What is the purpose of this article?
Enable founders and investors to discuss their assumptions about what each startup financing round means.
You can download a PDF of this article from: What is the difference between pre-seed and seed financing
What are the critical learnings in this article?
- Investors are looking for the evolving validation of: a large market; a competitively differentiated value proposition; and a team that is able to quickly learn and change.
- There are no commonly accepted standard definitions. I observe that people have many different interpretations of these words, resulting in confusion and mis-representation.
What are investors looking for?
Investors are looking for a startup with three critical potentials:
- A large number of cash paying customers with an urgent problem or need they are willing and able to pay for. A large market is needed in order to have a successful startup with a large shareholder value enabling a very profitable exit for the investors.
- A value proposition and solution which enables a large number of cash paying customers to achieve benefits and value. The startup will fail if the cash paying customers are not getting benefits and value.
- A great team which is able to continuously learn quickly and adapt. Continuous learning results in the team changing the focus of: who the target cash paying customers are; what the customers urgent problems and needs are; the characteristics of the competitively differentiated solution.
The financing evolution from family and friends through to Series A, B etc. provides ever increasing validation of the three critical potentials outlined above.
- First funding after family, friends etc.
- The goal or end-result, of the pre-seed stage is demonstrating that there is a market need.
- Prior to pre-seed funding, the startup has:
- Created something that works.
- Validated that that there are some potential customers with urgent problems/needs they are willing and able to pay for.
- The startup does not have a complete founding/leadership team, partners, channels.
- During pre-seed, there is likely little or no revenue.
- Funding provides a 3-9 month runway.
- Funds raised: $50K to $1 million.
- The goal, or end result, of the seed stage is proving that there are a large number of potential customers that are willing and able to pay for the solution AND there is a solution which can be scaled.
- Prior to seed funding, the startup has:
- Customer traction: e.g. at least one passionate pilot user, some customers that are paying for some beneficial operational piece of the solution or pilot, etc. (This traction excludes consulting and other revenue not reflecting the long term-solution the company is aiming for). The seed stage will further expand the scope of the benefits and the scope of the solution.
- Pilot users or customers validate the benefits they are able to achieve.
- The right founding team is in place to take the company to the point of being able to scale. The team will expand as the company starts to scale with the funds obtained from Series A funding.
- Funding provides a 12-18 month runway
- Funds raised $1-4 million.
Prior to series A funding, the solution and company have the potential to scale. Series A, and subsequent, funds are used for scaling. Scaling may require changes to: the technology, processes, and talent.
What are your next steps?
Founders and investors must write down exactly what they mean by terms such as “pre-seed” or “seed”.
What further reading should you do?
What does the startup journey look like?