Pre-Seed Funding: What It Is, How It Works & 7 Sources

Pre-Seed Funding: What It Is, How It Works & 7 Sources
The Entertainment Value Curve: Why TikTok is On Fire and Quibi Isn't

In the world of startups, securing funding in the early stages is crucial for success. Pre-seed funding, as the name suggests, is the initial round of funding that helps entrepreneurs bring their ideas to life. This funding is used for various purposes, such as developing an early version of the product and acquiring customers through marketing efforts. Typically, pre-seed rounds involve raising less than $1M and the product is still in its early stages, closer to just an idea or alpha product rather than a polished, live product.

Timing is an important factor when it comes to raising pre-seed funding. It is advisable to avoid raising funds during the end-of-year holidays and early summer when investors are likely to be on vacation. During these periods, investors typically pause on looking for new deals. Additionally, it's recommended to add a cash buffer of around 25% (or even 50%) to cover any unexpected costs that may arise during the execution of the plan.

According to a study on pre-seed funding, the average amount raised by US startups in a pre-seed round is $626,360, while it's $538,108 for startups in the rest of the world. It is commonly advised to have a cash runway of 12-18 months along with a 4-month buffer, totaling 16-24 months. This provides enough time for startups to validate their idea and secure further funding.

Closing a pre-seed round can be a challenging process. On average, founders need to have around 26 different investor meetings to successfully close a pre-seed round. The duration of the fundraising process can vary, with 15% of founders closing a round within 1-6 weeks, 42% taking between 7-18 weeks, and the rest taking 19 weeks or more. It is important for founders to have a proof of concept for their product or service idea, a clear plan for monetization, and references from potential customers who are willing to pay for their offering.

Building a strong founding team is crucial for attracting pre-seed investors. Investors often prefer teams of 2-3 founders as they are seen as less risky than solo founders. If you lack the technical skills to build a proof of concept on your own, it is advisable to find and add a technical co-founder to the team.

When it comes to raising pre-seed funding, there are various sources that entrepreneurs can explore. Angel investors, for example, can invest anywhere from $1,000 to $1,000,000, with the average check size ranging from $25,000 to $100,000. It is important to verify whether angel investors are accredited, as this can impact future rounds with institutional investors.

Pre-seed VC firms can provide larger checks, typically in the range of $100K-$1M. Rolling Funds, a new type of investment vehicle, can also be a source of pre-seed funding. The average check size from a Rolling Fund into a pre-seed startup is $100K, with the largest check written being $1M.

Accelerators are another option for pre-seed funding. There are thousands of accelerators worldwide, many of which are founded and funded by investors. These accelerators typically provide funding ranging from $25K-$500K in exchange for equity in the company.

Equity crowdfunding platforms have also emerged as a viable option for pre-seed funding. Thanks to Regulation CF, early-stage startups can raise up to $5M per year from the crowd, including non-accredited investors. Platforms like Republic, Start Engine, and WeFunder allow startups to raise capital through small investments from thousands of individuals.

Now, let's shift our focus to the entertainment industry and the success of mobile video apps. One key factor that sets successful mobile video apps apart is their ability to create not just a viewing experience, but a social experience. TikTok, for example, has skyrocketed in popularity due to its social nature, while Quibi failed to gain traction.

Quibi, a short-form video platform, was initially hailed as a disruptive and timely idea. However, it failed to understand the importance of social value in mobile video apps. Quibi focused on professional, high-quality content but neglected to prioritize the social connection between viewers and creators. This lack of social value ultimately led to its downfall.

On the other hand, TikTok understood the importance of both production value and social value. TikTok's algorithm gives new content a chance at virality, leveling the playing field for creators. The platform's emphasis on snackable, shareable content has made it a favorite among Gen Z users. TikTok breaks down the wall between the audience and the creator, creating a sense of personal connection and driving engagement.

Other successful mobile video apps, such as Snapchat, Instagram, and YouTube, have also found their place along the Entertainment Value Curve. Each platform strikes a balance between production value and social value, catering to different user preferences. Snapchat focuses on fun, user-generated content with low production value but high social value. Instagram has expanded its entertainment value by lowering the production bar and making lower-quality content readily accessible. YouTube allows creators to upload a vast amount of content, giving viewers a wide range of options.

In conclusion, pre-seed funding is a crucial step for startups to bring their ideas to life. Timing, team composition, and a strong proof of concept are essential factors to consider when raising pre-seed funds. There are various sources of pre-seed funding, including angel investors, pre-seed VC firms, accelerators, and equity crowdfunding platforms. Success in the mobile video app industry is driven by a balance between production value and social value. TikTok's rise to popularity can be attributed to its understanding of the Entertainment Value Curve and its emphasis on snackable, shareable content.

Actionable advice:

1. When raising pre-seed funding, carefully consider the timing and have a cash buffer to cover unexpected costs.
2. Build a strong founding team and, if necessary, find a technical co-founder to help develop a proof of concept.
3. Focus on both production value and social value when developing a mobile video app, as the combination of these factors drives user engagement and success.

By understanding these key concepts and incorporating them into your startup journey, you can increase your chances of securing pre-seed funding and building a successful mobile video app.