Securing early-stage funding is one of the biggest challenges a startup faces. In the early stages, you’ll encounter two primary types of funding: pre-seed and seed1. These rounds might seem similar, but there are key differences in funding amounts, investor expectations, and business milestones.
Understanding the differences between pre-seed and seed funding is vital, as it will help you make informed decisions on how to approach investors, what milestones to hit, and when to raise capital.
Overview of pre-seed vs seed funding
Early-stage funding is a critical part of any startup's journey. It allows entrepreneurs to take their ideas from concept to reality and, ultimately, build businesses that have the potential to change industries. However, not all funding rounds are the same.
This article thoroughly explores both funding stages and compares how pre-seed and seed funding differ. We'll discuss which funding stage best suits your business needs and explore the strategies to secure the right investment.
Definition and purpose
What is pre-seed funding?
Pre-seed funding is the earliest stage of investment in the startup lifecycle. At this stage, your business is typically in its infancy. You might have an idea or have started working on a prototype or concept. A pre-seed round aims to help entrepreneurs validate their ideas, perform market research, and form the foundation of their business1.
Key objectives in this round include:
- Idea validation: involves ensuring a demand for your product or service and that the concept is viable.
- Market research: Gather insights about your target audience, competitors, and the overall market landscape. This will help you understand your industry and tailor your product accordingly.
- Initial team formation: Bring team members who can help shape the product or service.
Typical funding sources for pre-seed round include:
- Founders: The founders often contribute their savings to fund the early stages.
- Family and friends: In the pre-seed phase, close connections can be tapped for financial support.
- Angel investors: They are early-stage investors willing to take risks on promising ideas in exchange for equity in the business.
Expected deliverables in a pre-seed round:
- Proof of concept: Demonstrate to the investors that your idea is feasible and worth pursuing.
- Prototype development: A basic version of the product or service that shows its potential.
- Initial user feedback: Gaining input from a small group of early adopters to validate your concept.
What is seed funding?
Seed funding comes after pre-seed funding, typically when a startup has moved beyond the idea stage and is looking to expand its operations2. The seed round focuses more on business growth rather than validation. It helps the business to establish its product and generate revenue.
Key objectives in seed funding:
- Product development: Focuses on refining the product based on customer feedback and preparing for a market launch.
- Market entry: Here, you introduce the product or service to a wider audience and establish your presence in the market.
- Customer acquisition: In this funding round, the business mainly focuses on acquiring early customers and proving the demand for its product.
Common funding sources for seed investment:
1. Venture capital firms: VCs are involved in seed funding and seek startups with high growth potential.
2. Angel investors: These investors may continue to provide support during the seed round, contributing larger sums than in the pre-seed phase.
3. Seed funds: Specialized funds that focus exclusively on investing in startups at the seed stage.
Expected deliverables in seed round:
- MVP launch: The minimum viable product that is ready for public consumption.
- Early revenue generation: The startup starts earning its first income, demonstrating that the business model works.
- Scalable growth strategies: Plans for expanding the customer base, scaling operations, and increasing revenue.
Key differences between pre-seed and seed funding
Funding amount and purpose
The money raised in pre-seed funding is generally smaller than seed funding. This is because the business is still in the early stages of development. Pre-seed funding primarily aims to validate the idea and cover initial expenses like market research and prototype development.
Pre-seed round: Investment amounts usually range from $10,000 to $500,000. The funding is meant to help validate the concept, build the product, and form the early team2.
Seed round: Seed funding tends to range from $500,000 to $2 million, or even more, depending on the business2. At this stage, the focus shifts toward scaling the business, refining the product, and acquiring customers.
The purpose of the funding also shifts: in the pre-seed round, the focus is on validating the idea and ensuring it has market potential. In the seed round, the purpose moves towards business growth and preparing for broader market entry.
Investor expectations and involvement
Investor expectations change considerably between the pre-seed and seed stages.
- Pre-seed investors are often more focused on the startup's vision and potential. They may expect to see a strong idea and some form of validation, even if the product isn't fully developed yet. Given that the business is in its infancy, these investors are typically more involved in offering mentorship and guidance.
- Seed investors expect more concrete evidence of progress, such as an MVP (minimum viable product), early customer traction, and a business scaling plan. As they are taking on more risk and expecting a higher return on their investment, they may ask for a larger equity stake in exchange for their investment. Investors at this stage are generally less hands-on than those in the pre-seed round, though they may still offer strategic advice2.
Risk profiles and milestones
The risk profile at the pre-seed stage is much higher. The product is still in development, with little to no market proof. Investors are betting on the idea's potential and the team's ability to execute it.
