Just 5 years ago, many articles were written about it being the end of startups. Fast-forward to today: India has seen twenty times more startups in five years, many of them going on to become unicorns! While a great idea and an able team are vital to a startup’s success, one of the most important factors that helps catapult a startup is the funding it receives from benevolent investors who believe in the startup’s potential. And the critical stages of funding that really push a startup off the ground are the pre-seed and seed funding stages. Often, people get confused between the two, and we understand why. There is a very thin line between pre-seed and seed funding, which is usually differentiated based on how far along you are in the process. Today, we are here to tell you the difference between “pre-seed” and “seed” funding and help you decide which one you should go for. Read along!
What is pre-seed funding?
Pre-seed funding is the initial investment that a startup needs to take off the ground and start operations. Typically, this stage is not considered an actual stage of funding and is often referred to as the friends and family round. The investors in a startup’s pre-seed stage tend to be the founders, their friends, family, and any other close stakeholders. The amount of funding that can be obtained with pre-seed funding ranges between $10,000 and $250,000. During the pre-seed funding stage, startups value anywhere between $10,000 to $100,000. The goal of pre-seed funding is to raise enough capital for product development and prepare it for future fundraising rounds. Remember, pre-seed funding should help you sustain the operations for at least 6–12 months. That gives you enough time to create a prototype and test product-market fit that you can then use during the official first round of funding, the seed funding round.
Recommended Read: Who Is an Angel Investor and How Does Angel Investing Work?
What exactly is seed funding?
Seed funding is the investment that a startup gets for research and development, sales and marketing activities, hiring, and product enhancements. Once you establish a startup with pre-seed funding, seed funding helps you grow your business and be on the market. The main investors in this round of funding are typically angel investors, micro-venture capitalists, and institutional investors. The funding amount at this stage tends to range between $500,000 and $2 million.
The basic requirements for this stage would be a proven team, a product that has some traction and interest to show, and, of course, data to demonstrate the product-market fit. We suggest raising enough seed funding to help you sustain 12-18 months. After that, if your startup is doing well, you can look forward to the next stages of funding. You can read more about seed funding in our recent blog post, “A Comprehensive Guide To Seed Funding For Entrepreneurs.”
How to know if you’re raising pre-seed funding or seed funding for your startup?
Pre-seed funding and seed funding rounds are often used interchangeably. However, there are a few attributes that can help you determine which stage you are in. The table below can help you understand if you should be raising pre-seed funding or seed funding for your startup.
|Attributes||Pre Seed Funding||Seed Funding|
|Investors||Founders, family, friends, accelerators||Angel investors, micro-venture capitalists, institutional investors|
|What the business looks like||1. There’s a prototype of the product.|
2. There is a clear roadmap of what the business would look like.
3. You have hired a couple of people.
|1. You have a minimum viable product and have established the product-market fit.|
2. You have some traction and customer interest to show.
3. You have a bigger team ready to kickstart.
|Target runway||3 to 9 months||12 to 18 months|
While the investors for the pre-seed round would be mostly close friends, the ones involved in the seed funding round would be mostly external investors and would help grow your network significantly. This would come in handy for your future funding rounds.
If you have just had your “Eureka!” moment, pre-seed funding might be the right option for you. Though it wouldn’t be enough to completely build a product, you will have enough capital to try out the different possibilities while also giving you time to get feedback from your investors. On the other hand, if you have already started and have initial market traction with a viable product and need funds to grow your startup, then seed funding would be the right choice. However, remember that the external investors might expect ROI in terms of share in equity.
Tips to raise pre-seed and seed funding for your startup
Always have a clear plan in hand. Even if it is just an idea, being sure of what you want and how the business would grow potentially will help convince investors to believe in your idea.
Research potential investors and curate a list of people you’d like to reach out to. While you might think it doesn’t matter during the pre-seed funding stage, having a concrete list of individuals who would be ready to help you grow your business can be a huge confidence-booster, and reduce any last-minute letdowns.
Have an elevator pitch ready. Be it a pre-seed or seed funding round, having a short but effective elevator pitch can help convince your investors and build trust. An added bonus would be a pitch deck and business plan that would be a testament to your understanding of the market, the competitors, and your business as a whole. You can check out our blog on how to write a compelling business plan with a free template that you can use right away.
Bonus: We have answered all your questions on raising seed funding for your startup in our blog, “Seed Funding FAQs | How to raise seed funding for startups.”
Is there any funding source that doesn’t involve equity dilution?
Yes! If you are looking for a flexible, highly scalable, 100% digital process of raising funds that require no equity dilution, we recommend getting revenue-based financing from Velocity. This founder-friendly approach lets founders raise funds without diluting equity and the repayments happen as a percentage of monthly revenue. You can learn more about how revenue based financing is structured to help businesses here.