At SVSG, we regularly talk with early stage companies about a myriad of topics. One topic that comes up most often from first time founders is fundraising — how much should we raise for our seed round? My answer is always the same: Before the founders can raise a seed round, they need to ensure that they have built the foundation for doing so — what we call meeting the Five Pillars of Successful Seed Stage Fundraising. If they have not, we recommend that the startup step back and raise a pre-seed round in order to build their minimal viable product (MVP).
The purpose of this blog post is to explain the difference between a pre-seed and seed round, and to educate the founder about the steps needed to move from one funding stage to the next. Misunderstanding the distinction between the two different stages is critical, as pursuing a seed round when you are actually pre-seed can waste six months of your life and create unnecessary anguish in your efforts to launch your product. As a reference point, only about 10% of the companies we work with have successfully raised a seed round without both an MVP and some demonstrated level of market traction. And note that a prototype is not an MVP.
Only 10% of the companies that SVSG works with have successfully raised a seed round without an MVP.
A big reason why we see so many founders confusing the two stages is that the dynamics of fundraising have changed over the past five years. There is significant competition at the seed stage now that did not exist before, which has led to bigger expectations as well as larger round sizes at the seed stage. This situation has created more focus now on the pre-seed stage as the nature of seed funding has become more mature. In fact, several new pre-seed funds have emerged in just the past two years.
What Exactly is the Difference Between a Pre-Seed and Seed Round?
The goal of the pre-seed is to demonstrate that your product fulfills a market need. In contrast, the seed round is raised for the purpose of proving product-market fit.
To be more specific: The pre-seed or post-ideation funding round is for early stage product development – essentially, for preparing the company to maximize its future fundraising opportunities via the assembly and testing of a coordinated, effective core team and the building of an MVP that goes beyond a prototype.
Companies in the seed funding round, in contrast, are expected to have already validated their value proposition, and it is during the seed stage that the company develops the levers with which they will define how their business will ultimately scale via an infusion of venture capital.
Pre-seed Round Structure
So what does a pre-seed round look like? A typical round has the following traits:
- In the $100-250k range
- Light term sheet, convertible note or SAFE/KISS
- Pre-money valuation in the $1-2M range
- Run-rate of 6 months
Goals of a Pre-Seed Round
For a detailed account of the milestones that should be accomplished during your pre-seed stage, read the five pillars of seed stage fundraising. But to summarize, by the end of your pre-seed round, your startup should have in place:
- Product – an MVP (functioning product) that demonstrates your ability to execute a polished product
- Team – a relevant (skill-wise) and credible team assembled, with the proven ability to work together
- Market – direct and documented experiences with customers in your market that provide investors and other constituents with not only data points on the potential size of your market but also indicators of customer demand
- Distribution – a growth strategy inclusive of conversations started with key distribution channels
- Traction – a completed alpha launch with product feedback from early adopters, and customers in place for a beta launch
Fundraising in Silicon Valley, like everything else here, changes often. Understanding today’s distinct demands within both seed and pre-seed rounds keeps the early stage company founder on track.
To learn more, here is an investor perspective on what’s happening with funding in the Valley, and why a company needs to start at the pre-seed level.