What Is Pre-Seed Funding and How Does It Work?

Q: How are seed and pre-seed funding different?

Pre-seed funding helps a startup initially get off the ground. It comes in early, when the founder may have nothing more than a viable idea. Seed funding, on the other hand, is typically for a product that already exists and has some form of customer base.

Q: How much money can you typically expect from pre-seed funding?

The amount you can raise with pre-seed funding will depend on the investor and type of business you’re starting. Startups that get pre-seed funding receive, on average, $500,000.

Q: How much equity should you give away in pre-seed?

The amount of equity you give away in pre-seed funding will depend on your industry and the amount of investment you’re receiving. Often, startups give away 5% to 10% of the equity in their company during a pre-seed round.

What Is Pre-Seed Funding and How Does It Work?

Susan GuilloryUpdated October 3, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

For many startups, the need for funding begins even before they have a fully developed product or service to bring to market. In fact, a founder may have nothing more than a great idea, yet still need capital to take it to the next level. The question is, where can they get it?That’s where pre-seed funding comes in. While you may have heard of seed funding, the first official round of funding for a startup, pre-seed funding comes into play even earlier in the game. It’s capital from investors who are willing to gamble on not much more than a viable idea for a new business.While pre-seed investment can be difficult to get, since you don't have a lot to back up your promises, it can fast-track your startup’s growth. Read on to learn how pre-seed funding works, who offers it, and how to secure a pre-seed investment.

Pre-Seed Funding Definition

Pre-seed funding is an early funding round in which investors provide a startup with capital to develop its product in return for equity in the company. Pre-seed funding comes before the “official” rounds of funding, which include seed funding, followed by Series A, B, and C stage funding. Generally, this type of investment is made when a venture is still in the proof-of-concept stage and provides founders with enough capital to get off the ground.

How Does Pre-Seed Funding Work?

Like other types of startup funding, pre-seed funding involves receiving a certain amount of working capital in exchange for equity in your business. As your startup grows, that equity will (hopefully) become more valuable, and investors can cash in when your business gets purchased or goes public.

Why Is Pre-Seed Funding Important

Pre-seed funding for startups is important because it’s that idea, that seed, that needs to be taken care of and nurtured in order to become a full-fledged, blooming business. Without money for research and development or employees who can turn that idea into reality, your startup may never actually get off the ground. Pre-seed funding provides the resources needed to establish the foundation of your business. Later rounds of financing can help you build on that foundation.

Pre-Seed vs. Seed Funding

There are similarities between pre-seed and seed funding, since all funding rounds tend to overlap slightly. For example, both pre-seed and seed funding are used to cover early-days expenses, like hiring and research and development, for a yet-unproven product.However, there are some key differences. For one, pre-seed funding isn’t generally considered an official round of funding, whereas seed funding is. Pre-seed funding also tends to be smaller than seed funding.Another key difference: With pre-seed funding, investors don’t expect your startup to have done much yet. With seed funding, on the other hand, investors often require that the company has already developed their product and has some form or customer base.Finally, pre-seed funding is riskier to investors than seed funding, since it's possible that product may never even make it to market.

What Is Pre-Seed Funding Used For?

You can use pre-seed funds for anything that helps you get your idea off the ground. That includes researching the market to understand who your audience is, hiring staff, renting office space, developing a prototype, manufacturing that prototype into something scalable, as well as marketing your product or service to those first few customers.

How Soon Does It Make Sense to Look for Pre-Seed Funding?

Even though pre-seed funding is for the earliest stage of a start-up, you don’t want to go to investors empty-handed. A good time to research pre-seed funding is when:

You know the niche your product fills. If you’ve done your homework, you know the market your product is designed for, and can use this early-stage funding to dive deeper into how you can tailor the product to fill a need in the marketplace.
You have a rough prototype of your product. It doesn’t have to be fully developed yet. Pre-seed funding will help work out the kinks.
You already have some interest. Have you started showing your product to customers? Early positive feedback is a good sign that a startup has high growth potential.
You have a revenue model. You may not yet be earning revenue, but you have a plan and clearcut path to making money.

Types of Pre-Seed Funding

Pre-seed funding can come from a variety of sources. These include:

Venture Capital

Startups and venture capital go together like peanut butter and jelly. There are even venture capital firms that specialize in pre-seed funding that may be willing to take a risk on your idea and help you develop it.

Friends and Family

Who better to support your endeavor than the people who know you best? You may be able to get pre-seed funding from friends and family. Just be careful to keep it a business transaction and create a loan or investment agreement that stipulates repayment or equity share.

