When you’re in the midst of developing a startup, among the most important elements of creating a company is to obtain funding that will assist with development. To better understand what kind of funding you should seek, there are various funding stages that are available for startups to get funding, which include Series A, Series B, and Series C funding.
While Series A funding is typically designed to be used for optimization of a young startup, Series B funding is meant to help startups expand their market reach, which means that your business will officially be past the initial development stage. As for Series C funding, these funding sessions are designed for quick growth via scaling the company. For instance, this funding could help your startup acquire another company. While it’s possible to obtain this funding from family, friends, and your own bank account, the two most popular forms of funding occur from angel investors and venture capital firms. In many cases, this funding is provided in exchange for a small share of the company.
Your startup may also consider pre-seed and seed funding, which are the earliest stages of funding that can be used to help a startup grow. Pre-seed funding is designed to help a startup get off the ground and typically comes from the founder of the startup and any close friends, family members, and supporters.
Seed funding is meant to help the startup with its initial growth via product development and marketing research, the funds of which come from incubators, family members, angel investors, and even venture capital firms. If you’re unable to convince investors to provide you with the funds you need to develop and grow your startup, it’s recommended that you first have a minimum viable product that you can show to potential investors. The following provides a more in-depth look at pre-seed and seed funding rounds, which may be important to understand for your startup.
What’s the Difference Between Pre-Seed and Seed Funding?
When you’re thinking about obtaining funding for your startup, it’s essential that you understand the differences between pre-seed funding and seed funding.
What Is Pre-Seed Funding?
Pre-seed funding is a type of funding that’s designed to help a startup with its initial formation and beginning of operations. Since this funding is meant to be used to get a startup off the ground, it’s not typically considered to be an actual round of funding. The investors who usually provide startups with pre-seed funding include the founder of the startup, close friends, family members, and supporters of the startup in question. The amount of funding that can be obtained with pre-seed funding extends from $10,000-$250,000.
If you have a business idea that you believe can eventually turn into a successful product or service, the funds that you obtain with pre-seed funding will help you pay for the initial setup costs of the company. This round of funding can last for as long as it takes to set the company up and begin operations, which can differ substantially depending on the type of company that you’re creating. You should expect this round of funding to sustain your business for anywhere from 1-12 months. While you don’t necessary need a minimum viable product during this round of funding, it’s recommended that you have one before you enter the seed stage of funding.
What Is Seed Funding?
Seed funding is basically the first official round of funding that a startup goes through. Once you have established the base of your startup with pre-seed funding, the seed funding that you raise should be used to help you grow your business. If you want to start developing a product that can be placed on the market and are looking to conduct an extensive amount of market research, seed funding is designed to help you reach these goals. During this round of funding, you should be able to identify who your target audience is and understand what your final products are going to be. It’s also at this stage that you should be hiring an entire team to help you complete these tasks.
The funding amount that’s usually sought during this round of funding can be anywhere from $400,000 to $2 million. While some of this funding can be obtained from family members and friends, you can also join an incubator at this time to assist you with product development and market research. This is also the first round of funding in which angel investors and venture capital firms may show some interest in your startup. If you’re considering obtaining these funds from angel investors, keep in mind that they will typically want a stake in your company in return.
While you don’t need to pay back angel investors if your business fails, they will eventually sell off their stake in your business in around 3-10 years. As for venture capital firms, they are typically repaid when you’re acquired by another company or when you take your business public via an IPO. To identify if your company is currently in this round of funding, your company valuation during seed funding should be around $5-$15 million. This round of funding typically lasts around 12-18 months before you move on to Series A and B funding rounds.
How to Secure Pre-Seed Funding
With pre-seed funding, you should attempt to secure this funding from friends, family members, and your own bank account if necessary. While the amount of funding that can typically be obtained isn’t much during this round, this should help you convince some individuals close to you to assist with getting your startup off the ground. Before you begin to approach prospective investors, it’s recommended that you compile an email list of each individual so that you can send the emails all at once.
