Pre-Seed vs Seed Funding
One of the first questions founders face when raising capital is understanding the difference between pre-seed and seed funding.
At a high level, both stages represent early forms of startup financing. But they serve different purposes, come with different expectations and are typically raised at different points in a company’s journey.
Understanding how venture capital works helps provide context for how these early funding stages fit into the broader ecosystem. Startup funding involves navigating different funding stages, each with unique characteristics, investor types, and strategic objectives. Understanding these stages—especially the distinction between pre-seed and seed funding—is crucial for founders to raise capital effectively, align with the right investors, and set realistic expectations for growth.
Pre-seed vs seed funding
Introduction to Funding Rounds
Funding rounds are a fundamental part of the startup journey, providing early stage companies with the capital needed to turn ideas into reality and drive user growth. For most startup founders, the first major funding stages are pre-seed and seed funding. Each funding stage serves a distinct purpose and comes with its own set of expectations and milestones. Investors evaluating pre-seed and seed rounds are often focused on similar core principles.
Pre-seed funding is the initial funding round, typically focused on validating the business idea and supporting early product development. At this stage, startup founders are often working to prove their concept, build a minimum viable product, and gather feedback from early users. Seed funding, by contrast, is aimed at helping early stage companies scale their operations, accelerate user growth, and establish a stronger presence in the market. Many early-stage investors, including Y Combinator, focus on these factors when evaluating startups. Understanding the differences between these funding rounds is essential for founders looking to secure the right capital at the right time and set their startups up for long-term success.
What Pre-Seed Funding Is
Pre-seed funding is typically the earliest stage of external capital raised by a startup. The pre seed phase marks the very beginning of the startup funding journey, occurring before seed funding and focusing on initial development and validation of the idea.
At this stage, companies are often in the process of:
refining the idea
building an initial product
validating the problem they are solving
Pre-seed money is often used for early product development, market research, and assembling a founding team.
In many cases, pre-seed capital is used to move a company from concept to something more tangible.
This could include building a minimum viable product (MVP), conducting early user testing or establishing initial market validation.
Pre-seed rounds are usually smaller and may involve:
angel investors
friends and family
early-stage venture funds
Pre-seed funding is often referred to as a 'friends and family' round, and pre seed founders and early stage startups often rely on their own money or funds from friends and family. Angel investment is a common source of pre-seed funding, with angel investors often willing to take greater risks on early-stage startups.
Pre-seed companies are typically unproven, may lack a functioning product, and often do not have financial records or revenue at this stage. The typical amount raised in a pre seed funding round ranges from $50,000 to $500,000, and this stage is associated with higher risk and lower valuations compared to seed funding. Pre-seed investors typically evaluate the founding team, the idea's potential, and initial traction, which can include a minimum viable product (MVP).
The focus at this stage is less about scaling and more about proving that the idea has potential.
Pre-Seed Funding Process
The pre-seed funding process is often the first formal step for early stage companies seeking external capital. At this stage, startup founders typically raise pre seed funding from a mix of sources, including friends and family, angel investors, and specialised pre seed investors or venture capitalists. The primary goal of this funding stage is to secure enough capital to develop a minimum viable product (MVP) and conduct thorough market research.
Pre-seed investors usually provide funding in exchange for equity, betting on the founding team’s vision and the potential of the business model. A strong business plan is essential, as it demonstrates to potential investors that the startup has a clear path to growth and a solid understanding of its target market. The pre seed funding process can be challenging, especially for founders with just an idea, but those who can articulate their vision, conduct market research, and present a compelling case are more likely to attract early stage investments. Ultimately, pre-seed funding sets the foundation for future funding rounds and helps startup founders move from concept to execution.
When to Pursue Pre-Seed
Knowing when to pursue pre seed funding is crucial for startup founders aiming to maximise their chances of success. Pre-seed funding is best suited for early stage companies that have a promising business idea and a dedicated team, but lack the initial capital needed to build a functional product or conduct market research. If your startup is at the stage where you need to test key assumptions, develop an MVP, or validate your target market, it may be the right time to raise pre seed funding.
