Most startups raise money to accelerate and support their growth through a series of funding rounds. If you’re a first-time founder and your business is still in the proof-of-concept stage or not yet generating enough revenue to support your growth or expansion, you may be able to raise pre-seed funding from interested investors to get your business off the ground.
What is pre-seed funding?
Pre-seed funding is an early funding round in which investors provide a startup business with capital (sometimes up to $2 million) to develop its product in return for equity in the company. A pre-seed startup investment round precedes Seed and Series A rounds, and may follow funding from an angel round or a period of bootstrapping with your own financial resources.
Because so many early-stage startups are looking for financial backing, the number of companies that actually receive pre-seed funding is relatively low: Investors may consider thousands of startups and only invest in a few. Read on to learn how to increase your chances of an investor selecting your startup for pre-seed funding.
Pre-Seed Funding Vs. Other Stages Of Funding
Here’s a brief overview of other rounds of funding and how startups typically use them:
- Seed Funding—Seed funding enables essential tasks like market research, prototyping, and hiring. As with pre-seed funding, seed funding is usually provided by angel investors—people or organizations who have the capital resources to assume risk in exchange for equity in the business.
- Series A Funding—Provided by venture capital firms or angel investors, Series A funding provides the necessary capital to make your business operational. Funds are often used for product development, hiring, and initial marketing.
- Series B Funding—As your startup grows, Series B funding helps you meet consumer demand. Again, funding traditionally comes from angel investors and venture capital firms.
- Series C Funding—The final stage of venture capital financing, Series C funding is typically provided by hedge funds or private equity firms through the sales of preferred shares. Generally, the goal of Series C funding is to prepare a startup for public listing.
Each stage of capital raising can be extended. For example, a business might engage in additional rounds of Series B funding before moving to Series C. However, if a startup conducts dozens of rounds of financing, investors may become skeptical of the company’s health.
As you start your business, you’ll need to set accurate goals for each round of financing. The first step is to determine when pre-seed funding is appropriate—and how much you’ll need to get your business into the early stages of operation.
When is your startup ready for pre-seed funding?
There is no single rule for when a business is ready to raise a pre-seed round, however, there are a few indicators that may indicate this is the right decision:
You have an MVP, or minimum viable product, that shows early signs of traction.
The MVP is a basic version of your product, which you’ll refine through consumer feedback and market research. The MVP attracts the attention of potential customers (and investors). However, the final version of the product may have additional features—or in rare cases, fewer features—than the MVP.
You can demonstrate potential for product-market fit.
In simple terms, product-market fit occurs when your product appeals to its target audience. Investors will be more likely to finance your startup if you can show how your company satisfies a distinct need within a specific market.
You have a strong founding team with relevant background and experience.
If you’re developing a new toothbrush and you’re working with the former chair of the American Dental Association, you’re probably ready for pre-seed funding. But even if your team has limited experience, you may still attract investors. Create an honest analysis of your team’s strengths and weaknesses before making your pitch.
You’ve begun onboarding customers to use your product or service.
At the pre-seed stage, your startup may have a small or nonexistent customer base. However, if you’re already acquiring potential customers, make sure you’re ready to scale your business to meet demand.
Active onboarding may help you find capital: Whether you’ve collected conditional orders or you’re growing your social media presence, investors will want to see evidence that your target audience is ready to buy.
Your business has begun generating revenue.
Total revenue is the income your company generates from the sales of goods and services, before expenses are subtracted. For more guidance, read: How to Calculate Total Revenue for Your Startup.
You need cash to develop your prototype.
Prototyping allows your business to develop the necessary techniques and processes for long-term production. As with financing, prototyping occurs in several stages; many startups seek funding prior to starting this process to ensure the best possible results.
You’re ready to make critical hires.
If your startup cannot take the next steps without more people, but you’re unable to generate enough revenue or make personal investments to acquire talent, it may be time to consider a round of financing.
Before starting any round of funding, review your balance sheet and financial projections. Your finance team can help you determine whether you need additional capital—and whether you’re ready to make a compelling case to investors.
Remember, to obtain capital from investors, your business will need to give up equity. Since equity can also be used to attract talented employees via equity compensation, your business should only raise money if you require capital to continue product development and accelerate growth.
Are your startup’s finances ready to present to investors? Click here to speak with Zeni about how we can help.
