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, what seed funding is, and how it could help accelerate your business’s growth.

Once you have a great business idea and decide to start your own venture, the next big question is how you’ll get the money to make it happen.

Seed funding is one of the many funding opportunities that could help you get your start-up off the ground and grow it into a profitable, successful business.

What is seed funding?

Seed funding is the money needed to get a business off the ground – this money is the ‘seed’ from which your start-up business grows.

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 a greater scale, such as moving from a prototype into initial manufacturing and sales.

Seed funding for start-ups may come from the business owner’s savings, friends and family, bank loans, or from investors.

The investors may include ‘angel investors’ (people who invest their own money into new businesses) or ‘venture capitalists’ (who manage a pot of money meant for investing in start-ups).

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 potential of a business idea, product, or service.

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:

• market research – understanding customer needs and market trends, which could help in refining final product or service offerings
• product development – covering the costs of design, product creation, and testing of product prototypes to ensure they are what your target customers want and that they meet regulatory requirements
• rent and utilities – paying for physical premises if needed (including renting office or retail space) and covering utility bills such as gas and electricity
• equipment and inventory – purchasing the necessary equipment essential for operations or building the initial inventory for product-based businesses
• hiring staff – 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 occurs 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.

This is the first injection of money into a business idea and is often provided by a start-up founder via personal savings or friends and family.

Seed funding

Seed funding comes after pre-seed funding and supports a potential business’s further development.
For example, the funds might be used to start the business and cover initial operating expenses.

Seed funding amounts are typically larger amounts than pre-seed funding.

The funding can come from a number of sources, including angel investors and 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.

It often comes after the business has proven it has significant traction in its chosen market and has the ability to generate more sales and profit.

You can have multiple rounds of Series A funding involving investors such as venture capitalists.

Series A funding can be used for product development, expanding your customer base, growing your team, or conducting more extensive market research and targeted marketing.

After Series A funding, there can be further rounds of funding called Series B, Series C – and so on.

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

How much can a business raise in seed funding?

The amount of seed funding your business could raise from investment depends on several factors, including market size, your business plan, competitive advantage, and your start-up’s valuation.

The government’s Seed Enterprise Investment Scheme (SEIS) offers tax incentives to investors to help early-stage companies raise seed capital.

Under SEIS, companies can raise up to £250,000 through SEIS investments.

For example, most companies (67%) received investments of over £50,000 through the SEIS from 2022 to 2023.

In the same period, around 41% of companies raised amounts over £100,000.

Seed funding can come from various sources, of which SEIS is just one option available to UK startups.

How long does it take to raise seed funding?

Securing seed funding from an investor could take a few months to over a year.

You will need to prepare your business plan and pitch, identify and contact potential investors, and set up meetings.

Once an investor is interested in your business, it will take time to negotiate terms, perform due diligence, and legally finalise the investment – this part could take several months.

How to get started with seed funding

Decide if it’s right for you

Seed funding is only one of several funding options that could help your start-up succeed.

You may first want to assess your financial needs, business model, and growth strategy before determining how much capital you need to grow or handle the risks of borrowing or giving away equity.

Before deciding, you may want to consult with a financial or business advisor.

Put together a pitch

A business pitch is a presentation to potential investors highlighting your business’s value proposition and potential for growth.

A simple, clear pitch that clearly states how much you wish to borrow and is confidently presented to investors could increase your chances of success.

You may want to include key information such as the problem your business solves, your solution, business model, target market, marketing strategy, financial projections, and the team behind the business.

Read our guide on ten ways to create a winning start-up pitch.

Pull together the relevant documents

To secure funding, you may need to present documents to investors so that they can make an informed decision.

A business plan could be the most important document you’ll need – it’s a working document that describes your core business objectives and how you plan to achieve them over a set period.

Download our business plan template. 

Find investors and choose the right one

Once you know your funding needs and have a concise and compelling pitch, you could look at finding investors for your start-up.

Finding the right investor might start with networking, attending relevant industry events, or using online platforms such as LinkedIn.

It’s a good idea to set up a compelling profile to engage with potential investors interested in your field.

Ideally, you may want an investor who shares your vision and brings valuable experience or has connections in your industry.

Multiple investors could provide more capital but consider how complex it could be to manage multiple relationships, as this may influence how many investors you choose to work with.

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

Negotiate a deal

Negotiating a seed funding deal may involve discussions about your business’s valuation, the amount of investment, and the equity offered in return.

Balancing getting the funding you need with how much control you keep over your business could be crucial – seek professional legal advice to ensure you understand any contract specifics.

Sources of seed funding

There are several ways you can access funding for your new business.

These include:

Personal savings and assets

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

However, achieving a return on investment is not guaranteed, which means 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; if the business fails and you can’t pay them back, it could strain your relationship.

Angel investors

An angel investor provides financial backing to a start-up in exchange for equity – a percentage of the company.

With the right angel investor, you can benefit from mentorship and financial backing.

Many angel investors can connect you with industry professionals who can help accelerate your business’s growth.

Loans

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

They 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 that can strain your cash flow, 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 smaller business a loan of up to £25,000 plus post-loan support and mentoring.

Incubators and accelerators

A business incubator is an organisation or programme designed to support the development of early-stage startups.

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

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

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 – in addition to raising funds, it can increase interest and attention from potential stakeholders, investors, and customers, which can put your growing business on the map.

It’s essential to be aware that a successful crowdfunding campaign requires time, energy and money, and it is not guaranteed to pay off.

Find out more about crowdfunding in our guide.

Ten tips for securing seed funding

• have a business plan – take the time to create a robust plan that outlines your product or service
• know your market – consider conducting market research, such as surveys, questionnaires, and interviews, so you can fully understand the market demand, your target demographic, and your competitors
• create a financial forecast – estimating your future costs allows you to predict how much revenue you’re likely to get so you can manage your expenses and put contingencies in place if you encounter any unforeseen expenses.
• know how much you want to raise – financial forecasting can also indicate how much you need to borrow to avoid underestimating or overestimating your funding needs
• networking – think about attending as many industry events and meetups, start-up events, and seminars in your area as you can. Networking can be daunting at first, but it can open doors and introduce you to potential investors
• don’t overlook your connections – friends and family might be able to provide funding, or they could introduce you to other people who can
• participate in start-up competitions, events, and programmes – keep an eye out for competitions and events targeted explicitly towards pre-seed funding, as this could offer you valuable opportunities
• think like an investor – understanding an investor’s needs, concerns, and expectations could help you secure a deal
• be transparent – an investor will want to have a clear idea of how you plan to use your seed funding, so explain as much as possible about your plans to help get their buy-in
• follow up with potential investors – if you secure a meeting that could lead to possible funding, always follow up with a note to say thank you and send any additional information promised during the meeting.