Pre-Seed Phase, Seed Phase, and the Beginnings of a Startup — Problems and Challenges

Amazon, Apple, Google, and Uber are recognized brands today. They started just like most companies: as startups created by visionaries and enthusiasts. The driving force behind them was the belief that they had found a way to effectively solve one of the customer's problems. And that was the beginning, the seed—the pre-seed and seed stages of a startup. What do these stages look like in practice?

Pre-Seed and Startup Phase—That's How It Begins

Apple, Amazon, Google—they all started in a garage. Coincidence? Not necessarily. The beginnings of every startup are primarily about vision, not fancy offices in prestigious locations.

A pre-seed startup phase is based on establishing an idea that is clearly formulated, organizes thinking, allows for the selection of analytical tools, and tests what works and what doesn't.

Who is the most important participant in a pre-seed startup? The idea owners, known as founders. At this stage, they are usually on their own and without external assistance, validating the idea on their own. There are no external investors or partners at this point. One in three startups starts with capital of less than $5,000. These small initial amounts demonstrate that the founders' time and resources are the primary assets.

Pre-Seed Phase: From Idea to Prototype

What Problems and Challenges Do Startups Face in the Pre-Seed Stage?

Founders are the driving force behind startups, but they can also be the ones slowing them down. The fundamental mistake is a lack of validation of ideas with someone from their immediate environment. They believe that the idea is great and should be immediately launched on the market, skipping the phase of testing and market fit.

Lack of understanding this mechanism leads to numerous pivots (significant changes in essential elements of the business, such as target audience, distribution model, or monetization strategy). Money is spent on products that do not fit customers' needs.

What are the most common mistakes made by founders in the pre-seed stage?

• Believing they have a revolutionary, universal product when, in reality, it solves a problem that only founders themselves face.
• Creating intricate and complex solutions that are costly without justification.
• Seeking investors instead of dedicating time to show how to acquire the first paying customers (which is an investment that will pay off in the future).

How to Survive the Pre-Seed Stage?

The initial chaos and the euphoria of finding a business idea should be organized in a more formal framework. It is necessary to structure the processes and attempt to define the subsequent steps that will bring the idea to life.

The role and behavior of the founders are crucial. How they conduct their actions from the beginning, how they divide the work among themselves, and whether they are willing to use proven methods and tools largely determine the survival and further development of the startup. A good business idea must be reflected in numbers, solid market analysis, and preliminary cost calculation, as well as a reliable revenue forecast.

Start Planning

Planning is the basis for all actions and a solid foundation for further discussions. It is crucial to define the problems, known as pain points, that you will address in the future. It is worth determining not only the time frame for actions but also priorities and dependencies between the steps.

Research the Market

According to statistics, 42% of startups fail due to misjudging market demand. Therefore, market research should never be skipped. A thorough analysis of competitors, available software, or companies that solve similar problems is an essential step in evaluating the idea.

What does market research provide? It allows you to assess whether there

is a place for your product in the market and identify the initial challenges or problems to overcome. However, there is no guarantee that other factors, such as costs or technology availability, are sufficient to execute the idea.

Create a Go-to-Market Strategy

You should define your ideal customer, the problem you solve, and the value you offer. It may seem simple and obvious, but some startups skip this analysis. They assume that there is demand for their product on the market and invest in its development without gathering and verifying data. This is the easiest way to join the 90% of startups that do not survive their first year.

Use the Value Proposition Canvas (VPC)

What is the Value Proposition Canvas? It is a tool that focuses on value proposition and customer segments. The key is to find answers to questions such as:

• What tasks does the customer perform?
• What pain points are associated with those tasks?
• What benefits are important to the customer?
• What is your solution and value proposition?
• How can you help alleviate pain or enhance benefits?
• What benefits do you offer the customer with the proposed solution?

The VPC focuses on the customer's needs, and in our opinion, it is an essential minimum requirement. It is an extension of another tool, the Business Model Canvas, which is also worth using to create a complete business picture.

Conduct Initial Idea Validation

The purpose of this process is to create a simple functional prototype in tools like Figma or Adobe XD. The goal is not to create a full-fledged Minimum Viable Product (MVP) but to present the product and its basic functionalities to potential users. It is a quick, simple, and inexpensive way to identify flaws in the logic and weaknesses of the product, as well as an opportunity to discover features that users like and are looking for.

Not sure if you can survive the pre-seed stage? Contact us, we'll help you through this process.
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Plan Finances

The euphoria of finding a great idea often leads to the assumption that funds will magically appear to finance the venture. Unfortunately, that's not the case. According to data from the US market, a lack of funds is the second most common cause of startup failures, accounting for 29% of cases.

Plan your costs and consider how to obtain funding. However, this is not the stage to approach external investors with investment proposals for your startup. That round is still ahead.

At this stage, it is challenging to accurately predict the direction the idea will take and the total cost of its implementation. However, even with an approximate approach to costs, it is important to consider every expenditure category, such as recruitment costs, marketing, SaaS platforms you plan to use, and legal support for your venture.

Startup and Seed Stage—Evaluating the Potential of the Idea

The main task at this stage is to verify the business model and the idea from the pre-seed phase. The MVP (Minimum Viable Product) comes into play, which is a product with basic functionalities. It is not yet the final, comprehensive product, but a preliminary version of the idea that needs refinement and testing to determine whether it meets users' needs.

