Investing in startups can be exciting yet risky for investors and founders. No matter what side you’re on, it is essential to understand the different investment rounds a startup goes through and how they work. Here is a quick overview of the various investment rounds, their meaning, and when they occur. However, these standards often go out the window when adult ventures and investors converge.

Pre-Seed Funding
Pre-seed is the earliest funding stage. This is when the startup is still in its conceptualization phase, and the founder’s idea is still taking shape. The funding at this stage is usually minimal, and most experienced (or knowledgable) founders focus on building a Minimum Viable Product (MVP). The benefit of this is creating something quickly and affordably to test the market. Commonly, however, people “go big” assuming a need exists or underestimate their ability or marketing cost to “break in” to an existing niche. The risk is incurring small losses by following the MVP model or incurring huge losses upon failure. Pre-see is often called the “friends and family” round because it is often funded by the founder’s friends and family members. The founder may also self-fund the business at this stage, usually because it is often too risky, even for the most affluent angel investors. It is the most perilous stage for investors because the business’s success depends solely on the founder’s ability to execute the idea. As an investor, looking for startups with a proof of concept or minimum viable product (MVP) before investing in them is crucial.

Seed Funding
At the second funding stage, the average startup has a more defined business model and has developed an MVP. Seed funding is usually used to fund early product development, such as creating prototypes or hiring a team.

As an investor, seed funding provides an opportunity to invest in startups with a higher chance of success than the pre-seed stage but still carries some risks. Often the “friends and family” or founder are tapped out and need funding typically provided by angel investors or early-stage venture capital (VC) firms. The amount of seed funding raised can vary, but it hovers between $500,000 to $2 million for mainstream ventures. [Continue Reading in XBIZ Magazine]