How to Get Pre-seed Funding for Idea-Stage Startups

Introduction

You know you have a great idea for a business. However, you don’t have quite enough funding to start building a prototype or marketing to your target audience. How can you get your idea off the ground?

Funding is a huge hurdle for starting a business, especially if you only have an idea. According to CBInsights, about 38% of startups fail because they run out of money. For founders who only have an idea, the risk of failure is particularly high. Without money, you can’t even take the idea to the product development stage, let alone start generating revenue.

But it’s not unheard of to raise money for a startup with a disruptive idea and not much else. You just need to know your idea-stage funding options and find what works best for your startup’s needs.

Can you get investors for an idea? 

For a company that simply has an idea for a company, you have a slim chance of securing investments. But there’s a difference between having an idea and having an idea-stage startup. An idea-stage startup is a company that has an idea for a product or service and is working toward developing a minimal viable product (MVP) with product-market fit, which is confirmation that what you’re selling actually has demand.

Lack of market need is one of the top reasons startups fail, so the idea stage is a crucial time for companies. The idea stage is when founders can fully develop their idea and create a pitch that explains why this idea is bound for success.

By establishing MVP and product-market fit, idea-stage startups can secure funding, even through investors.

For example, Appify was able to secure funding even in its earliest stages by having a well-developed vision and plan for the business. With a detailed idea and clear reasoning as to how this idea would scale, the startup was able to secure funding early on, FasterCapital reported. According to CBInsights, Appify has raised over $11.45M since it was founded in 2017.

Idea-stage funding options

For founders who feel strongly that their idea is worth building into a company, there are several funding opportunities for the idea stage.

There are pros and cons to the various idea-stage funding options to consider when deciding which option or options are right for your budding startup.

Bootstrapping

For new startups with no sales or MVP to show, bootstrapping is typically the first funding option that comes to mind. As DigitalOcean reported, as much as 70% of startups rely on bootstrapping by the founder or founders to start the company.

Bootstrapping is when the founder(s) use personal resources to fund the startup, at least in the earliest stages.

There’s no waiting period to apply to use personal savings, and you can prove to investors that you really believe in the company by putting your own money into it first. 

However, not everyone has enough savings to start a company, and putting personal funds into the business can put more pressure to succeed. This pressure could drive some founders to perform well, but it could also limit growth potential when so much of the focus is on making the money back rather than serving clients and producing a high-quality product.

Friends and family

Outside of using personal funds, another idea-stage funding option is to ask friends and family for investments in your startup.

The benefit to this funding option is that a founder can acquire larger investments from close friends and family or several smaller investments from loved ones, alleviating some of the personal financial pressure. Friends and family may also not come with the high interest rates you’d have by using credit cards or loans to start the business.

However, this option may only produce a small amount of funding, and it can put pressure on your relationships, especially if the startup doesn’t succeed. Even though you’re borrowing money from loved ones, it’s important to draw up contracts and establish professional boundaries to protect everyone’s finances and relationships.

Grants and competitions

In addition to bootstrapping or receiving funds from friends and family, grants and competitions offer another path for startup founders to get the money they need to launch the next phase of the company.

One huge benefit to grant or competition funding is that you don’t need to repay the money, so founders can relieve some of the stress that comes with receiving and paying back money.

There are some drawbacks to this idea-stage funding option. For one, grants and competitions may be difficult to access unless you know where to find them. For instance, this list of the top business grants for underrepresented founders can help increase accessibility to grant funding. Founders will need to spend time researching grants and competitions for which they qualify and preparing their application or competition submission.

This funding option can also take a long time. According to Grant Watch, the process to apply for a grant and receive funding could take up to 18 months.

Crowdfunding

Startup founders may consider crowdfunding as a way to fund their idea-stage businesses. This option allows the startup to share the idea on a crowdfunding platform, like Kickstarter or Indiegogo. From there, people can give money to your idea to help you develop it further, usually in exchange for perks such as early product access or discounts.

This method is another option that typically doesn’t require the founder to repay the funds or interest. Instead, the founder will pay with other perks or equity, depending on the type of crowdfunding.

