Pre-Seed vs. Seed Funding: What Every Startup Needs to Know
Learn the key differences between pre-seed and seed funding. We discuss definitions, stages, and what startups need to know about each. 5 min read updated on September 17, 2024
Key Takeaways
Pre-seed funding, sometimes called the "friends and family" round, is for the early development of a product, service, or prototype.
Seed funding is meant to scale startups that have established product-market fit and are ready to grow.
Pre-seed funding is typically smaller, ranging from $50,000 to $1,000,000, while seed rounds often raise over $3 million, depending on the industry.
Pre-seed companies are usually in the ideation or prototype stage, while seed-stage companies have validated their product and may already have customers.
Pre-seed investors are often friends, family, or early angel investors, whereas seed investors include venture capital firms or more established angel investors.
Pre-seed funding is best suited for building a minimum viable product (MVP), forming a team, or conducting market research.
Seed funding is more appropriate when the startup has found product-market fit and is ready to scale with investor backing.
What is Pre-Seed Funding?
Pre-seed funding is the earliest stage of startup finance and is sometimes referred to as the “friends and family” round. This funding helps startups move from the ideation phase to the development of a product or service.
At this stage, startups are typically developing their minimum viable product (MVP) or conducting market research, and are likely pre-revenue.
Typical Investors in Pre-Seed Funding: Investors at this stage usually include those in the founder’s personal network (e.g., friends, family) or early-stage angel investors. However, incubators, accelerators, and crowdfunding platforms are also common sources of capital at this stage.
Investments are often made via convertible notes, SAFEs (Simple Agreements for Future Equity), or in exchange for equity. SAFEs, in particular, have become a popular vehicle at this stage, as they allow investors to defer equity conversion until a later, more formal funding round.
Funding Size:
Pre-seed rounds typically raise between $50,000 and $1,000,000, though some rounds in certain industries (like biotech or deep tech) may be larger.
What is Seed Funding?
Seed funding is the first formal round of funding for a startup and is designed to help the company scale. By this point, the startup should have a validated product, possibly some early customers, and indications of market demand.
Seed Investors and Funding Rounds: Seed money is typically provided by angel investors or venture capital firms (VCs), especially those focusing on early-stage investments. By this stage, companies should have achieved some product-market fit and traction in the market.
Funding Size:
According to Crunchbase, the average seed round size in 2023 was $3.6 million, but this can vary widely depending on industry, geography, and the nature of the startup. Some seed rounds raise as little as $1 million, while others exceed $5 million, depending on market conditions and investor interest.
Key Differences Between Pre-Seed and Seed Funding
Although both pre-seed and seed funding are part of the early-stage fundraising process, they differ in several important ways:
Funding Amounts
Pre-Seed: Typically raises between $50,000 and $1,000,000, with some outliers.
Seed: Usually raises between $1 million and $5 million, with the average seed round around $3.6 million.
Business Readiness
Pre-Seed: Startups are still in the very early development stage, often working on an MVP or prototype.
Seed: Startups typically have a validated product and may already have some customers or evidence of traction in the market.
Investor Types
Pre-Seed: Investors are usually friends, family, early angel investors, and increasingly, micro VCs and incubators.
Seed: Investors often include more formal entities like venture capital firms, established angel investors, and specialized seed funds.
Business Goals
Pre-Seed: Focused on product development, building a team, and conducting early market research to validate the business idea.
Seed: Focused on scaling the business, expanding the team, refining the product, and growing the customer base.
When to Seek Pre-Seed vs. Seed Funding
The stage of your startup will determine whether you should pursue pre-seed or seed funding:
When to Seek Pre-Seed Funding:
Early Product Development: You are still working on an MVP or prototype.
Team Formation: You are hiring your first few employees or building the core team.
Market Research: You are conducting early research on product-market fit before fully launching.
When to Seek Seed Funding:
Product-Market Fit: You have a product that customers are adopting, and you’re ready to scale.
Growth: You need additional cash to expand your team, develop new features, or ramp up marketing efforts.
Investor Interest: If investors are showing interest and you're ready for a more significant capital infusion.
How to Prepare for Pre-Seed and Seed Funding
Regardless of which stage of funding you are pursuing, it’s essential to be well-prepared. Here are four steps to help you get ready to meet with potential investors:
Develop a Strong Pitch Deck
For pre-seed: Focus on the vision, the problem your product solves, and the market opportunity.
For seed: Highlight traction, revenue, and customer growth metrics to demonstrate that your startup is ready to scale.
Get Your Financials in Order
For pre-seed: You’ll want a high-level estimate of funding needs and financial projections.
For seed: Investors will expect a more detailed breakdown of how funds will be allocated, along with financial statements.
Select the Right Investors
Look for investors who understand your industry and can provide strategic guidance beyond just writing a check. Seek out those who can open doors through their networks.
Prepare for Negotiations
Be ready to discuss terms like valuation, equity stakes, and milestones. Pre-seed rounds may involve less negotiation than seed rounds, but both stages will require clear alignment with investors on terms.
Conclusion: Strategic Planning for Early-Stage Funding
Understanding the differences between pre-seed and seed funding is crucial for raising capital at the right time. Pre-seed funding is about laying the foundation—developing a product and getting initial market validation. Seed funding, on the other hand, is about scaling and driving growth.
Both stages require strategic planning, from preparing a compelling pitch deck to selecting the right investors. Seek legal advice early on to ensure your business structure, investor agreements, and funding terms are aligned with your long-term goals.
Post a job on UpCounsel to find a startup lawyer in your state who can guide you through the intricacies of early-stage funding. Lawyers on UpCounsel have an average of 14 years of experience and have worked with companies like Google, Menlo Ventures, and Airbnb.
