What Is Pre-seed Funding? An Entrepreneur’s Guide

Starting a business is an exciting venture, but it can also be a challenge, especially when it comes to funding. For early-stage startups, pre-seed funding can provide the necessary capital to get off the ground — helping you and your business develop their ideas, products and teams.

In this article, I’ll explain everything you need to know about pre-seed funding, including what it is, how to secure it, and the advantages and disadvantages of using it for your startup. I’ll also provide tips on how to prepare for pre-seed funding and offer actionable advice for startups seeking this type of funding. By the end of this article, you’ll have a better understanding of pre-seed funding and whether it’s the right option for your startup.

What is pre-seed funding?

Pre-seed funding is a type of funding that comes before seed funding, typically the first round of funding that startups receive. Pre-seed funding is used to help startups develop their ideas, products and teams before seeking larger amounts of funding in later rounds. Pre-seed funding is usually provided by angel investors or venture capitalists who are willing to take a risk on an early-stage startup.

One of the benefits of pre-seed funding for entrepreneurs is that it can help them get their business off the ground without having to give up too much equity or control. Because pre-seed funding is usually a smaller amount of money, it often comes with fewer strings attached than later rounds of funding. This can allow entrepreneurs to maintain more control over their business and their vision.

Pre-seed vs seed funding

Compared to other types of funding, such as seed funding or series A funding, pre-seed funding is typically a smaller amount of money because startups at the pre-seed stage are usually still in the ideation phase and have not yet validated their product or service in the market.

Another key difference between pre-seed funding and other types of funding is the stage of development that startups are in when they receive the funding. Pre-seed funding is typically used to help startups develop their ideas, build their teams and create prototypes or MVPs (minimum viable products). Seed funding, on the other hand, is used to help startups scale their business and bring their product or service to market.

Pre-seed funding

Stage: Earliest stage of funding.
Purpose: Develop business idea and create MVP.
Amount: Smaller, typically ranging from a few thousand to a few hundred thousand pounds.
Investors: Angel investors, friends and family, or startup accelerators.

Seed funding

Stage: Follows pre-seed funding.
Purpose: Scale the business and achieve growth.
Amount: Larger, typically ranging from a few hundred thousand pounds to several million pounds.
Investors: Venture capital firms or angel investors.

How much is pre-seed funding?

Pre-seed funding is typically a small amount of funding that ranges from around £50,000 to £250,000. This type of funding is used by startups in the very early stages of their development, often before they have a fully-formed product or service to bring to market.

What is pre-seed funding used for?

The purpose of pre-seed funding is to help startups validate their ideas and build a team to take their concept to the next level. It is used to cover the costs of things like:

• Research and development
• Hiring employees
• Marketing
• Product testing

Startups typically use pre-seed funding to refine their business model and prove their concept to potential investors. This can be done through activities like market research, customer discovery, and user testing.

Pre-seed funding can also be used to attract larger investors in later rounds of funding, as it demonstrates that the startup has the potential to be successful and has a solid team in place.

Another use for pre-seed funding is to help startups build out their team. This includes hiring key employees like engineers, designers, and marketers. Having a strong team in place is essential for the success of a startup and pre-seed funding can provide the necessary resources to build out that team.

Why is pre-seed funding important for startups?

Pre-seed funding is important for startups for several reasons.

Launch

Firstly, it provides the necessary capital to get the business off the ground. In the early stages of a startup, it can be challenging to secure funding from traditional sources such as banks or venture capitalists, as the business has yet to prove its viability. Pre-seed funding can help bridge this gap, allowing startups to develop their ideas, products and teams without the added pressure of finding capital.

Connections and resources

Secondly, pre-seed funding can also provide startups with valuable connections and resources. Many pre-seed investors are experienced entrepreneurs themselves and can offer guidance and mentorship to new founders. This support can be invaluable in helping startups navigate the challenges of starting a new business.

Control

Finally, pre-seed funding can also help startups retain more control over their business. Since pre-seed funding is typically smaller than later rounds of funding, it often comes with fewer strings attached. This can allow startups to maintain a greater degree of independence and control over their vision.

What are the stages in the pre-seed funding process?

1. Develop your business idea

The first step in securing pre-seed funding is to develop a solid business idea. This includes researching your market, identifying your target audience, and developing a business plan. Why not read our article: Raising Pre-Seed Investment: How To Prove Your Concept To Investors

2. Build a team

Once you have a solid business idea, it’s important to build a strong team to bring your idea to life. For example hiring key employees, such as engineers, designers, and marketing professionals.

