Pre-seed, seed, angel round, bridge round, series A, series D, mezzanine…
You will hear many of these terms when you start raising money for your business. It can be complicated to understand and determine if you are a pre-seed or seed company- but read on to decode startup nomenclature.
What is pre-seed funding?
Pre-seed funding is the earliest stage of startup funding, coming before the seed round and other forms of funding. Target investors for this round are often friends, family, fools (the 3F’s), accelerators, select VCs, and angel investors. Companies at this stage have strong value-proposition & differentiation and early indication of customer interest.
Angels like to invest in both the pre-seed and seed stages. Before investing, angels consider some things about your business, including, but not limited to, the strength of the management team, growth potential and market size, the uniqueness of your business, and how risky the venture is.
How do I know if I am raising a pre-seed round?
While things can vary, and no rules are set in stone, valuation is an excellent barometer to understand where you fit into the funding spectrum.
Valuations have risen over the past decade, and the total raised can vary depending on how developed the proof of concept is, who the investors are, and what sector you are in. Generally, the average pre-seed valuation is between $500k-5M, and the average pre-seed round is $100k-1M.
When to raise pre-seed funding
Before you go to investors, there are many boxes to check. To learn more about whether you are “ready for Angel Funding,” check out this post here.
Companies raising a pre-seed round typically have the following:
Minimum Viable Product (MVP): An MVP is a product with the minimum features set to allow a startup to validate its business idea with potential customers. An MVP is a vital part of the lean startup methodology, not a full-fledged product or the perfect product. Instead, it allows a startup to gain customer feedback to iterate and improve.
Clear Vision: You have proven to investors that you can realize your vision. As a startup founder, you should understand when and how you’ll succeed. A realistic definition of success should be set out at this point.
Product-Market Fit: Product-market fit is when a company’s target customers buy, use, and share with others about the company’s product in numbers large enough to sustain that product’s growth and profitability. In other words, the opportunity has a large market to support a growing business.
Mitigated Risks: A startup founder at the pre-seed stage should understand the risks involved in their business and identify a plan to mitigate them. Identified and mitigated enough risks for investors to invest their money.
Traction: Traction is the progress and momentum of your startup business. There should be some indicators of the growth tendencies, and the speed and acceleration of this growth help indicate business traction. Many angel groups are sector-agnostic and look for signs of traction across various sectors.
Stages of Venture Capital
Strong Value-Proposition & Differentiation
Early indication of customer interest
Friends, Family, Fools (3Fs)
Multiple POCs with customers
Product is ‘scalable’ and does not require significant changes to deploy
Found a “winning” sales formula
Financing proceeds primarily used for sales, marketing, R&D
Growth equity/ private equity
Sales and marketing beginning to shift towards account based marketing (ABM) focus
Beginning to become a “market leader” in field
Company is at or on the cusp of predictable profitable growth
Debt financing or subordinated financing
Repayment terms adapted to a company’s cash flows
Making an initial public offering
Interested in becoming an Angel Investor?
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