Startups are companies that turn innovative ideas into businesses, with significant potential for growth. To achieve that risky and challenging goal, founders need to be financially backed. That’s where a pre-seed investment comes in.
To get this kind of capital, startups will raise different funding rounds; based on the growth stage they currently are. Funding rounds vary in terms of the amount of capital they finally allow founders to receive — among other things — and the prerequisites startup teams need to fulfill, to get to it.
However, at the beginning of a startup’s journey, this initial — and oftentimes limited — capital is vital to a healthy start. This funding allows, in most cases, founders to leave their day job and focus exclusively on their venture.
What is a Pre-seed investment?
Α Pre-seed investment is the earliest funding round a startup takes part in, to secure a sufficient amount of capital. With the help of said capital, they’re highly likely to meet their first goal: To validate their idea and start shaping their business.
This first funding round is followed by a series of sequential funding rounds, startups will hopefully manage to take part in, throughout their journey:
- Pre-seed investment
- Seed investment
- Series A
- then Series B
- and then Series C, etc…
Of all the aforementioned — typically back-to-back — funding rounds, the pre-seed investment is the one that sets the tone as to how things will evolve, over time.
It’s worth noting, here, that the pre-seed round was not considered to be an official funding round until relatively recently. Founders used to lean on bootstrapping methods; funding their venture mainly using their own financial resources; or with capital coming from family members and friends. But, things have changed. Startups are now able to attract pre-seed investment firms that give them the opportunity to access larger amounts of capital and speed up their business development.
How do Pre-seed investments work?
Startup founders get the opportunity to receive their longed-for capital infusion, by leveraging different investment resources. In particular, they may approach or even attract — depending on the potential of their venture — different types of investors. Angel investors, pre-seed VC firms are among the investors whom startups may approach, at this stage.
Yet, the most suitable investor candidates for early-stage startups are firms that provide some additional resources. That is to say, startups usually participate in programs that provide both capital infusion and business development services. Incubators, accelerators and venture builder firms offer support and consultancy — apart from financial assistance — to startups that are just launching their entrepreneurial journey. All of these investment resources vary in terms of the amounts of capital they offer, in prerequisites and, last but not least, in the terms of the final investment agreement.
Minding the risk
Early-stage startups are more likely to get their pre-seed investment by pitching their ideas to incubators, accelerators and venture builder firms. VCs and other investing firms are usually interested in more mature startup companies.
Pre-seed investors take interest in funding risky ventures, to get partial ownership and control of the company. The sooner an investor gets to invest in a startup company the greater the percentage of equity they’ll get; mainly because of the high risk involved in a pre-seed investment. As a matter of fact, the overall risk involves — most of the time — technology, market and management risks. All of these business parameters are at stake for a startup company that is about to begin their journey. Investors are aware of such risks in stepping into uncharted territories. But, they’re also aware of the potential present in such endeavors; and that’s why they want to be part of it.
How and why would you get a Pre-seed investment?
To get access to capital infusion via a pre-seed investment round, early-stage startup founders need to demonstrate both the feasibility of their idea and the viability of their business model. But, the truth is, at this premature stage that is possible only on paper. To further explain, contrary to other funding rounds, where mature startups have data and real numbers to back up the potential of their venture, during this premature stage, startups can only count on their presentation and storytelling skills; and, on the faith of investors that will (hopefully) decide to put on them.
Securing capital via a pre-seed investment round is of paramount importance for a startup that is taking their first steps. Not only do startups get an initial amount of money to start everything off, but this pitching process – and the final “approval”, of course – serve as an initial validation of the potential in their endeavor. To further explain, getting their business idea in front of some experienced pairs of eyes, guiding through the process will also be critical for the foundation laid for the business.
Furthermore, pre-seed capital helps startups get their first hires and further grow their team. In the same fashion, they are also able to ramp up their product development, afford marketing and sales, and so forth. In the absence of financial resources, all of these business-critical processes may never see the light of day. Thus, securing pre-seed capital is more than critical for early-stage startups.
What makes a good Pre-seed investor?
Deciding which pre-seed investor is the right one to pitch to, is a difficult decision for startups. Most of the time, founders approach investors without any deliberate perspective in mind; none other than securing some capital to start everything up, that is. A pre-seed investment agreement does not necessarily lead to a long-term “marriage” between a startup and their investors. But, it’s that first investment agreement that greatly shapes — if not, defines — the funding future of a startup.
A good pre-seed investor is not necessarily an investor that aims to invest a large amount of money in a startup. Based on their needs, startups may choose to approach — and, hopefully, come to an agreement with — incubators, accelerators, angel investors or venture builders. Each one of these investors puts different things on the table. To answer the question above, an investor can be a good fit for a startup, if they don’t only buy-into the idea that is about to be built into a product, but also share the same strong enthusiasm about the business-to-be. Below, is a list of alternative investor resources startups may choose to pitch to, during their pre-seed investment round.
