By: MassLight Team

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Pre-seed funding is the earliest stage of funding that a startup company can receive. It typically refers to the initial capital provided to a company to help it get off the ground, before it has developed a minimum viable product (MVP) or generated any revenue. Pre-seed funding is usually provided by friends and family, angel investors, or other early-stage investors who believe in the company's vision and potential for success. This funding is used to cover the startup's initial expenses, such as market research, product development, and early team building. Pre-seed funding is often followed by seed funding, which is the next stage of funding a startup may seek as it progresses towards product-market fit and growth.

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Pre-seed funding is typically the initial major infusion of capital that a startup obtains, and it presents an early opportunity for venture capitalists (VCs) to back the company. The typical valuation of a pre-seed startup falls within the range of $500k to $5m, and pre-seed rounds usually raise between $100k to $1m. However, the total amount raised can vary considerably depending on various factors such as the level of development of the proof of concept, the identity of the investors, and the specific industry sector in which the startup operates.  ​​

A successful pre-seed funding round indicates that you possess the ability to construct a team, possess a comprehension of the market you operate within, have knowledge of your potential customer base, and understand how to engage with them effectively.

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What is seed funding commonly spent on?

• Experimentation: This involves testing a hypothesis or idea through a systematic and controlled process, with the aim of gathering empirical evidence to support or refute the hypothesis. Experimentation is often used in scientific research, but can also be applied in business and other fields to test new ideas, products, or services.
• Product-Market Fit: If product-market fit (PMF) is not achieved initially, pivoting or restarting the project may be necessary.
• MVP Development:  Verification that there is a strong business case for your project, which may be demonstrated through the creation of a minimum viable product (MVP). For software startups, low/no-code tools such as Retool or Airtable are useful in this endeavor.
• Hiring: Acquiring the right team members who possess the skills to accelerate the development of an MVP.
• R&D: Conducting additional research and development to refine the product or service.

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Give careful consideration to whether these hires are truly impactful for your startup in the early stages. Occasionally, founders may be the most suitable individuals to undertake this rudimentary work. Furthermore, refrain from unnecessary marketing expenditures that could lead to premature scaling of your business. Doing so may be counterproductive, inefficient, and a waste of resources.

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What area(s) do I dedicate resources towards?

We advise founders to inquire themselves a few questions while apportioning funds to various areas of a nascent startup.

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• What are the primary risks that must be mitigated to achieve your goal, such as market, team, technology, or regulation?
• What motivated you to establish this company?
• Is it possible to substantially reduce one of these risks in this funding round and make the company less risky from the perspective of investors? If yes, this could potentially increase the value of your company significantly in the upcoming round.
• What significant problem are you intensely passionate about solving?

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Once these questions have been addressed, take a reverse approach to determine what resources are required to accomplish the objectives. There is no ideal allocation of resources that is applicable to every startup; some teams may expend the majority of their funds on research and development, while others may concentrate more on business development or recruitment.

One way to decide how to allocate pre-seed funding among different business functions is to use objectives and key results (OKRs) as a framework. Start by identifying the main objectives to achieve during the runway period and what needs to be done to close a successful seed round. Then, break down these objectives into key results and associated activities. Determine the skills needed to optimize those activities, which will give an indication of the roles to hire. Keep in mind that early-stage startups involve uncertainty, so allow for ad hoc changes and flexibility if some initial bets don't pan out. By using this approach, startups can make strategic spending decisions and ensure that each dollar is worth it. Additionally, it's essential to begin building a recruitment pipeline before closing the round and invest in product development and new tech talent to drive growth.

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To ensure that every dollar spent is valuable, it is essential to be prudent while allocating funds and make the objectives of your company clear. Additionally, it is recommended to start creating a recruitment pipeline before closing the funding round to expedite the hiring process later.

Focusing on investing in the product and hiring new technology talent is also recommended. Founders may consider developing new functions, such as recruiting vendors for content, growth, and marketing. In certain cases, investing in marketing may aid in creating a product strategy.

Moreover, making small investments in experiments can help identify future growth opportunities.

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How do I avoid running out of money?

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It's essential to plan ahead for the duration of your pre-seed funding and the timing of your seed round, in addition to allocating investments wisely within your business. There are no hard and fast rules about timelines, but it's common advice to aim for an 18-month runway after your pre-seed funding. This should provide a buffer and help you weather potentially unfavorable market conditions when seeking to raise your seed round. However, due to the uncertain macroeconomic conditions in 2023, both VCs and startups are adopting more conservative approaches. Some teams may even go from pre-seed to seed in a matter of weeks.

By no later than six months before that point, it's expected that you will have made significant progress, and this is typically when you'll start preparing to raise your next round of funding.

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It is recommended to aim for raising your seed round when you have obtained a certain level of validation from your initial users or customers, ideally at a small scale. It is important to plan ahead and ensure that you have enough runway to avoid being cash-starved and giving seed investors additional leverage. By achieving this level of validation comfortably within your runway, you increase your chances of successfully securing seed funding.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.