Pre-seed funding, every founder and entrepreneur’s starting point is the earliest stage of raising money to transform any idea into an actual business.
Growing a new venture requires more money than most startups have.
Funding provides founders and businesses a chance to prove the viability of their product or service and it helps them reach a point where they have enough traction to scale on their own.
At an early stage, businesses will need to test integrations and tools, conduct user research, engage providers, build a comprehensive team of co-founders, pay salaries, market and develop the product, and many other things.
So, without external funding, it would be very difficult for most startups to sustain their operations, let alone grow them, become autonomous, and gain market share.
But for this not to happen, you should understand the several types of pre-seed funding and when/how to use them.
The key is to identify which type of funding would work best for your startup, according to your business model, your goals, and your industry.
While venture capital receives the most publicity when it comes to startup pre-seed funding, it is just one of six top sources of startup capital.
Let’s start with the most popular type: Venture Capital.
Venture capital is a type of private equity investment where investors fund startups in exchange for an ownership stake in the business. These investments are usually considered high-risk investments, but they also have greater potential for exponential growth.
The second type of pre-seed funding is Bootstrapping.
Bootstrapping a startup means launching without external financial support. In other words, fueling growth internally from cash flow produced by the business itself.
Bootstrappers may rely on sweat equity, customer funding, personal debt, or personal savings to provide initial capital. It might be an effective model for some new companies; however, bootstrappers may face cash flow issues and high levels of personal stress.
The Third type is grants which is an alternative to venture capital for entrepreneurs who do not wish to give up equity.
Startups can receive funds from their respective governments or industry-specific organizations. These entities offer grants to help in economic growth and nourishing their industries.
To find the right organization, research institutions within your particular industry, and look for grants with requirements and expectations you can achieve.
The “Friends, family & fools” or the 3 Fs is the fourth type of pre-seed funding.
When a startup doesn't have tangible proof to claim success and return on investment, yet it has a strong concept and presents a unique opportunity, then family members, relatives, and/or close friends are typically the first investors or stakeholders. In this case, the “fools” are individual investors with little experience in venture funding.
So if you have what it takes to start and grow a new business, then why not give it a shot and ask for support from someone who believes in you?
The fifth type is pre-seed accelerator programs.
These programs provide founders with training in lean startup practices, and support in developing a scalable and repeatable business model.
These kinds of programs compel founders to prove their hypotheses through customer discovery and early customer traction while building their product and showing some product-market fit.
The sixth and final type of pre-seed funding is crowdfunding.
This is a very different approach to financing. Crowdfunding is a way of raising money in small amounts from a large number of individuals usually via the internet.
Crowdfunding can be divided into four categories, which are equity-based, reward-based, debt-based, and donation.
The most relevant for the pre-seed round is reward-based crowd funding, as it does not necessarily require having an established business or product.
It allows investors to contribute to your venture in return for non-financial benefits, yet they might expect a reward in form of goods or services at a later stage.
Check our videos on the hub to learn more about the several types of crowdfunding, building a winning crowdfunding strategy, and more!