What is pre-seed funding and how does it work? - Peak (2024)

FAQs

What is pre-seed funding and how does it work? - Peak? ›

Pre-seed funding is the small first injection a startup receives to help start the business. On average, a startup pre-seed can range between $50k-250k. Usually, this pre-seed funding is done by relatives, friends, or angel investors.

Pre-seed funding is the initial capital raised by entrepreneurs to validate their business idea, build a prototype, and conduct market research. It is a crucial step in the startup journey as it allows entrepreneurs to prove the viability of their business idea before seeking larger investments.

The difference between pre-seed and seed funding

Founders tend to get higher investments through seed funding than pre-seed funding, with pre-seed funding generating around $50,000 to $250,000 while seed funding may raise upwards of $2M.

A pre-seed round generally allows a founding team to find product-market fit, hire early employees, and test go-to-market models. As a general rule of thumb, funding should last somewhere between 12 and 18 months.

Pre-seed funding can be dilutive

Your goal here should be to take as little money as possible that will still let you prove out your idea. We often see pre-seed rounds being between $500,000 - $1 million, with the valuation around the $5 million mark. This means you are still selling 10-20% of your startup.

As a general guideline, founders should aim to give up no more than 15-25% of their company at the pre-seed stage, in order to preserve enough equity for future rounds of follow on funding.

The average pre-seed stage startup usually gets between $50,000 and $200,000 within a fundraise of 3 to 9 months. About 60% of companies that raise pre-seed funding fail to make it to the next startup stage, Series A.

One popular method is to use a multiple of revenue. This means that you take your annual revenue and multiply it by a certain number. For example, if your annual revenue is $1 million and you use a multiple of 3x, then your company's pre-seed valuation would be $3 million.

Do you pay back seed funding? ›

There are a few different types of seed funding, including debt financing, equity financing, and grants. debt financing is when a startup borrows money from an investor and agrees to pay it back with interest. equity financing is when a startup sells a portion of its company to an investor in exchange for capital.

The Risk Of Giving Up Too Much Equity: In order for a startup to receive seed funding, the co-founders have to give up a significant amount of equity in your startup company in order to attract seed funding. This can be risky, as it means you'll have less control over your business.

Pre-seed capital, in a nutshell, is meant to fund early product development and prove a need in your niche market for your product. Companies are ready for seed funding after gaining traction and proving market needs.

Even though there are multiple funding rounds after it, raising pre-seed money is perhaps the most difficult point in your startup's life regarding raising capital. This is often because novice startups have no idea where to meet new potential investors.

Angel Investors: Often invest in startups at the earliest stages of development, including ideation and prototype phases. Pre-Seed Venture Capital Firms: Typically invest in startups at the pre-seed or seed stage, when there is some initial traction or validation.

Average Pre-Seed Valuation hinges on factors like market potential, team expertise, and startup value proposition, critical for setting up future funding, equity distribution, and investor relations. It's a vital step from concept to measurable entity, with valuations typically between $2M-$10M.

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For example, if you're a seed startup founder, you're going to be raising a lot less money. This is because you're still building your team and you're still trying to get proof of concept. Consequently, you will probably be paying yourself, as a founder, a little bit less than a later-stage company.