What's the difference between pre-seed and seed funding rounds?

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If there’s anything Silicon Valley loves more than complex startup terminology, it’s making that terminology even more arcane and complex. And while certain startup funding stages have some technicalities to them, it might be a little challenging to define what exactly is the difference between “pre-seed’ and “seed.”

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.

All of this is expensive, and that capital isn’t going to just come out of thin air. So often, you’ll turn to fundraising. Thus we enter the dilemma: are you a pre-seed stage company, or a seed-stage company? 

The short answer is it depends on how far along you are, while the long answer is probably some quantum superposition of one, both, or neither. Either way, if you’re going out the door to pitch investors, it’s good to know exactly how to identify yourself as it explains where you are in your product development stage.

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.

Still, you’re in a position to convince someone that you’ve built (or are building) something that has potential. You texted a friend a link to a test URL that does something straightforward and intuitive, and got an “It works!” reply. At this point, it’s time to start thinking long term and how you’re going to hit the first anniversary of your company.

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.

  • 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. 
  • You've identified a clear market opportunity. Some will be significantly more obvious than others
  • 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.
  • 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.

So how do I know I’m raising a seed funding round?

The valuation you want is a good barometer as you’re going out to raise money. By this point, you’re probably courting angel investors — and potentially venture firms proper — and have some product that’s gaining some traction to show off. 

In the past decade, though, valuations have risen pretty dramatically. 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.

But to raise that kind of funding, you’re probably checking off a few boxes:

  • 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.
  • 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.

By this point, you’re probably giving equity outright in your funding round as you’re searching for more money. And while you’re still a risky proposition, you’re dramatically less risky than a pre-product company.

Am I actually raising a pre-seed or seed funding round?

Again, the long answer here is going to be a very big “It depends,” because everyone is probably going to have a different idea of whether your company is pre-seed or seed. It’ll depend on the industry, the team, the actual idea, the barrier to entry for your market, and a few dozen attributes beyond that. That being said, there are some rough points you can look at to identify the right phrasing:

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All this becomes significantly more codified when you start entering your “series X” funding rounds. You’re beginning to identify and bring on professional investors and significant amounts of capital, handing out board seats, and have much more of a fiduciary duty to your investors. 

However, like any other piece of complex and sometimes unnecessary terminology within Silicon Valley, that’s all this is: terminology. You’re going out to raise money. It’s still important to identify what kind of round of financing you’re looking for when you’re getting started, but focusing on executing on your vision is much more important.

As with any funding round, you want to look at what’s best for you. A $3 million valuation might be high for one idea or company, and terrible for another. Or you might want to err on the side of less dilution and raise less money, but people still call it a seed round. Focus on the terms that are right for you before you start worrying about what to call your funding round.

Photo credit: Carlos Muza on Unsplash

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