Once prospective investors have responded to your email, it’s time to schedule meetings, which is when you’ll want to present a pitch deck. The key to a successful pitch for pre-seed funding is to first present yourself to investors before presenting your product idea. You should also be able to identify any co-counders who can help you run the business. It’s recommended that you can show these investors that you know how to build the idea and can build something else if the initial idea doesn’t pan out.
A great way to pitch your startup is with a PowerPoint presentation, which will allow you to do so in a succinct manner. No matter who you meet with for pre-seed funding, these initial meetings can also pave the way to introductions with additional investors. Aside from the base requirements, pitching your startup for pre-seed funding isn’t nearly as difficult as pitching your company to a venture capital firm for Series B or Series C funding.
The Impact of Pre-Seed Funding
Pre-seed funding exists to help a startup set up the initial components of their business. If you need to hire a couple people to help you run the business or require some equipment for the design of your product, pre-seed funding will give you the funds that you need to start formulating your company and turn your idea for a product into an actual business that can eventually develop the product in question.
In some cases, entrepreneurs are able to provide the money for this type of funding without the need to contact outside investors. If you only need $5,00-$20,000 to build the case of your company, it’s possible that additional investors might not be necessary. However, pre-seed funding is a great way to progress to the point where you believe your business can start conducting market research and developing a product. The individuals who provide pre-seed funding also don’t expect quick returns, which is very beneficial during the early stages of a startup.
Is Pre-Seed Funding Right for Me?
If you’re trying to determine if pre-seed funding is right for you and your company, the only way to properly answer this question is to identify your funding needs. Some of the factors that you should consider include:
- If you’re currently developing a minimum viable product or something that shows a small amount of function, pre-seed funding could help you further this development
- If you believe that your product can fit into a specific market, it’s likely that you’re ready to seek some of this funding
- Do you need to hire a couple employees to help you develop your initial idea? If so, you’ll want a small amount of funding to convince these individuals to leave their current jobs
- If the process of developing a minimum viable product has proven to be expensive, you’ll definitely want to consider pre-seed funding to help you get to the next stages of funding
If any of these factors apply to you, there’s no reason not to consider pre-seed funding. While seed funding may be right for your business, you shouldn’t consider obtaining it until you’re ready to start conducting market research and eventual product development.
Raising a Pre-Seed Funding or Seed-Funding for Your Startup
Once you raise pre-seed funding and seed funding for your startup, you’ll be able to get your startup off the ground and begin to envision the growth potential for your company. With pre-seed funding, the base operations for your company should start as a result of the funds that you receive. You’re likely at the very beginning of developing a minimal viable product. However, the funds that you receive may be able to assist you with further development of the product, which can help you secure future funding. Some additional elements of this funding stage include the identification of a market opportunity, growing expenses, and the need to make a few hires.
Once you have progressed to seed funding and have been able to obtain enough funds, you should be able to finance further product development and market research. While you may not yet make any profits, it’s at this stage that you should show some revenue gains. You’ll also likely have a full team helping you with the development of the product in question. Keep in mind that seed funding typically occurs after you have a minimum viable product. The funding that you receive can be used to turn a minimum viable product into a product that’s ready to be placed on the market.
Once you’ve obtained the amount of pre-seed funding and seed funding that you need to develop the initial aspects of your startup, you’ll soon have access to several additional rounds of funding, which include Series A, Series B, and Series C funding. If you’ve been thinking about how to turn your startup into a money-making business that turns a profit, Series A funding is perfect for you. Most startups raise around $2-$15 million throughout this round of funding. As for Series B funding, this is ideal for companies that have a successful product and want to expand their market reach. The funding is typically used for bolstering business development, tech, support, sales, and advertising efforts.
Finally, Series C funding is designed specifically for the scaling of a business. If you want to start developing new products, acquiring companies, or expanding into new markets, this round of funding may be right for you. If you’re still working on the initial steps of developing and growing a startup, a great way to keep costs down while you seek funding is to use a startup incubator, which will provide you with access to low-cost rental space, equipment, and everything you need to conduct product development and market research.
In the event that your startup is a life science or medtech startup, you should consider utilizing the many resources of a startup incubator such as University Lab Partners. With our wet lab incubator, you’ll have access to office space and extensive wet lab space, which should help you reach your business goals – apply today!