Over 23,000 startups have received seed funding from 2016-2020, which has grown exponentially compared to the decade before. Many businesses see the value of bringing in investors early to help launch their businesses right vs. bootstraps.
We’ll explore why pre-seed money is good and how to attract pre-seed investors to your startup business. By leveraging early investors, you’ll have the funding you need to realize your business idea.
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Table of Contents
What is the Purpose of Pre-Seed Funding?
Pre-seed funding ultimately helps you turn your idea into a legitimate business. Pre-seed funding helps:
- Form the company
- Fund initial operations
- Sustain the business to reach specific goals that can solidify more funding if necessary
Getting pre-seed funding can elevate the potential of your business because you don’t have to bootstrap it in your garage to get the startup off the ground. It can also sustain you through early research and development to ensure your products and services are competitive in evolving markets.
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Related Link: Startup Stages: A Guide to Every Step of the Process
What is the Difference Between Pre-seed Funding vs. Seed Funding?
Pre-seed and seed funding are capital investments in your business before your product is available. But there are subtle differences between these early investment funds.
Pre-seed funding is investing in the startup idea or potential. Your product or service may not have a market or potential customers yet. This is especially true for new technology or services for markets that don’t exist yet. Uber is a good example of needing funding for a service that didn’t have an existing market when it launched.
Seed funding is needed when the product or service already exists and has a customer base. The startup can predict demand, operational costs, and potential revenue for their product/service more accurately based on the existing market. This type of funding is easier to secure because the investors can quantify the value and ROI.
How Much Equity Do You Need for Pre-seed Funding?
Because your typical investors in the pre-seed funding round are friends, family, angel investors, or venture capitalists, you will need to offer a 5-10% equity stake in your new startup. If you need funding in the $1 million range, you may need to concede up to 20% equity to your pre-seed investors. They are investing in your potential to earn a return on their investment.
What is the Average Pre-Seed Funding for Startups?
A typical pre-seed fund can range between $10,000 to $500,000, depending on the market, business needs, and initial setup costs. A recent VC funding survey found that the median seed funding size has increased to $4.4 million.
You’ll want to create a detailed analysis and business plan, clearly defining your potential position in the market and potential for income. You’ll also want to accurately estimate your operational costs to determine how much pre-seed funding you’ll need to get you to the subsequent financing round.
How Long Does Pre-Seed Funding Take?
Raising pre-seed funding can be highly variable. It may take a week or six months, depending on the investor, the amount of funding needed, or how well you pitch. That said, plan on at least six months to pad expectations and financial planning, and then hope it delivers sooner.
Because you can’t control this, starting the pre-seed funding round well before you need it is smart. You don’t want to be caught running short on cash because you didn’t start the process soon enough.
What is a Good Pre-Seed Valuation?
When determining the company valuation for pre-seed funding, it is based on the company’s present value. This can be very challenging for startups because there may not be enough financial data during early operations. The external market and its potential ultimately drive the pre-seed valuation.
Because you are determining the funding you need to get your business off the ground, you’ll want to assess your operational costs as accurately as possible. You’ll also want to pad those costs to mitigate unforeseen obstacles. You’ll also need to illustrate to your pre-seed investors how the market can quickly justify and repay the pre-seed investment.
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Related Link: How R&D Credits Help with Payroll Taxes 
How to Attract Pre-Seed Investors
Finding investors outside your friends and family can be challenging. There are some networks for finding VCs, angel investors, or crowdfunding, but you’ll need a well-cooked pitch to get an offer. Here are some things you’ll need to have ready to pitch your business idea to potential investors:
- A Pitch Deck: This 10-15 slide presentation sells your business idea, market potential, and startup team.
- A Strong Presentation: Once you have your pitch deck, you need to perfect your presentation. You’ll more than likely have to do it in person, so find people who will listen and provide feedback on your presentation to ensure it is dialed in. Keep your presentation focused and short. Try to keep the presentation under fifteen minutes to allow for questions afterward.
- Negotiation Skills: You must develop negotiation skills to calmly and objectively reason through any offers and decide if the funding terms are right for your business.
- A Cultivated List of Potential Investors: Do your homework and research investor or crowdfunding websites that allow pre-seed funding. Make a list of the investors who have the most potential.
Leveraging Pre-Seed Funding is an Excellent Way to Get Your Business Off the Ground
If you decide that pre-seed funding would be the right move for your business, put in the work to develop a solid pitch to present to potential investors. You need to accurately evaluate what your business needs to reach goals that will enable more funding. This sweat equity will be worth it when you land that first round of pre-seed capital.
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