Choose The Right Investors To Approach
At the pre-seed funding stage, most startups don’t have much (if any) sales data to prove their business concept, so investors are taking a leap of faith on the founding team when they put money into businesses at this stage. You’ll need to target investors and funds that are primarily interested in pre-seed funding for startups: They will be prepared to take this risk and base their decisions on conviction and future potential rather than sales figures and revenue.
There are three key types of pre-seed funding investors:
- Angel investors—These individuals make relatively small investments, typically $25,000-$100,000. However, you can usually secure pre-seed money quickly from angel investors because they are the sole decision makers. If they’ve also been involved as part of your business’s angel round, they will already be invested in the success of your venture.
- Accelerator or incubator programs—These programs are kind of like startup crash courses. Early-stage companies not only raise initial pre-seed capital (typically ~$125,000, give or take) in exchange for equity, but are granted access to an entrepreneurial community chocked full of helpful training, networking opportunities, free or discounted resources, and exposure to top notch VCs for future funding rounds. Founders must go through the application process and, if accepted, follow the guidelines to complete the ‘course’.
- Pre-seed and seed investment venture capital funds—These funds represent multiple limited partner investors. VC funds can offer larger investments during pre-seed rounds but also have a longer decision-making process.
Instead of contacting hundreds of investors, consider this tactic: Research the funding background of possible investors and contact 20 that have a history of working with similar startups. If you’re pitching to a venture capital firm, reach out directly to the partner with the most direct experience in your startup’s vertical. By targeting your fundraising efforts rather than ‘spraying and praying,’ you’ll earn a much higher rate of response from investors.
Know How To Attract Attention From Pre-Seed Investors
If your startup is already generating sales and gaining traction, you’ll greatly increase your chances of securing pre-seed funding. However, four key attributes can help convince investors even if you don’t yet have a working product or service:
- An introduction—The best way to connect with a potential investor is through an introduction from someone they trust, ideally an entrepreneur they’ve invested in previously.
- An entrepreneurial personality—A startup founder’s personality is extremely important at this early stage—investors will be looking to see if you’re a go-getter and will note if you’ve left a high-paying job and taken risks to follow your dream.
- A qualified co-founder—The first responsibility of a founder is to build a team, so if you’re pitching to investors as a solo founder, your chances of receiving funding are greatly reduced. This is particularly problematic if you’re planning to develop a product but your background is in business and you don’t have a technical co-founder who can implement your ideas. Finding a co-founder isn’t easy, so start looking as early as possible.
- A relevant background—If you aren’t yet proven as a startup founder, having a impressive background in your field—for example, being a product manager at a major tech company or having a computer science degree—will encourage investors to take you seriously.
In all rounds of funding, investors will expect access to basic financial statements. Make sure you’re prepared to present your profit and loss (or income) statement, balance sheet, and cash flow statement. Read more about these three basic financial statements here.
Learn What To Include In Your Pre-Seed Funding Pitch
If you catch the interest of investors and they invite you to pitch, this is an opportunity to tell the story of your business and give a high-level vision of your company’s goals and opportunities to scale. You should be presenting the following information:
- What problem you’re solving
- Your unique solution to this problem
- The estimated market size
- Your differentiated product offering and/or competitive advantage
- Your business model
- How your revenue will grow over the next 5 years
- How your customer base or engagement will grow over the next 5 years
- The key milestones you’re planning to achieve
- If you’re selling a product, the number of units you’re planning to sell
- The amount of money you need to build your team and achieve these goals
You don’t need to bring detailed financial statements like your P&L or balance sheet to a pitch, but you will need to prepare financial projections and scenario modelling. These models will allow you to make predictions about your revenue, costs, and customer base with some degree of accuracy that you can confidently share with potential investors.
Use A Pitch Deck Template
Don’t be afraid to use a pitch deck template to get you started; there are a number of free and well-regarded startup investor decks available for free online, including decks from Y Combinator, First Round Capital (via Beautiful.AI), and Next View Ventures.
Zeni Gives You The Right Foundation For Pre-Seed Funding
Having accurate financials ready when you pitch to investors shows them that your startup’s financial processes are in order. Zeni is a full-service finance firm that handles all your bookkeeping, accounting, and CFO needs, freeing you up to focus on approaching and pitching to investors. Zeni ensures your accounts are up-to-date, GAAP-compliant, and ready to present, so when investors start the due diligence process, your business is in the best position possible to gain the investment you need.
Our team of experienced finance professionals will help you manage and track your goals as you move through the funding process, and make sure you have a solid financial foundation to continue scaling your company.