3. Create a pre-seed pitch deck

To secure pre-seed funding, you’ll need to create a pitch deck that outlines your business idea, market research, and financial projections. Your pitch deck should be tailored specifically for pre-seed investors and should include information on how the funds will be used to reach a seed funding round.

4. Identify potential pre-seed investors

Once you have your pre-seed pitch deck, it’s time to identify potential pre-seed investors. This might include angel investors, pre-seed venture capitalists, and crowdfunding platforms that specialise in pre-seed funding. Research potential investors to find those who have invested in pre-seed companies similar to yours.

5. Pitch your idea for pre-seed funding

Once you’ve identified potential pre-seed investors, it’s time to pitch your idea specifically for pre-seed funding. This can be done in person, through email, or through a crowdfunding campaign. Be prepared to answer questions about your business idea and financial projections and explain how the pre-seed funding will be used to reach a seed funding round.

6. Negotiate pre-seed terms

If a pre-seed investor is interested in your idea, they will likely want to negotiate pre-seed terms. This can include the amount of funding, the equity stake they will receive and any other conditions they may have specific to pre-seed funding.

7. Close the pre-seed deal

Once you’ve negotiated pre-seed terms, it’s time to close the pre-seed deal. This involves signing legal documents and transferring the funds to your company.

8. Use the pre-seed funds wisely

Once you have secured pre-seed funding, it’s important to use the funds wisely specifically for pre-seed purposes, including developing your product, building your team, and marketing your business with the goal of reaching a seed funding round.

The pre-seed funding process can be challenging, but with a solid business idea, a strong team, and a well-crafted pitch deck tailored specifically for pre-seed investors, you can successfully secure pre-seed funding to bring their ideas to life and move closer to a seed funding round.

When to start raising pre-seed funding

If you’re looking to raise pre-seed funding, you should do so at the earliest stages of your business, typically after validating your concept, building an initial proof of concept ), assembling a strong founding team, identifying your target market and determining potential revenue streams.

Concept Validation

Validating your concept can prove to investors that, not only is the problem worth solving, but that your solution is what the market really wants and needs. This validation can be done through surveys, focus groups, interviews, and/or with a simple proof of concept. The goal is to give investors enough evidence that it’s worth investing in building a Minimum Viable Product (MVP), as this is usually the primary focus of pre-seed funding.

Founding team

In addition to validating your concept, you should also assemble a strong founding team to help bring your idea to life. This includes individuals with diverse skill sets, such as engineering, design, marketing and sales. This is often mistaken for a co-founding team, but it could be future full time employees currently working part-time in return for share options, or an advisory team of experts guiding your development. Pre-seed investors often look for a strong founding team as an indicator of the company’s potential success.

Your target market

You should also identify your target market and demonstrate a deep understanding of your customers’ needs and pain points. This includes conducting market research into the size and scope of the market as well as gathering customer feedback to ensure that the product idea will meet the needs of the target market. This can help to attract pre-seed investors who are looking for businesses with a clear understanding of their target market and a solid plan for addressing customer needs.

Revenue

Finally, while having existing revenue streams is not strictly necessary for pre-seed funding, it can be a valuable indicator of the business’s potential for success. Revenue streams can demonstrate that the business has a viable business model and is capable of generating revenue, which can be attractive to pre-seed investors. At the very least, founders should be able to demonstrate and evidence how they plan to make money from the venture.

How to identify potential pre-seed investors

Entrepreneurs looking to raise pre-seed funding can identify potential investors through various channels, including personal and professional networks, online platforms, and industry events.

Networking

One effective way to identify potential pre-seed investors is to leverage personal and professional networks. You could reach out to friends, family, mentors, and colleagues to see if they know any investors who might be interested in their business. These personal connections can also help you get introductions to investors who may be harder to reach through other channels.

Online platforms

Online platforms can also be a valuable resource for identifying potential pre-seed investors. Seedrs and Crowdcube are examples of platforms that connect you with investors. If accepted into these platforms, they allow you to create a profile for your business and pitch their idea to potential investors. Investors can then review these profiles and decide whether they want to invest in the business. Tools like Crunchbase allow you to search a comprehensive list of global investors and refine that list by criteria that match your own business — allowing you to create a targeted outreach list.

