Starting a company takes cash. If you’re a new entrepreneur with few resources, it’s important to know what pre-seed funding is and how to get it.
What is Pre-Seed Funding?
Pre-seed funding is early-stage financial support from “angel” investors who expect a return on investment (ROI) as your company gains traction. Ideally, the process is mutually satisfying; you receive capital, and investors make a profit once your company is established.
Pre-seed funding is for companies just getting off the ground who need capital for product development or business growth acceleration. Startup businesses may go through multiple rounds of funding. Because pre-seed funding comes so early in the game, most people don’t consider it an official round. But pre-seed funding can help get a startup on its feet if you need an extra boost.
How Do You Get Pre-Seed Funding?
You can use three simple steps to get pre-seed funding.
1. Develop a specific goal. Investors want to know how you’ll use their money. Hiring a core team member or creating a finished product are examples of specific goals.
2. Find a potential investor. Often, friends or family offer pre-seed funding. People who know and love you are more likely to invest than a stranger. However, networking through LinkedIn or using specific connection services like Angel Capital Association are also good options when searching for an investor.
3. Prepare a great pitch. Explain what problem your company is solving, your creative solution, your projected revenue, key milestones, etc. You’re selling yourself here, and you want to put a lot of thought into the image you present. Make your ideas enticing. Give an investor compelling reasons why they should risk their hard-earned money on you.
Alternatives to Pre-Seed Funding
· Equity financing means an investor gives you money in exchange for company stocks. In other words, their payment is an ownership share of the company. You can ask friends, family, or fellow entrepreneurs for equity financing. Another option is holding an Initial Public Offering (IPO). This means you offer stock to public investors in exchange for cash. Before you offer an IPO, you’ll need approval from the Security and Exchanges Administration.
· Convertible debt means you borrow money from an investor to be paid back at an agreed-upon date. Later, when your company gets off the ground, you convert the debt into equity for the investor. In other words, you pay back the debt through stock. You’ll need to repay the loan with interest.
· Convertible equity is like convertible debt without the interest rate or end-date. Investors loan you money, and later, as the company gains traction, they convert their loan into equity. If you want to avoid debt, this may be a satisfying alternative.
Is Pre-Seed Funding Worth It?
Pre-seed funding can enable you to finish a product, hire crucial team members, and more. Startups need capital to thrive, and pre-seed funding is a debt-and-loan-free way to gain it. So yes. Pre-seed funding is worth it if you can find an investor. The biggest thing you should remember is that it might take time, effort, and persistence before an investor chooses your company. We caution you not to take the process lightly and weigh all your options before making a decision. Do your research and prepare thoroughly when choosing a financing route.
If you need help scaling your startup, book a call with one of our experts today.