Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
As an investor interested in early-stage businesses, at which point should you step into the funding process? For some, participating in the “incubation” period (the first few years) is the most exciting and rewarding. Other investors prefer to get involved once the business has built up steam and established proof of concept.
These two categories largely describe the “pre-seed” and “seed” stages of funding. Their distinctions are important to grasp both for founders and investors. The former will benefit by gaining more clarity about how to access funding at these two stages. Investors, moreover, will achieve greater confidence about which route to include in their portfolios – and, if both feature, the appropriate level of asset allocation.
Below, we explain pre-seed and seed funding in more detail for UK investors. We hope this content is useful to you. To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page. For enquiries regarding our latest projects and funding, you can reach us via:
+44 160 334 0827
What is pre-seed funding?
Pre-seed funding, in short, is the earliest stage of startup funding. Here, founders are often approaching friends and family for money, asking for support to get their idea off the ground (together with their own personal savings).
Funding is typically used to establish a minimum viable product (MVP), research the market, recruit one or two key team members and register important intellectual property (IP). For some promising startups, however, the pre-seed phase can involve angel investors.
This is where startup founders approach various investors for finance. Varying levels of equity are requested by investors (e.g. 10% of the business) in exchange, with the total “round” involving sums ranging from £100,000 to £500,000.
The business itself might be valued between £750,000 to £1.5 million. Funding will be earmarked by investors for very specific purposes such as building out the team and MVP.
What is the seed stage?
Seed funding is fairly similar to pre-seed funding – with a few key differences. By this point, the business has gained some momentum and sales have been happening. The business will have grown in value – typically to somewhere between £1m and 2m – and is exhausting its pre-seed finance. To achieve its growth potential, additional funding is needed.
Here, investor funds might be used for developing the MVP even further and expanding market research – gathering strategic data about customers and competitors to help inform strategic decision-making. Founders might also dedicate funds towards enhancing product distribution channels and gaining more traction with an “alpha launch” (with customer feedback).
Total seed funding might range anywhere between £500,000 to £2m, although certain capital-intensive startups (and those with exceptionally promising propositions) can receive far greater investment. Similar to the pre-seed round, investors will typically ask for an equity stake somewhere between 10 – 20%.
How do I build these into my portfolio?
It is important to specify that both the pre-seed and seed stages occur before the “venture capital” (VC) stage where large firms start to get involved. As such, these are not relevant to venture capital trusts (VCTs) which provide a tax-efficient means for investors to pool money together into unlisted early-stage companies.
However, this is not to say that tax-efficient schemes do not exist for businesses yet to enter their “Series A” or later funding rounds. The Seed Enterprise Investment Scheme (SEIS), for instance, is available to companies which are less than 3 years old, with fewer than 25 employees and less than £350,000 in gross assets.
An investor can commit up to £200,000 towards SEIS-qualifying companies per tax year. This grants access to inheritance tax (IHT) relief, 50% income tax relief, loss relief and tax-free growth upon share disposal. Due to the higher potential “real returns” and risk mitigation on offer, SEIS is a great option to consider for investors interested in companies at the pre-seed and/or seed stages.
Investing in businesses at the earliest stages may require access to decent sums of capital, especially for prospective angel investors. However, there are other avenues for investors involving a lower barrier to entry. The Innovative ISA, for example, allows retail investors to engage in peer-to-peer (P2P) lending and crowdfunding for startups, allowing for tax-free returns within the ISA “wrapper”.
Similar to almost all other styles of investing, however, financing early-stage businesses involves weighing up two key considerations – your time horizon and attitude to risk. However, investing at the pre-seed and seed stages is unique in that investors are often looking to generate a high return within a relatively short period (e.g. exit “window” of 3-8 years). This makes due diligence and diversification even more important for the early-stage investor since there is less time to wait for your investment to recover its value if it underperforms.
Invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group?
Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827
