How To Spend Pre-seed Funding
If you have secured pre-seed funding, you have started an already successful journey to become a business startup. But how should a company spend this funding? This is one of the most confusing questions, as this money is meant to grow and develop a business. Therefore, as a startup, you need to be wise when using this source of funding. Keep reading to discover the best approach to spending pre-seed funding.
Pre-seed Funding: What Is It?
Pre-seed funding is the small first injection a startup receives to help start the business. On average, a startup pre-seed can range between $50k-250k. Usually, this pre-seed funding is done by relatives, friends, or angel investors.
What Are The Uses Of Pre-seed Funding?
As a startup, you can utilize the pre-seed funding to showcase your intelligence and ability to meet long-term goals. This involves using the money to build a team, conduct market research, understand your potential customers, and how to win them. This means that you generally use this funding to grow your business.
How Do Most Startups Spend Pre-seed Funding?
Pre-seed funding is generally a small investment in a startup business. Typically, most venture capital investors spend pre-seed funding on multiple small investments. This is significantly different from established investors who heavily invest in a few companies.
Most startup companies use their pre-seed funding in various directions. Here are the most common uses of this funding.
1. Hypothesis Testing
Hypothesis testing is one way to spend pre-seed funding. Before spending all your time and effort building a product or service, it is essential to determine if there is a product-market fit. And if your service will work in the real world.
Hypothesis testing helps you to determine your customer interest and their potential demand. Generally, this is possible by forming a theory concerning possible solutions and outcomes and testing for its existence in the real world.
You can quickly achieve hypothesis testing in a few steps, which include:
1. Identify what you want to test and the parameters involved.
2. Create a hypothesis.
3. Determine the type of data you will need to test the hypothesis.
4. Design an experiment to collect the related data.
5. Conduct an experiment.
6. Analyze the results.
This is a great way to use pre-seed funding, as it will help you understand your business idea’s potential success. Thus, you can use this test to highlight any potential issues you are yet to factor in before investing a lot of money in a business.
You can also use it to acquire feedback from potential customers and establish whether your product meets their expectations. Later, you can use this helpful information to adjust your product and strategy accordingly.
2. Hiring a Good Team
Each startup business requires an exceptional team to transform its ideas into a great business. But which type of staff do you focus on when hiring? This can be confusing as your pre-seed fund can be limited. Making it challenging to identify the essential roles and their wage rates. Nonetheless, you should focus on roles you highly need for rapid growth.
For instance, if you plan on building a tech product, your top priority should be finding the perfect engineering talent. This can include a software developer, product designer, or technical lead. Moreover, you’ll also need to focus on introducing non-technical talents such as customer success and sales managers.
Additionally, you should remember that you need to offer competitive salaries or potential equity options to acquire the best talent.
3. Grow a Strong Brand
It is essential to grow a strong brand as you spend your pre-seed funding. After all, this fund is meant to boost you before you acquire more and greater investments. Fortunately, you can easily outsmart your competitors and attract more customers by growing your brand.
Here are some of the essential areas you should focus on to achieve this:
- Developing a clear identity
Consider factors such as your logo, tagline, and color palette to create a consistent look and feel across all platforms.
- Crafting content
Produce high-quality content that tells potential investors what your company is striving for and that truly demonstrates the value of your products or services.
- Utilizing social media
Ensure you’re active on all relevant social media channels and leverage those platforms to reach potential customers.
Focusing on these areas can help you create a compelling brand and increase sales. Also, it will give your company the strong foundation it needs to attract future investments.
4. Setting Up Infrastructure
Setting up the infrastructure you need for business is another way to use your pre-seed funding. This may include establishing a legal business unit, acquiring office space, tech stack, initial inventory, and other essential operational expenditures. However, you should focus on essential items first.
For instance, designing a logo, and creating a business website should be at the top of your list as they are the foundation of your business. Later, you can focus on other investments such as marketing campaigns, hiring staff, and setting up advertisements.
Lastly, you can consider other long-term investments you will need for your business, such as high-quality tools and services.
5. Designing Your Minimum Viable Product (MVP)
Finally, you should also spend your pre-seed funding to design and develop an MVP of your product or service. Typically, the MVP is the standard version of your product that contains the essential features and functionality without extra features. Developing an MVP allows you to test your product or service on a smaller scale before marketing it.
It is essential to simplify your MVP as much as you can. Focus on the essential features to test and validate your business concept. Also, ensure you are building something you can upgrade in the future. Building a basic version with additional features and functionality will save on costs.
Investing in developing an MVP will allow you to test your product before launching it to the public. This can help you to identify the potential issues with the product before releasing it on the market. It also minimizes the chances of expensive mistakes.
How Much Pre-seed Funding to Spend in Each Area?
To determine the amount of pre-seed funding to spend in each area, you ask the following questions:
- Why did I start the company?
- What’s the biggest problem my potential clients are obsessed with?
- What risks do I need to eliminate to build my business? This may include team, market, regulation, and technology.
- Can I eliminate any of these risks? If the answer is yes, you should significantly increase your company value in the next round.
After answering all these questions, you should work backward on the resources you need to attain there.
For example, you can spend half of your pre-seed funding on designing and developing an MVP. This will help you establish if you have a product-market fit. And if you have a nice-to-have or need-to-have solution to your client’s problems.
Then, you can spend 20-30% of your pre-seed funding on marketing and operations to meet the cost of outsourcing professionals. Such as accountants, lawyers, and other professionals that your business needs and may need in the near future.
How Long Will My Pre-Seed Funding Last?
In addition to spending your pre-seed funding wisely across your business, it is also vital to plan how long it will be available. In most cases, startups believe the money will last longer than it actually does.
Nonetheless, you should aim to utilize pre-seed funding for about 12-18 months before raising the seed funding round. This will protect your business from the possible tides you might experience due to unfavorable market conditions. Further, you’ll realize massive progress before launching your next round.
Typically, you should aim to raise a seed round after achieving approval from your early customers or users. Or when you can determine some economies of scale. This will give you a comfortable journey to your runway without starving for cash, which can give your seed investors additional leverage.
Conclusively, you need to be wise as you spend pre-seed funding. Fortunately, hypothesis testing, hiring a good team, growing your brand, setting up infrastructure, and designing an MVP can help you establish an excellent business foundation.
Moreover, investing in these small but essential areas can save time and money and increase your business’s chances of success.
Related article: Startup Funding Stages