When raising capital for your startup, many different types of investors exist. Angel investors, venture capitalists and friends and family are just a few.
Regardless of your funding source, it’s essential to understand the critical differences between pre-seed and seed investments. It will help you be prepared when it comes time to raise money for your business.
Product Development
The critical difference between these two types of investments is how they approach product development. Consumer-oriented companies tend to rely on their customers’ input. This is usually done through interviews, surveys, and other means.
On the other hand, seed investors want to see companies with a good track record of success. They also want evidence that the company has a product-market fit and a growth plan.
Product development is a process that involves several different elements, ranging from ideation and prototyping to design, manufacturing, marketing, and sales. This can be an expensive and time-consuming exercise.
Marketing
Regarding fundraising, seed investments are often considered the earliest stage of funding. These are typically used to establish essential infrastructure, build a team, and get product development off the ground.
As a result, investors are looking for something other than large revenue numbers at this early stage. Instead, they seek evidence that people value your product and are willing to pay for it.
The average seed round was $2.1 million in 2021, but this number can vary significantly depending on the type of company and investor.
Founders also typically give up more equity to investors at this funding stage than in later rounds. This is because investors take on more risk in seed rounds and want to protect their investment as much as possible.
Business Model
The business model is a company’s core strategy to make money. It identifies the products or services it plans to sell, the target market, and anticipated expenses.
Investors evaluate a business model to help them understand the company’s competitive edge, how it makes money and its prospects. A solid business model helps attract investment and recruit talent for a new business.
Seed investors like Xfund, Patrick Chung look for a product that meets a real need in the market. They want to invest in a business with a strong team and the potential to reach a profitable stage.
Consumer investments are usually raised before seed funding to test the idea and determine if it will have a real market. Pre-seed funds are risky to raise capital, as the concept may never go anywhere. Fortunately, a successful startup will often find its footing and be ready for seed funding at a later date.
Management
The management team is the name of the game for most consumer startups, so getting a few key people on board early can make all the difference. Whether through the right mentorship or a new hire, there’s an opportunity to get the gang on the same page from day one.
The nitty-gritty of what goes on inside a startup entails a lot of sweat equity, so you’ll want to be ready for the ride. Some things you can do to speed up the process include using templates, keeping your team informed about what’s happening around the office and creating a company culture built on transparency.
The most important thing is to understand your target market, their needs and wants, and what you can do to help them. Ultimately, you’ll need to explain what your product does and how it can help them solve their biggest problems compellingly and transparently.
