Pre-Seed Funding + A List of the TOP 20 Pre-Seed Funds

Pre-seed funds have exploded in popularity. We’ll list out some of the most active and best pre-seed funds below.

But, first, what is pre-seed funding and how is it different than a seed round?

Pre-seed funding is for really early stage startup founders, and it’s really for the  “non-famous,” “non-repeat” founders. Founders with an established track record, like those who’ve done an IPO or have been successful before, are probably going to go straight to seed, possibly even series A, and immediately raise a big chunk of capital.

Venture capital firms, angel investors, and everyone else loves to back founders that have done it before. Even founders that may not have previously been successful can sometimes have an easier time raising money than first time founders. They can talk about all of the things they have learned, and they know how to talk to investors, run board meetings and, essentially, build something. 

Usually pre-seed money is for a novel idea, often from a young founder, who other later-stage investors at series A, or even C, don’t want to take a chance on. We love this asset class here at Kruze because you are giving the truest form of entrepreneurs their first start. We really appreciate and respect the funds that do this.

Pre-seed funding can be dilutive

One thing to remember is that these very early funding rounds will probably be one of your startup’s most dilutive rounds as an entrepreneur. The reason for this is your startup valuation will be very low. Your goal here should be to take as little money as possible that will still let you prove out your idea.

We often see pre-seed rounds being between $500,000 - $1 million, with the valuation around the $5 million mark. This means you are still selling 10-20% of your startup. However, while a million dollars is a lot of dilution, pre-seed funding is for founders who really need that infusion of cash. The beautiful thing about taking that money, although you suffer dilution, is it means you are in business. If you build something awesome then you are going to be able to find follow-on money. 

The process for pre-seed startups

There are three basics goal that a founder wants to achieve with this type of funding:

• Build a minimum viable product
• Demonstrate a desirable product to customers
• Gain the interest of seed or series A funds 

That means pre-seed funds are the pipeline for seed and series A funds. Seed and series A funds are constantly talking to pre-seed funds to figure out who the best companies are in that pre-seed position. When they find a pre-seed fund with a successful company they become incentivized to help the startup raise money too.

There’s a huge amount of value in that introduction. It’s really helpful to gain someone who is experienced, who is in your corner, and who can give you guidance.

Former venture investor, Scott Orn, explains how pre-seed funding works in this video.

Angel investors

Angel investors have been around forever. They go back to the dentists and doctors in Silicon Valley, somewhere between the 1950s and 1970s, who had a lot of cash and decided to put money into startups and Silicon Valley was born.

This means there are plenty of people out there that will want to write smaller checks in front or behind the pre-seed funds. This is another value that pre-seed funding brings: Angels will write you a term sheet, put their name on it, and price the deal. Once you get that signed term sheet, it becomes considerably easier to fill in the round. There is huge value in having a lead investor, even at the pre-seed stage. That helps you find other angels, like high-net-worth individuals, successful entrepreneurs, or people you know or have worked with before. 

Incubators

Another path you can take are incubators, like Y Combinator. Incubators provide a lot of value, including:

• You get a tremendous amount of coaching. You will get more coaching in the incubators than you do from a typical pre-seed fund.
• You have peers with whom you’re going through the startup process. 
• You get the benefit of that incubator’s investor network. 

This will lead to you doing demo days and presenting to investors. It is another really good way to raise a pre-seed.

Accelerators

Accelerators and incubators are sometimes used as synonyms, so comparing the difference between the two sources of pre-seed funding is a bit of splitting hairs. That being said, startup accelerator is a program designed to help startups accelerate their growth and progress at a rapid pace. Accelerators are typically time-limited, spanning a few months, during which selected startups receive intensive mentoring, education, and access to resources. The focus of an accelerator is on accelerating the startup’s business model, refining their product or service, and preparing them for rapid scaling. Accelerators often typically take some ownershiop, and may provide a small investment in exchange for equity in the startup. 

Making your startup dream a reality

We often see companies raise a pre-seed simultaneously with joining an incubator. Instead of just going to the incubator and getting $200,000, they will raise between $500,000 and $1 million. This means the company can build a little bit faster and make a little bit more progress while they’re part of the incubator.

So our advice to founders who haven’t been successful at raising funds at seed or series A is that if you’re offered a check from a pre-seed fund, bite the bullet, take the dilution, and get into business. At that point you control your own future. You can really reap the benefits of pre-seed funding to get your startup off the ground.

