If you’re looking to start a seed business, you may be asking yourself one big question: How do I get started?
To do this, you need funding. You have to have money to fund your business in its early stages so you can get your product or service off the ground. But, you could be asking yourself, is there a difference between pre-seed vs seed funding?
We’re here to break down the answer to that question for you. Keep reading to learn what the difference is between seed funding for a business and other funding.
Stage of Funding
Pre-seed funding helps early startups refine and develop their business model and establish their identity. This type of funding typically totals between $50,000 – $500,000 and doesn’t involve equity or debt financing. Once the initial business model has come to fruition, the startup will then begin to look for Seed funding.
This includes the same financial backing while also allowing the business to access equity financing, such as angel and venture capital. The amounts invested in the stages of funding can range from $250,000 to a few million. This gives the startup the financial stability they need to launch their product into the commercial station.
Purpose of Funding
Pre-seed funding is the stage before seed and is used to support a company from ideation to a minimum viable product. This funding provides capital to create a sales funnel and early adopters.
Seed funding is the next step in the funding cycle and is usually sought out to scale products further:
- develop technology
- increase sales
- expand market share
The investments also provide the capital to help a company expand sales teams and marketing campaigns and promote customer acquisition.
Source of Funding
PreSeed funding is usually provided by family, friends, or angel investors. This funding helps establish the startup business to develop and validate its idea. PreSeed funding does not require an equity investment, which provides a business with access to capital to grow with no strings attached.
Angel investors and venture capital investors usually provide seed business funding. These investors normally expect a share of the ownership in the business in addition to a return on their investments.
These business investors offer large sums of money, which can usually be used to build out the product and get it to market. With purchase order funding, you determine the best option for your business growth.
Amount of Funding
Pre-seed funding is the first source of capital available for businesses. It usually comes in the form of a small investment from family, friends, and angel investors. The amount is usually between $25,000 to $2 million. Seed funding is the next stage after pre-seed. It is the first “real” source of external funding and, as such, will usually involve a larger sum of money.
Seed funding usually comes from angel investors and venture capitalists and can range from $2 million to $10 million. Essentially, the major difference between the two is the amount of funding available – Pre-seed money is usually a smaller amount that is enough to kick-start a business, while Seed money is a larger amount of funding that is used to fuel further development.
Equity Exchange
Pre-seed funding is money earned early on from friends, family, angel investors, or other startups. This money is used to help develop a business idea and create a proof of concept, and it’s usually small amounts of capital to cover basic costs. Seed business funding is when larger venture capital firms or banks invest money to fund a business with a bright future.
They invest in the product or early prototype of the company, and it’s usually more of a long-term investment. Equity exchange means both parties agree to transfer a portion of the equity of the company in return for the investment. This means that two or more investors now share a company’s ownership.
Investor Expectations
PreSeed funding is typically the very first instance of an investor putting money into a startup and can offer a founder the resources needed to develop product and service prototypes. Seed Business Funding often follows Pre-Seed funding and is a bit more lavish with investor expectations. It is used to further a project that has proven viable and can even include:
- resources for branding
- business development
- product marketing
The goal of Seed Business Funding is to give a startup the resources it needs to enter the target market and begin generating revenue. Investors typically look for long-term investments, and these may even include taking an equity stake in the business.
Risk Tolerance
Pre-seed investments are more speculative and high risk, as there is more uncertainty related to the business. As such, investors in pre-seed rounds are usually more tolerant of risk, as the potential payoff is bigger. On the other hand, seed investments are typically considered low risk, as the business has typically been validated by evidence such as:
- customer validation
- traction
- revenue
Investors tend to be more risk-averse, as they require a greater degree of assurance when it comes to returns on their investments. At the same time, however, the potential reward is significantly lower.
Timeline to Market Entry
Pre-seed funding is typically used to cover the costs of a project before the actual product or service has been released to market. This funding is used to pay for the costs associated with initial research, business plans, and getting a product market-ready. Seed Business Funding, on the other hand, is intended for established businesses ready actually to enter the market.
This round of funding can be used for:
- Product launch and marketing expenses
- opening new markets
- store expansions
Understanding the differences between preseed and seed funding is essential to understanding the timeline to market entry, as different stages of the process can require different amounts of funding.
The Difference: Pre-Seed vs Seed Business Funding
The differences between Pre-Seed vs Seed Funding businesses are significant and should be considered. PreSeed is more expensive to obtain but provides more leeway in terms of regulations and restrictions. Seed Funding, on the other hand, is more accessible but with more stringent conditions.
Be sure to thoroughly research both options to decide what is best for your business. Start exploring your options today!
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