Seed funding and pre-seed funding explained

If you have a killer idea for a product or service, then you may be ready to seek investment for your business to help get the idea off the ground and into the market.

These are two types of funding styles reserved for businesses that are attractive enough to people such as angel investors or venture capitalists in their earliest stages: pre-seed and seed funding.

Pre-seed and seed funding could bring exciting breakthroughs to your business, and the cashflow boost and vote of confidence from investors could really help you gain that crucial forward momentum.

While funding at these stages are typically rare to obtain – it is certainly not impossible. But before we dive into how to obtain either, let’s take a look at the subtle but important differences between them so you can determine which might be the best for you.

What is pre-seed funding?

Pre-seed funding is the first possible round of funding you can get as a business owner.

It is a stage that is both the most daunting for entrepreneurs and the riskiest for angel investors and venture capital firms, given the lack of track record of the startup involved.

Even if all you have is an idea, a trademark or a dream at this stage – there are ways to mitigate the risk for investors. For one, simply creating a business plan puts you ahead of the game. According to a new survey by accountancy firm PKF, 9% of firms have no business plan at all.

When does pre-seed funding happen?

Pre-seed funding happens at the earliest stages of a business, and is typically offered and agreed upon when a company is less than two years old.

Benefits of pre-seed funding for startups

With pre-seed funding, you don’t have to have much prepared on your own before receiving an initial investment. This can be a huge weight off a business owner’s shoulders, a confidence boost, and a relief for friends and family members who usually take the brunt of upfront investing and lending when it comes to new businesses.

Other benefits include:

• Validation of your idea
• Feedback from potential customers
• The potential to attract top talent to your team
• The time (without pressure) to spend hiring a great team
• The resources you need to build your product and launch your business
• New relationships with investors and mentors

Who is eligible for pre-seed funding?

Almost anyone with a great idea (and preferably a business plan) can try out for pre-seed funding. There are no specific requirements or limitations, it simply depends on the idea you have for a business and whether or not investors feel it is good or not. If you have what it takes and know how to network effectively enough and can get your new idea in front of the right people, there is the potential to get a pre-seed funding deal.

What’s a typical amount for pre-seed funding?

Research from Seed Legals has shown that UK startups raise between £50,000 to £250,000 in their first pre-seed round.

What is seed funding?

When does seed funding happen?

Seed funding generally happens when a minimum viable product has been already created at the very least. The business may have certain aspects of its product or service unfinished, or still be in the development stage.

This round is all about demonstrating that your startup has a proven track record, the ability to scale quickly, and can provide a serious return for investors.

Normally, a seed funding round will contain fewer than 15 investors. In exchange for their backing, they’ll gain convertible notes, equity, or a preferred stock option.

Benefits of seed funding for startups

An injection of seed funding gives startups more time to fine-tune their business model; the ability to find experienced business partners; the chance to build the confidence of investors to ensure increased capital in future rounds, and more flexibility to pivot if any drastic changes need to be made.

Who is eligible for seed funding?

Seed-stage companies have usually developed their first product, and will have a small number of ‘early adopter’ customers or trials to show investors – even if revenue is low at this stage. A business certainly isn’t expected to be showing profits at this stage.

What’s a typical amount for seed funding?

According to Seed Legals, UK startups raise between £500,000 to £1.5 million in their seed round on average.

Differences between seed and pre-seed funding

Pre-seed funding is there to help you build up all the essential first steps to creating a business from the ground up. Seed funding is about supplementing that first initial launch, taking the product and business out into the market for the first time. 

The main difference between pre-seed funding and seed funding is:

When looking to raise seed capital, you will not need a minimum viable product to raise pre-seed funding, but you will for seed funding.

Where can you go to find pre-seed or seed funding?

Here are some of the places you can try to find pre-seed or seed funding:

• Angel Investors: Angel investors are usually one single investor seeking opportunities solo, whereas venture capitalists would typically be comprised of a group of investors from a company.
• Peer-to-peer Lenders: Peer-to-peer (P2P) lending is a loan obtained from other individuals or a group, cutting out the traditional middleman, such as a bank. Crowdfunding would fall under this category, as would loans from your family and friends.
• Banks: Banks can be considered a kind of venture capital because they are the go-to for funding new businesses. Despite the fact that they are not personally invested in what your business is necessarily, and are unlikely to offer personalised support along the way, they offer starting funds to aspiring business owners that they deem to be viable enough.
• Accelerator programs: Accelerator programs provide startups with mentorship, funding, and other resources to help them grow. Some of these accelerator programs have connections to angel investors and venture capitalists and can help you in that aspect.
• Crowdfunding platforms: Crowdfunding platforms allow startups to raise money from a large number of individuals, and are similar to pre-seed funding in the sense that you only need a good idea that people can get behind to be successful. This can be a good option for startups that are looking to raise smaller amounts of money.
• Government grants: Some governments offer grants to startups under specific conditions, particularly if your business or idea is in a favoured industry, or is especially innovative. This can be a good source of funding for startups that are not yet ready to raise money from private investors.
• Business loans: Startups can also obtain business loans from banks or other financial institutions. However, business loans typically have high-interest rates and therefore can require more collateral than other forms of funding.

How does seed funding differ from series funding?

Where pre-seed and seed funding are available to completely new businesses who are starting from practically nothing, Series A, B and C funding is available only to startups that are further along from the pre-seed and seed stages, and basically already established and showing significant growth. 

To attract series funding, a business will usually have to be already seen as at least viable, “up and coming” and already growing steadily or rapidly.

Funding in general aims to provide you with the specific amount (and potential support) that is relative to the stage of business you’re in, to give you the best chance of exponential growth to benefit all parties involved. The amount can increase incrementally as your business grows.

The term ‘series funding’ is how it is categorised by amount after pre-seed and seed, following the pattern of the alphabet (Series A, B, C, and so on).

Another key difference between the seed rounds and the series rounds is that pre-seed and seed rounds are usually a one-time opportunity kind of deal. You can only be the new business on the block and have that as an excusable set of circumstances once.

Series A, B, C and so on are types of funding that happen at multiple junctures. They can increase in capital amount with each round, but you can also have multiple rounds at any specific stage. That is, you can have multiple Series A rounds before even moving on to Series B, for example. 

This may happen if there is still more to be done in a specific stage, but it simply requires more capital to be done. In that case, investors will want to keep the funding given under the specific category label (Series A, for example) just to make it clear that the business is still technically in that stage. 

Conclusion

In summary, pre-seed and seed funding can be very exciting and essential parts of a businesses journey and lifecycle, if you are able to obtain them.

Armed with this knowledge, we hope we’ve convinced you that the process can be a lot more straightforward than most business owners originally believe. 

Funding is always a seemingly vast and overwhelming task. But, with a great idea, business plan and drive, it is absolutely possible for you to get your idea out there into the world and have it picked up by some very keen investors.

You simply have to put in the work, do your research, and find the right people in your specific industry.