A startup requires only one thing: Capital. Without capital, a startup is likely to fail before bringing a product to market. Most startup founders of entrepreneurs need capital in the form of funding to kick-start their businesses. This funding comes in various stages but much of the terminology can be unclear to first-time founders.
Pre-seed funding is regarded as the first stage of funding by entrepreneurs and getting a pre-seed fund is seen as a big bet on a big business idea.
Pre-seed funding, also known as “family and friends” funding, is the first step toward obtaining enough capital to develop a product. The funding is intended to help with the formation of a team, the launch of a proof of concept, or even the development of an MVP (minimum viable product). It usually happens within the first 12 months of the startup’s existence, for amounts ranging from $100k to $700k.
Pre-seed capital is typically in the form of convertible security, usually starting as a loan, and once certain growth conditions are met, the loan is converted into a certain amount of equity. Naturally, each transaction is unique and will be influenced by a variety of factors.
Because pre-seed funding involves betting on an idea because the product may never even reach the market, it is typically more challenging to secure. It is best suited to high-startup-cost industries. For example, tech company developing hardware or a software company developing an app.
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This year alone, scores of tech firms in Nigeria announced obtaining their pre-seed funds:
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Several methods exist for securing capital during the pre-seed stage. The pre-seed round begins by determining which financing options exist for startups looking to turn an idea into a viable business.
GoFundMe, CircleUp, MicroVentures, Patreon, FundAnEnterprise.Org
The phrase “right place, right time” is crucial knowledge for any business owner. You must be aware of your startup’s readiness to look for funding. Recall that every year, investors interact with thousands of founders, so being underprepared will result in a swift rejection.
You also need to be more persuasive than other startups in order to raise money. So before meeting pre-seed investors, you should have built a team, built a prototype at the very least, have good feedback from people and model what your revenue will look like.
Pre-seed funding rounds typically raise much less money than Seed and Series A funding rounds. Startups tha receive pre-seed funding typically receive about $500,000. The amount you qualify for may vary depending on the investment route.
The most crucial guideline to bear in mind is simple: Ask potential investors for a reasonable estimate. You must also provide evidence to support the amount you are requesting, which means you should only ask for what you require to become profitable or to last until the next funding round.
While it may be tempting to demand an unrealistic sum, keep in mind that the more you demand, the stronger your startup’s performance will need to be. Remain cautious because knowledgeable investors will evaluate your proposal to determine whether the amount you are requesting is reasonable.
Pre-seed funding agreements and seed funding agreements share many similarities. The distinction is that it takes more effort to persuade an investor that an unproven product can have an impact. Remember that you haven’t yet determined whether your idea has any market traction, unlike a Seed company. Here are the steps needed to prepare to obtain a pre-Seed funding:
Pitch decks provide investors with all the information they require regarding your startup, the product, the market, and your short- and long-term financial projections.
Investors will learn about the product and the issue it addresses in a pre-seed pitch deck which should contain details about you, the owner, and the history of your company.
Even though you may be unable to demonstrate current traction in terms of market research, you can still carry it out. In the absence of market experience, focus groups are essential at this point for demonstrating customer interest.
The ideal pitch deck will consist of 10 to 12 slides, each of which will highlight a different concept.
Research on potential investors using the following primary characteristics:
What kind of an investor are you looking for? Some startups require funding, while others also require expertise and contacts from networks.
So you need to consider the investors experience, funding capabilities, expertise and the investors’ track record.