SUMMARY
The lack of support at the early stages hampers innovation and stifles the potential of promising ideas
Pre-seed funding helps show that the business solves a customer need by supporting early product development, funding the team, and creating a basic product
Unlike investors who enter at later stages of a startup's journey, pre-seed investors require a specific understanding of the market, with a dedicated pre-seed focus
India’s startup scene has become a hotbed of innovation, with many new and innovative startups emerging in different fields.
While there are success stories, early-stage startups often struggle to secure essential funding, especially at the ideation and validation stages, which is where pre-seed funding comes into play.
Understanding Pre-Seed Funding
Traditional funding models primarily focus on “seed” and “Series A” rounds, leaving a funding gap for startups in their infancy. The lack of support at the early stages hampers innovation and stifles the potential of promising ideas. Recognising this gap, the concept of “pre-seed” funding has gained prominence.
The pre-seed funding stage is a pivotal phase in a startup’s journey. During this phase, founders are usually in the early stages of conceptualising their business, addressing a specific problem, or even testing a functional beta product with some revenue.
Beyond financial support at this stage, pre-seed funding also helps attract top talent, allowing young startups to build strong foundational teams.
Supporting startups at this stage is not only needed to promote emerging ideas but also to foster a culture of innovation in the country. Young startups thinking out of the box will play an equally important role in the next leg of growth for India as large conglomerates.
The characteristics of this funding round may vary for different founders, but it typically falls between the phases of bootstrapping and seeking seed funding.
While the lines are blurring between pre-seed to seed, it is actually creating a dire need to have curated funding solutions for the pre-seed stage.
Pre-seed Vs Seed Funding
In the world of startup funding, pre-seed and seed rounds have different jobs. Pre-seed funding helps show that the business solves a customer need by supporting early product development, funding the team, and creating a basic product.
On the other hand, seed funding is about proving that the product fits the market. At this point, the business should have a confirmed value proposition. Seed funding helps founders figure out growth strategies and opportunities to make the business bigger.
So, pre-seed is like starting the engine, and seed is about making sure the car runs well on the road. Hence, the needs of startups also vary from pre-seed to seed.
Raising Pre-Seed Funding
Determining the precise moment for a startup to pursue pre-seed funding is not a one-size-fits-all scenario. The readiness timeline varies for each business. However, here are some key benchmarks to consider for what founders need to have to raise pre-seed funding:
- Minimum Viable Product (MVP): Before pitching to investors for raising pre-seed funding, founders must have an early version of their product through market research and consumer feedback. They can gradually add features to capture the attention of both investors and consumers.
- Experienced Founding Team: The founding team’s experience and industry knowledge go a long way in impressing investors. The team must convincingly demonstrate that they are the right individuals to address the specific challenges their business aims to solve.
- Problem Statement Validation: Investor appeal is naturally heightened when the product aligns with the needs and preferences of the target market. Validation of customer needs shows a clear wedge in the market.
- Initial Customer Traction: Founders must initiate pre-seed funding once their business attracts a small customer base or begins onboarding (beta users). They must ensure that the startup can effectively meet increasing demand as the customer base expands.
Investing In Pre-seed Stage Startups
Investing at the pre-seed stage is more of an art than a science, as there are no established benchmarks or metrics to gauge readiness, deterring several investors from treading this path. Hence, determining the pricing of companies and their eligibility for funding becomes a crucial task, requiring the expertise of dedicated pre-seed investors.
Unlike investors who enter at later stages of a startup’s journey, pre-seed investors require a specific understanding of the market, with a dedicated pre-seed focus. These investors need to grasp the intricacies of the market, understand the founder’s DNA, identify the product’s readiness, and deliver tailored value-additions, including services like hiring and recruiting, GTM support, and brand building.
When evaluating pre-seed stage founders, Pearl Agarwal, Founder and GP of Eximius Ventures, takes various qualitative factors into account, in addition to the market and need, including:
- Vision and Passion: A dedicated and passionate founder is more likely to navigate challenges and drive the company forward.
- Founder-Market Fit: Examine whether the founder possesses a deep understanding of the target market and its pain points. This alignment significantly increases the chances of developing a product that resonates with customers.
- Adaptability: Assess the founder’s adaptability and resilience. Startups often face unexpected challenges, and founders who can pivot and adjust their strategies are better positioned for success.
- Network and Team Building: Consider the founder’s ability to build and lead a strong team. A well-rounded team is essential for tackling diverse tasks and driving the startup’s growth.
- Financial Acumen: Assess the founder’s financial acumen and budgeting skills. Efficient financial management is vital, especially in the resource-constrained environment of pre-seed stages.
- Ethics and Integrity: Consider the founder’s commitment to ethical business practices and integrity. Trustworthy leaders are more likely to build lasting relationships with customers, partners, and investors.
The Need For Dedicated Pre-seed Funds
With the nuances involved at this stage, pre-seed funds serve as an essential component, addressing the unique challenges and requirements of ventures at this level. Here are a few ways in which pre-seed funds are best positioned to help younger startups:
- Early-Stage Focus: The unique needs of startups in the pre-seed stage require a specialised focus. Pre-seed funds dedicate their efforts to understanding and supporting founders at the earliest stages of development, offering crucial assistance required during this period.
- Tailored Support: Beyond providing capital, pre-seed funds offer tailored support to address the specific challenges faced by early-stage startups. This can include strategic guidance, market positioning advice, and operational support, which is often not as personalised in larger, more generalised funds.
- Market Understanding: Pre-seed investors understand the intricacies of their focus sectors. Their focused approach allows them to identify promising startups aligned with their niche, providing a level of market understanding that might be lacking in funds with a broader investment scope.
- Flexible Investment Structures: Pre-seed funds often utilise more flexible investment structures, accommodating the evolving nature of businesses in their formative stages, and offering a level of adaptability that larger funds might not prioritise.
Benefits Of Pre-seed Funding For Investors
While marked with slightly higher risks, pre-seed investing bears its advantages for investors, enabling them to unlock higher returns. This early involvement offers investors unique opportunities to support promising ventures, take significant ownership, and potentially realise significant returns as these startups grow. Here are some benefits of pre-seed funding for investors:
- Early Entry to Promising Ventures: Pre-seed investors have the opportunity to get in on the ground floor of potentially successful startups, securing early entry into ventures with high growth potential.
- Influence on Startup Direction: Pre-seed investors often play an active role in shaping the direction of the startup, offering strategic advice and leveraging their experience to contribute to the company’s success.
- Potential for High Returns: As early backers of startups, pre-seed investors stand to gain substantial returns if the company succeeds, given their lower initial investment and higher equity stake in the early stages.
- Building Long-term Relationships: Investing at the pre-seed stage allows investors to build long-term relationships with entrepreneurs, potentially leading to continued involvement in subsequent funding rounds and a deeper understanding of the business.
As we navigate this dynamic landscape, it’s clear that pre-seed funding is bridging the funding gap for startups in their infancy, propelling them towards growth and success. The symbiotic relationship between entrepreneurs seeking support and investors looking for promising ventures underscores the importance of pre-seed funding in shaping the future of India’s startup ecosystem.
