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

Kazuki

Hatched by Kazuki

Sep 21, 2023

3 min read

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

Venture capital plays a minor role in funding basic innovation, contrary to popular perception. In 1997, venture capitalists invested $10 billion, with only 6% going to startups. The majority of capital went to follow-on funding for projects developed by governments and corporations. This dispels the myth that venture capitalists invest in good people and good ideas. They actually invest in good industries, ones that are more competitively forgiving than the market as a whole.

The funds raised in pre-seed rounds are typically used for developing an early version of the product and acquiring customers through marketing. It is essential to have a proof of concept of your product or service idea, a clear plan for monetization, and references from potential customers. Building a product without talking to customers is the easiest path to failure. It is also recommended to have a cash buffer of at least 25% to cover unexpected costs.

The average amount raised in a pre-seed round by US startups is $626,360, while it is $538,108 for startups in the rest of the world. It takes an average of 26 investor meetings to close a pre-seed round, and the process can take anywhere from 1 to 19 weeks. Timing is crucial, as the worst times to raise funds are during end-of-year holidays and early summer when investors are on vacation.

When it comes to funding sources, there are several options available. Angel investors typically invest between $1,000 and $1,000,000, with the average check size ranging from $25,000 to $100,000. Pre-seed VC firms can write larger checks, usually in the range of $100,000 to $1,000,000. Accelerators are another source of funding, with check sizes ranging from $25,000 to $500,000. In exchange for their services, accelerators typically take between 5% and 10% equity in the company. Equity crowdfunding platforms provide another avenue for raising capital, allowing startups to raise up to $5 million per year from the crowd, including non-accredited investors.

It is important to verify that angel investors are accredited investors to avoid complications during future rounds with institutional investors. Additionally, founders should be cautious when investing their own money and ensure they have enough personal funds to cover their needs. Burnout can easily lead to failure. Having a technical co-founder can also be beneficial, especially if the founder lacks the necessary technical skills to build a proof of concept.

Three actionable advice for entrepreneurs seeking pre-seed funding are:

  • 1. Conduct thorough market research and customer validation before approaching investors. Having a clear plan to monetize the business and references from potential customers will increase your chances of securing funding.
  • 2. Build a strong founding team. Investors often prefer teams of 2-3 founders as they are seen as less risky than solo founders. Consider adding a technical co-founder if you lack the necessary technical skills.
  • 3. Prepare a compelling pitch deck. The average time spent by pre-seed investors reading a pitch deck is approximately 3 and a half minutes. Make sure your pitch deck captures their attention and effectively communicates your value proposition.

In conclusion, pre-seed funding is essential for startups in the early stages of development. It provides the necessary capital to build an early version of the product and acquire customers. Understanding the sources of funding and the requirements of investors is crucial for founders seeking pre-seed funding. By conducting thorough market research, building a strong founding team, and preparing a compelling pitch deck, entrepreneurs can increase their chances of securing the necessary funds to bring their ideas to life.

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