It’s common for start-ups to raise a number of seed rounds. Seed rounds can be categorized into two main groups: institutional seed rounds and pre-seed. There are no strict differences between the two groups, but I will try to set the boundary. A pre-seed is an initial round of funding that is intended to help start-ups achieve certain intermediate milestones such as recruiting critical team members.
There are many factors that have led to the increase of pre-seed rounds. One of the main factors is the frothy late-stage funding market, together with the scaling-down of several larger funds that retrenched following the financial crisis and the scaling-up of several early winners in the institutional seed ecosystem.
Pre-seed rounds are important because they enable a company to recruit critical team members, overcome some regulatory handles or business risks, move to a new geography, and build the credibility of an unproven team. The size of pre-seeds is smaller for three main reasons: the team is smaller, the time required to achieve goals is short, and founders have an incentive to reduce dilution at a point when equity is least valuable.