The Differences Between Pre-Seed Vs. Seed Funding
The most crucial stage of founding and running a business is securing funding to foster growth and development. When a company forms, that funding is called “early-stage funding.”
Raising early-stage funding, particularly equity capital, for your startup is undoubtedly daunting. It’s challenging to place the future of your business endeavor in the hands of other people. But also, it may be the first step towards making your entrepreneurial dreams successful if you can secure financing that’s right for your venture.
Most startup founders have lived and breathed their startups for some time before seeking funding. So, the fact that startup founders commonly underestimate the complexities of the funding process isn’t surprising.
Even when you’re sure that your business venture will become a resounding success, getting early-stage investors to believe in your vision could be daunting. You may even need to consider equity vs. stock options.
For startups, time is of the essence. Getting your business up and running as quickly as possible is imperative. Waiting on decisions for an extended period can be costly at such a delicate phase of your startup.
Fortunately, many startups meet their financial targets each year despite the potential negotiations and long waiting periods over equity, showing that venture capital funding is still one of the best options for scaling your business.
The most popular forms of funding that nurture businesses in their early days are pre-seed and seed capital. However, if you seek early-stage financing for your startup, you must know that funding comes in various phases.
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Understanding Startup Funding Stages
As startups try to get things moving, they will require funds. Startups engage in new funding rounds to raise money each time they bring on investors. Bootstrapping might be adequate for a little while, but there comes the point where using your savings is no longer enough to sustain your business venture and reach profitability, which is where outside funds come into play.
Starting with pre-seed and seed rounds, moving to A, B, C, D, and beyond, every round of funding represents a new phase in a startup’s growth process. At every stage, the type of investors and potential funds may vary. Often, a startup will need more than one round of financing.
Pre-Seed Vs. Seed Capital
Pre-seed capital usually comes from the startup founder, close friends, family members, or supporters. This capital helps a startup get off the ground and achieve liftoff.
Seed capital aids the startup with its initial growth and development through market research and product development. Seed investors include incubators, family members, angel investors, and venture capital firms.
Though lacking acknowledgment as a formal fund-raising round, you need to obtain pre-seed and seed capital early in a company’s lifecycle.
Suppose you can’t convince your investors to provide you with the early-stage funding needed to scale your business optimally. In that case, it’s wise first to develop a minimum viable product to show them.
Let’s quickly dive into the intricate details of these two essential financing rounds.
Pre-Seed Financing
When transitioning from the idea phase to the pre-seed stage, the burden is on the startup founders to build a proof-of-concept or product prototype. Thus, the pre-seed phase is also called the “proof-of-concept” stage.
Securing money to create the product mentioned above is a task that startup founders must work on independently. As a result, early-stage capital at this phase will most likely come from family members, close friends, personal savings, crowd funders, incubators, and angel investors. But the most common investors in this stage are personal savings, family, and friends.
The funds a startup requires at the pre-seed stage vary depending on the nature of the startup or the type of service or products it plans to offer.
Seed Funding
This stage comes after the pre-stage round. The seed funding will probably be the first instance of early-stage capital that your business formally raises.
You can raise seed funding from a wide range of sources. But the most common type of investors at this phase are angel investors. Besides these coveted partners, other investors may include family members, friends, and crowd funders.
Why Seek Early Stage Capital?
Most startups don’t survive without early-stage capital. Unfortunately, the money needed to propel startups to sustainable profitability is often beyond the founders' financial ability.
Before accomplishing profitability, high-growth businesses continuously need to burn funding to sustain development. However, a few startups often successfully fund themselves.
Capital enables a startup to:
Grow
Sustain itself
Mature
Also, a significant amount of funding can give a business a competitive advantage in ways that matter, including hiring employees in the public relations, marketing, product, and sales departments. Also, it helps in extending the company’s reach.
Many startups will want to raise funding at various stages of their journey. Luckily, many investors are eagerly awaiting the right time to give their money to promising startups, hoping to back a winning team.
Final Thoughts
There’s a gray area when differentiating between pre-seed and seed financing. Some consider self-funding or bootstrapping as pre-seed capital and may skip to the seed stage for outside funding. However you choose to define it, startups at either the pre-seed or seed round are very early in their growth, making them risky investment opportunities.