Navigate the Pre-Seed Investment Landscape With Confidence

Unless you're a kid at a lemonade stand, you generally need money to make money. And your ability to access capital at an early stage can influence your company's entire future trajectory. So, how do you go about securing crucial financing with decent terms? There's more to it than an elevator pitch, and we cover more on the basics to raising pre-seed funding for your startup here and in this blog post.

What is pre-seed funding?

Formal pre-seed funding emerged around 2014 when VCs wanted earlier stakes in companies with compelling potential. This journeying downstream has led to the emergence of SOPs and the giving up of equity very early on in the process.

For entrepreneurs, it's capital you hope to attract to scale your fledgling company. The pre-seed stage can last for up to a year, and investments can cover legal costs, travel expenses, capital equipment, rent, or talent acquisition. 

You're looking to raise at least 100k to a million dollars from around 40 different angel investors or micro VCs during a pre-seed round. You may be wondering if you qualify for pre-seed funding vs seed funding. The distinction largely depends on how developed your business is—pre-seed funding typically applies to startups in their very earliest stages, while seed funding usually follows once you've gained some traction or developed a minimum viable product.Because the number of companies seeking finance at the pre-seed stage is so high, competition is stiff.

But if your foundation is firm and investors can see that you've conducted extensive discovery and know your product and market, the fish will bite. In 2021, investors plugged $93 billion into early-stage startups in the U.S., and this record-breaking figure was thrice as much as it was in 2016.

Where can you get pre-seed funding?

Funding rarely comes without strings, so before committing to any investment, consider whether you're willing to give up what the other party wants and whether there's room for negotiation.

Besides your savings and funding from the angel investors and micro venture capital firms mentioned above, you can look for early investment from:

• Inner circles—Friends and family members contribute approximately $60 billion to American startups annually via loans and common stock purchase agreements.
• Grants—Government and NPOs invest in strategic industries at the local and national levels.
• Startup accelerators and boot camps—These entrepreneurial communities are enlightening and present opportunities for pre-seed investments.
• Crowdfunding—Grassroots micro-investments from people who love your ideas 
• High-Net-Worth Individuals (HNWIs)—Angels by another name, HNWIs are wary about ideas but interested in the tangibles related to product readiness and customer development. To capture interest in this segment, you need to be making moves in your space.

How to secure pre-seed investments

Highlight your strengths as a founder or co-founder

Thankfully for half of Silicon Valley, there's more to running a promising enterprise than charm. Charisma is great, and it certainly helps with pitching and regaling everyone about lean startup principles. However, if you don't ooze personality, you likely have other attributes that speak to your, and by extension, your company's capability. Now's not the moment for humility.

Pre-seed venture capitalists want to see passion underpinned by past performance, good instincts, and a technical background.

Leverage your social network

If you've successfully founded a company before, you've got a leg up. Every new business idea comes with risk, but if your track record suggests an awareness of business fundamentals, you're well-placed to open additional doors, particularly with stakeholders you've worked with already. 

New to the VC world? Join an accelerator or incubator and do the rounds at tech conferences. Once you start building exposure by working these circuits and making intro calls and connections, you'll meet a few angel investors or partners at micro VCs that are genuinely attentive and operate in a relevant or symbiotic vertical. Enquire about milestones you might need to reach to cement their interest and build your investor list. 

You may also have close friends or family that would be interested in participating in the earliest stage of funding your venture.

Even if relationships don't pan out for funding, these conversations are never a waste because you can glean golden nuggets of insight about your own business, trends, and the industry environment. 

Lay the groundwork 

Once you've achieved some of the goals and milestones early investors see as positives, it's time to get serious about raising VC funds and scheduling meetings with your curated list. This phase in a startup's life can be taxing, so brace yourself and beware of burnout.

Email your prospects around three months before closing. Begin with the pre-seed investors you're less keen on as they serve as warm-ups for the main targets.

Is there low-hanging fruit? Start with these potential investors, too, so you can convert them and present the best possible case to the big money cohorts. 

Get your documentation ducks in a row

Have answers to all the questions you would ask if you were doing due diligence on a hypothetical third party. Investors need to do their fiduciary duty, so in addition to a pitch deck and investment contract, they might want to see items of due diligence, including:

• Financial statements such as profit & loss statements (also called P&L statements or income statements), balance sheets, and cash flow statements. Preparing a rundown of future expenses and financial projections is also advised, for example: three years of annual projections for revenue and cost of sales by segment, Earnings Before Interest and Taxes (EBIT), as well as expenses like admin, human resources, marketing, and R&D
• A reference list including senior members of management, advisors, a couple of customers, investors, and anyone else you have faith in and feel could be influential for favorable decision-making
• Investment documents such as a simple agreement for future equity (SAFE) and convertible notes
• Current and pro forma cap tables that comprehensively outline present and projected equity allocations without divulging names
• Nice-to-haves including go-to-market strategies, product roadmaps, key performance indicators, sales figures, articles of incorporation, press coverage, patents or trademarks, and five-year budgets showing how much you need and the timelines you're working with. See Zeni’s Due Diligence Checklist for more color

Regarding reference lists, you can furnish only lead investors with your references' contact details and ask them to share notes from their interactions in the data room so others can see. This request prevents a situation where key personnel or customers are inundated with calls from multiple parties. 

Negotiate if you can

Even if your business checks all the boxes, you will get no after no. But when you do eventually get a yes, you'll receive a term sheet, and announcing this fact is often the catalyst that spurs those on the fence into action. At this point and with any luck, you can expect further invitations to investment committees—around two dozen on average— and new term sheets.

With inter-investor competition and perhaps even reverse pitching in the mix, the fun officially begins and you can start to negotiate more beneficial terms. It can take over four months to complete your fundraising.

Institutional investor leanings

DocSend's 2019 Startup Index Report offers valuable information about the VC landscape at the pre-seed level. 

VC biases lean towards two to three-person teams. VC firms are also attracted to startup founders from the West Coast who have initial funds from their social circle funding rounds.

There are also age and gender biases. Teams with an average age in the 30s get more meetings. But those with an average age in the 50s tend to secure slightly more money than their younger counterparts. All-female groups usually raise the lowest amounts, and mixed teams raise the highest. No all-female team in the dataset could raise pre-seed funding of over $800k.

The pitch deck 

Your pitch deck is a 10-15 page virtual document you use to present your company to desired investors. It should take about 3 minutes and 20 seconds to read. That's just over three minutes to craft a narrative before VCs choose to swipe left or right on your company, so you need to make your deck count. Keeping your finger on the pulse and changing your pitch deck according to sentiment is vital.

Focus on conveying info without jargon. Easy-to-understand monetization strategies and business models go a long way in landing deals. So does an emphasis on the product development and timing. Show investors why investing now is an excellent idea.

When compiling your venture capital pitch deck, you need to provide information about:

• The problem you're trying to fix/gap in the market
• The solution
• The product
• Why now? (Product-market fit?)
• Market size
• Competition
• Your team
• Business model
• MVP (Minimum Viable Product)
• Financials
• The ask or how much money you're looking to raise
• Traction or your strengths, how far you've come, and momentum

Final thoughts

Keep your eye firmly fixed on your organizational aspirations and the quality of your offering. Be sure to chat with a knowledgeable startup attorney to draft contracts and select investment vehicles.

Cover your pre-seed investment bases with Zeni

Even as an early-stage company, four financials need to be on point because they feature heavily in your planning and VC pitch deck. Zeni takes care of all your bookkeeping, accounting, and CFO needs so you can work smarter for less. 

Get in touch to find out how we can help you, or book a demo to see how our service works.