As an entrepreneur, you must have heard the terms pre-seed and seed-stage startup. They are categorizations given to startups based on where they stand in the market. Understanding these is crucial for your startup to have a smooth start and a promising future. They represent two distinct yet most critical stages of a startup, and yet they are commonly confused with each other. So, here we are to help you differentiate between pre-seed and seed funding and strategies to raise those funds. In this blog, we will discuss pre-seed vs seed funding and how you can choose the one that fits your startup stage.
Pre-seed vs Seed Funding: What’s the Difference?
Any startup begins with an idea. For it to turn into business, it needs research and testing to find the right market for profitability. This is called the seed stage because the startup idea is like a seed that needs to be nurtured with research, funds, and marketing to become a thriving and profitable business.
However, it’s a little more intricate to understand, as there are two stages before a startup comes to life: the pre-seed and seed stage. The following are the differences between pre-seed and seed funding:
The Purpose: Why does a startup need this funding?
Funds are to a startup what nutrients are to a plant. Without the nutrients, the seed might never even grow; forget about giving you fruits (profits). Therefor the purpose of the funds is to support the operations at diverse stages of the startup.
Pre-seed
In the pre-seed stage, the most vital task is to validate the idea by researching the market trends, developing a minimum viable product (MVP), and testing the primary target audience for traction.
Seed
In this stage, the focus is on developing a better product, scaling the business operations by hiring team members, installing production units, and targeting a broader target audience.
Focus on what your purpose of raising the fund is: to create better pre-seed vs. seed investment strategies. It is crucial because without any MVP, hardly any investor will provide you seed funding. For example, a technical expertise-providing company, SVSG, says that only 10% of their seed-stage startups were able to secure funding without any MVP. So, define the purpose
of raising funds and then take the relevant action to increase the chances of securing the funds.
The Investors: Who will provide this funding to the startups?
While both of these stages are too early for large-scale investment, the investors still vary for both of these fundings. Note that the government provides many grants and supportive programs to help innovative startups grow.
Pre-seed
It is a risky stage for investments because 60% of startups fail at this stage. Therefore, some limited investors are willing to take the risk, like angel investors and accelerators. More often than not, pre-seed funding comes in the form of the entrepreneur’s funds or borrowed from family and friends.
Seed
Here, startups at least have an MVP to show to the investors and gain traction from the customers. Therefore, angel investors and early-stage venture capitalists firms provide seed funding to promising startups with traction and market growth potential.
The Amount: How much funding can be raised?
While the funding needs of each startup differ based on the sector, operations, and startup stage, there can be a range that you must consider while creating fundraising strategies.
Pre-seed
The primary focus here is on idea validation through research and MVP development. Thus, the average amount range for pre-seed funding is between $50K and $250K.
Seed
In this stage, the startup is focused on venturing into the market and recruitment; many operations need capital. Therefore, the typical range of funding available for the seed stage startup is $500K – $5 million (source).
The Period: For how long can you survive with this funding?
The funds keep the business afloat. The capital raised should be enough to cover the burn rate (expenses and overheads of a startup) for a specific period before they need to raise the next tranche of startup funds. Remember, you should start the fundraising process 6-8 months prior to running out of cash to keep your operation sailing smoothly!
Pre-seed
This one lasts for about a year. Therefore, the ideal period is 12-18 months.
Seed
This stage is where significant development and scaling of the startup takes place. Therefore, the seed stage funding should suffice for 12-24 months.
Pre-seed vs. Seed-stage Investment Strategies
Let’s understand how the startup needs to operate in both stages by creating relevant and effective strategies.
How to raise pre-seed funding?
The focus of the pre-seed stage should be on validating the idea. Therefore, create strategies for conducting market research to solidify your idea and your target audience’s acceptance of your startup idea. Set up a vision for your startup and create a prototype and an MVP to test in the market for product-market fit.
Networking is the real deal when it comes to the growth of the pre-seed startup. Through networking, you can validate the idea from industry experts and reach out to investors. The International Investor Summit opens the gate for entrepreneurs and investors from the UAE and across the globe to connect and network for funding and references.
How to raise seed funding?
The goal of seed funding is to scale operations and gain market traction. Therefore, after the primary research, focus on creating a scalable business model and recruit a core team to develop your startup.
Pitching your startup to investors like angel investors or early-stage venture capital firms at a pitching show like the one at the International Investors Summit can be of great help. It helps you establish a market presence, validate your idea, and gain feedback from talented industry folks.
Conclusion
Understanding the difference between pre-seed and seed funding is crucial to save time and secure necessary funds. Pre-seed funding and seed funding differ based on the purpose, investors, amount, and the period for which it should be enough to keep a startup afloat.
While pre-seed funding focuses on networking to build trust for yourself and your vision to secure the funding and validate your idea with research. Seed-stage funding focuses on scaling the business and expanding your existing customer base. The seed stage funds can be raised from angel investors and VC firms after showing market traction.
For more insightful blogs on the UAE’s startup ecosystem, stay tuned with us!
FAQs
1. What’s the difference between pre-seed and seed funding?
Pre-seed funding is the earliest stage of investment that helps founders develop a concept, validate their idea, and create a prototype. It is high-risk, as the business lacks traction and proof of concept. Seed funding supports startups in scaling operations, refining products, and acquiring customers. Seed-stage startups usually have some market validation and are less risky than pre-seed startups. The amount raised, the investors involved, and the purpose of the funds also differ significantly between these two stages.
2. What are some helpful pre-seed vs. seed investment strategies?
Pre-seed investment strategies focus on lean operations, founder vision, and proving a problem-solution fit. Investors often prioritize the founder’s passion and ability to execute their idea. At the seed stage, the emphasis shifts to market validation, scalability, and team strength. Startups should showcase customer traction, revenue potential, and a solid growth plan. Both stages require tailored strategies to align investor expectations with the startup’s goals.
3. Can a startup skip the pre-seed stage and directly raise seed funds?
Yes, a startup can skip the pre-seed stage if it already has a validated product or service, initial traction, and a clear growth strategy. This scenario often occurs when founders have prior entrepreneurial experience or access to personal funds to develop their ideas. However, skipping the pre-seed stage requires startups to meet the higher expectations of seed investors, including
demonstrated market demand and a more robust business model.
4. How to find investors for pre-seed and seed-stage funding?
For pre-seed funding, startups can approach friends, family, and angel investors or participate in accelerator programs. These sources are ideal for securing small investments to validate an idea. Seed funding involves reaching out to venture capitalists, institutional investors, and angel networks. Startups can leverage online platforms, attend investor events, and build a strong pitch deck to attract funding. Networking and personalized outreach are key to connecting with the right investors at each stage.
