Pre-Seed Funding: What It Is, How It Works & 7 Sources

Hey — It's Nico.

This is issue #1 of April's 4-email series about Startup Fundraising. This week I published a guide about how to raise a Pre-Seed Funding round.​

🙌 Welcome to the 1,085 founders who joined this week.

This issue is brought to you by Around:

I recently downloaded Around. Failory is currently a team of one, so I don't run any team meetings. However, I have various calls/week with startup founders and I wanted to see if I could improve Zoom's calls experience.

I'm sticking to Around for two reasons: 1) it frees up my screen, which allows me to easily read/take notes as I have the call; 2) my background image and noise are always messy and Around helps me avoid founders from noticing this ;)

Big startup funding rounds usually get covered everywhere. The piggybanks that take startups from 0 to 1 don't.

What is Pre-Seed Funding? The first round of investment a startup gets in its life cycle.

What is Pre-Seed Funding used for? Basically for two things:

1. Developing an early version of the product by hiring talented engineers.
2. Acquiring customers by spending on marketing.

How is Pre-Seed different to Seed? The differences are getting blurrier lately. Pre Seed rounds typically total less than $1M and the sophistication of the product leans closer to just an idea, no-product, or alpha product.

When should you raise Pre-Seed Funding? Not until you have verified that:

1. The problem you’re trying to solve has a large customer base, willing to pay for your product.
2. It’s technologically feasible to build the solution to the problem.
3. Building the business to manufacture and deliver the solution is viable at scale.

Note: The worst times to raise are during end-of-year holidays and early summer when investors are off on summer vacations.

How much Pre-Seed Funding should you raise? The general rule of thumb is to raise enough money to hit the milestones needed to de-risk the startup enough in the eyes of your future seed investors.

We studied 3,680 pre-seed rounds and we discovered that the average amount raised in a pre-seed round by US startups is $626,360, while it’s $538,108 for startups in the rest of the world.

How much time does it take to raise a Pre-Seed round? According to Docsend:

• It takes founders 26 different investor meetings to close it.
• 15% of founders close it in 1-6 weeks; 42% take 7-18 weeks; 43% take 19 weeks or more.

What are the common sources of Pre-Seed Funding? In the article, we analyze 7:

1. Your own money (Bootstrapping)
2. Angel investors
3. Pre-seed VC firms
4. Rolling funds
5. Accelerators and incubators
6. Equity crowdfunding
7. Friends and family

If you're building an early-stage startup, you should read this guide to understand what are the existing early-stage fundraising options and their pros and cons.

​Here's our Pre-Seed Funding guide.​

This week I launched a new page on Failory called Resources. There, you can find all of Failory's digital products, both free and paid.

Finally, here are my 3 recommended resources of the week:

• ​I Wasted $40K on a Fantastic Startup Idea: Tom spent $40k of his savings on building GlacierMD, a platform that powered the world’s largest depression meta-analysis. A few months later, he shut it down. Nobody was willing to pay for it.
• ​The Rise of TikTok: This 2020 article shares the story of ByteDance, TikTok's parent company, and goes over the elements that have made TikTok such a success.
• ​Underutilized Fixed Assets: Lots of marketplaces have been built on top of these assets (Airbnb is the best example). This article analyzes the business model and its challenges.

That was all for this week's issue. I hope you enjoyed today’s article and curated resources.

Cheers,

Nico