Seed funding and pre-seed funding explained

If you have a killer idea for a product or service, you may be ready to seek business finance to develop it and bring it to market.

One of the first places to start is with pre-seed or seed funding – when early-stage startups are offered the money they need to build their first product, grow their team or attract their first customers.

These funding options can lead to significant breakthroughs, boost your cashflow, and add credibility by showing that investors believe in what you’re building.

But what exactly does pre-seed and seed funding mean, and how do you know which one is right for your business? In this article, we’ll break down what these funding options are, how they work, and what you need to know before considering them for your own business.

What is pre-seed funding?

Pre-seed funding is the first possible round of funding you can get as a business owner. It’s also the riskiest for angel investors and venture capital firms, given the startup’s lack of track record and uncertainty.

Compared to other rounds of funding, pre-seed is typically a smaller investment and can range from £5,000 to £250,000. This money is used to help founders hire early team members, develop a product prototype or minimum viable product (MVP), or conduct initial market research.

In return, investors typically take equity in a business, which is usually around 10% to 25%. A typical seed funding round also lasts around three to six months.

Who is eligible for pre-seed funding?

Anyone with a business idea that’s in the early stages could be eligible for pre-seed funding. Typically, it’s for entrepreneurs who are just starting out, even before they’ve fully developed a product or secured any customers. Some examples include:

• Startups in the idea stage: those that have a business idea but haven’t yet built a product or offered services
• Early-stage founders: entrepreneurs who are passionate and ready to get their business off the ground, even if it’s just in its infancy
• Innovative projects or concepts: an idea that clearly addresses a market need or has innovative potential

How does it work?

Pre-seed typically unfolds in several key stages, with each step building on progress and investor confidence. Here’s a breakdown of the typical stages of pre-seed funding.

• Idea and concept stage: you may not have a product yet, but you have a vision of what your product could be
• Team building and initial development: this includes bringing on co-founders or early employees. You might also begin working on your product/service prototype or MVP
• Market validation and feedback: you have a basic MVP or beta version of your product and start gathering customer feedback
• Fundraising and securing pre-seed investment: involves actively seeking investors to fund your early-stage startup. You may approach angel investors, VC firms or apply for accelerator programmes to secure pre-seed funding
• Closing the round: here, you can start focusing on scaling your product/service, developing customer acquisition strategies and laying the groundwork for the next stage of funding (seed or Series A)

What is seed funding?

Seed funding is the first official round of investment a startup raises after the pre-seed stage. It’s typically used to help a business grow beyond the idea phase – usually when there’s already a prototype, early customers, or some proof that the concept works.

At this stage, funding is used to hire key team members, launch a full version of the product, grow your customer base, build your operations and marketing efforts.

Seed funding rounds typically raise anywhere from £250,000 to £2 million in the UK, but this can vary depending on the startup, industry and how interested investors are in putting money into a business.

Who is eligible for seed funding?

While pre-seed funding focuses on turning an idea into a working concept or prototype, seed funding is for startups that show early traction and growth potential. This includes businesses that:

• Are past the idea stage: you’ve moved beyond the concept and now have an MVP, early users or some revenue
• Have a clear vision or plan: you can explain what problem you’re solving, who it’s for and how you’ll grow
• Have proof of product market fit: this could be positive feedback, customer interest or proof that your solution works
• Have a scalable business model: you’ve got a way to grow fast and generate meaningful return on investment (ROI)

How does it work?

Seed funding usually follows a more structured path than pre-seed, with each stage focused on turning early traction into scalable growth. This is what’s typically involved in a seed funding journey:

• Fundraising preparation: for this, you’ll need to create a pitch deck, finalise your business model, define how much you’re raising (and what you’ll use it for), and set a realistic business valuation
• Finding investors: reaching out to angel investors, VC firms that do seed-stage deals, accelerators or seed funds. Involves a lot of pitching, networking and follow-ups
• Due diligence: once investors are interested, they’ll want to look at your financials, understand your market and review your team and product/service
• Term sheet and negotiation: investors offer a term sheet (a document outlining the investment terms). You can negotiate these terms, such as how much equity you give up, investor rights and conditions, and timeline and funding milestones
• Closing the round: once everyone agrees, the deal is finalised, the funds are transferred, and you officially close your seed round

Differences between seed and pre-seed funding

Pre-seed and seed funding are both early stages of startup investment, so it’s easy to get confused about where one ends and where the other begins. However, the main difference is that you won’t need an MVP for pre-seed capital, but you will for seed funding.

