As a startup, whether you are targeting the pre-seed or seed rounds of funding, you will want to understand the difference and how much funding you need to raise for these rounds. Of course, there is no set amount that every startup needs to reach for each round. The requirements for these rounds depend on your business plan and other factors, such as your competition.
Difference between pre-seed and seed funding
Pre-seed rounds are typically the first stage of funding that a startup raises, and they're usually much smaller than seed rounds. These funds are used to get the company off the ground, and founders or co-founders traditionally raise them with their capital.
Seed rounds are the second stage of funding that a startup raises. They're typically more significant than pre-seed rounds. Seed investors tend to be more sophisticated than pre-seed investors and want greater control over the company's direction.
The most significant difference between these two types of funding is their purpose—pre-seed rounds help companies get off the ground. In contrast, seed rounds are meant to help them become more established and successful businesses.
Funding to raise for pre-seed
Startups typically use pre-seed rounds to fund their pre-launch operations and development. These rounds can range anywhere from $100,000-$500,000. They're typically used to fund research and development, build a beta product, hire employees, and make strategic partnerships. Angel investors or venture capital firms usually fund pre-seed rounds. Startups typically use the funding to raise seed Seed rounds to fund their launch operations and development. They can range anywhere from $500,000-$3 million.
What are the costs covered by pre-seed funding?
Pre-seed funding is the first stage of venture capital funding for startups. It's often the first time a startup will receive money from outside investors, and investors are willing to contribute the smallest amount of funding.
The costs covered by pre-seed funding include the following:
- Development costs - The money required to make your product more functional and appealing to users. This can involve hiring developers, designers, and other professionals to help you build your product.
- Marketing costs - The money required to promote your product to customers, so they know about it and decide they want to buy it/use it/try it out.
- Other operational costs - Any other costs that may arise during this phase of development, such as renting office space or paying for legal advice on patents or trademarks
Funding to raise seed
Seed is where your business starts to grow. Your company will have taken off, and now you want to expand beyond its initial launch phase. This means hiring more people, developing new products or services, and pushing into new markets. You'll need about $1 million for this round of funding (though it can be less).
According to CB Insights, the average seed round is $1.3 million raised from between two and four investors. In a seed round, you're typically looking for people who can provide marketing, technology, and customer acquisition expertise. These investors will also want to see that you already have some traction with customers or clients.
What are the costs covered by seed funding?
Seed funding is the first round of investment in a company, and it covers the costs related to developing the product and marketing it. These expenses are necessary before your business can sustain itself through revenue.
These are some of the costs covered by the seed capital.
- Salaries for the founders and initial employees.
- Various costs that fold into COGS (e.g., AWS, licenses, etc.) so that you can bring the product to market.
- Computers, phones, rent, etc.
- Lead generation (Google & Facebook ads, etc.).
- Travel expenses.
- Events, trade shows, marketing collateral, and other things you need to market the product initially.
- Software licenses & subscriptions (Quickbooks, MS Office, Salesforce).
Considering all these factors, estimating the amount of funding an early-stage startup should raise is tricky. The numbers we outlined above illustrate how much funding your company may need at each stage in its development, but it is wise to remain flexible with your budget as you develop. Even if you think you need a certain amount from investors, remember that the more time and money you have at your disposal, the better off you'll be. And who knows? You might find yourself needing significantly less funding than you previously thought.
