Pre-Seed Round

Anyone starting a company needs money early on: for salaries, technology, and office space. But in the beginning there are no customers yet willing to pay for anything. So founders raise money from outsiders, specifically from people who are betting on the company’s success. In return, these people receive a stake in the company, meaning they own a piece of it. This very first round of fundraising is called the pre-seed round. The name comes from English and roughly means “before the planting”: investment happens before anything has even been planted.

What a few hundred thousand euros decide at the start

At this stage, often only an idea and a small team exist. Without money, no one can work on it full-time. The pre-seed round therefore mainly buys the founders time. Typical amounts range between 100,000 and one million euros, meant to last twelve to eighteen months.

For investors, this is the riskiest stage of all. Most companies at this stage fail, and then the money is completely gone. In return, the stake is cheapest here. Anyone who got in very early in 2010 on a company that later became worth a billion dollars got their money back a thousandfold. These rare hits finance the many failures.

For AI startups, the amounts have risen sharply in recent times. The reason is simple: computing power costs money. A team that wants to train its own model burns through large sums on servers even before landing its first customer. That’s why you now read about pre-seed rounds exceeding ten million dollars, which would have been unthinkable a few years ago.

Shares, valuation, and the convertible loan

Central to all this is the valuation: a number that determines what the entire company is calculated to be worth. If a startup is valued at four million and someone invests one million, they then own twenty percent. At the outset, this number is purely a matter of negotiation, since there is neither revenue nor profit to base it on.

This is precisely why the valuation is often deferred. Instead of selling shares immediately, many use a convertible loan. This is borrowed money that automatically converts into company shares later, usually at the next larger funding round. The early investor then receives a discount, often 20 percent, as a reward for taking on higher risk.

A common misconception: more money is always better. Every round dilutes the founders' shares, meaning they own less of their own company afterward. Anyone who gives up 40 percent in the pre-seed round has barely any control left after two more rounds. That’s why experienced investors themselves advise against giving up too much at this stage.

Who provides the money and how to read about it

Typical investors are business angels, usually former founders who invest their own wealth and bring experience along. There are also specialized funds and government programs. In Germany, the High-Tech Gründerfonds is a well-known name, as are accelerators like Y Combinator in the US, which offer money in exchange for a fixed stake and a training program.

Such rounds appear in business news almost daily, often in sentences like “The startup raises three million euros in a pre-seed round.” These are typically followed by the seed round and then Series A, B, and C. The sequence roughly tells you how far along a company is: pre-seed means idea stage, Series B means an already operating business with real customers.

When reading such news, a skeptical eye is worthwhile. A large pre-seed round is not proof of a good product, only proof that someone believes in it. It also shows which topics are currently trending. If amounts in a particular sector jump sharply, that often says more about market sentiment than about the individual companies.