Events

Industry events and conferences can also be a valuable way to meet potential pre-seed investors. Entrepreneurs can attend events related to their industry or business idea to network with potential investors and learn about the latest trends and developments in their field.

Other organisations

Finally, you might also seek out advice and mentorship from incubators, accelerators, and startup organisations. These organisations often have networks of investors and can provide valuable guidance on the fundraising process.

How to raise pre-seed funding?

There are several steps to raising pre-seed funding, including developing a solid business plan, building relationships with potential investors, demonstrating traction and market validation, and preparing a compelling pitch.

Develop your business plan

One key step in raising pre-seed funding is to develop a solid business plan that outlines the company’s mission, target market, revenue model, and growth strategy. A well-crafted business plan can demonstrate to potential investors that the entrepreneur has a clear vision for the business and a plan for executing that vision.

Build relationships with potential investors

This is an important step for raising pre-seed funding. Start by leveraging your personal and professional networks to make introductions to potential investors. Attend industry events and conferences to network with potential investors and get feedback on your business idea.

Market validation

Demonstrating traction and market validation is another important step in raising pre-seed funding. This includes gathering feedback from potential customers, as well as conducting market research to understand the competitive landscape and customer needs. It can help to demonstrate to potential investors that the business has the potential for growth and success.

Create a compelling pitch

Preparing a compelling pitch is an essential activity for raising pre-seed funding. You should be able to clearly communicate your business idea, market opportunity, and growth strategy in a concise and compelling way. This includes creating a pitch deck that outlines the key aspects of the business and demonstrates why it is a good investment opportunity.

Explore our helpful guides for lots of articles on creating a compelling pitch.

What do pre-seed investors look for in a startup?

Pre-seed investors look for several key factors in a startup and its founders. Here are some of the most important ones:

Strong founding team

• Investors want to see a team with a track record of success and complementary skills. They want to know that the founders have the drive and expertise to execute on their business idea.

Clear value proposition

• Investors want to see that the startup has a clear and compelling value proposition that solves a real problem for a specific target market. They want to see that the product or service has the potential for significant market demand.

Validation

• Investors want to see some evidence that the startup has validation from potential customers or users. This can come in the form of surveys, focus groups, results from a proof of concept, early PR successes, or even positive quotes from industry experts.

Scalable business model

• Investors want to see that the startup has a business model that can scale to generate significant revenue and profits over time. They want to see that there is a clear path to profitability and a large addressable market.

Coachability and openness

• Investors want to work with founders who are coachable and open to feedback. They want to know that the founders are willing to learn and adapt as they grow your business.

Dilution and pre-seed funding

Dilution in pre-seed funding refers to the reduction in the percentage of ownership that a founder has in their company when they raise funds from outside investors, such as friends, family, or angel investors. This happens because investors receive shares of the company in exchange for their investment, which means that the ownership percentage of the founder is reduced proportionally.

In pre-seed funding, the dilution is often more significant as in later rounds of funding because the company is unable to sustain a large valuation . This can be a concern for founders, as it can feel like they are reducing their control over the company and limiting their potential future earnings. Founders may try to minimise dilution by negotiating favourable terms with investors, such as a higher valuation or convertible notes that can convert into equity at a later stage.

A typical pre-seed round will cost around 20% in equity. However, because the investment amount is lower there are often fewer terms attached to the capital versus seed and Series A rounds — giving founders greater autonomy over decision making.

The goal with any pre-seed round should be to spend the investment on significantly increasing the company valuation — ideally by at least 2–3x. In doing so, the founder will have a smaller but more valuable share of their business.

Advantages and disadvantages of pre-seed funding

Pre-seed funding can be a great way for startups to get off the ground, but it also has some potential drawbacks.

Advantages of pre-seed funding

More control

Pre-seed funding typically involves raising money from friends and family or angel investors, which can give founders more control over the direction of their company than if they were to take on institutional investment later on.

Less dilution

Because pre-seed funding is typically smaller than later rounds of funding, founders can raise the money they need to get started without giving up too much equity in their company.

Validation

By raising pre-seed funding, startups can demonstrate that there is investor interest in their idea, which can be helpful in attracting additional investment later on.