Here are some other key points where pre-seed and seed funding differ:

1. Timing

Pre-seed funding is the very earliest stage of investment, and typically happens before you have a finished product or significant user base. At this stage, your business is usually just an idea or early prototype.

On the other hand, seed funding comes after you’ve already built a product (often an MVP), gained some traction (e.g. through users, revenue or interest), and you are ready to start scaling further.

2. Purpose of the funding

In a pre-seed funding round, the money typically goes towards developing your MVP, conducting market research or covering basic operating costs while you figure out the core of your business (e.g. your target market, value proposition, business model, etc.)

Money in seed funding rounds is aimed at helping you take what you’ve already built and scaling it. It’s used for improving your product, hiring your first full-time employees, expanding your marketing efforts and growing your customer base.

3. Amount of money raised

Pre-seed funding usually involves smaller amounts of money, generally ranging from £5,000 to £250,000, though the exact amount depends on your market and goals. In contrast, seed funding is a larger round, typically between £250,000 and £2 million.

4. Types of investors

At the pre-seed stage, investment usually comes from angel investors, family and friends, pre-seed venture capitalists or your own personal savings.

By the time you reach seed funding, however, you’re more likely to attract institutional investors like seed-stage VC firms, angel groups or accelerators, who have more experience in early-stage funding.

5. Risk

Pre-seed funding is considered high-risk because your idea is still in its infancy, and there’s little to no market validation.

While seed funding is still risky, it comes with more proof that your business idea has potential. At this stage, you’ll likely have a working product/service, some traction with users, and a clearer path to growth – making it slightly less risky for investors.

6. Equity given up

As there’s a higher risk involved with pre-seed funding, investors may require a larger chunk of equity – sometimes up to 25% – in exchange for their investment. Seed funding typically involves giving up equity as well, but it’s usually less than pre-seed – generally ranging from 10% to 20%, depending on the amount raised and your startup’s valuation.

Differences between pre-seed and seed funding	Pre-seed funding	Seed funding
Timing	Very earliest stage of investment	Comes after pre-seed fund, when an MVP is built
Purpose of funding	Developing MVP, market research and basic operating costs	Scaling (e.g. improving product, expanding marketing efforts and growing customer base)
Amount of money raised	Approximately £5,000 to £250,000	Approximately £250,000 to £2 million
Types of investors	Angel investors, family/friends, pre-seed venture capitalists, personal savings	Seed-stage VC firms, angel investor groups or accelerators
Risk	High risk due to little/no market validation	Less risky as there's more proof of vitality
Equity given up	Up to 25%	Around 10%-20%

How is seed funding different from series funding?

Seed funding and series funding are both essential for a startup’s growth, but they serve different purposes and happen at different stages of your business journey. 

While pre-seed and seed funding are available to completely new businesses that are starting from practically nothing, series funding is only available to startups that are further along from the pre-seed and seed stages, and are basically already established and showing significant growth. Here’s how series funding differs:

Stage of the business

Series funding rounds happen after seed funding, when your business has already proven some level of success. Each series happens as your company grows, with each round bringing in more capital as your business proves its value and expands.

Round continuity

Pre-seed and seed funding rounds are usually a one-time opportunity kind of deal, and you can only play the “new business” card once. 

On the other hand, series funding happens at multiple junctures. They can increase in capital with each round, but you can also have multiple rounds at any specific stage. For example, you can have multiple Series A rounds before moving on to Series B and beyond.

Purpose of the funding

The primary purpose of series funding is scaling. Therefore, investments made will be used towards:

• Expanding into new markets or geographies
• Accelerating growth (e.g. more marketing or a larger sales team)
• Building out product features, or even a second product
• Improving operations, technology or infrastructure

Conclusion

Getting your head around startup funding can be tricky, but understanding the difference between pre-seed and seed funding is key to securing the right investment at the right time.

In short, pre-seed helps to kickstart your business idea, while seed funding helps you grow and start building a customer base. Additionally, pre-seed typically involves a smaller investment and comes with a higher risk since you’re still in the very early stages, whereas seed funding comes after you’ve gained some traction and have a clear path forward.

It all comes down to knowing where you’re at in your business journey, as you can make sure you’re going after the right type of funding. Whether you’re just testing the waters or ready to take the market by storm, the right stage of funding will help you secure the support you need to move forward and scale effectively.