How to Get Pre Seed Funding | The Ultimate Startup's Guide

What is Pre-Seed Funding?

Pre-seed funding is the initial capital required to launch your startup, typically sourced from family, friends, or early-stage investors like Pitchdrive. This early backing transforms your idea into reality by enabling you to hire developers, build prototypes, conduct market research, and secure trademarks. It supports activities such as feasibility studies, creating a minimum viable product (MVP), and sometimes building a core team. As the first financial boost for entrepreneurs, pre-seed funding sets the stage for future investments, allowing your business to grow and attract more substantial seed funding if your idea proves promising.

Importance of Pre-seed Funding 

In your startup journey, pre-seed funding is the spark that brings your big idea to life. It's a key step that shapes your venture's future. This helps you dive into market research, build a prototype, or put together a killer team. These aren't small tasks—they're the backbone of your startup's story. Handling this stage with a clear plan can make future funding easier and boost your startup's reputation in the busy startup world. Getting the hang of pre-seed funding is a must for any entrepreneur.

What’s the difference between seed and pre-seed funding?

Pre-seed funding is all about turning your idea into something real. It's the stage where you’re developing your product and figuring out if there's a market for it. Once you've got that initial version of your product and some idea that people might actually want it, you move to seed funding. This is where you get the resources to grow your budding product and really push it into the market. You’re refining, tweaking, and making sure it fits perfectly with what your audience wants. So, think of pre-seed as creating something from scratch, and seed funding as taking that something and making it bloom.

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What is pre-seed funding used for?

Pre-seed funding is your startup's launchpad. It's the initial fuel to get your ideas off the ground and set the stage for future investments. Here's what startups typically do with pre-seed funding:

1. Develop a Minimum Viable Product (MVP): Turn your concept into something tangible that can be tested and improved.
2. Assemble an Initial Team: Bring together a group with the right mix of skills to develop, market, and distribute your product effectively.
3. Craft a Growth Strategy: Outline a plan for scaling your business, from marketing tactics to sales channels.
4. Establish Distribution Channels: Identify and set up the pathways to get your product into the hands of users.
5. Conduct Market Research: Analyze your target market size, opportunities, and gather feedback from potential customers to refine your product and approach.

Find Your Best Pre-Seed Funders: A Quick Guide

FFF (Friends, Family, and Fools)

Start with your inner circle. Raising funds from friends and family offers comfort and trust. However, mix personal relationships with business carefully. Clear agreements and open communication are essential to avoid conflicts.

Pre-Seed VCs

Early-stage venture capital firms, like Pitchdrive, provide more than money. They offer mentorship, industry insights, and guidance. Partnering with them can make a big difference in your startup’s success.

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Ready to fundraise? Sign up with Pitchdrive today!

Angel Investors

Angel investors are wealthy individuals looking for promising startups. They bring not only funds but also experience, connections, and advice. Attracting an angel requires a strong pitch, a solid business plan, and shared vision.

➡️ Also interesting: Pro Tips for Startups on How to Find Angel Investors

Accelerators and Incubators

Incubators help ideas grow slowly, like greenhouses. Accelerators speed up growth with intensive programs. Both offer funding, mentorship, and resources, along with a strong network.

Explore various options beyond big names like Y Combinator. Many alternatives provide similar benefits and might be a perfect fit for your startup. Top European Alternatives for Y Combinator in 2023.

Remember, each funding source can be a catalyst for your startup. Every step brings you closer to turning your vision into a reality.

➡️ Also interesting: Angel Investors vs. Venture Capital: Key Differences Explained

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How Much Do Founders Raise in Europe for Pre-Seed Funding?

In the vibrant landscape of European startups, founders typically secure round increased to €4.6 million in Q1 2024, up from €2.5 million in 2023​​. 

The capital you attract from investors hinges on several critical factors:

1. Equity Distribution: Generally, you can expect to part with 10% to 20% of your company’s equity.
2. Company Valuation: Your startup’s valuation plays a pivotal role in determining the funds you can raise.