Angel Investors

Angel investors tend to provide smaller amounts of capital than venture capitalists, which can make them particularly well-suited to pre-seed funding. Plus, many have niche specialties that could align with your business’ industry or focus.

Incubators

Incubators are programs that offer coaching and assistance to startups, including feedback on product development and connections to influential people in the entrepreneurial community. Some also include pre-seed funding, while others will assist you in raising funding from angel investors or venture capitalists.

Accelerators

Accelerators are just like incubators except that, rather than focus on helping a startup launch, they typically help already-established startups grow. However, if you have experience launching other startups, you may be able to find funding assistance through an accelerator program.

5 Tips for Getting Pre-Seed Funding

The steps for getting pre-seed funding are similar to those for seed funding. The difference is that it can be harder to convince an investor to fund an untested product or idea. Here are some ways to increase your chances of success.

1. Formulate a Business Plan

You may be chomping at the bit to find the money, but you’ll first need to establish a solid foundation to attract the right investors. That starts with your business plan. This document will get ideas to paper on who your audience is, the problem your product solves, and how you’ll market it to customers.Your business plan should also include your revenue model and startup costs so investors know you’ve done your due diligence and will use your pre-seed funding judiciously.

2. Come Up With Your Pitch

Your business plan will help you develop a pitch deck, which is a slide presentation that tells investors everything they need to know about your startup, the product, the market, and your financial projections Here are some ideas on what to include in your pitch:

The need your business idea fills
How your ideal fills this need
Your target market
What makes your product/service unique
Your revenue model
Revenue projections for five years
How you’ll market to customers
Budget for pre-seed funding
Information about you, the founder, and your business’ story.

It’s a good idea to keep your pitch short and sweet, otherwise your investors’ eyes might glaze over during your presentation. Stick to the highlights and be ready to elaborate as you answer questions.

3. Find Potential Investors

You may want to start by using your business connections to find investors who are interested in early-stage startups. Incubator platforms can also help you access investors specializing in pre-seed capital. As your research investors, be sure to dig into their track record on working with pre-seed startups, how much funding they typically give, and their experience in your industry.

4. Present Your Pitch

Most investors will require an in-person presentation before committing to your company. Once you secure that coveted pitch meeting, it’s a good idea to practice until you can confidently give your pitch from memory. Anticipate the questions that investors will ask, paying particular attention to numbers. Know your audience, your costs, and your revenue projections, and be sure to show your winning personality.

5. Negotiate

You may not get the offer you wanted right off the bat from an interested investor, so be ready to negotiate. Decide how much equity you are willing to give up in exchange for capital in advance so you don’t make a bad decision in the heat of the moment. Also be sure to get any deal you make in writing, especially if an investor is committing their time and resources.

Alternatives to Pre-Seed Funding

The types of investors listed above aren’t your only options for getting the capital you need for your startup. Here are a few alternatives.

Small Business Loans

There are many different types of small business loans. While traditional banks will typically only lend to businesses that have been established for two years or more, alternative online lenders tend to be more flexible. You may be able to get a small business loan, such as a short-term loan, startup business lines of credit, invoice factoring, or equipment financing, from an alternative lender with only a short length of business history. You’ll likely receive smaller amounts and pay higher interest rates than more-established businesses, however.

Crowdfunding

There are hundreds of crowdfunding sites, where anyone (not just professional investors) can contribute toward a new business project, product, or service. While it can time and effort to create a compelling campaign, you typically don’t have to give up equity with crowdfunding. Instead, you may need to provide a token of appreciation to donors or investors, like early access to your product or a t-shirt with your startup’s logo on it.

Startup Loans

Startup loans may not have the strict criteria for time in business that other business loans do, and you may be able to secure funds before you’ve even launched.The U.S. Small Business Administration (SBA), for example, offers a microloan program for small businesses looking to start or expand. Microloans are also available outside of the SBA program through nonprofit and for-profit lenders. Often, these lenders focus on giving opportunities to minority business owners and startups in underserved communities.

Explore Small Business Funding Options With Lantern

No matter where you are on your business journey, there may be a loan available to help you take it to the next level. If you’re interested in exploring your startup financing options, Lantern by SoFi can help. With our online loan comparison tool, you can access offers from multiple small business lenders matched to your needs and qualifications with one short application.

Frequently Asked Questions

How are seed and pre-seed funding different?

How much money can you typically expect from pre-seed funding?

How much equity should you give away in pre-seed?

Photo credit: iStock/S_Z

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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