Seed funding comes with slightly lower risk, as the startup should have some validation (e.g., product prototypes, early user feedback, or initial revenue) by this point. However, the risk remains significant because the company must prove it can scale and sustain growth.
Investors at both stages look for specific milestones to signal progress:
- Pre-seed milestones: A validated idea, initial prototype development, and feedback from early users.
- Seed milestones: Launching the MVP, securing early customers, generating some revenue, and showing the potential for scalable growth.
Business readiness and timeframes
In the pre-seed stage, you’re still testing the waters, and it can take time to reach the point where your business is ready for seed funding. Pre-seed funding often occurs when the startup is still in the ideation or early prototype stage2.
It usually takes six months to a year to achieve the goals set in the pre-seed round, which include building a prototype, gathering user feedback, and validating the business concept.
Seed funding, on the other hand, generally comes after the pre-seed phase, when the startup is ready to scale. A business in the seed stage will have an MVP, an early customer base, and plans for growth2. Entrepreneurs can expect to spend one to two years after the pre-seed round before moving to seed funding.
Readiness indicators for transitioning from pre-seed to seed funding include:
- Pre-seed readiness: A well-validated idea, working prototype, and feedback from initial users.
- Seed readiness: An MVP showing early traction, positive user feedback, and early-stage revenue generation.
When to pursue pre-seed vs. seed funding
Ideal scenarios for pre-seed funding
Pre-seed funding is ideal when your startup is still in the very early stages of development. Here are a few scenarios when pre-seed funding makes sense:
1. Ideation stage validation: If you have an idea but haven’t built a product or tested it with customers, pre-seed funding can help you validate whether there’s a real market need for your concept3.
2. Team assembly: If you're still assembling your founding team, pre-seed funding can provide the necessary resources to attract key team members and establish your company's core structure3.
3. Product validation and early development: If you're building a prototype or conducting market research, pre-seed funding will provide you with the resources to ensure you're heading in the right direction before you invest heavily in product development.
Ideal scenarios for seed funding
Seed funding comes into play when your startup is ready to move beyond the idea stage and start building a business. Here are the scenarios where seed funding is ideal:
1. Launching an MVP: If you have a minimum viable product (MVP) and want to refine it for launch, seed funding is the capital needed to take your product to the market and start gaining real customer feedback3.
2. Scaling operations: When your product has been validated and you’ve seen some early traction, seed funding can help you scale operations, hire key employees, and develop the infrastructure needed to grow3.
3. Market entry and customer acquisition: Seed funding is ideal for entering the market on a larger scale. Whether it's building awareness, acquiring new customers, or increasing sales, this funding round supports activities that help establish your market presence and generate revenue.
Can pre-seed and seed funding be pursued together?
While pre-seed and seed funding are usually separate stages, some overlap can exist. The transition from pre-seed to seed funding typically occurs after reaching key milestones, such as validating the idea and developing a prototype.
However, some startups may raise capital that spans both stages, especially if the pre-seed funds are limited or the transition is happening quickly.
Investor expectations differ between these stages. In the pre-seed round, investors focus on the business's vision and potential, while seed investors expect evidence of progress, such as an MVP and early customer traction2.
You should tailor your pitch deck for each stage to navigate both rounds successfully. You can achieve this by clearly defining your milestones and demonstrating traction. Additionally, maintaining strong relationships with early investors can help facilitate the transition to seed funding.
Ultimately, while the two rounds are distinct, aligning your strategy with investor expectations can help you smoothly move from pre-seed to seed funding.
Master every funding stage with winning pitch decks.
At the pre-seed stage, investors seek the vision and potential behind your idea3. They want to know why your product matters and how it could solve a significant problem. For seed funding, your pitch deck should focus on traction and growth strategies that show your business can scale and generate revenue.
To ensure your pitch deck is polished and impactful, consider leveraging pitch deck expert services. A professional pitch deck service can help you craft a deck that meets investor expectations at every funding stage. With the right pitch deck, you can improve your chances of securing the funding you need.
To get help, contact Propitchdeckservices.com, experts in pitch deck designs. They create pitch decks tailored to your startup's needs.
Sources used in this article:
- Beginner's guide to pre-seed funding: https://www.digitalocean.com/resources/articles/what-is-pre-seed-funding
- Pre-Seed vs. Seed Funding: The Complete Guide: https://www.hubspot.com/startups/fundraising/preseed-vs-seed-funding
- What's the difference between pre-seed and seed funding rounds? https://www.brex.com/spend-trends/startup/pre-seed-vs-seed-funding-round