When investors buy equity, they do so at a set price per share. So, if your company’s valuation is high, your share price goes up, meaning you can raise more money. To nail down how much you want to raise and how much equity you're giving up, you need to set a ‘pre-money valuation.’ This number is key for negotiating with investors and getting the funding you need.

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Crack the Code: Securing Pre-Seed Funding for Your Startup

Securing pre-seed funding can be one of the most challenging tasks that startup founders face. After you break the ice with startup funding, you get used to the process and learn how and where to find investors. But because pre-seed is the first time you’re raising money, it can seem like a daunting task because you don’t yet know where to start.

We understand – Pitchdrive deals with first-time founders all the time. Depending on what you need, one of the first things we do is direct you towards some of the angel groups and VCs that invest at the pre-seed stage. Securing pre-seed funding can feel like a major hurdle for first-time founders, but with the right approach, it’s definitely achievable. Here’s a streamlined guide to get you started:

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Develop a Solid Business Plan Ready to Pitch

A strong business plan is your foundation for creating a successful pitch deck. It should clearly outline what your business does, how it operates, and what sets it apart from the competition. Conduct thorough market research to understand your competitive landscape. A well-drafted business plan not only helps you understand your business better but also convinces potential investors of your venture's viability. Don’t forget to download a free business plan template to get started. When building your pitch deck, use storytelling to create a captivating narrative and practice your verbal presentation. Here are the key elements to include in your pitch deck:

Problem Statement: Clearly define the problem your business aims to solve. Highlight the pain points and why it is essential to address them.

Solution: Explain how your business provides a solution to the problem. Describe your product or service and what makes it unique.

Market Opportunity: Provide an overview of the market size and growth potential. Include data from your market research to demonstrate the demand for your solution.

Business Model: Detail how your business will make money. Include your pricing strategy, sales channels, and any partnerships that will drive revenue.

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Build a Strong Team

Ensure you have the right skills to drive your business forward. Whether it’s through hiring staff, contractors, or freelancers, having a team that complements your vision and adds value to your operations is crucial. A diverse and competent team boosts investor confidence in your business’s potential for success.

Network and Connect with Potential Investors

To secure initial funding and support for your startup, it is crucial to follow a structured approach. Start by identifying important investors, particularly focusing on angel investors, as they are more likely to invest at the pre-seed stage compared to venture capitalists. Building relationships is essential; connect with mentors and advisors who can offer valuable advice and introduce you to potential investors. Their support can be instrumental in navigating the early stages of your startup journey, providing both the guidance and connections necessary to secure initial funding and grow your venture. Additionally, prepare your term sheet by deciding on the key deal terms and being ready to present this document to investors. The term sheet summarizes the main points of the funding agreement and is essential for negotiations, helping to clearly communicate the terms to potential investors. 

👉 Explore more

‍Term Sheet Tactics: How to Navigate Pre-Seed Startup Funding

Term Sheets Guide for Startups: Everything You Need to Know

From Funding to Flourishing: A Deep Dive into the Essence of VC Coaching

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Attend Networking Events

Expand your professional network by joining entrepreneurial communities and industry-specific groups. Engage in these circles to gain valuable contacts and insights. Networking events are fertile grounds for meeting like-minded individuals and potential investors.

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Participate in Start-Up Competitions and Programs

Joining research incubators or accelerators can be a strategic move for startups seeking support, tools, and networking opportunities. These platforms often provide invaluable resources that can help transform a nascent idea into a viable business. However, it is crucial to be aware of the potential equity stakes or fees they might require in exchange for their services.

Additionally, participating in competitions and events aimed at startups, particularly those focused on pre-seed funding, can offer significant benefits. These events not only provide funding opportunities but also enhance exposure and offer validation for your business idea. Winning or even participating in such competitions can add credibility to your startup, attract potential investors, and open doors to further networking opportunities.

