A Guide to Pre Seed Funding for Early Stage Startups

Starting a business comes with a lot of challenges, and one of the biggest challenges is fundraising. Every new endeavor needs money to get off the ground. At these early stages of the entrepreneurial journey, pre-seed funding can be an option.

This article is a guide to pre-seed funding for early stage startup founders. In it, you'll learn:

• What is Pre-Seed Funding?
• Who provides pre seed funding?
• Where to find pre-seed investors?
• How much pre-seed funding do you need?
• What is the average size of a pre seed funding round?
• How much equity should you give for pre-seed funding?
• How long should pre-seed funding last?

and more!

But before we dive in, it's worth noting that Chisos Capital invests in entrepreneurs, athletes, and creators as early as Day 1. If you're looking for capital to pursue your dream, apply for funding from Chisos today.

What is pre-seed funding?

Pre-seed funding refers to the very first investment that a startup receives from investors. Since funding rounds are typically raised consecutively, the pre-seed round usually comes before a seed round, or the Series A.

Pre-seed funding is capital raised at the idea stage; there may be a clickable prototype at this stage, or early version of the product. At this stage, the business is unlikely to be generating revenue yet. To reflect this reality, pre-seed funding is sometimes referred to as the “acorn stage” or “pre-revenue funding.”

At the pre seed stage, investors are probably not yet backing a product or service. Instead, they’re evaluating the strength of your idea, and their belief in the founder, when determining whether to invest. 

Pre-seed funding is used to cover early startup expenses such as market research, product development, and legal and operational fees.

Check out this blog to learn more about different types of startup funding, beyond just pre-seed.

Who provides pre seed funding?

Pre seed funding is usually raised by founders from their own savings, family and friends, or angel investors. There are some funds (like Chisos) that invest at the pre-seed stage. Below, we’ll summarize some of the most common sources of pre-seed funding:

• Personal savings: The founder’s savings, selling assets, or taking a loan.
• Family and friends: Founder’s acquaintances or family members that provide personal loans or equity investment.
• Angel Investors: Individuals that invest their own money into startups in exchange for equity.
• Incubators and accelerators: Organizations that offer funding, strategic guidance, mentorship, and office space in exchange for equity.
• Crowdfunding: Raising money from a large number of individuals through online platforms such as Kickstarter, IndieGoGo or GoFundMe.
• Grants: Government and non-profit organizations exist that may provide grant funding at the pre-seed stages. Finding and applying for grants can be time-consuming, but the reward is capital that doesn’t cost equity and doesn’t need to be repaid.
• Lenders: Some small banks and non-bank lenders provide a business loan at the earliest stages.

Where to find pre-seed investors?

Finding pre seed investors can sometimes feel like looking for a needle in a haystack, but with the right strategies and resources, it can be much easier. There are several avenues you can explore:

1. Angel Investor Networks: Angel investors are individuals who provide capital for startups in exchange for equity or convertible debt. They can often be found in organized networks. Platforms AngelList and communities like Angels + Entrepreneurs can help connect startups with investors.
2. Startup Accelerators and Incubators: These types of organizations offer mentorship, resources, and often capital in exchange for equity. Well-known accelerators like Y Combinator or Techstars have a pre seed funding round as part of their program.
3. Online Funding Platforms: Websites like Kickstarter and GoFundMe allow startups to raise capital through crowdfunding. While these platforms may not bring in large amounts of capital, they can help businesses get off the ground.
4. Venture Capital Firms & Other Funds: Some funds like Chisos Capital invest at the pre-seed stage. Such firms often bring more than just money to the table, offering business expertise and industry connections as well.

Remember, finding the right investor isn't just about the money. It's about finding a partner who believes in your vision and can help guide your startup to success.

Looking for more guidance? We recently published this blog all about how to find investors for your startup.

How much pre-seed funding do you need?

It can be really difficult to know how much capital to raise at the pre-seed stage - and for good reason! The amount of capital you'll need at the earliest stages varies based on your business, industry, product and/or service, and even location.

A good way to estimate is to make a detailed budget plan of your early stage expenses. Look at your cash flow projections and determine how much money you need to reach a sustainable level.

What is the average size of a pre seed funding round?

Data suggests that the average size of a pre-seed raise is typically $50,000 to $250,000. That said, the amount you raise will be dependent on your business.

How much equity should you give for pre-seed funding?

The amount of equity to offer to investors in exchange for pre-seed funding can also differ. There’s a lot of nuance here; that said, early-stage investors will likely expect between 5-20% equity in a company. For example, imagine you’re a first-time founder building a venture-backable company. If you’re raising $250K pre-revenue, you can expect to give up 5-10% equity. 

To determine how much equity to grant, research the average seed round investments in your industry. Then, calculate how much equity the investors will hold, post pre-seed funding round.

How long should pre-seed funding last?

In the past, experts recommended that pre-seed funding should last between 6-12 months. That said, it's more difficult to raise in the current financial environment, so try to extend that runway.

That being said, your capital will likely need to last long enough for you to build your product or service, and begin testing how your market responds. Don't forget that it also needs to last long enough to land the next round of funding or revenue. It’s essential to have cash reserves at the end of this period to maintain operations, in case the next funding round is delayed.

Pre-seed funding is vital to startups in the early stages of their journey.

If you're looking for pre-seed funding, Chisos Capital invests in early-stage entrepreneurs, athletes, and creators across a range of disciplines. We're more than just a capital provider: we also work with our portfolio to provide community, connections, and expert guidance.

Learn more and apply for pre-seed funding today.

https://www.chisos.io/application