Incubators provide startups not only with capital; they additionally offer access to a long list of business services fundamental for the business launching. Among other things they offer office space, legal and accounting support, administrative and management services and more. Joining an incubator as a startup that has just started developing their idea can be all too helpful in handling and minimizing the administrative noise. And that holds true for a period that can last from a few months, up to a few years.
The amount of capital startups receive from an incubator firm varies. Furthermore, apart from the aforementioned services and the capital secured, startups may get access to extra financial resources that come from networking and relation-building with additional financial partners. In the same fashion, startups also get access to a network of experienced consultants and c-level executives, for advice. As mentioned above, incubators provide all these things (capital included) in exchange for equity stake.
Accelerators provide more or less the same offerings with incubators. However, one of the core differences is that, contrary to incubators, accelerators offer support to startups that have already managed to build their business model and strategy; and need to speed up their go-to-market process. Services such as office space, administrative support — and more — are also available; but, this time, for a limited period of time, which can be lengthened based on criteria and milestones, throughout their tenure.
Venture Builders provide startups not only with the capital needed to take off the ground; they are deeply involved in their operations and management processes, right from the beginning of their venture. As a matter of fact, startups often come into being when breakthrough ideas evoke venture builders’ interest; and they decide to jointly work with new co-founders towards their implementation. Thus, venture builders build long-term relationships with the founders they form startups with. To put it another way, venture builders accompany the once incubated startup as a cofounder, for a long time.
How to get a Pre-seed investor’s attention
Investors need to assess a long list of startups before they make their final decision for investment. In the end, they typically decide to finance only a few of them. To get a pre-seed investor’s attention, startups should hone their storytelling and presentation skills, so that they make the best out of their strengths; which should be no other than team’s profile and domain expertise, combined with the right attitude. Throughout their negotiation meetings, founders should make sure they highlight all of these things in a useful way. All in all, building rapport with investors — regardless of the type of investor founders may choose to approach — can be dealmaker or dealbreaker. Below, we’ll see how each one of these factors help founders get to the final capital infusion:
One of the most important assets, for a startup trying to get pre-seed investment, is a competent team. The profile of the team — with consistency in terms of cultural fit and diversity in skillset — can also make or break an investment agreement. Even at such an early stage. The majority of investors usually prefer small, agile teams of 2-3 co-founders with different backgrounds. In addition to that, team demographics along with location of the team – whether it’s a distributed team or not — are also important to pre-seed investors. Above all, investors need to understand — and hopefully appreciate — where startup team members come from; and where they’re planning to go.
For tech startups — which is the case, most of the time — having one or more team members with tech background is, as expected, critical. As a matter of fact, this is usually the hardest challenge startups will be facing during this preparatory stage. It’s what keeps some startups in stalemate; and, thus, investors will prefer startups that have already ticked these boxes. All in all, startups that have already managed to onboard team members with roles that are essential for successful product development, are the ones that have a greater chance of landing a pre-seed investment deal.
Expertise in your domain
Apart from team composition, startups looking for pre-seed investment, need to have an additional key attribute; expertise in the domain they’re about to build that business on.
Startups usually come up with business ideas that stem from a problem related to a founder’s past experience or occupation. However, the ones that decide to build a new product/service aiming to offer value — by solving a problem — in an industry they have no past experience in, are not a lost cause. Investors will appreciate startups that have already onboarded a domain-expert, as a quasi-founder for example. And, thus, are — hopefully — equally eager to offer pre-seed investment.
That happens because domain expertise will help startups make it without cutting corners, but avoiding “reinventing the wheel”; at least, so far as market research and other key business aspects are concerned. This in-advance-acquired know-how helps save time and, consequently, extend the available runway. That will, of course, also help reduce the market risk; a win-win situation for both investors and investees, which will get them closer to deal.
Adopt the right attitude
To get investors’ attention and respect, startups need to adopt the right attitude. And, by right attitude, we mean founders to be — among other things — self-driven and doers. Investors are highly likely to take seriously startups founders that think and act this way. In the same fashion, it is of vital importance for investors to cooperate with founders who are rather unambiguous as to why it is the right time to invest any particular amount of money in their endeavor.
Additionally, it is important for investors to feel that the founders demonstrate full and unequivocal commitment to driving their startup towards success; and they should justify that commitment, by having already put their own skin in the game. All in all, a founder’s attitude, demonstrated in the aforementioned ways, is highly likely to sooth investors’ concerns, with respect to any leadership and managerial risks involved.
