What to Expect from Pre-Seed Funding in 2022

Last updated: September 19, 2022

Starting your own company begins with a great idea and requires a series of funding through the stages of development as you grow. It's an exciting yet daunting adventure as you work hard to transform your dream company into a reality. There's a lot to consider in the early stages of development, and raising capital through pre-seed funding is one of the first critical steps you need to take.

There are several funding stages, and you likely will have many questions regarding your first round, such as what exactly a pre-seed funding round is. How much do you need? Where do you go to get investors? This article will guide you through everything you can expect from pre-seed funding in 2022.

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    What is Pre-Seed Funding?

    Pre-seed funding for startups is the earliest stage of funding, providing the basic financial needs for a startup. These funds are essential to help a startup in the early stages of development to begin production of its products or services. Often the source of funding is provided by the people closest to the founder, their friends, and family.

    Pre-seed funding is gathering enough initial cash flow to launch the business during the initial setup to get the startup to the next round of seed funding for startups. Investors during the seed round have high standards and want to see a viable startup with some market promise.

    It takes time, money, and effort to create a company that will appeal to investors. While friends and family are a great place to start for the initial investment in an idea during the early stages, other investors can provide pre-seed funding for your startup.

    When is the Right Time to Get Pre-Seed Funding?

    You want to understand your startup and what it's ready to start looking for financial backing. If you're unprepared, you'll likely end up getting rejected by potential investors. Investors meet thousands of founders every year, and beyond needing to persuade investors, you need to have a good sense of your readiness. Some indicators you're ready to start finding pre-seed funding include:

    Market Research – You've done market research that shows your product or service is a good fit for your chosen market. In the first rounds of funding, you will have done the research but have yet to test your product.

    Need a Team – When your workload for your startup has increased, and you need to hire a team to take on some of the work or hire the right expertise for certain aspects, it's a good sign you're ready for pre-seed funding.

    Built a Prototype – Investors will want to see a product demo before investing. You should at least have a prototype prepared before acquiring pre-seed funding.

    Early Positive Feedback – If you've shown your product to people to gain feedback and most of the feedback is positive, it's a good sign your startup has growth potential.

    Although pre-seed funding is the earliest stage, investors will want to invest in more than just the idea. They need to see that your startup has the potential to grow. Show potential investors that you have the numbers and positive feedback to help boost your chances of securing pre-seed round funding.

    Different Pre-Seed Funding Investors

    There are a lot of resources you can use to secure pre-seed funding for your startup. If you don't qualify for a small business loan, here is a list of ideas of where to get the money to get your startup off the ground.

    Your Own Money – If you have the funds available, you can use the money to build your startup in this initial phase of your company. It can go a long way in future rounds of funding with other investors to see that you believe in your startup enough to put skin in the game.

    Accelerators or Incubators – Accelerators and Incubators are a great place to start with the pre-seed funding. You can access resources, information, and networking opportunities through an enriched entrepreneurial environment. You'll need to apply and be accepted to get funding through this channel.

    Pre-Seed and Seed Investment Venture Capital Firms - VC firms are a group of investors who have pooled money to offer more significant pre-seed investments.

    Angel Investors – Angel investors are wealthy individuals that choose to invest in startups that may align with their interests and experience. More often than not, Angel investors are former entrepreneurs and can offer guidance and networking opportunities.

    Crowdfunding – There are a lot of crowdfunding platforms to help you advertise your idea and get ordinary people around the world to invest in your idea in exchange for a perk once it's released. This avenue requires you to market your startup strategically.

    Family and Friends – Friends and family is the most popular funding option for pre-seed startups.

    What Does Pre-Seed Funding Do for Startups?

    Pre-seed funding helps take a founder's ideas and transform them into a fully functional startup. The funding helps get them to the next round of funding to further the growth of their business. Startups use the funds to help develop a team to help execute the company's plan, research the market and demand for the product or service, and begin to test and launch using critical feedback during the initial stages.

    The funding helps provide financial backing to support a founder as they potentially quit their job to focus on the startup and help cover operating costs, hire a team, and pay for essential materials and equipment to help in product development.

    How to Get Pre-Seed Funding

    Securing the pre-seed funding to get your startup off the grown requires you to craft a compelling story that will convince potential investors to invest in your project. You won't have any traction to back up your startup during this round, so you need to work hard to show that your product or service can impact your market. There are a few crucial steps you need to focus on when attempting to get pre-seed funding.

    Build a Pitch Deck – Your pitch deck will evolve as your startup grows and changes shape but building a pitch deck is essential to raising capital at this early stage. A pitch deck is a carefully crafted presentation that will tell investors about you and your startup, the product or service, the research on the market and need, and potential financial projections.

    Your market research will be limited at this stage because the product hasn't been tested but putting the research in can show investors you are dedicated to making the right moves to gain traction and earn a profit. Include information about long-term projections and your goals but be realistic. Keep your pitch deck simple and short, as you usually will only get a small amount of time to pitch your idea during a meeting with investors.

    Research Investors – Many investors will not invest in the pre-seed stages of a startup, and you want to research investors that will ensure you don't waste your valuable time. Use connections, networks, and online resources to search for investors interested in investing during the pre-seed round.

    Think about the type of investor you want to back your startup. Each type of investor has its own benefits, such as connections and expertise in your industry. Choose investors that match the type of funding you need for your startup. For each investor you research, you'll want to look at their background, experience with pre-seed startups, and experience in your market and industry. Try to find an investor that matches your startup and may seem like a good fit to help go beyond the funding stages and help your startup grow.

    Present to Investors – Investors want to meet to get to know your startup before deciding to invest. Even if the potential investor is your friends and family, it's a good idea to have a meeting to highlight your startup and show the value it can provide to your chosen market. Before you meet with investors:

    1. Practice your presentation to ensure you nail it on the first go and can confidently present your pitch deck.
    2. Keep your presentation simple and concise.
    3. Be genuine and ambitious but try to focus on realistic figures and numbers.

    Negotiate Terms – Investors invest in pre-seed startups in exchange for either an equity stake or a percentage of profit over the initial investment amount. You don't want to give away too much at the early stages, so you want to carefully consider negotiations without taking the first offer presented on the table. If the offer is unsuitable, don't be afraid to walk away. You never want to partner with an investor who doesn't have the startup's best interests in mind which could lead to potential misunderstandings down the road.

    Pre-seed funding helps build the foundation of your startup. This stage of development is critical and has to be planned and executed with precision to optimize the chances of your success in gaining funding. While it can be a challenge, putting in the work for your preparation for your presentation and strategizing your approach can help you ensure you can successfully gain pre-seed funding.

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