For investors who are new to the startup space, there can be a lot of new terminology to wade through as you learn the lay of the land. As we help many early-stage companies raise funds on our platform, it’s helpful to understand what exactly it means for a startup to be raising at the pre-seed or seed level.
Understanding startup funding rounds
As startups work to get off the ground, naturally they need funding. Bootstrapping may be enough for a little while, but there usually comes a point where using your own money and resources is no longer enough to help fully develop a product and reach profitability. This is where outside funding rounds come into play. Every time a startup brings on investors to raise capital, it is engaging in a new funding round.
Most often, startups will raise more than one round of outside funding. Starting with a pre-seed or seed round, moving to rounds A, B, C, D, and beyond, each round represents a new stage in a startup’s growth process. At each stage, the type of investors and potential raise amounts can change.
What is a pre-seed round?
You may have heard a pre-seed round referred to as a “friends and family round.” A pre-seed round is essentially the first money that a startup assembles to get things moving. At this point, a startup is likely conducting research and product development. How much a startup can grow at this stage of funding varies significantly, but companies raising a pre-seed funding round typically:
- Are pre-product: They don’t have a full-fledged product yet, but they are likely working on creating their minimum viable product (MVP).
- Have a clear potential market opportunity: There is clear market potential and a plan in place to get the product to market.
- Have no team: The founders are likely trying to do everything, and may be feeling the pressure to bring on a couple of additional employees.
Typically, startups raising outside funding at the pre-seed stage may look to secure somewhere around $50,000 to $250,000 in investment capital. The typical investors at this stage are friends and family or even accelerator programs. Investment opportunities that are raising at the pre-seed stage are extremely risky and only suitable to investors who have very high risk tolerance.
What is a seed round?
After a pre-seed round, a seed round is the natural next step for a growing startup that is starting to take off. At this point, startups may often have:
- A minimum viable product (MVP): Between prototype and final product, the MVP is a basic version of a startup’s product used to perform initial market testing.
- Product-market fit: The company has demonstrated that there is a viable market for its product, and it has achieved some level of traction. It may also (but not always) be generating some amount of revenue at this stage.
- A small team: The founders are no longer going it alone, and may have assembled a small team to tackle critical business functions.
Startups raising a seed round may be looking to raise anywhere from $500,000 to $2 million, but it depends on the industry they’re operating in. At the seed funding stage, investors may move beyond friends and family to include angel investors and institutional investors. While investment opportunities that are raising at the seed stage are somewhat less risky than those raising at the pre-seed level, they are still highly speculative. This type of investment is only suitable for investors who are comfortable potentially losing the entirety of their investment.
There is always some gray area when it comes to differentiating between a pre-seed round and a seed round. Some consider bootstrapping, or self-funding, to be pre-seed funding, and may skip to a seed round when the need for outside funding arises. Either way, it’s important to remember that startups at either the pre-seed or seed-stage are very early on in their journey and make for risky investment opportunities. If you’re interested in high-risk, potentially high-reward early-stage startup investment opportunities, visit the offering page to browse our current offerings or sign up to become a MicroVentures investor.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.