This funding stage is also ideal for founders preparing to scale operations and position their company for future funding rounds. By pursuing pre-seed at the right moment, startup founders can secure the resources needed to achieve critical milestones, refine their business model, and demonstrate early traction to potential investors. Understanding the timing and purpose of pre-seed funding helps ensure that your company is well-prepared for the challenges and opportunities of the early stages of growth.
What Seed Funding Is
Seed funding typically follows pre-seed and represents the next stage of capital. The seed funding round is the first major fundraising event for seed-stage startups, marking a key funding milestone in a company's development.
By the time a company raises a seed round, there is usually:
a working product
early user or customer traction
some evidence that the product is solving a real problem
Seed funding typically comes from venture capital firms, institutional investors, and leading investors who specialise in early-stage investments. These investors play a critical role in analysing financial data, assessing company financial health, and leading funding negotiations or pitches.
Seed capital is generally used to:
refine the product
build out the team
begin scaling customer acquisition
scale operations and cover operational expenses
increase market traction after initial product validation
At this stage, investors expect to see more concrete signals that the business is moving in the right direction. The typical amount raised in a seed funding round ranges from $500,000 to $5 million, with the median deal size reported at $3.8 million in Q3 2024. Seed funding provides 12-24 months of runway and is aimed at companies with early users, traction, or revenue.
The fundamental distinction between pre-seed and seed funding is the shift from potential to proof, with seed funding requiring a market-ready product that consumers are willing to pay for and significant progress between funding stages. While the company may not yet be profitable, there should be clear evidence of progress.
Key Differences Between Pre-Seed and Seed
While the two stages can sometimes overlap, there are several important differences. Both pre-seed and seed are forms of early stage funding, but each represents a distinct funding milestone in a startup's journey. Raising money at each stage is about securing funding to reach the next set of milestones, whether that's building a prototype, launching a product, or scaling operations.
Founders should aim to raise enough capital in the pre-seed round to provide a runway of 6 to 18 months, allowing time to prove their concept and attract further investment. In the seed round, the goal is to secure funding sufficient to hit key milestones for growth and prepare for future rounds. Typically, founders sell 10–20% of their company in a pre-seed round and another 15–25% in a seed round. Setting clear milestones helps outline the path for potential growth and aligns expectations with investors at each funding milestone.
Stage of the Company
Pre-seed companies are often earlier in their journey, sometimes even before launching a product. Most pre-seed founders are still developing their MVP, have little or no revenue, and are focused on validating their product potential to attract pre-seed investment. Startups at this stage often lack revenue and may not have a functioning product, but should have a compelling vision backed by initial research and perhaps a rudimentary prototype.
Seed-stage companies typically have a product in market and early traction.
Purpose of Capital
Pre-seed funding is used to validate the idea and build the initial product. Pre-seed money is typically allocated to early-stage activities such as MVP development, market research, and forming a founding team. This funding helps startups validate their business idea and develop a minimum viable product (MVP) to demonstrate initial traction.
Seed funding is used to begin scaling the business and refining the go-to-market strategy.
Level of Risk
Pre-seed investing carries a higher level of risk, as there is often limited data available. Early-stage startups at the pre-seed phase typically face significantly higher risk, resulting in smaller check sizes and lower valuations compared to seed funding.
Seed-stage companies still carry risk, but investors have more information to evaluate. Investors expect significant progress between funding stages, including a market-ready product that consumers are willing to pay for by the seed stage.
Investor Expectations
At pre-seed, investors are primarily backing the founders and the potential of the idea. Approximately 92% of pre-seed deals currently use SAFEs (Simple Agreement for Future Equity), which are agreements that convert into future equity during later funding rounds. At this stage, a compelling story is often more important than detailed financial projections, and investors look for signs of bootstrap traction, such as a minimum viable product (MVP).
At seed, investors expect to see early traction and clearer signals of product-market fit. Financial projections become more important at the seed stage, as investors want to understand the company’s goals, milestones, and financial outlook.
How Investors Evaluate Each Stage
The way investors assess companies differs between pre-seed and seed. Understanding market trends is important for both pre-seed and seed evaluations, as industry dynamics and market conditions can significantly influence startup valuation and investor interest.
