The nature of startup funding has dramatically changed in the past decade, and if you’re looking to successfully grow your company, it’s crucial to understand what the funding landscape looks like today. Investors in the early 2000s were often ready to offer Series A financing to companies that looked promising enough to make it to market. Fast forward 10 to 12 years and the process shifted into the animal that we know today, where Series A rounds can occur for pre-revenue companies and many companies stay private for far longer. Enter pre-seed funding.
We’re going to take a quick look at pre-seed funding and explore what it is and how you can get it. After all, any startup that’s looking for long-term success needs capital to thrive, and if you’re poised to reach out to investors in the near future, you need to know what exactly you’re asking for and who to ask.
A Quick Lesson In Seed Funding
Without delving deep into the fine print of investor funding over the last decade, startups should know that for all intents and purposes, pre-seed investors are a relatively new piece to the puzzle. Companies used to enter into the funding game looking for larger fundings like a Series A round out of the gate, and even if they didn’t have a fully ready product just yet, this money was intended to get them there.
Seed Investors fill a critical place and are today key to the early-stage funding puzzle and can make or break a company’s future. They will often be your first investor, stock-owning advisor, and a critical part of your seed round’s negotiations. That’s not to say that they will be directly involved in negotiations, but rather that their investment terms will impact the next funding round.
Late in the first decade of the 2000s and early in the 2010, both the number of VCs in the United States and their funding capacity increased, leading to a major shift. Series A rounds instead became larger and more focused on companies that already had some proven viability and the funds distributed were often larger than they were in previous years. Companies not quite ready for Series A began to seek out seed funding to get them ready for bigger opportunities.
This left room for yet another initial round through pre-seed investors and seed investors, those who are looking for early-stage startups with specific goals compared to those who are looking at companies making an entrance into the marketplace. In most cases, pre-seed funding tends to be small ( $750,000 or less) and leaves room for a round or two of seed funding after. Many of today’s pre-seed investors are tech company employees who have made their own riches from their startups, family offices, and high-net worth individuals.
When Pre-Seed Money Makes Sense
Before we uncover exactly how to go about acquiring this funding, it’s best to know if it’s actually right for you. Now that you understand the pre-seed definition so to speak, how can this money be applied in the real world? Pre-seed funding makes sense in any of the following situations:
- You’re still in the product development stage and need capital to keep operating, although you’re not too terribly close to going to market or even revenues
- Your team needs funds to hire a foundational member of the team like a CTO
- There’s an impending risk to the livelihood of your startup or a regulatory issue to address before moving forward (for example, something like healthcare or energy)
- You’ve moved locations for any number of reasons and need funds to reestablish your operation
Keep in mind this list is not all-inclusive and any number of startups might find pre-seed funding valuable for other reasons, but if any of the above resonates, then you’re likely in the market for this initial investment. As always, funding rounds are typically associated with completing a major milestone – if you’re going to raise a round make sure you know how you’ll use that funding! Investors typically call this concept “use of funds.”
How To Acquire Pre-Seed Funding
Meeting with pre-seed investors might seem nerve-wracking, especially if your startup is in the initial stages and you feel that your vision might not be truly seen by others. Like any other funding round that you enter into, it’s key to have your financials organized and to develop a clear plan detailing exactly what the funds will be used for. Pre-Seed or Angel Investors can sometimes be less sophisticated than VCs, but many of them will expect to see a document that speaks to the market opportunity, your possible customer(s), and your product’s market and fit. All of this won’t be nailed down, but having the ability to speak to these concepts will be critical for fundraising.
As far as finding these investors goes, that can be tricky. Typically companies start with a friends and family round; this could include anyone from your serial entrepreneur friend, mom and dad, or that rich uncle. While it is an easier sell to people you know, be mindful that you are taking their hard-earned money with some expectation of a return. Next up, would be looking into your network’s 2nd, 3rd, and 4th degree connections for meeting investors. LinkedIn can be a great tool here to make connections, get intros, and meet new contacts. Typically you’ll want to find someone that has an affiliation with a local angel network or other early-stage investments. Networking with local founders can help you identify these people and how to connect with them, or at least point you in the right direction.
If you have a minimal viable product already, you’re in great shape, but remember that an MVP isn’t a requirement for pre-seed funding. However, you do need more than just a great idea. Simply demonstrating customer engagement can be enough to secure funding, and can be done in any of these ways:
- Consider offering pre-sales or pre-registrations for your product or service to gauge interest and begin building your brand. It would be difficult for an investor to say no if it’s clear that the market is clamoring for your products
- Create a landing page for your upcoming launch and integrate tools to capture emails, track clicks on non-functional “purchase” buttons, and count page visits
- Build your brand via social media and create a buzz around what you’re doing. Again, the more interest you can generate, the more confidence an investor will have in your startup
There are many other factors that go into pre-seed funding decisions, and ideally, a startup should treat it as if it’s a huge Series A deal. Investors want to see that your founders are well-qualified to bring the company to market and the more you can illustrate a detailed roadmap for not only your pre-seed funding but all future capital, the better.
Startups who are ready to raise seed funding and want to tap into an experienced mind for help should look no further than airCFO. Our team can ensure you have everything in place for successful investor meetings now and in the future.