For a start-up, pre-seed funding an initial round of development funding designed to help the business grow. Pre-seed funding tends to be in amounts between $10,000 and $250,000, and usually, these funds come primarily from family, friends, or the own funders, as this can help them develop a first MVP and access to the seed funding.
Understanding pre-seed funding
Pre-seed funding is a relatively recent concept. Traditionally, new companies would look for Series A funding right away and then worry about developing a viable product.
Seed investors have since come to fill a critical role in this process. Instead of looking for companies focused on getting to market as quickly as possible, they look for start-ups who have the following characteristics:
- They have an extremely basic product showing some functionality or are working on a minimum viable product (MVP).
- They have identified a clear market opportunity.
- They are in the process of making new hires or expect to advertise imminently.
- They have increasing operational expenses.
Pre-seed funding tends to be in amounts between $10,000 and $250,000. It typically comes from friends, family members, ardent supporters, or the start-up founders themselves.
Some basic features and requirements of pre-seed funding
The idea of pre-seed funding is to enable the launch of the business and get it to the next level of funding. The start-up founder is typically responsible for making the capital last as long as possible. They must also make the business attractive enough for subsequent investment.
Here are some other general features and requirements:
- Pre-seed funding should last up to 12 months to set a good rhythm. Delays beyond a year portray an unprepared or underdeveloped business.
- Funds are typically extended to a start-up based on the credibility of the founder, and not so much on the viability of an idea.
- Investors must not expect quick returns and be cognizant of the risk at this early stage of development.
- The founder(s) must be accountable to investors. Personal relationships must not cloud accountability.
- As a matter of priority, funds must be directed to clarifying a value proposition, milestones, and a financial road map.
How pre-seed funding is raised
For a start-up requiring pre-seed capital, there are several options:
- Pre-seeding platforms – these are host companies or entrepreneurs willing to invest in fresh ideas. Sping is a popular Dutch service for those developing web applications and other online platforms.
- Crowdfunding – this allows friends, family, and passionate supporters the chance to financially support a growing business by using the crowdfunding model. Kickstarter and Indiegogo are two of the more popular options.
- Early-stage accelerator programs – these are ideal for start-ups who require assistance in developing a product and honing their business model. Ultimately, these programs connect businesses with investors and provide critical support in the form of mentoring and education. Startup Boost is one such company with a focus on moving pre-seed stage start-ups towards accelerators, investment, and/or revenue.
- Pre-seed funding is an initial round of funding designed to help a start-up commence operations. It is typically funded by friends, family, and the founder of the start-up itself.
- Pre-seed funding tends to be in amounts under $250,000. Start-ups who have identified a clear market opportunity can use the funding to build a simple but functional product or recruit extra staff.
- Pre-seed funding can be raised in several ways, including specialized pre-seeding platforms, crowdfunding platforms, and early-stage accelerator programs.
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