Disadvantages of pre-seed funding

Limited funding

Pre-seed funding rounds are typically smaller than later rounds of funding, which means that startups may not be able to raise all the money they need to get to the next level.

Longer fundraising process

Because pre-seed funding typically involves raising money from a large number of individual investors, the fundraising process can be time-consuming and distracting for founders.

Potential for misaligned interests

Because pre-seed investors are often friends and family or individual angels, there is a risk that their interests may not be aligned with the long-term interests of the company.

Tips for deciding whether pre-seed funding is right for your startup

Evaluate your funding needs

Consider how much money you need to get your startup off the ground and whether pre-seed funding will provide enough capital.

Assess your investor network

Evaluate whether you have a network of potential investors who are interested in your idea and have the financial means to invest.

Weigh the benefits and drawbacks

Consider the advantages and disadvantages of pre-seed funding and whether it aligns with your goals for your company.

Develop a fundraising strategy

If you decide to pursue pre-seed funding, develop a fundraising strategy that will help you identify and attract potential investors.

Prepare for the long haul

Raising pre-seed funding can be a time-consuming process, so be prepared to devote the necessary time and resources to it.

What makes a great pre-seed funding pitch deck

Creating a strong pitch deck and business plan is crucial for any startup seeking pre-seed funding.

Here are some tips for creating these essential documents:

Keep it concise

• Investors receive a lot of pitches, so it’s important to keep your pitch deck and business plan concise and to the point. Aim for no more than 15–20 slides in your pitch deck and limit your business plan to no more than 10,000 words.

Tell a story

• A pitch deck and business plan should tell the story of your startup and what makes it unique. Use compelling visuals, anecdotes, and data to bring your story to life.

Focus on the problem you are solving

• Investors want to see that your startup is solving a real problem that people are willing to pay for. Make sure your pitch deck and business plan clearly articulate the problem and how your solution addresses it.

Include financial projections

• Investors want to see that your startup has a clear path to revenue and profitability. Include financial projections for at least 3–5 years, including revenue, expenses and cash flow.

Highlight your team’s strengths

• Investors want to see that your team has the skills and experience to execute your vision. Highlight your team’s strengths and accomplishments and explain how each team member contributes to the success of the company.

Practice, practice, practice

• Once you have your pitch deck and business plan, practise your presentation with friends, family, and mentors. Get feedback on your delivery and refine it until it is polished and compelling.

Robot Mascot’s Five-act Pitch Structure

1. The Hook — What is the most powerful and emotive angle you can use to explain your business idea?
2. The Essence — Give investors a bird’s eye view of what you do, why you do it, and how it works.
3. The Evidence — Every critical bit of evidence that would silence a concern must be present and correct here.
4. The Plan — Now you get to show investors exactly how you intend to make this business a success.
5. The Ask — Your pitch must conclude with an ask.

How to build relationships with potential pre-seed investors

Building relationships with potential pre-seed investors is crucial for any startup seeking funding. Here are some tips for how to build these relationships:

Attend networking events

Attend networking events in your industry to meet potential investors in person. This is a great opportunity to make a first impression and start building a relationship.

Utilise social media

Use social media platforms like LinkedIn to connect with potential investors and engage with them by commenting on their posts and sharing industry news.

Get introductions

Use your network to get introductions to potential investors. Ask your mentors, advisors and other contacts if they know any investors who might be interested in your startup.

Build a relationship before asking for funding

Don’t just reach out to potential investors when you are looking for funding. Build a relationship with them by keeping them updated on your progress and asking for their advice.

Be persistent but respectful

Follow up with potential investors after your initial meeting, but don’t be too pushy. Remember that they receive many pitches and it may take time for them to make a decision.

Be transparent and honest

Be transparent about your startup’s progress and challenges and be honest about what you need from investors. This will help build trust and credibility.

Examples of companies that received pre-seed funding

There are many successful startups in the UK that have raised pre-seed funding and gone on to achieve great success. Here are a few examples:

• Plend raised £700k pre-seed funding — exceeding their target by more than £300k.
• Just Fix closed a £395k pre-seed round via crowdfunding — 195% overfunded.
• Frolo successfully raised a pre-seed round and has since gone on to raise subsequent seed rounds to expand the business.

If you’re pitching for funding, why not download a free copy of my bestselling book Investable Entrepreneur. It’s full of great advice for founders and entrepreneurs — including tips and guidance for those seeking to secure funding. You can download it here.