The average amount of capital raised in a pre-seed round is typically $100,000 to $1,000,000 - although CrunchBase reports pre-seed capital raises of up to $7.3 million in the first three months of 2021. 

Most of our clients who raise this type of capital raise under $2,000,000, with this round of financing being a bridge until they can raise a larger seed round. And seed rounds have became quite large in 2021; we saw a number of seed rounds raising $10 million or more in capital. This has moderated somewhat in 2022, but there are still companies raising $5M+ seed rounds, usually off the backs of $2M+ pre-seed rounds.

How much pre-seed funding should a startup raise?

Most of these capital raises are $100k to $1M in size, but the “correct” amount of capital to raise in a pre-seed round depends on how much capital the startup needs to achieve the milestones to successfully raise a seed funding round. An MVP, revenue traction, strong customer logos, proof of concept from a scientific perspective - these are all good milestones to shoot for with the pre-seed round.

How much equity do you sell in a pre-seed round?

We see most startups selling 10% to 20% of their equity in a priced round. However, many startups - especially ones with second-time founders - negotiate a SAFE or convertible note round with around a 30% discount. These rounds, if done with a convertible security, often have a more aggressive discount rate since company is usually closer to ‘slideware’ than an actual operating business. 

Sometimes a founder will find the right lead investor for their seed or pre-seed round right away. Other times, getting funding commitments is a long battle that involves conversations with multiple groups over a long period of time.

There are two common strategies to get investors to commit, sign and wire seed and pre-seed funding (seed extension funding as well!). Founders use these strategies when they are raising a convertible security, like a SAFE or Convertible Note; these strategies are not usually used when raising a ‘priced’ round with Preferred Stock. The two strategies are: Progressive Caps or a Soft Commits.

Progressive Caps vs Soft Commits in an early-round

With a progressive cap strategy, the founder sets a series of progressively higher valuation caps on their SAFE/Convert. The first investors to sign and wire their investment get the lowest cap, until all that security is taken. Then the next investors get the subsequent caps. 

For example, the founder will state that they are raising $500k at a $4M cap, then $500k at a $5m cap, then $500k at a $6M cap. As each amount is filled, investors coming in get the higher cap, until the round is closed. This creates a sense of urgency through scarcity, meaning that investors are more likely move so that they get the more desirable tranche. The biggest issue with this fundraising strategy, especially in a difficult funding environment, is that investors may be afraid to be part of the first commitment, since the subsequent dollars may not arrive. this leaves them as an investors in a pre-seed company that failed to fill out it’s round and that may not have enough capital to achieve the goals it needs to hit to raise a seed round!

For a Soft Commit strategy, the founder gets investors to provide “soft commits,”, i.e. asking the investors how much they want to invest at a reasonable cap/valuation. Then the founder meets with many investors to pencil in the round. In an ideal scenario, the founder finds an investor near the end of the process who sets the pricing/cap. Then the founder has to go and tell all of the committed investors what the terms are, and get them to sign and wire. This strategy can be slower/take longer to get funding into the company. However, in a tough funding environment, it can be a higher probability method of raising a round, to the extent that your startup remains attractive and that investors who soft committed were serious. 

You’ll need a place to keep the cash that you’ve raised, an accounting system to keep track of your finances, a payroll system to pay you and your first employees, a corporate card (not a personal one!) to pay expenses, and more. Here are the steps you need to take after you’ve raised pre-seed funding:

• Corporate bank account - pick a bank that knows startups; you don’t need your banker freaking out that your business isn’t generating enough revenue to cover your costs - you aren’t a coffee shop!
• Company Credit Card - the biggest thing is that you want a card with NO personal liability transferred to the founders. Startups go under all the time, especially pre-seed funded ones. You don’t want to go bankrupt if your startup fails.
• Payroll - don’t mess around if you are paying employees. The IRS wants their payroll taxes; mess this up and you can actually go to jail! (And you don’t pass go and get an extra $200 in pre-seed funding!)
• Get an Accountant
• Get Quickbooks - this is the best accounting software for funded companies in the USA
• Financial projections - know when you are running out of cash, and keep track of your progress against your financial goals and cash position
• Immediately begin writing investor updates every month