🚀 Need more insight into what angel investors look for in startups? Get more info here: What Should Angel Investors Look for in a Startup

How Branding Helps Your Startup Get Investors

Branding is key when you're trying to get funding for your startup. Investors aren't just putting money into your idea; they're backing a brand they think can win and connect with the market.

Building Investor Confidence

A strong brand looks professional and shows you have a clear plan, which makes investors feel secure. A well-defined mission, vision, and values show your startup's potential for growth and profit.

Crafting a Captivating Brand Story

A compelling brand story highlights the problem you're solving, the solution you offer, and your team's skills, grabbing investors' attention.

Standing Out from the Crowd

A unique brand identity makes your startup noticeable in a busy market, boosting your chances of getting funded.

Strengthening Investor Relationships

Consistent and genuine branding builds trust and credibility, which are crucial for keeping investor relationships strong and getting more funding in the future.

👉Explore more on Startup Branding: Building a Foundation for Long-Term Growth

Prepare and Practice Your Pitch

Your pitch is your chance to make a strong impression on investors. Craft a compelling story about your startup and practice delivering it confidently. Your pitch should include details on the amount of funding you need, how you plan to use it, and the potential returns for investors. The more polished your pitch, the better your chances of securing investment.

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Need some help with your pitch deck? Grab your pitch deck template.

Already have the best pitch deck? Sign up with Pitchdrive today!

1. Set a realistic valuation for your startup: Pre-seed funding often implies relinquishing some equity in your startup. A balanced, defensible valuation is crucial to strike a fair deal between the capital you raise and the equity you give up. Valuation will often be further refined and negotiated during conversations with your investor.

Where to Find Pre-seed Funding

Angel Investors vs. Venture Capitalists

‍In the startup funding arena, both angel investors and venture capitalists are key players, each bringing something unique to the table. Angel investors are usually wealthy individuals who invest their own money, driven by a personal interest in helping new businesses. They tend to offer a more flexible and personal approach, often willing to wait longer for returns.On the other hand, venture capitalists manage large funds and look for high-growth companies that can provide substantial returns. They bring a more structured process, bigger checks, and a vast network of contacts. Deciding between them depends on your startup’s current stage, how much funding you need, and what kind of relationship you're looking to build with your investors.

👉 Learn more:

Everything an angel investor ever wanted

Angel Investors vs. Venture Capital: Key Differences Explained

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‍If you're hunting for pre-seed funding, angel investors are your best bet. Make a list of potential angels to approach, and don't forget to see what sectors they typically invest in. Here are our top picks for angel investors in Europe who back companies at the pre-seed stage:

• Cambridge Angels
• EUVC
• Be Angels
• Business Angels Network Germany
• Oost NL

➡️ Also interesting: Pro Tips for Startups on How to Find Angel Investors

‍Here are some of the top VCs in Europe that are all about that pre-seed action:

• Point Nine
• Creandum
• EQT Ventures
• Earlybird
• Lakestar

Ready to dive in? These VCs are where you want to start!

‍Strategies for Effective Investor Meetings

‍Here are some key pre seed funding tips and tricks for startups diving into investor meetings:

1. Know Your Audience: Before you walk into that meeting, do your homework. Understand who you're pitching to, what they care about, and tailor your presentation to hit those notes.

2. Craft a Compelling Narrative: Investors want more than just numbers. They want a story. Paint a vivid picture of your startup’s journey, the problem you're solving, your unique solution, and the market potential.

3. Focus on Traction and Milestones: Great ideas are good, but what investors really want to see is progress. Highlight your key achievements—whether it’s user growth, revenue, partnerships, or product milestones—to show you’re on the path to success.

4. Be Transparent and Authentic: Honesty is crucial. Be upfront about your challenges and risks, and show you’ve got a plan to tackle them. Authenticity builds trust.

5. Practice, Practice, Practice: Preparation is everything. Practice your pitch until it’s smooth and anticipate potential questions so you’re ready with confident answers.

6. Listen and Learn: Investor meetings are a two-way street. Listen to their feedback and insights. It’s not just about pitching but also about learning and refining your strategy.

