Startup Valuation: Everything You Need to Know About Pre-Seed Funding for Your Startup
A startup requires only one thing: capital. Without capital, a startup is likely to fail before bringing a product to market. Most entrepreneur startup founders need capital in the form of funding to start their business. This funding is done in several stages, but much of the terminology may not be clear to new founders.
Pre-seed funding is considered the first step in financing by entrepreneurs and securing pre-seed funding is considered a big bet on a great business idea.
What is Pre-Seed Funding?
Pre-seed financing, also known as “family and friends” funding, is the first step towards obtaining sufficient capital to develop a product. The funding is intended to help build a team, launch a proof of concept, or even develop an MVP (minimum viable product). This usually happens within the first 12 months of the startup’s existence, for amounts ranging from $100,000 to $700,000.
Pre-seed capital is usually in the form of a convertible security, usually starting with 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.
Since pre-seed funding involves betting on an idea because the product may never even hit the market, it’s usually harder to get. It is best suited for high start-up cost industries. For example, a technology company developing hardware or a software company developing an application.
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Tech companies that have secured pre-seed funding
This year alone, dozens of tech companies in Nigeria announced they had secured their pre-seed funds:
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- Norebase secured $1 million in pre-seed funding
- yarpathe Nigeria-based fintech company, closed a $500,000 pre-seed round funded by Yolo Investments and a strategic angel investor.
- from Nigeria Yeah! $1.5 million pre-seed funding
- Based in Lagos Klump secured pre-seed funding of $780,000
- Starting Blockchain Payments Bitmama got a $2 million pre-seed round
- now now raises $13 million in seed funding to expand services across Africa.
Types of pre-seed financing
Several methods exist to secure capital during the pre-seed phase. The pre-seed cycle begins with determining what funding options exist for startups looking to turn an idea into a viable business.
- Family and friends: This is the source of funding that pre-seed startups choose most often. Here, most entrepreneurs invest their own money and seek help from relatives
- Venture capitalist: Investing in startups at the very beginning of their development is a specialty of certain venture capitalists who are generally 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 typically high net worth individuals who frequently seek significant risk 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 Paystack, PiggyVest, TeamApt and Voltron Capital, owned by Stripe. Michael Seibel of Y Combinator and Idris Ayodeji Bello of Google for Startups are other angel investors.
- Crowdfunding – There are more than 500 crowdfunding platforms. Here, small donations are made by people around the world to fund ideas. These are useful tools, but they rely heavily on marketing your brand to generate interest. Some crowdfunding platforms include:
GoFundMe, CircleUp, MicroVentures, Patreon, FundAnEnterprise.Org
- Incubators – Incubators focus 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 rapid scaling for concepts with significant room for expansion. Although some accelerators provide pre-seed funding, they generally focus 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 funds?
The phrase “right place, right time” is crucial knowledge for any business owner. You should be aware of your startup’s willingness to seek funding. Remember that every year investors interact with thousands of founders, so being underprepared will lead to quick rejection.
You also need to be more persuasive than other startups in order to raise funds. So before you meet with pre-seed investors, you should have assembled a team, built at least a prototype, got some good feedback from people, and modeled what your earnings will look like.
How much should you ask?
Pre-seed funding rounds typically raise significantly less money than seed and Series A funding rounds. Startups that receive pre-seed funding typically receive around $500,000. The amount you are entitled to may vary depending on the investment route.
The most crucial guideline to keep 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 request what you need to become profitable or to last until the next funding cycle.
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. Be careful as knowledgeable investors will evaluate your proposal to determine if the amount you are asking for is reasonable.
How to get pre-seed funding
Pre-seed funding agreements and seed funding agreements share many similarities. The difference 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 if your idea has traction in the market, unlike a seed company. Here are the steps needed to prepare for pre-seed funding:
Pitch decks provide investors with all the information they need about your startup, the product, the market, and your short- and long-term financial projections.
Investors will learn about the product and the problem it solves in a pre-seed pitch deck that should contain details about you, the owner, and your business history.
Even if you can’t demonstrate current traction in terms of market research, you can still achieve it. In the absence of market experience, focus groups are essential at this stage to demonstrate customer interest.
The ideal pitch deck will consist of 10 to 12 slides, each highlighting a different concept.
Search for potential investors using the following main characteristics:
What type of investor are you looking for? Some startups need funding, while others also need expertise and networking contacts.
You should therefore take into account the experience of the investors, the financing capacities, the expertise and the track record of the investors.