Since the product is now more tangible, related actions such as creating a landing page (a website that attracts users' attention) or developing an MVP emerge. This allows startups in the seed stage to seek funding by demonstrating traction, a working business model, scalability, and the potential for rapid growth with appropriate financing.

Startups in the seed stage usually do not generate revenue yet. In fact, startups at this stage rarely make any money. Employed team members often receive compensation below market value, often supplemented with equity in the startup, and rely on internal resources to solve problems, minimizing costs.

Seed Phase: From Prototype to MVP

Problems and Challenges of Startups in the Seed Stage

At this stage of startup development, the product remains the primary challenge. We must genuinely solve customers' problems. It is critical to achieve product-market fit as quickly as possible. Product-market fit is the state in which the market and customers are ready and eager to use our solution. It also determines whether a sufficient number of customers will pay for the product before focusing on strategic goals such as growth or upselling. Assessing whether product-market fit has been achieved is not as simple as it may seem, and each startup will have a different path to achieve it. Metrics such as Net Promoter Score, user growth rate, and churn (the percentage of users who stop using the product over a specific time period) can help determine if product-market fit has been achieved. However, it is difficult to definitively say, "We've made it." Achieving product-market fit will have a significant impact on previously defined KPIs.

A positively validated prototype that has passed user tests is not a guarantee of success. It may turn out that, for various reasons, users do not want to use the MVP despite their initial declarations. Therefore, continuous testing and exploration are necessary to understand users' actual expectations. The project should evolve and grow with functionalities that users genuinely need.

At the seed stage, a startup should also demonstrate its customer acquisition path. What better argument is there than results that show if investors invest in the startup, they will receive a significant return on their investment?

The last trap is the cost. Since startups are not generating revenue, there must be an awareness that financial resources will eventually run out if an investor is not found or if the product is not monetized quickly enough. It is crucial to be aware of this to avoid waking up one day without funds to operate the company. The runway, which indicates how many days, weeks, or months of funds are available at a steady cost level, is critical at every stage of the startup.

How to Address Startup Problems in the Seed Stage?

The central problem remains the product and its potential for market adoption. However, other factors influencing the future development and operation of the startup begin to emerge. Building solid foundations will help weather the challenges of the early startup phases.

Create an MVP

The prototype was developed during the pre-seed stage, and now it's time for a Minimum Viable Product (MVP) that can be released to the market and tested with real users. It is generally accepted that today's MVPs need to be more sophisticated than a few years ago when Lean Startup was a novelty. However, this does not mean that an MVP must have a vast number of features and be a comprehensive solution from the beginning. The scope of the MVP needs to be balanced and supported by UX research methods, such as user testing, to avoid spending too much on unnecessary functionalities and to create a product that effectively solves users' problems.

Prioritize User Experience (UX)

We are entering a time when ease of use and user-friendly experiences are prioritized, even in B2B software. Digital products such as mobile and web applications should have a well-designed UX/UI from the start, although the market has only recently fully understood its importance.

At the SaaSTR Europe 2022 conference, the founder of UserZoom stated that the decade between 2020 and 2030 will be the decade of UX, and the days when B2B software could have a poor UX/UI design, often created by developers without consultation with UX specialists, are over. We wholeheartedly agree. Understanding

users' problems, needs, and behaviors through user research and implementing this knowledge into product design will give startups a competitive advantage and increase the chances of success.

Test, Measure, Iterate

A startup must be flexible and ready to iterate. The first version of the product may not be perfect, and that's okay. It's essential to gather feedback from users and measure the performance of the product. This feedback loop allows for continuous improvement and adaptation to the market's needs.

Define Key Performance Indicators (KPIs)

Key Performance Indicators (KPIs) are metrics that help evaluate the progress and success of a startup. At the seed stage, it is essential to define relevant KPIs that align with the business goals and track them consistently. Examples of KPIs for startups in the seed stage include user acquisition rate, user retention rate, conversion rate, and customer lifetime value (CLTV). These metrics provide insights into the product's performance, user engagement, and potential for revenue generation.

Seek Funding

At the seed stage, startups often seek external funding to fuel their growth and development. This can be done through angel investors, venture capital firms, or crowdfunding platforms. To attract investors, startups must present a compelling pitch deck that outlines the problem they solve, their unique value proposition, the market opportunity, the business model, and the team's capabilities. It's important to demonstrate traction, such as user growth or initial revenue, to showcase the startup's potential.

Build a Strong Team

As the startup progresses from the pre-seed to seed stage, the team becomes increasingly important. Hiring skilled individuals who are passionate about the startup's mission and have relevant expertise is crucial. A strong team can help overcome challenges, drive innovation, and execute the startup's vision. It's important to focus on building a diverse team with complementary skills and a shared commitment to the startup's goals.

Develop a Go-to-Market Strategy

With the MVP in hand, startups need to develop a comprehensive go-to-market strategy. This includes identifying target customers, defining marketing channels and tactics, setting pricing and distribution strategies, and creating a sales plan. A well-executed go-to-market strategy can help startups gain visibility, attract customers, and generate revenue.

Summary

The pre-seed and seed stages of a startup are critical phases that lay the foundation for future success. During these stages, startups focus on refining their ideas, validating their assumptions, building an MVP, and attracting early adopters. It's a period of learning, testing, and iterating to find product-market fit and demonstrate the startup's potential to investors. By addressing the challenges and following best practices, startups increase their chances of survival and growth in the competitive startup ecosystem.