Pre-Seed Funding: What It Is, How It Works & 7 Sources: Stupid Apps and Changing the World

Pre-Seed Funding: What It Is, How It Works & 7 Sources: Stupid Apps and Changing the World

In the world of startups, securing funding is crucial to turning an idea into a reality. Pre-seed funding, as the name suggests, refers to the initial round of funding that startups raise to get their concepts off the ground. This funding is generally used for two main purposes: developing an early-version of the product by hiring talented engineers and acquiring customers through marketing efforts.

During a pre-seed round, startups typically raise less than $1 million. At this stage, the sophistication of the product is closer to just an idea or an alpha version, rather than a fully polished product ready for sale. It's important to note that timing is crucial when raising funds. It's best to avoid the end-of-year holidays and early summer when investors are usually on vacation. During these times, investors tend to pause their search for new deals.

One key recommendation when planning a pre-seed round is to add a cash buffer of around 25% (some suggest 50%) to cover unexpected costs that may arise during the execution of the plan. This buffer ensures that startups can navigate unforeseen challenges without derailing the entire project.

Based on a study of 3,680 pre-seed rounds, it was discovered that 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. To ensure an adequate runway, startups commonly follow a framework of 12-18 months of cash runway plus an additional 4 months worth of buffer, totaling 16-24 months.

Securing pre-seed funding is not an easy task. According to Docsend, founders typically need to engage in an average of 26 investor meetings to successfully close a pre-seed round. The timeline for closing a pre-seed round can vary, with 15% of founders closing within 1-6 weeks, 42% taking between 7-18 weeks, and the remaining founders taking 19 weeks or more.

When seeking pre-seed investment, investors are primarily looking for three things: a proof of concept of the product or service idea, a clear plan to monetize the business, and references from potential customers indicating their willingness to pay for the product or service. If a founder lacks the technical skills to build a proof of concept, it is often seen as a good signal to find and add a technical co-founder to the team.

Founding teams of 2-3 members are often preferred by investors as they are perceived as less risky than solo founders. When preparing a pitch deck, founders should aim to capture investors' attention within approximately 3 and a half minutes, which is the average time spent by pre-seed investors reading a pitch deck.

While securing pre-seed funding is important, it is equally crucial for founders to manage their personal finances. Founders should ensure they have enough personal savings to meet their personal needs, as burnout can easily lead to failure.

When it comes to funding sources, there are several options available to startups. Angel investors typically invest anywhere from $1,000 to $1,000,000, with the average check size falling within the range of $25,000 to $100,000. It is important for founders to verify that their angel investors are accredited, as this can impact future rounds with institutional investors during the due diligence phase.

Pre-seed VC firms can write larger checks compared to angel investors, usually ranging from $100,000 to $1 million. Rolling Funds, a relatively new investment vehicle, have an average check size of $100,000, with the largest check written being $1 million. Another avenue for pre-seed funding is through accelerators, of which there are thousands worldwide. Accelerators typically provide funding in the range of $25,000 to $500,000 in exchange for a portion of equity.

In recent years, equity crowdfunding platforms have gained popularity as a means of raising pre-seed capital. These platforms allow early-stage startups to raise up to $5 million per year from the crowd, including non-accredited investors. Startups can raise funds through platforms like Republic, Start Engine, and WeFunder by accepting small investments from thousands of individuals.

Now, let's shift gears and explore the concept of "Stupid Apps" and their potential to change the world. Many groundbreaking technologies and platforms that we take for granted today were initially dismissed as trivial or incremental. Facebook, Twitter, Reddit, and even the internet itself faced skepticism in their early days. However, their value grew exponentially as more users joined, creating a network effect where the value of the network increases as a function of the square of the number of nodes.

When building a startup, there are two time-tested strategies to change the world with technology. The first is to create something that may initially be perceived as a toy but has a dedicated group of users who find it indispensable. By continuously improving and expanding the product, startups can tap into the power of network effects and transform their seemingly trivial creation into a game-changer.

The second strategy is to think big and aim to tackle grand challenges. Starting an electric car company or a rocket company may seem audacious, but history has shown that such ambitious ventures can have a profound impact on the world. However, it's important to remember that claiming to change the world should only be done after actually achieving it. Ignoring the naysayers and working on what you find interesting is key, as critics who dismiss your work likely aren't building anything themselves.

In conclusion, securing pre-seed funding is a critical step for startups to turn their ideas into reality. It requires careful planning, effective pitching, and perseverance. To increase the chances of success, founders should focus on building a proof of concept, outlining a clear monetization plan, and collecting references from potential customers. It is also essential to manage personal finances and ensure there is enough runway to avoid burnout. When seeking funding, founders can explore various sources, including angel investors, pre-seed VC firms, accelerators, and equity crowdfunding platforms. Finally, founders should aim to create products or services that may initially be perceived as trivial but have the potential to change the world through the power of network effects or by tackling grand challenges.