7. Follow Up Promptly: After the meeting, send a follow-up message. Thank them for their time, reiterate key points, and address any outstanding questions. This keeps the conversation going and shows your professionalism.

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🔥Looking for extra tips and tricks to perfect your pitch? Check our guide to boost startup success with investors

‍Mastering Due Diligence: Your Startup's Path to Funding Success

‍Due diligence is crucial in your pre-seed funding journey, where investors scrutinize your startup to minimize their risk. They evaluate your business model, team, financials, and legal compliance. Understanding this process and preparing thoroughly can significantly enhance your chances of securing funding.

‍Preparing for Due Diligence

‍Investors start with a detailed examination of your startup’s viability. This involves reviewing your business plan, market potential, and team competence. Equip yourself with a well-crafted, data-driven business plan, realistic financial forecasts, and a strong presentation of your team’s skills. Keep all information well-organized for a smooth due diligence process.For more insights, read our guide on Preparing for Due Diligence: Essential Tips for Early-Stage Startups.

‍Protecting Your Intellectual Property

‍For many startups, intellectual property (IP) is their most valuable asset. Investors need to see that your IP is protected and that you have the rights to use it. This includes patents, trademarks, copyrights, or trade secrets. Conduct an IP audit to ensure all assets are legally protected and be ready to present documentation during due diligence.For extra tips, read this article on how to safeguard your startup's IP.

‍Sealing the Deal

Negotiating Terms and Conditions

‍Getting a funding offer is exciting, but it's crucial to carefully examine the terms and conditions. Focus on the investment amount, equity share, your startup's valuation, voting rights, exit strategy, and future funding provisions. Each aspect can significantly affect your startup's path and your ownership.Legal advice is essential to understand the details and secure favorable terms. Remember, the goal isn't just to get funding but to ensure it aligns with your long-term vision.

‍Undertaking Comprehensive Investor Due Diligence

‍Due diligence goes both ways. While investors evaluate your startup, you should also research them. Learn about their investment approach, portfolio, involvement with other startups, and reputation. Talking to founders they've funded can reveal their work ethic and the value they add beyond money. This ensures you get not only financial support but also strategic guidance, mentorship, and a valuable network.

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Creating a Legal and Financial Mix‍

Closing a pre-seed funding round involves navigating legal and financial complexities. This includes drafting and reviewing investment documents, compliance checks, and finalizing financial arrangements. Legal and financial advisors are crucial to understanding each clause and ensuring regulatory compliance. Keeping updated and accessible business records is also essential. Though challenging, these steps ensure a transparent and compliant transaction, setting a strong foundation for future fundraising.

‍Final Steps: Investment Agreements

‍Finalizing investment agreements marks the end of the pre-seed fundraising process. Starting with a term sheet and followed by a detailed contract, these documents outline the investment terms, including capital, equity, investor rights, and future funding clauses. Review these documents carefully with legal counsel before signing. Once signed and funds transferred, the deal is sealed, paving the way for your startup's growth. Remember, this isn't just the end of fundraising; it's the beginning of a partnership and a shared journey toward success.

‍Managing Pre-Seed Funding: A Strategy Blueprint

Crafting Your Financial Blueprint

‍Start with a solid financial plan and budget. Outline your key financial goals, income and expenses, cash flow, and emergency funds. Align your budget with your business strategy, directing funds towards milestones like product development, customer acquisition, and market expansion. Regularly update this plan to adapt to your startup's growth. A well-crafted financial plan ensures efficient use of pre-seed funds and demonstrates financial responsibility to investors.

‍Prioritizing Expenses and Allocating Resources

‍With tight pre-seed budgets, prioritize spending and allocate resources wisely. Focus on high-growth potential areas, such as product development and customer acquisition. Align resource allocation—like hiring key team members or investing in technology—with strategic goals. Effective prioritization and allocation ensure your pre-seed funds drive your startup towards key milestones.

