Familiarizing yourself with words used by founders and investors about pre-seed startups will help you chat more comfortably with people in the space. This doc is sourced from Embroker.
Startup fundraising occurs in several rounds. The pre-seed stage occurs early on when the startup is just beginning to take off. Since there are little data and performance indicators to base investments on, the pre-seed stage is more about selling the idea to potential investors. Pre-seed funding also often involves investing your own money and receiving contributions from friends and family.
The average funding amount in the pre-seed round sits just above $500,000 in the U.S. and typically doesn’t exceed $2 million.
Here are the terms you need to know for this stage:
One way to fund your startup is through bootstrapping: this is when startup founders invest their own money or get friends and family to invest in the business.
Bootstrapping gives business owners more room to experiment with the business and product since there’s no pressure to meet the expectations of investors.
Equity refers to the percentage of ownership in a business. VCs typically make investments in exchange for equity, a percentage of the company’s shares.
A startup accelerator is a fixed-term program that provides early-stage startups with financing, education, mentorship, and resources to help them grow into self-sustaining businesses.
Accelerators typically accept startups with an established business model.
A limited partnership is created when two types of partners — general and limited partners — go into business together. The general partners assume full liability for the business, and they’re the ones who actually manage the business.
Limited partners are only liable for a business’s debt up to the amount they invested in the startup. They have limited voting power and do not partake in the day-to-day operations of the company.
Scalability describes a business’s ability and capacity to grow and increase revenue. Scaling a startup requires you to have measures in place to be able to handle increased market demand, such as having the right infrastructure, staff, and technology.
Cash position points to the number of cash reserves that your company has at a specific moment in time. Cash position is a good indicator of how viable your business is — the healthier the cash flow, the more freedom you have to take business risks.
Crowdfunding is a financing method where a group of individuals invests in your business. To run a successful crowdfunding campaign, you need to showcase your project to a large audience to convince them to invest.
Depending on the type of crowdfunding, investors may receive shares, interest, or products or services for their investment, or they may not ask for anything in return.
Runway refers to how long your business can sustain itself before running out of money and is based on your income and expenses.
Here’s to calculate runway: initial cash balance / net burn rate
Through bootstrapping and crowdfunding, Fly Buy was able to raise $400,000 in capital. After figuring out their operation costs and burn rate, they estimated that they have a runway of around 18 months. To maintain positive cash flow while finalizing their drone product, the founders decided to go for a seed funding round.