What is pre-seed funding and how does it work?

August 3, 2022
What is pre-seed funding and how does it work?

Pre-seed funding is the earliest in the funding process, slotting in before the seed and series A funding stages. 

Traditionally, pre-seed was the ‘friends and family’ round, referring to founders who would approach people known to them for the capital to get their idea up and running. 

Depending on who you ask, the term pre-seed itself emerged only between 2013 and 2017. Regardless of its origin, pre-seed funding is here to stay. 

We’ve seen a considerable shift in the last five years. VC firms are now more open to investing earlier in a startup’s life cycle. This is built on the understanding that, in order to gain access and build relationships with founders and the products they build earlier. Even if the product in question is still being developed.

This increased willingness from institutional investors means that the expectations from founders have also evolved. 

When should you pitch for pre-seed funding?

While there is no single, golden framework to help you decide if your business is ready to raise a pre-seed round - there are a few key indicators to keep in mind.

  • Your minimum viable product has early signs of traction, and needs capital for continued development.
  • You’ve identified a clear opportunity in the market, and can show potential for product-market fit.
  • You have a strong founding team - and now need to hire for critical roles to continue growing. 

Reviewing the applications for the Holi ‘22 cohort reveals interesting insights along these lines. 

As they apply, we ask our founders which stage they believe their business has reached, with options from idea stage to already funded. More than three-quarters of the applicants described themselves as having progressed beyond the idea stage.

Actively generating revenue is an excellent bonus indicator. At the pre-seed stage, most startups have a small to nonexistent customer base. Evidence that you have customers willing to pay for your product is a strong signal to investors. Returning to our applicant pool once again, we find that 57% of all applicants have an existing customer base with another 39% indicating that their company is revenue-ready.

At this point, you’ve likely noticed a common thread across all these indicators:

Pre-seed funding is used to either develop a product, or to grow the team developing it. 

For Anisha and Anusha at Jify, preparation for pre-seed funding meant solidifying their business relationships before building their product. Jify is a B2B2C business focused on building long term financial wellness for the employed workforce. It does this by offering individuals access to their earned wages at any time. 

As Anisha puts it, the team wanted to ensure they had their corporate customers and partnerships with NBFCs as a first priority, instead of building a product and then trying to figure things out. 

The two founders were certain that they would invest in building their product, with or without external funding. Once funding was secured, tech hires were the first priority, followed closely by the business team once again.

Pre-seed Funding with Atoms

Funding a pre-seed stage startup can typically happen in two ways

The first is called a priced round, and is fairly straightforward. You raise money from an investor after mutually agreeing on your company’s valuation. The investor then writes a cheque in exchange for a percentage stake in the company. 

Atoms uses the other approach, commonly known as a convertible. Here, you receive the $250,000 without immediately giving away any equity. This money is used to build your business and converts to equity only after you raise your next round of funding. 

With a convertible, you avoid worrying about valuation early in your business’ life cycle as well as avoid giving out too much equity too early. We’ve written more about how an uncapped convertible benefits founders here. 

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