Pre-Seed vs. Seed Funding: What’s the Difference?

We often have a somewhat romanticized view of startups. Aspiring founders work diligently to disrupt the market with some kind of genius, innovative product that allows them to cut into the corporate giants’ market share. If you’ve seen HBO’s Silicon Valley, you know it’s rarely such a storybook experience.

The data shows that 90% of startups fail, 80% within the first five years. One of the biggest reasons is that they fail to secure the funding necessary to make a meaningful impact in the market. For some entrepreneurs, the world of early-stage investment is complex and confusing, making it difficult to even begin the process of raising money for the business.

Here, we aim to demystify the process by focusing on pre-seed vs. seed funding. While both represent initial investment stages, they cater to very different points in a company’s lifecycle and come with distinct expectations. By understanding these nuances, founders can strategically determine which round aligns best with their current business needs and objectives, paving the way for sustainable growth.

What Is Pre-Seed Funding?

Pre-seed funding is the earliest stage of external investment a startup receives. It’s the foundational capital that helps founders transform an initial concept into a viable business.

At its core, pre-seed funding is about getting an idea off the ground. You’ve been in the whiteboard stage, working on an idea, but pre-seed funding provides the very early capital to help you conduct thorough market research or develop a Minimum Viable Product (MVP). It provides the funding necessary to essentially test your product market fit and understand the business’s true potential.

• Company stage: Pre-product, meaning the focus is on identifying a clear market opportunity and demonstrating the potential for a solution to an existing problem.
• Funding characteristics: Funding is typically from people who strongly believe in the founders’ vision, such as friends and family, angel investors, or startup accelerators. Amounts are modest, usually not more than a few hundred thousand dollars.
• Investor expectations: Investors aren’t looking for immediate revenue, but they do want to see some form of traction, such as an MVP or a compelling proof of concept.

What Is Seed Funding?

Seed funding is the next significant step in a startup’s funding journey, when the company is ready to move beyond concept and start going to market. As far as pre-seed vs. seed funding goes, the biggest difference is the stage of the company. The primary purpose of seed funding is to go from launching a product to expanding the team, scaling operations, nurturing and meeting a growing demand. It’s about accelerating growth.

• Company Stage: Still early, but have gone to market and begun to gain some traction by selling their product or service, gathering user feedback, and showing early signs of growth.
• Funding Characteristics: Seed funding rounds typically involve more formal investors, like venture capital firms. Funding amounts tend to be significantly higher, sometimes into the multi-millions.
• Investor Expectations: Seed investors do want to see a return on investment, as well as tangible evidence of progress and market validation. This includes active metrics and evidence of product-market fit.

Key Differences Between Pre-Seed vs. Seed Funding

While both rounds are crucial for early-stage companies, their distinct characteristics define when and why a startup pursues one over the other.

The Fundraising Process

Despite the pre-seed vs. seed funding differences, the general fundraising process is somewhat similar between both. Regardless of the type of funding, founders must:

1. Develop a robust business plan: This outlines the problem, solution, market opportunity, business model, and financial projections.
2. Set clear milestones: Define what you aim to achieve with the funding and how you will measure success.
3. Create a compelling pitch deck: A concise and persuasive presentation that tells your company’s story, highlights its potential, and explains the ask.
4. Identify suitable investors: Research and target investors whose investment thesis aligns with your industry, stage, and mission.

Specific Considerations for Pre-Seed Funding

Remember, when you’re seeking pre-seed funding, you’re really just working with an idea. Your pitch will rely heavily on your business plan, vision, and passion. At this stage, any investor is betting as much on you as they are on your idea. They want to believe in the founders’ ability to execute on a promising idea, which means you’ll have to sell yourself and your credentials just as much as the idea.

Of course, it’s still crucial to demonstrate why your idea is unique, the size of the market opportunity, and how you plan to achieve initial product-market validation. Provide as much qualitative feedback about your product from friends, family, or market tests that you can.

Specific Considerations for Seed Funding

When pitching for seed funding, it’s all about data and metrics that demonstrate product-market fit and growth. You’ll need hard numbers to prove to investors that there’s something brewing here. Data you should be able to show includes:

• Active user metrics
• Revenue figures
• Customer acquisition costs
• Customer retention rates
• Costs of goods and services (COGS)

Investors want to see a clear path to scalability and substantial returns for their investment. You’ll need to articulate how the seed capital will be used to accelerate growth and move towards the next significant funding round. (That’s when you start getting into Series A, Series B, etc.)