As an angel investor, I talk to a lot of founders in their early startup stages. One of the most common questions that come up is – what’s the difference between pre-seed and seed funding, and how do we know what we need?
As logic would have it, pre-seed funding comes before seed funding, but timing isn’t the only difference. The sources of your funding, the goals of your funding, and the amount of your funding will also differ in pre-seed and seed rounds. Understanding the purpose of each stage will help you create a pathway to success and use your funding wisely to catapult you there.
What is a pre-seed funding round?
Pre-seed funding is the first funding a startup gets that happens just after ideation and as you begin to form your company. Pre-seed funding most often comes from the founders themselves, followed by any friends or family who may want to contribute personal funds. Pre-seed investors take on the most risk by exchanging their investments for a share of equity since the company is so early in its development.
The goals of pre-seed funding include:
- Creating a Minimally Viable Product (MVP): The funds raised in a pre-seed round should be used to create a functioning prototype demonstrating your ability to develop something polished and practical.
- Developing a Team: Hire a talented team of experienced professionals who are self-motivated and can work well together.
- Supporting Market Data: Gather research and data on the potential market size as well as customer demand.
- Distribution Strategy: Develop the beginning of your growth strategy, starting with which channels you’ll use to distribute your product.
- Traction: Obtain feedback from early product testers or adopters and generate interest for a beta test launch.
Learn more on Pre-Seed Funding
What is a seed funding round?
A seed funding round is the first “official” funding round for a startup just before Series A, B, and C funding begins. While you’ll still likely get funding from friends and family, other seed funding investments will likely come from angel investors, accelerators, or incubators.
The goal of a seed funding round is to use the capital for:
- Proving Product-Market Fit (PMF): Perform market research to gather data that proves a product-market fit.
- Business Infrastructure: Create an infrastructure of essential operations to support your startup long enough to reach further fundraising rounds.
- Scaling Strategy: Develop a scaling strategy and define how you’ll use further financing to grow and scale your company.
- Hiring: As your business grows, you’ll need to hire more talent, including marketing teams, engineers, and HR managers.
Learn more on Seed Funding
The main differences between pre-seed and seed funding
The primary differences between the pre-seed and seed funding rounds lie in the funding amount and source, your product’s progress, and your startup’s valuation and runway.
Pre-seed funding is the introductory level of fundraising – the very first money a company gets, usually from people they know personally – which is used over a shorter period to create the foundational aspects of the business, like the initial MVP and founding team. Seed funding follows that up once your company has increased its value and you’ve made some more progress. You’ll raise more money from more experienced investors and it will last you longer as you begin the journey of getting your product to market.
- Funding Amounts: Pre-seed funding typically falls anywhere from $50k -$250k, while the seed funding round will receive more funding, around $500k-$2M. This is because you’re still getting your idea off the ground during pre-seed, so your need for capital won’t be as large, and you won’t have the valuation needed to attract more money.
- Product Stage: In a pre-seed stage, you’ve started to develop your product but may not have an MVP yet, but you’ve identified a target market and a path to get your product there. In the seed stage, you’ve now developed a fully-formed MVP as well as demonstrated a product-market fit for it and some traction within the market. At this point, you’ve also likely hired a strong team for your company.
- Valuation: Valuations for pre-seed companies are difficult because there’s no way to accurately measure the value so early on. It’s all perceived value, based on the current market forces and companies that are comparable to yours. Seed stage companies are easier to gauge because they’re further along with some proof of traction. Most pre-seed companies are valued at around $1M-$3M, while seed companies are valued between $5M-$15M.
- Runway: Your target runway is how long you’ll need the funding to last until your next funding round. For pre-seed companies, that runway falls somewhere between 3-9 months, while the runway for seed funding is longer, between 12 and 18 months.
- Investors: As mentioned before, your money sources in pre-seed and seed funding rounds will differ. Pre-seed funding is more likely to come from you, the founder, and your friends and family. In the seed round, however, you’ll start to attract other funding sources, such as angel investors like me, and other institutional investors, such as incubators and accelerators. While some seed-stage companies receive venture capital investments, they typically don’t come in until Series A, B, and C rounds.
Do I need pre-seed or seed funding?
You should have a good idea of what stage of funding you’re at by exploring the differences between pre-seed and seed funding listed above.
If you’re just getting your idea off the ground, pre-seed funding may be a better fit for you. The money you raise won’t help to launch your business entirely, but it can help you test out different ideas as you begin creating a prototype without too much money on the line. It also gives you a chance to then show investors your progress in your seed funding round, giving them the opportunity to share feedback and potentially invest again.
If you’ve already made a good start on your business, but need more funding to continue to grow it, seed funding might be more appropriate. Seed funding will help you earn enough to last upwards of a year so you can hire a full team, get your product to market, and begin to scale.
However, remember that pre-seed and seed are just terminologies, and in many ways, they’re a matter of perception. It’s about presenting your current progress in the right way and convincing investors to provide the financing you need.
Need funding? Meet Steve MacDonald
If you’ve received pre-seed funding via bootstrapping, friends, or family, and have a plan to develop a prototype, seed funding may be the next logical step for you. As an angel investor, I try to pinpoint the most innovative new companies in their early stages, typically during the seed fundraising round. My sweet spots are companies using fresh tech to solve legacy problems, cut down on admin work, and streamline operations.
I invest more than just my personal capital, also offering my own years of experience and insights to help the next generation of world-changing startups get off the ground and find their own path to success.
If you’re part of the next generation of founders who are developing world-changing tech, reach out.