Turning your great business idea into a legitimate startup is exciting, but it does come with various challenges, one very notable one being funding. Startup business funding can be one of the most challenging things to secure, though you don’t necessarily have to get your lifetime funds all at once. There are several startup funding stages, the first of which is called pre-seed funding.
What is pre-seed funding?
Pre-seed funding is the first opportunity for startups to raise money towards their business idea in hopes of receiving financial support from investors. This funding stage aims to help a startup validate its business model and gain early traction.
During this initial pre-seed round, startup founders pitch their ideas to investors, who then decide whether to provide them with capital to develop their ideal products. These investors typically receive equity in the business, a percentage of earnings, in exchange. A pre-seed investment is a show of belief in a business or product idea, as prototypes are typically yet to be created.
When you’re pursuing funding to start a business, it’s essential to research your market and potential customers to understand their needs and build a solid business model around that. Focus on how you can generate revenue to prove to prospective investors that your startup is viable.
Pre-seed vs seed funding
As the name suggests, pre-seed is the round of funding before you get to seed funding, a more formal round designed to create significant growth. The main difference between the two is the amount of money you intend to raise: pre seed funding looks to generate a workable amount to develop a serious product and establish an early business, while seed funding is designed to take that product into the market and help make necessary hires possible.
Another key difference is the type of investors you’re hoping to attract. The pre-seed round is geared towards funding from friends and family, dedicated startup accelerators, or even crowdfunding. Seed funding is more likely from angel investors and potentially early-stage venture capitalists.
Why should you use pre-seed funding for startups?
Pre-seed funding allows you to validate ideas, practice execution, and build a network. You can examine what works well and what needs fine-tuning in every aspect of your business, which helps you sharpen your goals and ideal outcomes. Overall, going through a pre-seed phase ensures that all your ideas are concrete and that you deliver a more robust pitch at later stages of funding.
Additionally, pursuing a pre-seed fund allows you to connect with mentors and advisors who can show you the ropes of navigating the industry. It’s an opportunity to gain impactful feedback and potentially widen your circle to more investors through who your mentors and advisors have in their network — opening the door to seed investors down the road.
When to start raising pre-seed funding?
Consider funding your business when transitioning from someone with a good idea to someone with a genuine business opportunity. Some specific signs that you are ready to begin pursuing a pre-seed investment include:
- MVP ready: If the initial version of the product, also known as the minimum viable product (MVP), has been developed, it can pique the interest of both investors and consumers. This can open an opportunity for a founder to begin funding based on what they already have to offer the market. Over time, businesses can still make changes and improvements to the product depending on market research and consumer feedback.
- Experienced leadership: A strong team with valuable industry experience can appeal to more investors who want to support it.
- A good fit in the market: Showing how a product solves a problem and that there’s a need for it in the market helps demonstrate how a product can appeal to a target market, which ultimately appeals to investors to start pre-seed funding.
- Already have a community of customers: With a base of people already showing demand, businesses can raise pre-seed funding to support that demand.
How to get pre-seed funding
Once you’ve fulfilled the steps needed to qualify for the pre-seed round of funding, you can begin to raise!
Pitch deck
Before you meet anyone, you need a detailed pitch deck with all the relevant information an investor will need. This includes top-level information like your business vision and mission but more specific details like your financial goals and runway, your target market, and most importantly, how your product or service fills a present consumer need. Your investors need to know precisely what they’re putting their money towards to support your growth adequately.
Connect
With your pitch ready, consider who the ideal investors would be for your business. This may include people who have invested in similar startups in the past, individuals in your industry and existing network. On your side, you should look for investors with a positive history of suitable investments and a vested interest in your industry or market who will be keen to support your vision and growth.
Negotiate
If you’ve successfully made a good deal, get it in writing and have both parties sign it. Examine the agreement in detail to ensure it matches what you have spoken about and will not hurt your business or goals.
Supporting startups and new businesses
As a co-working space, we support innovators, entrepreneurs, and startup founders. We offer a variety of flexible, convenient working spaces built for early-stage businesses, helping you develop your idea without breaking the bank. Whether you are creating your idea, looking to get involved with funding a business, or already running one full-time, we have workspace opportunities to fit your business goals and needs.
Melbourne Connect Co-working is home to pre-seed Funds and Venture Capital firms, with whom we regularly collaborate to bring talks and workshops and increase support for startups and entrepreneurs in Melbourne.
Connect with us today and start building your future.