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Fundraising

Your how-to guide 👍 on how to get pre-seed funding

How to secure funding, where to find investors and how to best pitch them.

August 25, 2021

Your how-to guide 👍 on how to get pre-seed funding

A question most entrepreneurs' have as they start working on their company is how can you ensure you have good financing 😎 for your startup 🤔 and what are the top ways to raise money 💰?  

This piece will focus on the funding for early-stage companies, i.e., pre-see and seed funding. We hope that this how-to guide will help you learn how to secure funding 💰 faster when you're raising money for pre-seed startups as an entrepreneur or startup founder.

What is seed funding?

Seed funding is the first equity funding your company raises.

The investors in this kind of round would be any combination of large-angle investors, micro VCs, and VCs who focus on seed stages. Check sizes would be anywhere between $0.5M-$5M.

A company that raises seed funding would usually be required to have:

  • A team of founders committed to the company
  • A reasonably focused idea or product
  • An MVP of the product under development
  • Some validation for product-market fit
  • Some initially traction with the market

The last point about market traction is really what defines the stage, and it is industry dependant. In B2C, you'll be required to show users' onboarding, usage, and growth, albeit all in relatively small numbers (thousands to hundreds of thousands depending on your app). In B2B, you may need customer interviews, letter of intention (LOI), ongoing POCs, etc., but may not be required to show any commercial contracts yet. This really depends on your ACV - the lower the planned ACV is, the more real commercial progress you'll be required to show.

The seed funding goal is to get you to prove product-market fit, gain some commercial traction, and set you up for series round A. This takes time, so you'll need to plan for a decent runway of 18 months since it might take 6 months to raise the next round.

One of the biggest challenges entrepreneurs have is getting from the idea stage to having enough proof points to raise seed funding. For that, you'd usually bootstrap or get some pre-seed funding, which we'll explain below.

What is pre-seed funding?

Pre-seed funding enables you to get from an idea to having enough proof points to raise a seed round.

The investors in this kind of round would usually be small angles and early-stage accelerators. The overall check sizes would be anywhere between $25K-$100K.

This round is seldom an equity round and is more commonly structured with some convertible, such as a SAFE.

To raise pre-seed funding, you would likely be required to show:

  • A customer pain that is not addressed well today.
  • A market opportunity around this pain.
  • A team of founders who will be able to build a startup around it.
  • Some indication that the company can achieve product-market fit.

The last point, product-market fit, is also the hardest. It's important to show what you've explored to make the investors believe the company can achieve it. Show customer interviews, show a willingness to corporate around solving the pain together with you, etc.

Keep in mind that the purpose of the pre-seed funding is just to set you up for seed funding. It would be best if you didn't plan to build a full-fledged company with it. Just aim to prove the needed points and start raising your seed funding in parallel.

What is pre-seed funding

How to raise pre-seed money when you don't have much to show?

This is a really common problem for startups, especially if you're bootstrapping or starting from an idea.

Your job as an entrepreneur is to find potential investors who make a good fit for your company and its stage.

Apart from an amazing team and groundbreaking idea, you can also impress them by:

  • Taking part in startup events (such as Startup Weekends, or other hackathons, etc.) and winning awards
  • Building a solid social network and showing how you can leverage it
  • Engaging with the community and making yourself known to investors.
  • Showing interest by other investors

While none of the above truly creates value in a company, they help to draw attention to your company. Word of caution: it is easy to get distracted with focusing on attention-grabbing activities, forgetting you're building a company. It's always better to interview more customers and get more insights than just making noise and the investors understand it.

Marketing to customers is analogous to creating noise to investors.
Just the same as customers would expect a product, the investors would expect you to show them what progress you've achieved in validating your idea apart from winning a pitch day.
In the early stages of the company, customer discovery is king, and proving that a real problem was identified is the key.

In every stage of fundraising, you'll be working with people, and you should get to learn as much as possible before you approach them. This is especially true for angel investors who invest in the early stages. They get approached by a huge number of entrepreneurs, all confident they have the next TikTok of Tinder (or vica versa). You'll gain a lot of points by carefully crafting your approach to them detailing:

  • Try to get an intro if possible, preferably from a founder they invested in.
  • Try to state why do you think they might be a good fit for your company? Good indications are companies they invested in from the same industry, or founders you are networked with.
  • State in advance what you currently have, what you're trying to achieve, and how much you're trying to raise. Holding your cards close to your chest is great, but it might also kill the relationship before the fire meeting.

