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.
What is pre-seed funding?
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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Tech firms that obtained pre-seed funds
This year alone, scores of tech firms in Nigeria announced obtaining their pre-seed funds:
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- Norebase secured $1m in Pre-seed funding
- Yarpa, the Nigeria-based fintech company, closed a $500k pre-seed round funded by Yolo Investments and a strategic angel investor.
- Nigeria’s Yep! closed $1.5m pre-seed funding
- Lagos-based Klump secured $780k pre-seed funding
- Blockchain payments startup Bitmama secured $2 million pre-seed round
- NowNow raises $13 million in seed funding to expand services across Africa.
Recommended Reading: Top 5 insurtech startups
Types of pre-seed funding
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.
- Family and friends: These are the funding source that pre-seed startups most frequently choose. Here most of the entrepreneurs invest their own money and enlist the help of their loved ones
- Venture capitalists: Investing in startups at the very beginning of their development is a specialty of some venture capitalists who are usually very picky. Examples are: Future Africa, EchoVC, Ventures Platform, Growth Capital Fund, Microtraction, GreenHouse Capital, Lead Path Nigeria etc.
- Angel investors: Pre-seed angel investors are usually wealthy individuals who frequently seek out significant risks and make an average pre-seed investment of $100,000 in a startup. Examples of angel investors are: Olumide Soyombo who has invested in 33 startups, including Stripe-owned Paystack, PiggyVest, TeamApt and Voltron Capital. Michael Seibel of Y Combinator and Idris Ayodeji Bello of Google for Startups are other Angel investors.
- Crowdfunding – There are more than 500 crowd funding platforms. Here small donations are made by people from all over the world to fund ideas. These are useful tools, but they heavily rely on your brand’s marketing to generate interest. Some crowd funding platforms include:
GoFundMe, CircleUp, MicroVentures, Patreon, FundAnEnterprise.Org
- Incubators – Incubators place an emphasis on offering additional business services, such as training programs, office space, and access to active investors, in addition to capital. Examples are:, Trium, Tony Elumelu Foundation, The Bulb Africa, ARM Labs, iNOVO, Greenhouse Lab, SMEbizinf and others.
- Accelerators – Accelerators focus on quick scaling for concepts with significant room for expansion. Although some accelerators provide pre-seed funding, they typically concentrate more on startups that are already growing. A few accelerators include: Wennovation hub, CcHUB, LeadPath Nigeria, StartPreneurs, Techstars, L5Lab, Founder Institute, Google for Startups, etc.
When should you start raising pre-seed funding?
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.
How much should you ask for?
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.
How to get pre-seed funding
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:
- Build your pitch deck
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.
- Make an investor list
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.