What is seed funding?

Pre-seed funding could be the bridge that transports a promising vision into a lucrative new enterprise; it enables entrepreneurs to transform their unique ideas into businesses by helping them access the necessary resources, work with industry professionals, and determine the interest of potential customers.

This guide outlines some of the benefits and potential drawbacks of seeking pre-seed funding, but always seek independent and specialist financial advice when looking to obtain investment in your start-up, as individual circumstances will vary.

What is pre-seed funding?

Pre-seed funding provides the initial capital needed to start a prospective business.

For example, an aspiring entrepreneur may have a brilliant idea for an educational app but lack the funds to execute it.

In this instance, pre-seed funding could supply them with the necessary resources to hire skilled software developers to build prototypes for the app, undergo market research, and establish trademarks to protect it from infringement.

Once this has been achieved, new businesses could receive subsequent seed funding if their business idea continues to show potential.

What’s a typical amount for pre-seed funding?

Pre-seed funding often comes from personal savings, friends and family, or angel investors.

Pre-seed funding can vary in amount and is subject to various factors such as the industry type, current market factors and the nature of the business.

Government-backed Start Up Loans offers new businesses the opportunity to apply for a loan of up to £25,000 to get their new venture off the ground.

The difference between pre-seed and seed funding

Pre-seed funding is the earliest stage of start-up funding; it is provided to help entrepreneurs grow and explore their business concept, allowing them to cover a range of expenses from conducting initial market research to establishing prototypes or minimum viable products (MVPs).

Seed funding is designed to support businesses after developing a viable product or service and achieving market traction and validation. It is often used to expand marketing efforts, increase operations, hire additional team members, and further develop products.

Pre-seed funding amounts are usually lower than seed funding, as investments are typically considered riskier as the business is only at the initial stage and still needs to develop an MVP or gain market validation.

Venture capital firms usually offer seed funding, whereas pre-seed funding derives from personal savings, personal connections, or angel investors.

What is pre-seed funding used for?

Founders could use pre-seed funding to jump-start their business in several ways, such as:

  • purchase necessary premises, such as an office or warehouse space and any other practical amenities or equipment, as well as any essential software needed to get the business up and running
  • conduct market research to understand their market size and target audience by creating surveys, questionnaires or conducting interviews, as well as taking the time to familiarise themselves with competitors, and current market demands
  • conducting product research, buying materials, and running trials and tests to build prototypes and MVPs
  • employ the necessary staff with the expertise needed to bring the concepts to life, including web or software developers, graphic designers, marketers, sales representatives, or other skilled workers based on the business’s needs
  • seek advice and support from mentors who can offer industry insights and valuable advice to aspiring entrepreneurs
  • secure intellectual property rights, such as brand names, patents, logos, and trademarks, to safeguard the business’s original ideas
  • establish a brand by creating a solid company image, which may include creating a business website
  • start a marketing strategy, which can consist of building an online presence, conducting SEO research, creating quality content such as blogs, articles, brochures, leaflets, and videos, or establishing a social media presence across multiple platforms.

Discover how social media can help your small business.

Read our guides on how these social media platforms could benefit your business:

Sources of pre-seed funding

Personal savings and assets

Using your savings or assets to pre-seed your business funding gives you complete ownership and control over all decisions related to your business.

However, there is a risk that you could lose your savings and assets if your business experiences difficulties.

Therefore, consider the level of risk you’re willing to take before investing, and it’s a good idea to have contingency plans in place.

Friends and family

The advantage of borrowing money from friends and family is that it can be relatively easy and quick to access funds.

However, it’s important to consider that if your business encounters difficulties, not only can loved ones lose money, but personal relationships may be affected.

Angel investors

Finding an angel investor that supports your idea can offer financial support that could springboard your business off the ground.

In addition, many angel investors have years of industry experience and can provide invaluable guidance throughout starting a new business.

It’s important to consider that an angel investor could want some input in decision-making in the business as they have invested funds, which can compromise your autonomy and potentially lead to conflicting ideas of getting the business off the ground.

Loans

Bank loans typically come with fixed repayment terms, allowing you to schedule and prepare for your repayments, helping you manage your finances more effectively.

When thinking about taking a bank loan, consider that bank loans often require collateral which means you could risk losing your assets if your business struggles to make a profit.

Read our guide on how to secure the best loan for your business.

Incubators and accelerators

Incubators and accelerators are designed to nurture start-up businesses as they offer funding and access to mentors and investors to help start-ups grow.

It’s important to understand that many incubators and accelerators require equity in exchange for participation in their programmes.

Government grants and schemes

Government grants can provide start-ups with significant funding that can instantly boost their reputation as it demonstrates credibility.

You may need to meet certain qualifications or have experience working in specific industries to qualify for a government loan.

If you don’t meet these criteria, it can be difficult to secure government funding.

Crowdfunding

A successful crowdfunding campaign can serve as marketing and publicity for your start-up.

Aside from raising money, you can market your brand by attracting attention to your up-and-coming business.

Organising crowdfunding can be challenging; it involves careful planning, creating compelling content, and marketing the campaign, all of which can cost time and money without guaranteeing a successful outcome.

If you’re thinking about crowdfunding, consider crafting a campaign that will generate high interest levels and showcase your product or service authentically to potential investors.

Tips for securing pre-seed funding

If you’re looking to obtain pre-seeded funding, you may want to consider the following tips:

Develop a solid business plan

A thorough business plan that outlines your product or service gets to the root of what your business does, how it works and, crucially, what makes your business different from the competition and what will help it succeed.

Do your homework by conducting market research to understand the competitive landscape is advisable.

Download our free business plan template.

Build a strong team

It’s a good idea to ensure you have the necessary skills for your business to succeed, whether by employing staff or looking into contract or freelance expertise.

Network and connect with potential investors

To help secure pre-seed funding, it could be a good idea to build relationships with mentors and advisors who can provide advice, support, and put you in touch with people who can help.

Attend networking events

To gain valuable contacts and professional experience, consider joining entrepreneurial communities and engaging with industry-specific groups to expand your network and increase your visibility.

Participate in start-up competitions, events, and programmes

It can be a good idea to keep an eye out for competitions, events targeted explicitly towards pre-seed funding, or events that align with your industry.

Prepare and practice a pitch

Being well-versed in a pitch to potential investors can help you confidently communicate your investment opportunity when you meet them.

It’s advisable to include information on the funding amount you’re seeking, how their funds will be invested in the business, and their potential return on investment.

Want to learn how to manage your start-up’s finances? Check out our free online courses in partnership with the Open University on being an entrepreneur.

Our free Learn with Start Up Loans courses include:

Plus free courses on finance and accounting, project management, and leadership.

Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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