Hacking Seed and pre-seed funding valuation

Raising early funding is great as it allows you to move faster than you could just be bootstrapping. The thing you need to be most careful of in the early stages is dilution.

As long as you can raise funds without setting any value to your company, that is great. The problem arises once you do early equity rounds or capped SAFE rounds, with a capped valuations that dilute your holding in the company.

The solution to it is raising SAFE agreements with varying post-money valuations as you progress. For example, you might raise a SAFE of $200K at a post-evaluation cap of $4M soon after you've incorporated. This means you're granting the investor 5% of the current company. 6 months later, you might have some more proof point, the company is progressing, but you might not be ready yet for a full seed round. You can raise more money, but this time with a different post money valuation. For example, raise a SAFE of $800K at an $8M post-money valuation, so the new investor gets 10%.

Although you raised 4x the sum of money in the second SAFE, you only provide 2x of the percentage due to the changed cap.  You might ask yourself why the new investor would agree to a different cap, and the reason is decreased risk. You've shown you can create value with the initial money you have received; you already show more proof points, and thus the risk of the new investor is lowered. Keep in mind that the biggest risk for any early-stage company is that it would not raise its next round and dissolve. You increase your potential for a future successful seed round or even a series round A by showing progress.

Angel vs. seed round

Although angels can participate both in pre-seed funding and in a seed round, the general distinction between an angle angel vs. seed round is in the following characteristics:

  • Process length: angel and pre-seed funding usually take much less time. This is because there is little to analyze in the business due diligence and not enough company traction to require deep financial or legal due diligence.
  • Legal work:  the legal work would also be much simpler. Since the amount of money is small, you don't need to draft a complicated equity and option grant and usually rely on a standard SAFE agreement.
  • Business scrutiny: venture capital due diligence usually follows a structured process. Angels process is usually more ad hoc and thus shorter.
    For this reasons, VCs are seldom impressed by Angel names on the cap table. 
  • Investor type:  angels can invest strictly in their belief in the founding team and its capabilities to build a successful company.  A
  • Seed round investor will be more likely to insist on some proof points of how the company is currently doing, how much progress it has made so far etc.

Hacking Seed and pre-seed funding valuation

How to get seed funding for an app

The days of money chasing apps are long gone. Current investors will focus on the app's business model and the founders' indications towards that model. Most consumer-facing apps will rely on one of the existing business models, such as

  • In-app Advertising.
  • In-App Purchases.
  • Paid Apps.

Notice that each of these business models will have different requirements before you can raise seed funding.

For example, if your app is a free app that relies primarily on in-app ads, you'll need to show:

  • Number of downloads
  • Number of daily active users
  • How long they engage with the app every time
  • The geographies
  • The partnered add networks you use
  • Your CAC
  • Your growth over time

Nobody is expecting you'd have 10M active users when you raise your seed funding, but what you should be able to show is:

How your market opportunity allows you to get there.

How do you plan to get to the next stage with the funding you're raising.

If you have not raised any funding, it's a good idea to raise some pre-seed funding and invest it in marketing to show growth and show actual tested CACs.

Seed funding pitch deck

A seed funding pitch deck is an essential tool for finding investors.

It should have all the components of a pitch deck, but it should focus especially on the following items:

  • Team slide - this is probably the most important slide for early-stage ventures. The company and numbers don't speak for themselves yet, and it's all about the team.
  • Problem statement  - how big is the problem you're trying to fix and the market size for your potential product. You'll want to quantify this as detailed as possible.
  • Plan your business model - how will you make money? Make sure to break down all parts of the process: how you acquire customers, how they use the service, and so on.
  • A financial plan focused on cash burn - simply representing how long you can last with the current funds.

Future financing plans - angels and early investors need to know that VC investments would follow their investment. You need to show the proofs you are planning to achieve and the timeline to facilitate a future financing round.

What's next

Seed funding is the way to go for entrepreneurs who want a little more than just pre-seed financing.
The biggest difference between seed and pre-seed rounds are how much money you have in hand, how long it takes to close, what type of investor you're looking for, and how much work needs to be done before an investment can happen.
Whether you need help with developing your own seed round deck or if this article has sparked some inspiration - let us know!


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