What's the difference between pre-seed and seed funding rounds?

Pre-seed funding is the foundational investment round that helps founders transform their initial concept into a viable business through market research, prototype development, and early customer validation. Many entrepreneurs and investors might refer to this as a “friends and family” round. While companies may take on venture capital — especially if they have experience starting companies and relationships with investors — this is the first bit of money you scrape together. Sans investors proper, you’re essentially asking someone to take a massive bet and hand over part of their savings to fund your idea. And often it’s probably just that: an idea.

Still, you’re in a position to convince someone that you’ve built (or are building) something that has potential. You texted a friend a link to a test URL that does something straightforward and intuitive, and got an “It works!” reply. At this point, it’s time to start thinking long term and how you’re going to hit the first anniversary of your company.

Many times this will end up in the form of a convertible note — essentially a loan that converts into equity (generally around the time of the next funding round). So let’s walk through some of the mechanics of your funding stage.

• You’re considered pre-product, but have something to show. Right now you’re probably in the process of building out even the most minimally viable product, or you have something that’s extremely bare-bones but shows some function. 
• You've identified a clear market opportunity. Some will be significantly more obvious than others
• You’re about to make your first few hires. You’ve probably realized that you need some additional help to get your product off the ground. That might come in the form of engineering or people with operational experience. Either way, convincing someone to leave a stable job for a complete shot in the dark is going to cost you.
• Your expenses are starting to pile up. If you’re working on something technically demanding, you might be racking up a substantial AWS or Google Cloud bill in the process. 

In this case, your term sheets are probably relatively clean and straightforward. You might be raising in the early hundreds of thousands of dollars - sometimes from an early stage startup accelerator program, and you’re mostly trying to get a run rate of at least a few months to build out your product and show you’ve found some product-market fit.

The valuation you want is a good barometer as you’re going out to raise money. By this point, you’re probably courting angel investors — and potentially venture firms proper — and have some product that’s gaining some traction to show off. 

In the past decade, though, valuations have risen pretty dramatically. It was pretty normal to raise a few hundred thousand dollars at a valuation in the low millions. Seed rounds today can be in the millions of dollars raised with valuations in the tens of millions of dollars. It’s not uncommon today to see companies coming out of accelerators and raising more than $1 million in a seed funding round.

But to raise that kind of funding, you’re probably checking off a few boxes:

• You’ve identified a clear product-market fit. You aren’t at the point where you’re listing out KPIs, but you have some active user metric on your slide deck. Better yet, you might even have some revenue to show, though you’re not at the point where you have clarity into a full profit and loss (P&L) statement.
• You have a team to show off. You’ve shown you can convince people to jump on board and apply their expertise to the problem. It’s a sign of faith in the idea and company in addition to a demonstration of your recruiting capabilities.

By this point, you’re probably giving equity outright in your funding round as you’re searching for more money. And while you’re still a risky proposition, you’re dramatically less risky than a pre-product company.

Again, the long answer here is going to be a very big “It depends,” because everyone is probably going to have a different idea of whether your company is pre-seed or seed. It’ll depend on the industry, the team, the actual idea, the barrier to entry for your market, and a few dozen attributes beyond that. That being said, there are some rough points you can look at to identify the right phrasing:

All this becomes significantly more codified when you start entering your “series X” funding rounds. You’re beginning to identify and bring on professional investors and significant amounts of capital, handing out board seats, and have much more of a fiduciary duty to your investors. 

However, like any other piece of complex and sometimes unnecessary terminology within Silicon Valley, that’s all this is: terminology. You’re going out to raise money. It’s still important to identify what kind of round of financing you’re looking for when you’re getting started, but focusing on executing on your vision is much more important.

Lack of a clear business plan

A well-structured business plan is crucial for attracting investors. It serves as blueprint that outlines your company’s vision, goals, and strategies. Without a clear plan, investors may hesitate to provide you funding as they can't fully understand the business model or its potential for success.

