Seeding the Future: A Guide to Understanding Pre-Seed and Seed Investments

Imagine you have a seed: a small idea with the potential to grow into a majestic tree. That seed is your startup. But for it to germinate and grow, it needs nutrients, fertile soil and constant care. In the startup world, those nutrients are pre-seed and seed investments.

These types of investments not only provide the financial resources necessary for the development of a startup, but also give entrepreneurs access to mentors, networks and strategic investors that can accelerate their growth. Although, as many mentors in our community say, the best early investors are customers.

Let's not forget that, when we are in the early stages, our priority is to validate, validate and validate: validate the idea, the solution, the technology and move forward on solid foundations in order to grow. There are many innovation methodologies, but the lean method is still key. Remember it? The one that promotes efficient business development, focusing on experimentation, rapid feedback and continuous iteration to minimize risks and optimize resources ;)

But if we have already validated and know that we need money to turn our business idea into reality, now let's see how to access those sources of funding, beyond our beloved family, friends and fools.

I hope you find this reading useful....

What is a Pre-Seed investment?

The pre-seed phase is the most incipient stage of a startup. You do not yet have a consolidated product, but you are validating the idea, researching the market and perhaps developing a prototype. At this stage, resources are limited and founders usually finance themselves with personal savings, contributions from friends and family or initial investors who believe in the vision of the project.

Pre-seed investors, often Business Angels, accelerators or specialized early-stage funds, seek to support ideas with high potential, understanding that it is a high-risk bet. They do not expect immediate profits, but rather to be part of the birth of an innovative company.

According to the VII Business Angels Report published by AEBAN in 2022the pre-seed investment in Spain usually ranges between €50,000 and €200,000. This capital is mainly used for:

1. Develop the MVP (Minimum Viable Product);

2. Conduct market research;

3. Build a start-up team;

4. Cover basic operating expenses;

5. And obtain initial customer validation.

What is a Seed investment?

If the pre-seed investment allowed your startup to take root, the seed investment is the water and nutrients that will help it grow rapidly. At this stage, you have validated your idea, you have initial users and a more defined business model. Now you need to drive growth and achieve metrics that allow you to scale.

Investors at this stage are usuallyVenture Capital funds, Business Angels with greater financial capacity and accelerators looking for startups with traction and a scalable business model.

According to the article. "What are the main investors in startups in Spain and at what stage do they invest"?seed investment in Spain is around €300,000, although it may vary depending on the sector and the maturity of the startup. This capital is allocated to:

1. Expand the equipment;

2. Expand marketing and sales strategies;

3. Develop new product functionalities;

4. Explore new markets;

5. And improve the startup's technology and infrastructure.

How to choose the right investment for your startup?

There is no one investment that is "better" or "worse" than another; it depends on the stage your startup is in. To make the best decision, you should consider several key factors:

Level of development of the startup

• If you only have an idea or an initial prototype, pre-seed investment is the most viable option.

• If you have already validated the product and have users or revenue, it might be time to look for a seed investment.

Financial needs

• Think: How much capital do you need to reach your next milestone?

• Define a detailed financial plan with the necessary investments and their impact on the growth of your startup.

Type of investors

• Business Angels: Ideal for initial stages, as they provide capital, experience and knowledge.

• Venture capital funds: Enter in seed and later stages, when there is more traction.

• Accelerators: Offer capital, training and strategic contacts.

4. Control level

• External financing involves relinquishing part of the control of the company.

• Define how much equity you are willing to give up in each investment round.

The "valley of death" and the importance of Seed investment

As explained very well in an Upventure Partners articlemany startups fail between early stage and growth due to lack of funding. This period, known as the "valley of death", is when the startup has already exhausted its initial resources, but still does not generate enough revenue to be sustainable.

Seed investment plays a crucial role in helping startups get through this stage, providing them with the capital needed to reach profitability and scale.

Tips for securing early-stage investment

To attract pre-seed and seed investors, you need to prepare well. Here are some key tips:

1. Develop a solid business plan: Clearly define your value proposition, target market and monetization strategy.

2. Demonstrate traction: Investors want to see evidence of interest in the market, whether in the form of users, sales or strategic partnerships. So, show them real metrics from your startup.

3. Build a strong team: The capacity of the founding team is key to the success of the startup.

4. Prepare a compelling pitch: You must communicate clearly and attractively why your startup deserves investment. Practice it as many times as necessary and improve it with the feedback received.

What forms of investment are there?

In Spain, startups in pre-seed and seed stages have various forms of financing, both public and private. These are some of the options available:

Sources of public financing:

1. ENISA (National Innovation Company): Offers participative loans for innovative and viable business projects. Its financing lines include:

• Young Entrepreneurs: Loans from €25,000 to €75,000 for startups led by entrepreneurs under 41 years of age.

• Entrepreneurs: Loans between €25,000 and €300,000 for start-ups with no age limit for founders.

• Growth: Loans from €25,000 to €1,500,000 for companies in expansion phase.

2. CDTI (Center for the Development of Industrial Technology): Provides financial support to R&D&I projects. It is worth mentioning the NEOTEC program, which offers grants of up to €250,000 to small technology-based companies that are less than three years old.

3. Fond-ICO Next Tech: With a budget of €4 billion, this fund boosts the technology sector in Spain through direct investments in startups and venture capital funds.

4. Horizon Europe: European Union framework program that funds research and innovation activities. Startups can access grants and support for disruptive and high-impact projects.

Sources of private financing:

1. Venture Capital: Funds that invest in startups with high growth potential. In Spain, managers such as 4Founders Capital have launched funds, such as 4Founders Capital III of 65 million euros, aimed at investing in around 40 early-stage technology startups.

2. Business Angels: Individual investors who provide capital and expertise to early-stage startups. According to a study published by El Referenteit is estimated that there are more than 3,000 active business angels in Spain.

3. Equity Crowdfunding Platforms: Allow multiple investors to contribute capital in exchange for a stake in the company. Platforms such as Crowdcube y Fellow Funders are recognized in the Spanish ecosystem.

4. Accelerators and Incubators: Offer mentoring programs, resources and, in some cases, financing in exchange for a stake in the company.

In addition to these forms, it is essential for startups to consider specific programs and support that may be available at the regional or sectoral level, as there are local initiatives that offer financial support and additional resources for entrepreneurs. For example, MICIU (Ministry of Sciences, Innovation and Universities) have mobilized around 450 million euros in order to boost the innovation of national startups.

To keep up to date on current calls for proposals and programs, it is recommended that you regularly consult official platforms such as the National Office of Entrepreneurship (ONE) and the Foreign Trade Institute (ICEX).

What conclusions do we draw?

The path of a startup is full of challenges, and getting investment in the early stages can make the difference between success and failure. Whether it's a pre-seed investment to validate your idea or a seed investment to scale, each phase has its importance.

Analyze your situation, choose the right type of investment and get ready to talk to investors. With the right strategy and the support of the community of other entrepreneurs, you will be able to grow your startup and consolidate it efficiently.

At Tetuan Valleywe have been helping entrepreneurs prepare for these challenges for years. If you want to learn more and connect with other founders who have gone through the same process, join our community, join our community and keep exploring with us!