Introduction
Every successful business we know today was once an idea of someone—an idea with the capability to change the world- whose success was linked to some type of funding which also includes pre-seed funding.
An idea that is completely fresh and new is what we call a startup. If you are working on the ideas of others, then you are not doing a startup. If you want to become like Bill Gates, then you should know that the next Bill Gates will not build an operating system; you need to create a new idea.
A disruptive idea marks the beginning of a startup, but not all ideas become real businesses. Some are discarded during the course, and some fail. To ensure that the startup idea converts into a profitable business, an entrepreneur needs to know where they can get funds at the starting phase when all they have is only an idea and a burning desire to fulfill it. That is when the important role of venture capitalists and their pre-seeding funding emerges.
Stages of startup
There are 3 stages of startup:
- Formative stage: company is still being formed.
- Angel investing/Pre seed stage: Financing provided at the idea stage.
- Seed stage financing: Financing provided for product development and market research.
- Early stage: Financing for companies moving towards operation, but before commercial production and sales. Fund to initiate commercial production and sales.
- Later stage financing: For expansion after commercial production and sales but before IPO.
- Mezzanine stage: Preparing to go public.
What is Pre-Seed Funding?
During the pre-seeding phase, entrepreneurs aim to secure funding to cover primary and foundational expenses like market research, product development, team building, etc.
This type of funding is critical for transforming an idea into a successful business and tangible product or service.
Pre-seeding funding typically comes from various sources, including angel investors, friends and family, and occasionally from early-stage venture capitalists.
Investors at this stage are willing to take on higher risk, recognizing the potential of the startup’s idea and the entrepreneur’s capability to execute it successfully.
In essence, pre-seeding funding provides the financial resources necessary for a startup to lay the groundwork, refine its value proposition, and achieve key milestones that will attract further investment in subsequent funding rounds.
Sources of pre-seed funding
Bootstrapping:
- It means using personal savings and sources to fund the initial stages of the startup.
- It is beneficial to retain control over the business because owner doesn’t have to dilute shares of the company.
Friends and Family:
- During the pre-seed stage entrepreneur usually took support from close friends and family members who believe in the startup idea.
- This can be a more informal and flexible source of funding.
Angel Investors:
- Angel investors are high net worth individuals who invest their personal fund in startups to earn multifold if idea get succeed.
- They also provide mentorship and guidance to entrepreneur.
Crowdfunding:
- It is a way of raising small amounts of money from a large no. of people through online.
- Some crowdfunding platforms are indiegogo, mightycause, startengine and GoFundMe which allow entrepreneurs to showcase their ideas to a broad audience.
Incubators and Accelerators:
- These are the programs that offer funding, guidance and other resources to entrepreneur in exchange for equity.
- Accelerators “accelerate” growth of an existing company, while incubators “incubate” disruptive ideas with the intention of building out a business model and company. In simple, Accelerators focus on scaling a business while incubators often focus on innovation.
There are also various other options available to starups to raise pre-seed funding.
Success Stories: How Pre-Seed Funding Catapulted Startups to Success
1. Airbnb
2. Dropbox
Drew Houston and Arash Ferdowsi, the founders of Dropbox, faced challenges securing funding in the initial stages. In 2007, they received pre-seed funding from Y Combinator, allowing them to focus on developing their cloud storage solution. Dropbox has since become a widely used platform, reaching a valuation of billions.
3. Instagram:
Kevin Systrom and Mike Krieger, the creators of Instagram, initially received pre-seed funding from Baseline Ventures and Andreessen Horowitz. The funds helped them refine their photo-sharing app, and in 2012, Facebook acquired Instagram for about $1 billion.
4. Stripe:
The Collison brothers, Patrick and John, founded Stripe to simplify online payments. They received pre-seed funding from Y Combinator, which enabled them to build and launch their payment processing platform. Today, Stripe is valued at tens of billions of dollars.
5. Reddit:
Steve Huffman and Alexis Ohanian started Reddit with the help of pre-seed funding from Y Combinator. The investment allowed them to grow their online community platform. Reddit is now one of the most visited websites globally.
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