This post was originally published in technext.it See the post here: The Ultimate Guide to Getting Pre-Seed Funding for Startups
Securing the funding to bring the idea to life is the first challenge a funder must face. Although managing investors becomes relatively easier startup has proof or a user base, it is still hard to get funding at the initial stages of a startup.ﾠ
Not too long ago, startup founders had to bootstrap their companies all the way to the early stage. However, today, a number of VCs are open to investing in early-stage startups, including the pre-seed phase. This has resulted in more entrepreneurs being able to pursue their dream, confident that they can secure the funds needed to start their startups.ﾠ
You may be wondering what pre-seed financing really is. When should you take them, and how to manage pre-seed financing for your startup? Let’s find out.
Fundamentals of Pre-Seed Funding
What is pre-seed funding?
Pre-seed funding is the initial investment round for a startup when the business is just getting started. In this phase, the founders work to bring their concept to life, and the investors contribute a small amount. As the name suggests, the pre-seed funding stage comes before the seed round, and an entrepreneur doesn’t have much to show for at this stage.
It wasn’t a part of the startup funding stages until very recently and is still not considered an official funding round like a seed round or series A round. Even in 2023, only a handful amount of founders manage to secure pre-seed funding.
As a result, most of the founders bootstrap (over 70%) at this stage or find a few (mostly informal) ways to get money. Self-financing, friends and family, and company pitching events are the most prevalent pre-seed capital sources.ﾠ
Is it Worth Taking Pre-Seed Funding?
On average, founders raise 50,000–200,000 in the pre-seed stage in exchange for 5–10% equity. If you compare this deal to the initial round, where an average of 2.2 million is raised for a 10–20% stake, then the pre-seed round may not seem like a good fit.
But when you consider that about 90% of startups fail, and as a founder, you’re already investing your time, you’ll realize that taking pre-seed funding will minimize risk for founders. Plus, the amount helps you in several ways, such as:
- It helps you to build a better MVP, which is important to successfully raise the seed funding.
- Helps to establish the startup’s core so that it can compete with well-established competitors.
- Used for things like hiring new employees, renting an office, and advertising to your first few consumers that drive rapid growth.
- Startup Market research needs a significant resource. Pre-seed round funding Supports market research and helps funders gather data at the initial stage.
- Can create a business strategy and boost business growth with these financial backups.
On top of the financial backup, many micro VCs or initial-stage VCs bring their technical and business expertise to the table. With these added brains, founders can make informed decisions. Most of these VCs are part of the local and international startup environment, so their connections make it easier to find new investors in other funding rounds. All those factors combined increase the chance of success.ﾠ
After reading all these, it’s easy to think taking pre-seed funding is a no-brainer. Well, that’s not the case. Raising funding at this early stage also has its downsides. You see, every founder has their own unique vision for their new venture. As a result, funders don’t hesitate to go beyond the industry standards and make individual decisions. Sometimes, these vision alone gives startups a huge boost, but tieing with a venture capital firm limits the founder’s free will, which is often detrimental for a new venture.
Not just that, investment at this early stage means giving away a huge chunk of equity for a small amount of money. That is why the question arises: Is it worth giving away that much future earning and decision-making power in exchange for such little investment?
Ultimately, there is no one true answer to this question. Whether or not a founder takes pre-seed funding is subject to the factors mentioned above. If a founder can secure enough financial support for all other necessary things and has enough connections or knowledge, bootstrapping would be the better choice. If not, they should go for pre-seed funding.
