If you want to know all about pre seed funding, this comprehensive article is going to prove very helpful.
It reveals a lot about pre seed funding, what it is and very powerful tips to help you, regardless of what stage you are in the process of looking for funding.
Why Pre-Seed Funding?
A trip to the farming community would readily reveal the importance of pre-seeding.
Before the planting can occur, the ground needs to be prepared.
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As part of that preparation, the soil is tested and any needed nutrients required to make the soil more fertile added, and the ground is tilled.
Therefore, just as it is important before the seed is placed to prepare the soil, so it is with the beginnings of a business.
There needs to be preliminary work, testing the soil or testing the market, breaking up the ground or breaking out of the box as it relates to business thinking, and then investing in the seed to produce a crop.
Our not-for-profit was taking on an ambitious financial project.
Our goal was to raise, in pledges and contributions, $6,000,000. The purpose was to create an endowment fund.
The principal was not to be invaded but we were going to draw on the interest to supplement our significant budgetary gap between our income and expenses each month.
The plan was to approach businesses, foundations, corporations, and individuals within the community to ask for donations as well as pledges.
There were a variety of options made available to the individual wishing to support or agency.
We hired a professional fundraiser to help with this endeavor.
In looking over our plan he agreed with the strategy and the overall goals associated with the approach to each of the different segments of the community.
However, he indicated to us that we were lacking in one particular area.
He further added that each of us, to successfully raise this money “needed to have skin in the game” or other words, we needed to make our donation and pledges first.
He further explained that it would be difficult to approach other individuals if we were not fully vested in pursuing and achieving this goal.
What is Pre-Seed Funding?
Pre-seed funding is the initial invested money that begins the business on its road to fulfilling its vision, mission, and achieving success.
Typically, this round of funding is where the founders of the business have gathered their resources and assets available to provide the beginning financial foundation of moving forward on their dream.
Also, this first stage of funding may be realized through the business owner’s sphere of influence.
That sphere of influence may be family members, friends, and other individuals who may be wishing to support the business owners.
The primary purpose of pre-seed funding is to test the viability of the idea of business, select a business segment within the market, and empower the idea into a product that will be financially viable.
When Pre-Seed Funding is Needed
As it seems with all things, the most fragile moments of any endeavor or relationship are the very beginnings.
For a business this is true as well because the business is just starting in its growing process, cash flow is more of a trickle, and establishment with business customers is minimal.
Therefore, beyond the initial investors of family and friends, pre-seed money may need to be obtained to ride out the rough waters of the businesses’ voyage.
Pre-seed money may be critical to maintaining the business before the full roll-out of services.
Additionally, pre-seed money may be critical to hiring key personnel to manage and provide critical leadership as the business begins to evolve.
Also, there are several associated risks to the beginning of a business if there is insufficient capital or liquidity drawn upon.
Some of those risks could be the lack of a safety net for key employees if they do not have healthcare or money for household obligations.
Having pre-seed money will help mitigate these risks.
Other needs for pre-seed funding could be for several other reasons.
One of those reasons could be the need to relocate the business operations for a variety of reasons and consequently the task of reestablishing that business because of the needed move.
How to Acquire Pre-Seed Funding
If the need for pre-seed funding is indicated, it is important to continue to pursue the needed finances required for operations.
Although in the fledgling beginnings of the operation, a report can be shared with those potential investors on pre-sales that have occurred with the product that is being developed.
These pre-sales or pre-registrations for the product can help the investor to analyze the potential of the product that will be offered through your business and being able to ascertain what the potential will be.
If pre-sales or pre-registration is robust, it would be hard for a potential pre-seed investor to not realize the investment opportunity that is before them.
Related: Venture Financing and everything you need to know!
As part of the initial funding stage, it is also important for your product, revealed through social media platforms and various marketing techniques, to create a webpage for people to review the product or service that is being created.
A webmaster would be able to integrate on your platform the various tools to track the number of visits, count the computer mouse clicks on the various links and other embedded affiliation banners.
This captured information and emails from interested individuals regarding your company and the services could be a positive reflection of the future success of the business.
All of this information can be utilized to indicate the potential of your company and speak loudly to pre-seeding investors.
It is important not to discount the power of social media and various platforms. Those platforms include Facebook, Twitter, Instagram, etc.
Your family and friends can begin to create a “buzz” as to what is occurring, what the company is all about, and how it will resonate with customers.