What range of capital is considered Pre-seed funding?
The amount of capital a startup usually manages to receive during a pre-seed investment round is not fixed. There is a different approach from one investing firm to another. As a matter of fact, the location of the investment firm along with the industry-to-trade-in and additional parameters they all define the final amount. Typically, startups secure capital that can be between $50K to $250K.
How long does a Pre-seed investment extend your runway?
As mentioned earlier, pre-seed investment capital helps startups initiate their fundamental business operations.
The amount of secured funds versus the costs to perform these business operations and actions defines the runway of a startup. That is to say, the time remaining till a startup runs out of money. As expected, different investors come up with different agreement terms. To put it another way, startups need to achieve a list of pre-agreed milestones within a specific period of time, based on their initial agreement with their investors.
A pre-seed investment extends the startup’s runway from 3 to 9 months, on average. Some investors may extend the total duration at a maximum 12 or even 18 months; adjusting the respective milestones, accordingly. As a rule of thumb, founders need to keep in mind that an extension of their runway may be riddled with overambitious milestones that can, potentially, put a strain on their team. Taking that in consideration, they may choose to accept or further negotiate the agreement.
How does a Pre-seed investor get their investment back?
As mentioned earlier, pre-seed investors assess a long list of startups, before they decide to invest in only a few of them. The selected startups will need to meet the agreed-upon milestones, within a predetermined period of time. But, even so, investors are fully aware of the difficulty of this endeavor. It is almost impossible for all startups to be equally successful in the end; some of them will fail — or fail to meet these expectations. As a matter of fact, statistically, only a few of them will be able to produce all the returns.
To further explain, investors get in the game and sign the check with specific return expectations in mind. That is to say, they expect startups to grow into profitable companies, with further potential for scalable business — and revenues. Some, for instance, may expect that the value of each company they have invested in will be — or, up to 10 — times the amount of money they have totally invested at the end of the pre-seed investment round. This value that is gradually built into the company will help obtain access to additional funding rounds. So, all in all, investors are aware of the risk; and by running multiple investments in parallel, they manage to not only balance potential losses from any of their portfolio companies, but also raise additional funds and invest in more startups.
How is Pre-seed different from Seed investments?
As explained above, through pre-seed funding, startups gain momentum and help take their operations off the ground. However, it’s a preparatory funding phase for startups; at least to some extent. The maximum amount of capital startups may raise, during a pre-seed investment round, is almost half the minimum they may receive at a later seed round. And that’s only one of the main differences between the pre-seed round and the seed round that may follow.
To elaborate, in order to get access to a pre-seed investment, startups need to demonstrate the feasibility of their idea and their ability to turn it into a profitable business. The former is accomplished (preferably) with an MVP; the latter is backed by a competent team, as already explained.
Contrary to that, to get seed investment, startups need to have already reached their product-market fit stage; or to have at least moved closer to that important milestone. Another key difference is that this capital infusion will extend the runway — taking all necessary and costly growth-oriented activities into consideration — to 12-18 months; as opposed to the 3-9 months runway achieved with pre-seed funding. Last but not least, startups looking for a seed investment may additionally attract and/or approach angel investors and, also, other institutional investors.
A pre-seed investment is the earliest of a series of funding rounds startups may take part in, throughout their journey. This initial and critical funding round was not considered to be an official funding round until recently; and, thus, aspiring startup founders would only use their own financial resources to get their startups off the ground. Things have changed and startup founders now pitch their ideas to accelerators, incubators and venture builders. These organizations allow them access to capital infusion; and services critical for the development of their business.
To get investors’ attention, startups need to have already assembled a small but competent team, demonstrating knowledge and expertise in the domain in question; and, also, to adopt the right attitude throughout negotiations. Securing pre-seed investment is essential for startups, as it allows them to basically test the feasibility of their idea and the appeal it will have in the market. That’s so it sets the ground for its implementation, initializing fundamental business operations.
A pre-seed investment round helps startups extend their runway from 3 to 9 months, on average; depending on the business actions to perform. As for the range of capital they’ll usually secure in total, it could range from $50K to $250K, on average; but there’s considerable variation in both the amount of capital and the achieved runway.
How it works
Pre-seed investment serves as an inflection point; and it’s this preparatory phase that will set the tone for the funding rounds to come. With it, startup founders manage to leave day jobs and focus exclusively on their challenging venture. As expected, the earliest money is the hardest money to get. Investors are aware of both the risk and the potential involved; and that makes them part of the game. It’s with the returns they get from only a few of the startups they invest in that they balance their losses. The achieved milestones and the growth state of the startup, at the end of this funding round, would be the ticket for the next funding round; the seed investment.