One of the pros of crowdfunding is that it allows startups to build a loyal following early on, even before developing the product prototype. It’s also fast, and founders can raise the money they need within 30 to 60 days.

Keep in mind that crowdfunding has become extremely competitive, though. Not only are you up against other startups with similar ideas, but by sharing your idea on a platform, it also becomes public. That means you’ll need to take extra care to protect your intellectual property before sharing it online.

Crowdfunding can help you reach the next phase in your startup, but it won’t offer as much funding as other idea-stage funding options, like investors or loans. Plus, according to Kickstarter, fees to use crowdfunding platforms may range from 5% to 12% of the funds raised.

Incubators and accelerators

An incubator is an organization that offers tools and resources for idea- and early-stage startups to help develop their businesses. Incubators may offer office space, mentorship, business classes, networking events, and more to participants. Incubators don’t always offer money to participants. Still, the available resources can help founders in the idea stage work toward an MVP that will open the door to accelerator programs. In exchange for these resources, the startup usually offers equity.

An accelerator is typically for venture-stage startups with an MVP (minimum viable product) and proven product-market fit. These programs span around three to six months and offer startups a space to refine their product or service. Accelerators, like incubators, offer resources and mentorship during the programs. At the end of the accelerator, participants may receive funding in exchange for equity in the startup.

While both incubators and accelerators can help startups grow by offering invaluable resources and sometimes even funding, they require a lot of time and focus from founders. The programs may have short time frames to get a lot of work completed, so founders should prepare to spend most of their time and energy within the program to benefit from the resources and funding.

Angel investors

Unlike venture capital firms, angel investors are often willing to take on the higher risk of an early-stage startup. Still, it’s difficult to find investors for idea-stage startups, but that doesn’t mean it’s impossible. 

Founders will need to do thorough research into angel investors with experience funding similar startups, and it will be important to show how the startup will meet market demand and scale over time. After all, most investors are looking for opportunities that could provide a 10x or higher return on their investments.

If you do find an angel investor at the idea stage, you’ll need to learn how to listen and incorporate their feedback without losing your input during the decision-making process.

Pre-seed venture capital

Most startups aren’t thinking about venture capital until after the pre-seed and seed funding stages, but there are idea-stage funding options through VCs. Founders may find certain VC firms that offer smaller investments for idea- and early-stage startups.

A benefit to pre-seed venture capital is that it gives your startup more experience in venture capital, which will come in handy later on when you reach series funding.

However, the catch here is that VC firms are taking on a much higher risk by investing in idea-stage startups. In exchange, they are likely going to ask for higher portions of equity. According to Verified Metrics, pre-seed investors may request 5% to 10% equity, which is a significant amount of control to hand over so early into the company’s history.

Strategic partnerships 

Idea-stage startups may consider partnerships as a funding option to tap into resources and funding from an established company rather than angel investors or incubators. With a partnership, startups can share their idea with companies that are aligned in mission and industry. If the company believes the idea could be beneficial, it may offer funding or other resources in exchange for incorporating the product into their business and, often, for equity in the startup.

For example, Steve Jones, founder and CEO of pocstock, found opportunities to partner with major companies like Audible and Canva. In an interview with HubSpot for Startups, Jones shared that the Audible partnership provided funding to set up an office. With Canva, the pocstock team found an opportunity to improve the diverse stock image assets on Canva, leading to a global partnership.

When it comes to navigating partnerships and equity, Jones says, “If you're building something to scale and exit, you have to raise money. You also have to realize that it's better to have 20% of a $1B company than 100% of a $1M company.”

Turn an idea into a real product with idea-stage startup funding

When you have an idea for a product or service, it can be difficult to start developing that idea into a real business without any funding. Securing funding from traditional methods, like business loans or VCs, can be particularly challenging when you don’t have a sales history or any company metrics to prove your success.

However, there are still plenty of idea-stage funding options to help turn your dream into reality. From bootstrapping and crowdfunding to signing partnership agreements or finding angel investors, startups in the idea stage do have opportunities to develop the idea into a product. Founders just need to do some research and planning to secure the funds and start building their business.

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