This created excitement and enthusiasm for your product will take on a life of its own and again speak volumes of potential to investors now and in the future.
Who Needs Pre-Seed Funding?
Pre-seed funding may also be sought by the entrepreneurs as they may reach out for potential grants or funds from investors in the private sector.
These private investors are known as business angels and typically have knowledge and experience in their segment of the business world.
Other possible investment opportunities in this stage of the business’s metamorphosis could be small business loans, Crowdfunding, financing through successfully awarded grants, etc.
It is important to remember that people give to people.
At this stage of the operation, not only are the initial investors looking at the popularity of the product but are also taking a deep concerted look at the management team.
Because people give to people, and when you have the opportunity to present your business idea to potential investors, you must be engaged with the decision-makers.
This doesn’t mean that your enthusiasm is over-the-top or could be defined as fake.
However, sincerity and passion for the business idea and service and/or product are essential.
In other words, if you cannot demonstrate your enthusiasm and excitement over your product and its potential, it will be hard to engage or convince others.
The days of just entering into a business deal with a handshake are over.
Having said that, it is also important for you as the individual representing the company that you exude trust, confidence, and demonstrate skill in the business area of your startup.
For example, if the business relies heavily upon informational technology, the team and the spokesperson should demonstrate that skillful know-how.
Also, leadership should be able to reflect a business acumen and connection with their potential customer base.
Trust will go a long way in building confidence with those representing the potential investment opportunity.
Purpose of Product
As it relates to the opportunity of presenting the businesses’ mission, vision and goals it is important to address many key elements within that presentation.
The need for the service that is going to be provided by the company must have a definite niche.
That the solution your company is offering is viable and that it will be well received by the customers needing the service.
Perhaps the challenge that your company has identified is that people are not comfortable with current mouse traps available on the market.
They want something that is more humane-driven and possibly can catch and release the mouse back into its natural habitat.
In other words, if you are pitching to build a better mousetrap, that may be more humane and technology-driven.
The improvement that you and your company will provide through the production of a better mousetrap will somehow stand apart from the other available products.
It will be unique, match the identified improved need, and will attract customers to buy your better mousetrap.
Having identified the need, the presentation should indicate to the potential investor the company’s solution for this identified challenge that people more and more are expressing.
Consequently, your company has built a better mousetrap that is more humane and utilizes technology to not cause the demise of the rodent but to drive it from the household or other spaces in which they are living.
The third component of the presentation is that the presenter or presenters should build on the challenge identified, the purpose of the company, and your solution by indicating who would look to utilize this service or product.
In other words, who are your potential customers?
Keeping with the product of a better mousetrap, what household or business has not had to deal with the potential of an errant or infestation of mice?
The customer base would be potentially anyone who has ever had this type of issue.
Your Business Model
Wrapping up your presentation would include your explanation of your business model which is your business plan.
The business plan would talk about your legal formation, the leadership involved, milestones and goals that you anticipate to be met, marketing your product, growing your customer base, number of units anticipated to be sold, etc.
This will speak loudly to the investors that the plan expressed is not just some arbitrary writings or words.
Rather, they’re well-thought-out and detail a plan that will be followed to make the business successful.
Pre-Seed Funding FAQs
How Much Equity Should I Give Away in the Pre-seed Round?
There are a variety of answers to this question.
However, it seems that the standardized return for those who are pre-seeding the venture is a 10 to 20% return on the investment. This investment can be through early profits or via shares within the company.
How Long Does It Take?
The average timeframe that is generally associated with the pre-seed stage ranges anywhere from 3 to 6 months.
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You Can Do It
You started with a business idea and have begun the journey of seeing that idea become a reality.
Your business is in the infant stages, and you have done your preliminary work, are sold on the success of the services that you will be offering and have invested yourself and your assets along with other members of the leadership team.
The next stage in your business venture is to obtain pre-seed monies to further your idea and develop awareness in the community of your product.
You are excited, you are engaged, you have a plan, and you just need a little financial support.
Your hard work will pay off.
Likened to the agricultural community, starting a business begins with assessing the soil to ensure that the growth of the crop will take place.
Also, similar to the agriculturalist, the ground needs to be worked and then the seeding can occur.
However, crops are not grown overnight.
It takes time, effort, cultivation, and following proven methods of working towards the harvest.
Above all, you have invested yourself and your investment will bring a harvest of dividends.