What is pre-seed funding?

UK start-ups can raise seed funding to help turn a promising business idea into a profitable venture. Learn how you can access seed funding and how it may help accelerate your business’s growth.

What is seed funding?

Seed funding is typically a small amount of money invested in start-ups at the early stages of their business development.

Those who benefit from seed funding are generally start-ups with product prototypes or fledgling services that have potential but require capital to establish their product at greater scale, such as moving from a prototype into initial manufacturing and sales.

Seed funding typically follows pre-seed funding and is usually obtained once the start-up has developed a minimum viable product (MVP) that demonstrates the business idea, product, or service has potential.

Find out more about Start Up Loans for new and small businesses, and find out if you’re eligible.

When looking at different financial products it’s a good idea to seek independent financial advice to ascertain which product is right for your business.

What is seed funding used for?

Start-up business owners often benefit from seed funding since it allows them to take their business venture to the next level.

Seed funding can be used for the following:

• refining an MVP, prototype, or service that aspiring entrepreneurs can demonstrate to potential customers and investors
• allowing start-ups to delve further into their product development process, such as testing and undergoing more extensive research to gather the feedback needed to refine their final products or services
• helping emerging businesses to scale with the purchase of office or warehouse space, equipment, and amenities so they have the proper infrastructure in place to continue developing
• funding the cost of hiring additional staff or seeking expert advice from consultants.

Read our guide on how to know when your business needs to hire staff.

The difference between pre-seed, seed funding, and series A funding

Pre-seed, seed, and Series A funding occur at different stages of a start-up’s growth, yet they differ in terms of criteria, amount, and funding purpose.

Pre-seed funding

Pre-seed funding generally happens at the initial stage of a start-up – typically when an aspiring entrepreneur has a great idea but lacks the funds and resources to execute it.

Seed funding

Seed funding’s purpose is to support a potential business to develop further.

Seed funding amounts can vary, but are usually higher than pre-seed funding and typically come from venture capital firms.

Series A funding

Series A funding is usually introduced when start-ups are well on their journey to business growth, and this type of funding propels the business further.

Series A funding allows start-ups to invest in product development, expand their team, and conduct more extensive marketing and customer acquisition strategies.

Read our guide on how to get more investment to grow your business.

Sources of seed funding

There are several ways you can access seed funding, such as:

Personal savings and assets

Drawing on your savings allows you to have total control over your business, and you don’t need to pay back loans or interest to investors.

However, achieving a return on investment is not guaranteed, and you could risk losing your assets or savings if the business doesn’t succeed.

Friends and family

Asking friends and family to support your business endeavour financially can be advantageous as it may provide easier access to funds, as well as potential support and encouragement.

Borrowing from loved ones can be risky, however – if the business fails and you can’t pay them back, it could strain your relationship.

Angel investors

If you find the right angel investor, you can benefit from their financial backing and mentorship.

Many angel investors can also put you in touch with industry professionals who can help to accelerate your business’s growth.

However, angel investors will want a share of your business (known as equity) in exchange for their support.

Loans

Loans can give you significant capital needed to meet the financial requirements of your business.

Loans often come with various repayment options, such as fixed or variable interest rates and repayment terms, making them easily adaptable to your financial plan.

It’s important to know that loans come with financial obligations which can strain your cashflow, especially in the early stages of your business when revenue might be scarce.

Find out more about Start Up Loans that can offer your start-up or small business a loan of up to £25,000 plus post-loan support and mentoring.

Incubators and accelerators

Incubators provide access to networking opportunities, expert advice and mentorship, and financial support.

However, before going into an incubator, it’s essential to know that they may require a portion of the equity in your business.

Read our guide on networking – where to find support as a start-up.

Government grants and schemes

A government grant supports your business and saves you from incurring debt or interest, as you don’t have to repay the funds.

Government grants and schemes are highly competitive, and applying for one can be time-consuming.

Crowdfunding

Crowdfunding can achieve a dual purpose; aside from raising funds, you can also increase interest and attention from potential stakeholders, investors, and customers, which can put your growing business on the map.

It’s important to be aware that undergoing a successful crowdfunding operation requires time, energy, and money, with no guarantee it will pay off.

Find out more about crowdfunding in our helpful guide.

Tips for securing seed funding

• Have a business plan – take the time to create a robust business plan that outlines your product or service.
• Know your market – conduct market research such as surveys, questionnaires, and interviews so you fully understand the market demand, your target demographic, and your competitor research.
• Have a financial forecast – estimating your future costs allows you to predict how much revenue you’re likely to get, so manage your expenses and put contingencies in place if you encounter any unforeseen expenses.
• Know how much you want to raise– financial forecasting can indicate how much you need to borrow to avoid underestimating or overestimating your funding needs.
• Simplify your pitch – prepare and practice a pitch that confidently communicates the investment opportunity; keep it simple and clearly state how much you seek to borrow. Read our guide on ten ways to create a winning start-up pitch.
• Connect with potential investors– once you know your funding needs and have a concise and compelling pitch, it can be an excellent move to network with potential investors, utilise social platforms like LinkedIn, and set up a compelling profile to engage with potential investors interested in your field.
• Participating in start-up competitions, events, and programmes – keep an eye out for competitions and events targeted explicitly towards pre-seed funding, as this can offer you valuable opportunities.
• Negotiate the deal carefully – ensure you understand your business’s value and demonstrate its appeal and market potential.

It’s well worth putting yourself in the place of the investor so you can understand their needs, concerns, and expectations too; this can better help you to compromise and secure a deal.