June 28, 2023
Unless you’re Elon Musk or Jeff Bezos with more money than you know what to do with, you probably need some kind of fundraising to get your business off the ground.
Maybe you have a killer idea for a product that solves a critical problem in the market. Or perhaps you’re a more established entity with funding needs for expansion, distribution, and improvements.
If either of these sounds like you, you’re in the seed stage of funding.
But there are two versions of seed funding—pre-seed and seed. Both help startups fund essential functions and allow the flexibility to expand operations. They are also both less demanding when compared to series A, B, or C funding.
So, what’s the difference?
While pre-seed is the earliest stage of funding geared toward getting your product on shelves, seed funding is for businesses with higher valuations and a more established market presence.
In this article, we expand on the differences between pre-seed and seed funding rounds and how you know which is right for your business. Regardless of where you are in the funding process, you need accurate reporting.
Pre-seed funding, also known as “family and friends” funding, is an early stage of funding a startup. It happens after a business has a minimal viable product (MVP) that extends beyond a prototype and meets the demands of a target market.
During the pre-seed funding stage, founders receive money from a variety of places, including people closest to them, loans, accelerators, incubators, convertible notes, and crowdfunding. It’s the capital raised after bootstrapping from the founder.
Businesses at the pre-seed funding stage will have a market valuation of anywhere from $500,000 to upwards of $2-3 million, pre-cash. They will be looking for funding from the tens of thousands to hundreds of thousands of dollars with an average runway of between three and nine months.
Additionally, pre-seed businesses have a team of skilled individuals with a proven track record and may even have some market traction thanks to an alpha launch. It’s likely these businesses are looking toward a beta launch, have a solid growth strategy, and are in talks with distributors.
Businesses that meet or are meeting these milestones or descriptors should consider themselves in the pre-seed stage. Once your business eclipses these metrics, you can start to consider the next round of funding.
The seed stage of funding is more demanding than in years prior, with many investors demanding a more solidified market position, proper financial practices, and a clear plan for scaling operations.
Seed funding comes from a variety of places, such as venture capitalists and venture capital firms, angel investors, and institutional investors. These investors will want to see consistency, stability, and lower risk associated with their capital.
Likewise, the seed funding stage is for exponentially higher amounts compared with pre-seed organizations. These amounts can stretch to several millions of dollars, and investors want to see valuations in the tens of millions of dollars.
The runway for such investments is also longer than pre-seed funding, with timeframes ranging from 12 months to upwards of 18 months or more. That runway allows businesses to establish crucial departments, build out production infrastructure, and engage in marketing.
A solid practice that business leaders use to secure additional seed capital is creating a strong pitch deck. This pitch deck highlights a clear value proposition, financial plans, hiring strategies, and big wins to can point to.
Once a startup begins to realize these milestones, the search for expanded capital becomes more prevalent, and founders start parting with equity in exchange for those additional funds. The experience gained through seed funding provides a strong groundwork for series a, series b, and series c fundraising as operations continue to expand.
By understanding the differences between pre-seed and seed funding, you can adjust your approach accordingly and seek out the best methods of obtaining capital. While you now have a grasp of what to expect during each round of fundraising, here’s a more detailed look at how the two types of funding differ.
During the pre-seed round of funding, the founding team receives capital through cash, loans, and convertible notes. Startup founders with a minimum viable product typically ask for anywhere from $50,000 to $250,000 for product development, onboarding, and team growth.
On the other hand, the amount of funding during the seed funding round is much higher. These amounts range from $500,000 to $2 million or more and have an established business model, a defined product market fit, and an established founding team.
At the earliest stages, pre-seed investors are friends and family members of founders and co-founders. They may also be loans, incubator firms, financial accelerators, or crowdfunding seed money.
Likewise, seed fundraising happens on a larger scale and with more professional and established investors. Seed investments come from angel investors, venture capitalists, and institutional private equity investors.
Where your business is in the growth cycle can determine what type of startup funding you need. Early-stage startups will have an MVP, a clear market need, and a customer base ready for your product to launch.
If you are in this early stage, then a pre-seed funding round may be appropriate for you. You may need this first round of funds to prove you have a viable product, fund hiring activities, and start to grow operations.
Entrepreneurs in a later stage of operations will need to grow specific departments, keep up with expenses, and continue to expand production. These businesses have market traction and are looking to carve out a more significant presence.
During the seed stage of funding, businesses use capital to purchase machines, pay for salaries and benefits, expand distribution networks, engage in marketing, and implement product improvements.
With each subsequent fundraising round, businesses grow to fill market space, improve product delivery, and expand operations. The difference between pre-seed and seed-stage companies highlights that growth.
Pre-seed companies are looking for modest amounts of funding, up to $250,000, for bringing their minimum viable product to market. Alternatively, seed-level companies need much higher capital amounts to establish themselves as significant market players.
As a founder, you understand the importance of tracking KPIs at every stage of funding. The accuracy of that data is your competitive edge. The best way to ensure you have up-to-date and flawless information across your business is with Facta.
By using Facta, you can be among the countless founders we help prepare for every stage of funding, from seed to series, and helped raise more than $2 billion in startup capital. Try a demo today and start funding your startup!