‍Finding and Engaging Top Advisors

‍Identify and engage advisors with expertise and experience that match your startup's needs. Look for individuals with strong industry track records or specialized skills in finance, marketing, technology, or strategy. Network, attend industry events, or reach out directly to potential advisors. Clearly communicate your expectations and the mutual benefits of the advisory relationship.

‍Leveraging Their Expertise and Network

‍Your advisors offer more than advice—they provide valuable networks and expertise. Their connections can lead to new clients, partners, or future funding. Regular meetings and updates keep them engaged and informed, allowing their insights to guide your strategic decisions and help navigate industry challenges. A strong advisory board can be a crucial catalyst for your startup’s success, offering active contributions and impactful influence on your growth journey.

‍Power Partnerships: Navigating Pre-Seed Challenges

Building Partnerships, Not Just Funding

‍Securing pre-seed funding isn’t just about the money—it's about forging partnerships that shape your startup's future. Investors offer guidance and support, helping you navigate early-stage challenges. Regular updates and open discussions strengthen these relationships, allowing you to tap into their expertise. They want you to succeed, and their insights can be crucial in achieving your goals.

‍Understanding Rejection

‍Rejections often stem from issues like a small market size, unsustainable business models, lack of product differentiation, or a team seen as unprepared. Sometimes, the market simply isn’t ready. By understanding these reasons, you can adjust your strategy, pitch, or product accordingly.

‍Learning and Improving

‍Each rejection is a chance to improve. Use feedback to pinpoint and address weaknesses in your value proposition, pitch, or business model. Whether it's enhancing your product, refining your pitch, strengthening your team, or reassessing your market approach, learning from failures can boost your funding chances and solidify your startup's foundation.

‍Tactics for Extending Your Runway

• Slash Unnecessary Costs: Identify and cut any non-essential expenses. Every dollar saved is a dollar earned.
• Delay Non-Critical Hires: Hold off on hiring for roles that aren’t immediately needed.
• Renegotiate Vendor Contracts: Push for better terms or discounts from suppliers.
• Seek Upfront Payments: Encourage customers to pay upfront to boost immediate cash flow.
• Shorten Payment Cycles: Invoice promptly and follow up to ensure quicker payments.
• Explore New Revenue Streams: Find new ways to make money, whether through new products, services, or markets.
• Monitor Cash Flow Closely: Keep a close eye on your cash flow to avoid surprises and make informed decisions.
• Optimize Inventory Levels: Don’t overstock; manage your inventory efficiently to free up cash.
• Leverage Payment Terms: Extend payment terms with your suppliers to keep cash longer.
• Consider Alternative Financing: Look into grants, loans, or investors to inject cash without immediate repayment pressures.

Read 👉 ‍

How to overcome common objections from investors during your pitch

Calculate Startup Funding Runway

4 Ways To Extend Startup Funding Runway

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‍Handling Unplanned Financial Hurdles

‍Unplanned financial hurdles, such as sudden expenses, revenue dips, or shifts in market conditions, can hit your cash flow hard and shorten your runway. To get through this, you need to be quick, adaptable, and creative. This might involve slashing costs, looking for short-term financing, or shifting your business model to meet new market demands. Having an emergency fund and a backup plan can also help. The aim isn’t just to get through these tough times, but to come out stronger and more resilient.

Curious about 👉 what are the main KPIs that early startups should track?‍‍

Quick Recap

‍We've covered what pre-seed funding is, how it differs from seed and Series A rounds, and how to prepare for it. We discussed pitching to investors, handling proposals, finalizing agreements, managing funds, building an advisory board, tracking key metrics, and overcoming challenges by leveraging investor relationships.

‍Stay Persistent and Resilient

‍Expect rejections and hurdles, but stay determined. Learn from setbacks, refine your strategy, and keep going. Your persistence will pay off.

‍Final Advice

‍By understanding pre-seed funding and following a structured approach, you can secure the initial capital to bring your idea to life. This first step is crucial for attracting more investments and building a strong foundation for long-term success. Want to know more? Check out the rest of the Academy's content in the Academy

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