A founder asked me what makes a $2M round “pre-seed”? especially if the startup already has a product and revenue? And why do we still sometimes hear about pre-seed rounds that look more like a series A in pricing and size? What’s the difference between an angel round and pre-seed round and why do I believe we’ll see more pre-seed rounds taking place in 2024?
While the answers are somewhat semantic, the pre-seed funding round is making a comeback in 2024 startup financing. Pre-seed rounds accounted for 14% of all seed stage deals in 2023, up from just 5% in 2020 according to Pitchbook data and I predict it will be even higher in 2024.
Data by Carta (mostly US companies) reveals that although on average startups saw a 50% reduction in funding in 2023 (the impact in Israel was closer to 65%) pre-seed funding rounds rose by 51%! In comparison, priced seed rounds declined 33%, capital flowing to series A rounds reduced by 61% and money invested in series D declined by 82% in 2023.
Data from Crunchbase shows a pretty consistent picture.
Defining the pre-seed round
It’s futile to look for ‘one true’ definition. Pre-seed round tends to be the first ‘institutional’ round of funding in a startup. It can be after the angel, or ‘friends and family’ round, or clubbed together. There are of course anomalies, like French AI startup Mistral which raised a “seed” round of $113M in June last year.
According to Carta, Pre-seed means “companies raising less than $1 million on SAFEs who have not raised any priced equity”. While I think the amount is more variable (and can go typically to $1.5M-$4M), I believe Carta is a good indicator on the current average terms for US early stage deals:
• 80% of pre-seed fundraising (up to $1M) happens on SAFEs
• 80% of that is post-money SAFEs (the YC default has become everyone’s default)
• 90% come with a valuation cap of some kind, about 40% also have a discount
Naturally, I asked ChatGPT to outline the differences between a pre-seed and seed round. As you can see, it’s a bit vague, and basically the main difference (apart from the amounts) is the purpose of the round and what the startup has to prove. Pre-seed tends to be about developing an MVP and generating early traction. Seed is about showing initial product market fit.
| Aspect | Pre-Seed Round | Seed Round |
|---|---|---|
| Stage of Financing | Earliest stage, before seed round | Follows the pre-seed round, before Series A |
| Purpose and Use of Funds | Validating the business idea, conducting market research, developing a prototype or MVP | Scaling the validated idea, further product development, initial marketing |
| Typical Investors | Founders, friends and family, angel investors | Angel investors, early-stage venture capital firms |
| Amount Raised | Less than seed round, usually under $500,000 | Higher than pre-seed round, often between $500,000 to $2 million |
| Valuation | Typically lower due to higher risk and earlier stage | Higher than pre-seed, reflects reduced risk and proof of concept |
| Focus | Proving the concept and setting the groundwork | Scaling the business and preparing for Series A |
Why are Pre-seed rounds poised to grow now
The typical pre-seed investors are angels, accelerators and VC funds, particularly micro funds who specialise in the pre-seed stage. So far there’s not much that has changed, so why should pre-seed look any different in 2024?
Below are just a few contributors to the rise of pre-seed in the current market:
Explosion of Micro funds – In recent years, there’s been a steep increase in the number of micro funds, which are generally below $100M in size. This list by Shai Goldman is a good sample, and I’m proud that Remagine Ventures is included in this group. In smaller funds, ticket sizes tend to be lower, so pre-seed is the only stage where micro funds are able to secure their minimum equity targets.
Everyone moved to earlier stage – part of the decline in late stage investing is the ‘baggage’ of companies that previously raised money at inflated valuations that they would struggle to justify in today’s market. Carta reports that 20% of the rounds in 2023 were down rounds, but I believe the actual number is much higher. For that and other reasons (like cash preservation) VCs moved to focus more on earlier stage, and many funds that typically invest in A started deploying more into seed rounds. That’s yet another reason for micro funds to move earlier in the fundraising timeline.
Lower valuations and follow on valuation sensitivity – fundraising is a recurring event in the life of a startup. To reduce the impact of dilution, the expectation is that startup valuation should more or less double between the pre-seed to the seed, and seed to series A (ideally backed by reasonable traction/ revenue multiples). Not only the bar for seed rounds has gotten higher (as less seed rounds get done) but also the founders prefer to build their company based on milestones.
During ‘peak VC’ in 2021, when money was cheap and free flowing, many startups opted to skip the pre-seed round as they could raise $5M off of a deck at pre-money $20M valuation with zero revenue. Today, most founders would be wary to try to raise a seed round at $40M pre with $1M in ARR, so they are opting to raise a pre-seed to build the MVP and ship it to first customers, reducing the burden of proof and valuation expectations.
Technology makes it possible to do more with less – LLMs, generative AI have are rapidly changing the game with all kinds of automations, from coding to content creation. Sam Altman recently said that we’re not far from the day that we’ll see a billion dollar company with one or few employees. Therefore, software startups (it depends of course) need less money than ever before to build an MVP and get to first customers.
What founders need to approach Pre-Seed VCs with confidence
As a pre-seed investor I can share how we evaluate the attractiveness of investment opportunities we evaluate:
Founding team – while the product, business model and market may all change with time, the founding team is the core of the company. We’d like to see that the relevant functions are covered (who’s writing code? who’s talking to customers?) and there’s a founder/problem fit, trying to answer the question of why is this the right team to tackle the problem, and whether we believe they can attract top talent to join them.
Market / opportunity size – one of the main tasks of pre-seed investors is to evaluate whether a startup is a fit with the VC model in general. Profitability potential is not the only filter VCs look at. VCs are looking for businesses that can become HUGE. As I wrote in the past, it’s ok, and even recommended to find a niche that might in time become big, but we need to see the potential of the startup to scale.
Product/ tech/ insight – In many cases, pre-seed startups might already have a minimal viable product or at least some initial functionality to demonstrate potential. Though your market opportunity may vary in obviousness, you’ve identified a clear gap your product aims to fill. We’d love to understand why you think this is a great opportunity that you’re willing to dedicate your next 7 years (give or take) pursuing.
In summary, the return of the pre-seed round in 2024 highlights a strategic shift in the startup ecosystem towards earlier engagement with investors, a milestone-driven approach to company building, and the advantages of partnering with specialist funds.
Shameless plug, at Remagine Ventures we’re one of those specialists funds, investing in the future of interactive entertainment tech, gaming and next-gen consumer startups. I genuinely believe that the next 24-36 months will be a great vintage to invest in early stage. Strong consensus founders in strong consensus areas have always attracted capital, but the real gems may lay outside of those pockets.
At the risk of sounding cliche, there’s never been a better time to be a startup founder. Think about it this way: talent is becoming available (all these layoffs you’re seeing big companies do are a pipeline of experienced talent for your startup), money for the earliest stage is flowing and new technology, in particular LLMs and generative AI has the potential to tackle many problems at scale without massive infrastructure costs.
I’m a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google’s first physical hub for startups.
I’m also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we’ve built 11 schools and 50 libraries in the developing world.
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