Business

Understanding Pre-seed Funding in Layman Terms

We all know that startups begin with a disruptive idea. Not all ideas can convert into real organizations. Some discard during the course, while some fail. Make sure that the startup idea you choose results in a profitable business. A businessman needs to validate it. The validation comes from the startup to pitch in value for money. That’s where pre-seed capital comes into the picture.

But, we still need to understand what pre-seed funding is. Let’s find it out together.

What is Pre-seed Funding?

Pre-seed funding for startups in India is the earliest funding round for a startup. It raises money to confirm the problem-solution hypotheses, demands and propositions. Founders get enough equity to get off the ground. It is used to develop an early version of the product to raise the funding.

It’s all set to set the base for the business operations to reach the targets.  Before you go seeking investors, it’s important to understand whether your startup is ready.  The more funding you raise, the more you’ll be giving up in exchange . The base is set by the following –

  • Bringing key stakeholders – It includes chief technical officers, financial officers, etc. All of them together convert ideas into full-fledged businesses.
  • Validating hypothesis – This relates to the customer’s demand and the plans offered. The idea is to conduct research and analysis.
  • The third step is registering key patents and trademarks to future-proof the business. Pre-seed funding is too small to be known as the official round of funding. For many startups, it’s an important inflow of capital. It can definitely set the base for something big that can disrupt the industry.

Aim of Pre-seed Funding

A business raises pre-seed capital to make the idea ready for the business. The tasks are divided into three major categories –

  • Getting key stakeholders
  • Hypotheses validation
  • Invent or concept ownership

Hypothesis Validation – Startups usually raise pre-seed capital to fulfill their validation processes. They conduct many experiments based on set hypotheses. This is done to validate their market value, offering or a problem. The hypothesis contains assumptions about the problems. It also aims to solve the success criteria of that particular problem. There are many ways of resorting to validate the hypothesis –

  • Market Research – Every business needs to research the target audience. This is important to find the solution to the problem. The other hypothesis focuses on converting all the ideas into the business. The market research involves small groups and specialized products. It involves large trials.
  • Interview – It involves interacting with defined customer personas. It can be done in many forms, either in the form of surveys or face-to-face interviews.
  • Prototype Testing – It’s basically a model of the product created for functionality. For this, it’s important to visualize the idea. It’s not for the market but for the stakeholders and prospective customers. The objective of prototype testing is to fix errors and identify them.

With all the above mentioned, you can easily prepare an early-stage funding pitch. So, what are you waiting for? Start working on your startup pitch deck.

Pre-Seed vs Seed Funding

The main differences arises between things like company valuations and funding amounts, though there are some more requirements with regard to traction, product/market fit, etc.

  • Pre-seed funding helps a startup with its initial formation and beginning of operations and Seed funding is first official round of funding that a startup goes through.
  • Founders receive higher investments from seed funding than from pre-seed funding.
  • Pre-seed funding can come before any product development takes place, while seed funding investors require the company to have some form of traction.

Challenges

One of the main reasons why it’s difficult for a firm to raise funds through pre-seed funding is convincing investors to invest in their business.

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