What Are Pre-Seed and Seed Funding? A Guide for Startups

There’s a fork in the road at the beginning of every startup founder’s journey.

Will you travel the path of the bootstrapped entrepreneur? Or will you take the venture-backed road to high growth?

Bootstrapping and venture funding each have advantages and disadvantages. But if you’re taking the venture-backed road, you need to get familiar with how to maneuver your business through various funding stages.

When all you have is a concept you feel will make for a unique and high-value business, it’s time to raise pre-seed and seed capital. Here’s what you should know about the two earliest of funding rounds before starting down the fundraising path.

What Is Pre-Seed Funding?

Pre-seed stage funding is the earliest stage of funding of capital your business will ever raise. However, raising pre-seed money is generally not considered part of the “official” funding rounds for early-stage startups.

In many cases, pre-seed funding is called the friends and family round because your capital likely won’t come from institutional investors (although some firms like Village Global do invest in pre-seed rounds). Instead, you’ll put money in as the founder along with your closest supporters and any angel investors you’re able to connect with. Unlike later rounds, there isn’t always an expectation of equity in exchange for the investment at this stage.

The most important aspect of pre-seed funding is that you have an idea you believe in enough to dive head-first into entrepreneurship. Even if you raise pre-seed funding from angels or close family, the majority of the initial investment will come from you and your co-founders — both in terms of money and your time.

Are you ready to go all in and officially start your business? Then you’re ready to talk to pre-seed investors. And in the world of SaaS where the initial setup costs are so low, you likely don’t need to raise a massive amount, and the round could close quickly.

What Is Seed Funding?

Seed stage funding is the first true round of equity financing for a startup. It literally provides the capital necessary to plant the initial seed of your business idea so it can grow into the unicorn you envision.

Whereas pre-seed funding is more about establishing the business as an official entity and getting yourself prepared for the startup journey, seed-stage capital takes you to the next level. You’ll use this money to fund any necessary market research and hire your first engineers (if you aren’t technical yourself) so you can get a proof of concept (POC) in place.

While the question of “when to raise money” gets more complicated in later stages of the startup lifecycle, it’s fairly simple at the seed stage — if you can raise money, you likely should raise money (if the venture-backed path is what you’re after).

You likely don’t have a minimum viable product (MVP) at this stage, let alone revenue. So, the only thing you really need to raise a seed round is the ability to weave a compelling narrative about your business idea and growth potential for would-be investors.

Major Seed-Stage Investors

There are three primary categories of potential investors at the seed stage — individual angel investors, traditional early-stage venture capital firms, and startup accelerators.

Angel investors and early-stage venture capitalists work the same way at this stage as they do at any other stage. You’re trading equity for capital based on an agreed-upon valuation and other terms. Traditional VC firms active in this early stage of funding include Village Global, XYZ Venture Capital, Google Ventures, and First Round Capital.

But startup accelerators and incubators work a bit differently. The most well-known examples are Y Combinator, 500 Startups, and TechStars. These are programs that you apply to be part of. And, if accepted, you give up 5% to 10% equity in your company for an opportunity to start building your business within the accelerator. These programs can give you access to:

• A vast network of potential investors and mentors with experience in your industry
• Educational programs designed to help you overcome the most challenging aspects of building a startup
• Coaching on the best ways to pitch your business as you move to the next funding rounds
• Talent pools and referrals for early hires you may never have reached before

Alumni of highly-regarded startup accelerators rave about their value. However, that doesn’t mean you should try to join an accelerator at all costs. There are hundreds of options, and choosing the wrong one — or one that isn’t well known — could end up being a much more expensive equity investment than if you raised a more traditional seed funding round.

The Current State of Seed-Round Funding in 2023

Because seed funding is so early in a startup’s journey, activity at this stage typically lags behind turbulence in the public markets. So, when the market downturn hit in mid-2022, early-stage funding didn’t experience a sharp decline like other stages of venture financing. But as of Q1 2023, the trend of decreasing seed funding has continued.

According to Crunchbase data, seed funding is down 45% year over year and at its lowest point since Q4 2020.

But still, there were nearly 1,600 deals made for $3.1 billion. Compared to Series C funding which saw just 55 total deals in Q1 2023, it’s clear that there’s no shortage of entrepreneurial spirit in the startup ecosystem.

While raising seed capital may be a bit more competitive than it was at the peak of venture activity in early 2022, investors are still active at this stage. The money is there if you have a compelling pitch.

Tips to Secure Pre-Seed and Seed Funding

At the pre-seed and seed rounds of funding, investors are backing the founding team and the business idea.

There are no financials to review. No tangible results to lean on when making an investment decision. That means your ability to secure funding comes down to how well you can sell the vision.

For some founders, that’s the easy part of the job. For others, it’s not where their natural talent lies. In either case, the following tips can help you make the pitch and secure funding that takes you to the next level of growth.

Keep the Pitch Clear and Concise

This may well ring true at any stage of funding, but it’s especially true in the early stages where your company is barely off the ground.

Early-stage investors are bombarded with startup ideas every second of the day. You won’t stand out by over-explaining yourself. You’ll get their attention by having a tight narrative for the value your business will provide to a particular audience.

Save the deep dives into future product development for later conversations. In the initial pitch, stick to the brief elevator pitch and the growth opportunity. Then, let the investors ask their questions.

Be Specific About What Your Business Needs

It’s no secret when you’re connecting with investors — you need capital to grow your business. But when you pitch investors, you need to be much more specific in that.

Wrap up any investor pitch with a quick overview of:

• The specific amount of money you’re looking to raise in the round
• The primary way you’ll deploy that capital
• What strategic help you need from investors

Be Intentional About Who You Add to the Cap Table

While the primary goal is simply to secure funding for your company, you should be selective about who you’re adding to the cap table even in these early stages. You’ll have an easier time securing funding if you’re connecting with investors who truly understand your space and value proposition.

When Mosaic was raising its earliest rounds, our founders assembled what we call our CFO Advisory Council — a small group of angel investors who represent the very best of the industry we’re trying to serve. This included CFOs and former CFOs from HubSpot, NetSuite, Palantir, Shopify, Zendesk, and more.

These angels deeply understood our mission and provided a significant level of credibility for our brand in the early stages of our lifecycle. They weren’t our only means of securing funding, but they proved invaluable to securing further capital and building out our initial customer base.

Lean on Personal Experience Wherever Possible

Personal experience often makes for the best stories, which is why the founding team’s background often plays a critical role in securing early-stage funding. How well can you explain why you and your co-founders are the right people to solve the specific problem you’re trying to tackle?

In Mosaic’s case, the three co-founders are all former finance leaders who have experienced the pain of implementing and using legacy FP&A platforms. They leaned on that experience to explain to investors that they’d solved the market’s problems before on a small scale — and that they were setting out to productize the vision and solve it on a large scale.

Wrap your personal experiences around an explanation of what your MVP will look like, what kinds of companies you’ll target as the first potential customers, and why it’s the right path.