When investing in startups, the stage at which you invest can impact your risk exposure, potential growth, and the level of due diligence required. For example, investing in a startup’s Pre-Seed round typically looks different than investing in a Series A round. In this blog, learn more about the Pre-Seed vs Series A funding, their respective risk profiles, and how investors may want to approach due diligence at each stage.

Pre-Seed vs Series A Funding

Pre-Seed Investment

Investing in Pre-Seed funding is often the first official capital that a startup raises outside of bootstrapping efforts. At this stage, the company may be little more than idea, a prototype, or an early product with minimal traction. Founders typically use pre-seed funding to validate their concept, build a minimum viable product (MVP), conduct market research, and hire initial team members.

Typical investors in pre-seed rounds may include angel investors, accelerators, friends and family, or micro-VCs.

Series A Investment

By the time a startup reaches its Series A funding round, it typically has developed a working product, demonstrated some market traction, established a core team, and outlined a scalable business model. Investors may want to see clear product-market fit, a path to profitability and growth, and a defensible competitive advantage at this stage.

Risks

All startups are inherently risky, but traction metrics between Pre-Seed and Series A stage startups may have differing results.

Pre-Seed Risks

Due to the early-stage nature of Pre-Seed startups, there are significant associated risks. First and foremost, all startups have a high failure rate, and especially Pre-Seed startups that haven’t proven product-market fit or customer traction yet. Without market validation, even startups with great ideas may fail. Additionally, with little to no revenue, few to no customers, and no proven team track record, there may be limited data for investors to perform due diligence on Pre-Seed startups. Finally, investing in private companies are illiquid, and Pre-Seed startups may be even further from a potential exit event than later-stage startups.

Pre-Seed Benefits

Investing in Pre-Seed companies do have some unique benefits. For example, getting in early to a startup could mean a lower entry valuation with lower priced equity. Additionally, because of the earlier investment, potential future exits could be larger than investors that join in at later rounds. Finally, earlier investors may have closer connections to the company and founders and could provide strategic guidance in the overall company direction.

Series A Risks

Despite investing in a slightly more mature startup, investing in Series A also has its own inherent risks. For example, at this stage, the company may be focused on scaling operations and growing. This means there are operational and managerial risks to execute growth strategies. Additionally, even if the company has early traction, market changes and competitors could make scaling challenging. Finally, if the startup struggles to raise a Series B or beyond round, early investors may be subject to the risks of down rounds.

Series A Benefits

Investing in Series A startups do come with potential benefits. Because the company is established, there may be more data to assess the viability of a startup. Revenue, customer retention, and unit economics can help provide better due diligence and potential future growth signs.

Due Diligence

Because of the differing growth stages of Pre-Seed and Series A startups, due diligence processes could look different when deciding whether or not to invest.

Pre-Seed Due Diligence

Because Pre-Seed companies are typically very early-stage, hard data points may be non-existent. Since revenue and customer numbers may not be available, investors can look at factors such as if the founders have the experience, resilience, and ability to pivot. What does the market opportunity look like? Is the problem real and is the proposed solution scalable? Does the company have any early traction from customer surveys?

Series A Due Diligence

At Series A, a startup may have some more concrete historical numbers that can assess when conducting due diligence. Investors may want to assess revenue and growth trends, product scalability, team depth, and burn rate and runway when conducting due diligence on Series A startups.

Final Thoughts

Both Pre-Seed and Series A investments have their own unique benefits, limitations, and due diligence requirements. Pre-Seed investing comes with significant risks, but getting in early to a startup may be able to provide benefits while having a greater say in company operations. Series A investing may have conquered some of the early-stage challenges and have more concrete numbers to review when conducting due diligence, but new risks come into the picture such as scalability and increased competition. Investors should carefully assess the benefits, risks, and due diligence requirements when deciding whether Pre-Seed or Series A investments are right for them.

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• From MVP to Exit: Evaluating Startup Milestones
• Spotting Red Flags: Evaluating Startup Financials
• 2025 IPO Check-in
• Diversifying Your Portfolio: Public and Private Markets

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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.