Key components of a strong business plan include: an executive summary, market analysis, financial projections, and a clear go-to-market strategy. For example, if you fail to clearly define your target market or competitive advantage, investors may doubt in your ability to scale or break into a market.

Underestimating the importance of networking

Building strong relationships is essential for raising capital. Investors often prefer to fund founders they trust or those recommended through their network. So it's important to attend industry events, leverage online platforms like LinkedIn, and joining accelerators or incubators. Establishing connections with peers and potential investors can greatly increase visibility and credibility, making it easier to secure funding when you need it.

Ignoring investor feedback

Actively seeking and incorporating investor feedback can significantly improve a company's fundraising efforts. If you're not getting funding, try and understand what gaps you may be blind to. Investors can offer valuable insights into market trends, business strategy, and potential pitfalls. Dismissing or ignoring this feedback may not only alienate potential investors but can hurt your reputation if adverse to change. Companies that listen and adapt based on investor feedback often present more compelling cases for future rounds of funding.

Not preparing for due diligence

Due diligence is the process through which investors thoroughly evaluate a company before committing capital. This involves scrutinizing areas like financial records, team background, intellectual property, and market positioning. Failing to prepare for due diligence can slow down or even derail a deal. To ensure a smooth process, founders should maintain up-to-date financials, ensure legal compliance, and be transparent about any potential risks or challenges.

Pre-seed rounds are often used by startups to validate their idea, build an initial product, and gather early traction. These companies took advantage of pre-seed funding to develop their platforms, test their markets, and eventually scale into industry leaders.

Robinhood

The commission-free stock trading app raised its pre-seed round in 2012 through Y Combinator. Founders Vladimir Tenev and Baiju Bhatt used this funding to develop their platform aimed at democratizing finance. Robinhood's disruptive approach to stock trading helped it quickly gain traction, allowing it to secure larger funding rounds. As of October 2024, Robinhood's market capitalization is approximately $8.5 billion.

Airbnb

Airbnb, the online marketplace for lodging, raised a pre-seed round in 2008 from Y Combinator. With just $20,000, the founders launched their platform and proved their concept. Their unique approach to travel accommodations and strong user adoption set the stage for Airbnb to secure additional funding and become a global leader in hospitality. As of October 2024, Airbnb’s market cap is around $82.73 billion.

Notion

Notion, the all-in-one productivity platform, raised pre-seed funding in 2013. Founders Ivan Zhao and Simon Last used the early capital to develop their initial product combining notes, wikis, and task management. By bootstrapping for several years before raising larger rounds, Notion built a strong user base, and in 2023, it was valued at $10 billion.

Some startups manage to skip the pre-seed round entirely, opting to raise significant seed rounds early in their journey. This leap is often driven by a combination of market fit, early traction, and a solid founding team. The following companies exemplify this strategy, securing sizable seed rounds and achieving great success.

Slack

The popular workplace communication platform secured seed funding in 2013 from investors like Greylock Partners and Andreessen Horowitz. Slack’s rapid growth and strong user traction allowed them to bypass the pre-seed stage and jump straight into a larger seed round. In July 2021, Slack was acquired by Salesforce for $27.7 billion.

Pinterest

Pinterest, a visual discovery platform, raised its seed round in 2010 with backing from Andreessen Horowitz and Bessemer Venture Partners. Pinterest’s early success and user growth enabled it to skip the pre-seed phase and raise significant capital directly. As of October 2024, Pinterest’s market capitalization stands at around $22.45 billion.

Canva

The graphic design platform Canva raised its seed funding in 2013 from investors like Sequoia Capital and Matrix Partners. Canva’s innovative approach to democratizing design, combined with rapid user growth, enabled it to skip the pre-seed stage. By September 2021, Canva was valued at $40 billion.

As with any funding round, you want to look at what’s best for you. A $3 million valuation might be high for one idea or company, and terrible for another. Or you might want to err on the side of less dilution and raise less money, but people still call it a seed round. Focus on the terms that are right for you before you start worrying about what to call your funding round.

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