Startups should prepare a strong, forward-thinking business plan that clearly outlines their company's goals and strategies for achieving them. In addition, founders should create a concise and compelling pitch deck and have financial forecasts ready for investor meetings. Networking with potential investors before raising funds can also help startups close their rounds more quickly.
Pre-Seed Evaluation
At the pre-seed funding stage, investors are looking for bootstrap traction and early signs that the startup’s product is of interest to the target market, even if it isn’t fully developed. This phase is often the first time startups seek external investment, typically from friends, family, or angel investors, before achieving product-market fit.
At the pre-seed stage, investors typically focus on:
the strength of the founding team
the size of the opportunity
the clarity of the problem being solved
To secure pre-seed funding, founders must demonstrate that their product has generated some interest or validation from the target market, which can include having a minimum viable product (MVP) or other early indicators of traction.
Because there is limited data, much of the decision is based on the potential of the founders to execute.
Seed Evaluation
At the seed stage, investors begin to place more emphasis on:
early traction and growth
customer feedback and retention
initial unit economics
Institutional investors often participate at this stage, bringing experience in analysing financial data and assessing company financial health. They place greater emphasis on financial projections and expect startups to present a compelling business plan that outlines clear goals, milestones, and a realistic financial outlook. For seed funding, startups need to have both an MVP and some product sales or traction as proof that this isn't just a concept but a real product with tangible results. As companies progress, metrics such as CAC and LTV become increasingly important.
Metrics become more important, even if they are still early and evolving.
How Much Should You Raise
The size of each round varies depending on the market, the business model and the ambition of the company.
In general:
pre-seed rounds are smaller and designed to fund early development
seed rounds are larger and support scaling efforts
Rather than focusing on a specific number, founders should think about how much capital is needed to reach the next meaningful milestone. Founders should aim to raise thr amount of capital required to provide a adequate runway to hit critical milestones. In the pre-seed round, startups should target raising enough capital to give them a runway of at least 6 to 18 months.
This could include launching a product, achieving product-market fit or reaching a certain level of revenue.
Lessons from Early-Stage Investing
From an investor perspective, the transition from pre-seed to seed is one of the most important phases in a company’s journey. Startups should be prepared for the fundraising process to take several months, from initial conversations to closing the round. Accelerator programs and incubators can provide mentorship, resources, and funding opportunities for startups at various stages, often in exchange for an equity stake.
It is where ideas begin to translate into execution. At the earliest stages, capital is often used to explore and validate. By the seed stage, the focus shifts toward building something repeatable and scalable. This transition is not always linear, and the boundaries between stages can sometimes blur.
But the underlying principle remains the same: each round of capital should move the company meaningfully forward.
Common Mistakes Founders Make
Understanding the distinction between pre-seed and seed funding can help founders avoid common mistakes.
Raising too much too early
Taking on more capital than needed can lead to unnecessary dilution and higher expectations.
Raising without clear milestones
Each round should be tied to specific goals that demonstrate progress.
Misaligning with investors
Different investors specialise in different stages. Aligning with the right type of investor is important.
Treating stages as rigid definitions
In reality, the boundaries between pre-seed and seed are flexible and can vary depending on the company.
Frequently Asked Questions
Do all startups raise a pre-seed round?
No. Some companies raise a seed round directly if they already have a product and early traction.
How long does each stage last?
There is no fixed timeline. The transition between stages depends on how quickly the company achieves its milestones.
What matters most at pre-seed?
Typically the founding team, the problem being solved and the potential size of the opportunity.
Final Thoughts
Pre-seed and seed funding represent two important stages in a startup’s journey.
While both involve raising early capital, they serve different purposes and come with different expectations.
For founders, understanding these differences helps ensure that capital is raised at the right time, from the right investors and for the right reasons.
Ultimately, each round of funding should bring the company closer to building a scalable and sustainable business.
Author
Damien Singh is the former CFO of Canva, where he helped scale the company from approximately US$10 million to more than US$2 billion in revenue.