Pre-seed funding is a crucial step for startups on the path to success. This type of funding paves the way for startups to validate their business model, build a prototype, and begin developing their product or service. While it can be challenging to secure pre-seed funding, it is essential for startups that want to achieve long-term success.
Picking the right investor goes beyond funding history and how good of a deal they’re offering—relationships between founders and investors exceed signing a contract. When you choose an investor, you’re choosing a life partner.
The Role Of An Investor
Investors play a fundamental role in the growth of a company. Providing the initial funding gives the company the necessary resources to get off the ground. They also offer the company a vote of confidence, which can attract other investors and help the company grow.
However, different types of investors focus on various stages of a startup. In this blog, we’ll look specifically at the pre-seed investor who supports early-stage companies.
How Pre-Seed Funding Investors Differ From Other Investors
Pre-seed investors are a vital part of the startup ecosystem. They provide the initial funding that helps startups get off the ground and achieve early-stage milestones. Without pre-seed funding, many startups would never make it past the ideation stage.
Angel investors are also pre-seed investors seeking early-stage companies trying to get their foot in the door.
Depending on their portfolio, Angel investors may invest during the pre-seed stage. In contrast to typical pre-seed funders, angel investors have a high net worth and typically have multiple investments at once. Startups are their way of diversifying their investment portfolio in exchange for ownership equity.
Investors interested in pre-seed stage companies typically invest small amounts (usually between $25,000 and $500,000) before the startup generates revenue. Pre-seed investments fund prototype development and first-round hires to help the company grow.
Pre-seed capital investors take on a lot of risks, as most startups that receive this type of funding are early-stage and have not yet proven themselves. Genuine interest in pre-seed startups means potential investors believe in your company's goals and values.
The Importance Of Finding The Right Investor
The relationship between an entrepreneur and their investor is key to the success of a business. Many founders make the mistake of viewing fundraising as a singular moment when it's the formation of a close partnership.
When you choose a life partner, you look for someone with the same values and goals as you, right? You can’t move forward together if you’re going in different directions. The same holds for startup founders and investors.
In a marriage, decisions are made together with mutual respect and understanding – in business, the board of directors makes decisions based on what everyone feels is most beneficial to the company. In most cases, investors become a part of your board. You don’t want to tie yourself down to someone who doesn’t respect your opinions or listen to your concerns.
How To Choose A Pre Seed Investor
Choosing the right pre-seed investor can be a make-or-break decision for your startup. The right investor will bring pre-seed funding, valuable resources, advice, and connections to the table.
So how do you choose the right pre-seed investor? Here are seven key details to look for:
1. Goal and Value Alignment
You should have your goals and company values outlined clearly in your pitch deck during your initial pitch. Clear, concise goals eliminate any confusion or misconceptions about where you want your company to go and what is most important to you as your business grows.
An investor who disagrees or doesn’t see the reasoning behind either won’t provide substantial aid to the path you envision your company taking. Rather than waste time trying to bridge the gap, it’s best to thank them for their time and move on.
Open communication strengthens the bond between two partners, like in a marriage. The relationship between founders and investors should flourish with mutual respect. Companies with an investor-founder team mentality run smoothly and tackle problems head-on with each other's support.
Look for investors with experience and knowledge to share with you and your employees. Find a partner that invests because they believe in you and your dream. Success is the goal you both share. Listen with open ears but don’t be afraid to ask questions or counter on something you don’t fully agree with.
Yes, investors can provide input and advice, but they should ultimately respect the decision-making process of the management team. When vetting potential investors, try to understand how they manage to avoid landing with someone who will micromanage your every move.
3. Mutual Trust
Investors are often quick to judge a startup’s management team on their ability to execute their business plan. However, it is also essential for investors to respect the founders’ vision for the company and their ability to navigate the early stages of growth. Founders, in turn, need to respect the role of investors and the value they can bring to the table.
When both sides show mutual respect, it can go a long way in building a solid foundation for the startup’s future.
4. Genuine Belief in the Company
Stand-out companies have a compelling story and vision for the future. They're companies that investors can believe in and feel good about supporting. Investors should feel connected to your dream. Without sales records or financials, all an investor has is your company’s vision.
When investors are only interested in a fast profit, they may quickly push for decisions that go against the route you’ve laid out in your pitch.
5. Ability to Offer Value Beyond Funding
Fundraising is stressful for founders. You’re bouncing around from meeting to meeting, perfecting your pitch, and hyping up the team to attract the right investor. So when you enter a room to pitch, you should gauge the preparedness of the person on the other side of the table. They should be equally prepared to explain how they can support you and your company beyond simply handing over the dough..
Ask questions about how the relationships will work post-funding and how they plan to involved. Ask for examples of how they’ve supported their current or previous portfolios.
Or, better yet, do research before scheduling a meeting, including talking to that VC’s portfolio companies. Background check what kind of value the person or firm was able to offer to help the company meet its goals.
Reputable investors attract other investors. You want a professional with experience in your company’s field that can help with proper connections down the road. The next step after pre-seed funding is to reach series A or B to grow the business. Both you and your investors should be able to work together to bring in other potential investors and experts that will benefit your business.
7. Matching Company Culture Expectations
Your startup company culture is a pivotal component of how your team and board will interact with each other. Old school investors will likely expect a traditional business culture in the boardroom, while a younger, more relaxed investor might not care as much about strict formalities.
At the end of the day, it’s your company. Your boardroom will include different personalities, but they need to mesh. When speaking to investors, you should feel comfortable enough to be honest and talk openly. Conversely, a good potential investor will listen respectfully and offer the same level of respect you’ve given them.
Investors are your partners; if you can’t have a conversation without tension, there’s no point in moving forward. They're probably a good match if you can see yourself going out for a drink after a long day.
Prepping For Pre-Seed Funding
Preparing for investors is as important as finding the perfect match for your company. At Zeni, we take the pressure off organizing your company’s financial information to pitch to investors.
With Zeni’s CFO services, founders receive support on building board meeting finance presentations, fundraising preparation, and financial tracking and planning. We help present on-point numbers for potential investors with confidence. Our Dashboard also records burn rate, expenses, cash flow, and net balance daily so that you can show off your financials at any time with the click of a button.
Spend time where it matters, perfecting your pitch deck, and let us handle the paperwork.
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