Pre-Seed vs. Seed- What's the Difference?

At the end of my fundraising workshop two weeks ago, a very early-stage founder sheepishly asked me about the difference between a pre-seed and seed round. I told them there’s no reason to feel embarrassed; the answer has become increasingly ambiguous, and even investors will have a hard time giving you a clear response.

Pre-seed vs. Seed: What's the Difference?

The term "pre-seed" is relatively new. As recently as 5 years ago, not many people were using the term. But because of more and more capital flowing into the earlier stages, what used be called a seed round and what used to be called a Series A round started getting inflated.

When seed rounds started growing to $5M+, the investors that would try to get their money in earlier would squeeze in $1-$3M checks before that round- thus creating a new round, the pre-seed.

Pre-Seed: Validating the opportunity

Previously, you might associate the earliest round of capital you raised as funding essential to build a product. Today, thanks to easy access to technology allowing you to build so much more without raising capital, the landscape is shifting. The first round, or pre-seed, is about validating opportunities rather than just building a product. Especially after the market correction of the 2021-22 hype cycle, founders are required to show much more traction at each stage in order to attract investors and get them excited about doing a deal.

A compelling opportunity at the pre-seed stage could mean:

1. A founder demonstrating / communicating to investors a genuine problem that your company can solve
2. Signifying an exciting, experienced team, perhaps one that has had exits before.

Seed: Capturing the opportunity

Whereas the pre-seed is all about validating the opportunity, the seed round is about capturing the opportunity. Whether you’re a SaaS startup, revenue-generating product or service, etc. seed rounds are raised based on showing enough traction/revenue to demonstrate a clear understanding of the market and a direct path to capturing the opportunity you validated with the pre-seed.

There is some debate about whether or not you need to establish conclusive product-market fit by the seed round. I’ve seen founders able to raise before achieving full product-market fit, but you need to show a very clear path leading to it, often reflected through significant revenue or user growth.

How Should You Answer Investors?

If you're uncertain about how to communicate your fundraising goals to investors, here's a tip: if an investor asks whether you're raising a pre-seed or seed round, you can say explain that these labels have become blurry. Instead, state your intent: "We aim to raise X million dollars to reach these specific milestones: ___. We've already accomplished A, B, and C. This next round is essential in getting us to ___"

The key is to define the amount you need and the milestones you wish to achieve, with enough details for an investor to able to make an informed decision.

Good investors at the earliest stages will consider any opportunity within the pre-seed to seed range, so the label doesn't matter as much as you might think.

Investors are requiring more from startups at each stage. Keep these tips in mind:

1. Push to build the best company and get as far as you can without outside capital until it's absolutely necessary- where you’ll either go out of business without that capital, or the pull from the market is so great that you need the capital to capture the opportunity in front of you.
2. At the pre-seed stage, pinpoint and articulate the problem you're solving and the unique insights/value your team brings. Why will you win?
3. At the seed stage, showcase your traction and a clear pathway to capturing your market opportunity.

Any different ideas or thoughts on this? I'm all ears!