Pre-seed funding: Meaning and how to get it
Startups often go through a series of funding stages before engaging in an initial public offer (IPO). Funding is often a major business concern for startups in Nigeria, and indeed in almost every company globally. The funds assist startups in kick-starting the process of offering their services to the general public while maintaining profits from the business in the long and short run.
The pre-seed funding is often the most overlooked funding stage, in today’s financial space, investors as well as shareholders tend to ignore this vital stage of funding and lay emphasis on the other series. Nonetheless, the importance of pre-seed funding cannot be overemphasised; this article offers insight into the basic knowledge there is to know about pre-seed funding.
What is pre-seed funding?
The pre-seed funding is the first step on the funding pyramid that offers the business the requirements to kickstart the business. In this kind of funding, investors offer the business capital to engage in various initial steps that would see the business blossom into offering its services to the general public.
The pre-seed funding is the earliest form of funding a business would meet when starting. Most business owners are often unaware of the existence of this funding, same as are investors often sceptical of making investments to businesses in the pre-seed funding stage, these shortfalls have caused the existence and significance of the pre-seed funding round to be overlooked, with major corporations as well as professionals often beginning funding rounds with the seed funding rather than the pre-seed. The pre-seed funding can cause varying delays in the startup’s business model and can eventually lead to a collapse of the business.
Understanding pre-seed funding
The pre-seed funding is a funding round and is different from the bootstrapping or angel investing styles. The pre-seed funding comes into the discussion when the business is in existence but the prototype or the vital tools needed to start the business are yet to be acquired. For instance, if Bummy Limited is registered with the corporate affairs commission (CAC) to engage in dry cleaning services. Nonetheless, Bummy Limited doesn’t possess the necessary equipment for dry cleaning which include washing machines, dryers, a space for laundry, and others. Bummy Ltd seeks support from an investor to acquire the said equipment to begin the business, such funding to Bummy Ltd is the pre-seed funding.
From the above example of Bummy Ltd, if Bummy Ltd was not in existence such would not classify as a pre-seed funding stage; the bootstrapping or the angel investing could suffice.
Basic due diligence in pre-seed funding
Often business owners believe the pre-seed funding stage lacks due diligence, this belief is fostered by the idea that in the pre-seed funding, the business is yet to commence business, hence has nothing to show as traction to investors willing to make a pre-seed funding. Nonetheless, this belief is wrong. Below is some vital due diligence most investors look for in a business before making the pre-seed funding.
- A minimum viable product: the minimum viable product or MVP is the basic identification of the business’s product or services. Every business intends to solve a problem through its products, the MVP provides insight into the product or services a business intends to offer to the general public. The MVP must be clear, precise and must be able to adapt to the market. For instance, using the Bummy Ltd example, the MVP would be to offer dry cleaning services to the public. The MVP is a vital aspect of due diligence in the pre-seed funding because if the MVP cannot be understood by the investors, there is a likely tendency that the pre-seed investment may fail.
- Has a strong team: ordinarily most investors seeking to make pre-seed funding would want to understand the value the people in management bring to the table. Startup companies must be intentional when gathering their management list and not just draw family and friends into the management of the company. For instance, using the Bummy Ltd example, investors would be keen on meeting professional dry cleaners as persons in the management of the company.
- Has a target market: companies seeking pre-seed funding must provide clear details as to who they would be serving. The essence of the business and whose problem the business intends to solve is highly vital. Business owners must be able to identify a target market they intend to serve and state how they would be serving the market in the long and short run. For instance, still, on the Bummy Ltd example, investors seeking to make pre-seed funding Bummy Ltd would want to clearly understand the various persons that make up the target market for the dry cleaning business.
Difference between pre-seed funding and the seed funding
The pre-seed funding is very similar to the seed funding, nonetheless, there are obvious differences. The major difference is the point at which the business is in offering its services, for pre-seed funding to develop into seed funding the business must show tractions of a customer base using the product or service and continued progress on a small scale. At the seed funding stage, all the necessary equipment to start the business has been put in place and the business already draws in income.
The product the business intends to sell has also been developed and the business model of the company at a seed funding stage points to growth rather than acquiring assets to startup the business.
How to get pre-seed funding
1. Have a clear idea of your service
The service intended to be delivered to the business must be clear and precise to the business owner. Investors would ordinarily invest in companies that have a defined picture of their product or service.
2. Create a business model
The business model is a vital tool to explain to investors all there is to know about the prospects of the business as well as the target the business aims to get in the future to come.
3. Pitch to investors
Start with people in your circle. The chances of an investor offering your business pre-seed funding are very unlikely. Nonetheless, business owners can leverage their family, friends and close associates for funding. Also, Angel investors tend to invest at this stage too.
Every business at a point must face the reality of fundraising, this arduous task has seen businesses fall from the top to zero. The pre-seed financing is arguably the most important form of funding to a business and also is the longest and most difficult to raise; nonetheless, once the pre-seed funding is raised other forms of funding can easily be raised by the business in the latter future.
Frequently Asked Questions
The pre-seed funding offers the business the opportunity to scale through the market and start offering its services to the public.
Yes, most often investors ask for ownership stakes in the business before offering the pre-funding.
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