Pre-Seed vs. Seed Rounding Funding

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Ready to raise funds for your startup idea? There are lots of things to consider when you looking to raise money. I recently raise our seed round for Schoolio and hope my experience can help your fundraising.

First,

  • Where are you in your startup lifecycle? Ideation? Product development? In-market? Where you are in your lifecycle is the starting point on determining who can fund you and how much. Most pre-seed investments are too early in the lifecycle and are looking for startup capital to validate their product or market fit.
  • How much funding do you need?
  • What is the use case of the funds?

When you’re getting off the ground, one of the first things you’re probably thinking about after you’re building out your first product is how you’re going to get it out the door. You might also want to pay for advertising and marketing to get that first push of early adopters. You might need as much help as you can get with contractors or an outright team. Or you might have to quit your job to focus on a product full-time because it’s so challenging to build out.

What exactly is a pre-seed funding round?

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.

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.

  1. 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.
  2. You’ve identified a clear market opportunity. Some will be significantly more obvious than others
  3. 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.
  4. 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.

What exactly is seed funding round?

  1. 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.
  2. 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.

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.

 

For Schoolio,

  1. We had already bootstrapped to product-market fit
  2. We were seeing recurring revenue
  3. We saw growth potential with increased funding
  4. We can establish a starting valuation and figured out how much equity we were willing to trade

I hope this helps your journey – reach out via linkedin if I can help.

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