, investors are typically deciding whether or not the founders are a team they want to back and if the idea feels viable. It is often a gut decision over anything else.  


Sources of Pre-Seed Funding


The sources of pre-seed funding have historically been friends, family, and individual angels. However, there is a growing class of VCs that focus on providing pre-seed capital, such as Afore, Precursor Ventures, and Notation Capital, that deal specifically with providing pre-seed funding to the startups with promising ideas.


We are also seeing a new set of pre-seed investors arise; you! Equity crowdfunding has become a popular option wherein the idea is presented to the broad public, i.e. “the crowd”, through equit y crowdfunding platforms such as Republic, Wefunder, and StartEngine. This is a great way for founders to test their idea with a broader audience and see how it resonates within a broader market. It also provides the necessary initial capital to get a business going.


How is Pre-Seed round different from the Seed round of funding?


A Seed Round is often the first round of funding a startup would receive. Since the emergence of equity crowdfunding. Just a few years ago, even, what used to be the seed round of less than $1 million, has become more like a Series A round of funding ($3-$5 million). This brought in the need to rename the first round of funding.


Thus, pre-seed is now the earliest round of funding, with a value around $1 million, and it is used to “test the waters”. It helps to demonstrate that the product or service fulfills a market need. Nevertheless, a seed round of funding is taken when the company has already validated its value proposition and is in the process of defining how its business will scale through capital infusion.


What is Pre-Seed Funding used for?


The capital received from pre-seed funding is used to make the startup’s concept or idea into a reality. The money helps the founders and entrepreneurs in converting their thoughts and concepts into a real product or service. Ideally, a pre-seed round is used to prove whether a product or service is indeed viable.


The money received can be used for product and market validation, business model refinement, prototype development, team assembly, and to prepare the company for higher fundraising opportunities. Overall, the pre-seed round of funding is used to build a minimum viable product (MVP).


The Bottom Line


As pre-seed round of funding is typically the first-ever round of funding that a startup receives. It is generally a small amount, with run-rate of about 6 to 9 months. The goal of a pre-seed round of funding is to develop a functioning product that can develop into the finished product in the future, to assemble a relevant team, test the market, and move on to the distribution and test launch of the product or service.


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About: Chris lustrino

A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.

View Chris lustrino's articles

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