Neil Patel

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What are pre-seed financing rounds?

When it comes to getting startup fundraising and launched into action, the money doesn’t all just come in a one and done deal. Funding comes in chunks as you progress and the value of your company and proof grows.

Your pre-seed may be your most important round. So, how does it fit in? What do you need in order to get money at this stage? What best practices can help set you up for ongoing success?

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    You don’t just ‘get funded’ and then have it made, with plenty of millions to splurge on planes and lavish parties.

    Startup funding is broken down into multiple stages. Building a house is a great analogy for this. Contractors and builders don’t just get a loan to build a whole home or condominium building. They may get a little money to buy the land. Then a little more after they lay the foundation and it is inspected. Then more in reimbursements, as they frame it, put on the roof, and add interior finishes. They perform work in stages and as they prove they’ve used the money well and have added value to the property, they may be able to access more.

    When you are wondering what are pre-seed financing rounds, keep in mind it’s the same concept when it comes to building a company. 

    The most common startup funding rounds and stages you will probably hear of are:

    • The Seed Round: Provides take off funding to further prove the concept and develop
    • Series A: Provides capital for hiring, expansion, and growth
    • Series B: Adds more working capital to multiply results
    • Series C: Provides capital to scale and even acquire other companies on the way to an exit
    • Series D, E and Beyond: Acts as a bridge to an exit and fills gaps when the timing isn’t right for an IPO

    What Are Pre-Seed Financing Rounds?

    As the name suggests, the pre-seed round comes before all of the above. Often also called the friends and family round

    This is the earliest pre-flight capital.

    Depending on your unique startup this may be cash to:

    • Cover the most basic expenses, like incorporation, a website, marketing, and travel
    • Hire a team, develop an MVP, test the concept and go to market
    • Simply explore the idea

    Who Funds A Pre-Seed Financing Round?

    As previously mentioned, this is also often called the friends and family round. 

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    This is because friends, family, and personal connections are the most common investor participants at this stage. 

    This can actually be a very broad group as you are looking into what are pre-seed financing rounds, that may include:

    • Internal funding from cofounders
    • Immediate and extended family members
    • Personal friends, former college classmates, coworkers, bosses or professors
    • Family of friends or friends or family

    Other funding sources at this stage may include:

    • Individual angel investors
    • A select few pre-seed startup accelerators
    • Grants and winnings from business plan competitions
    • Bootstrapping using personal savings and credit
    • Loans and debt financing
    • Donation or reward-based crowdfunding

    You may not need any external financing at this point at all. However, everything always costs more than you think and takes longer than you think with a startup. It is much better to raise when you are strong than when things have gone south and you are desperate and broke. Or to have to make poor and desperate decisions that will sabotage future success due to lack of funds. 

    Raising a pre-seed round not only helps speed things up but also gives a great sign of confidence and credibility to future investors and potential customers. After all, if your own friends and family who know you best don’t believe in you enough to help, then why would strangers.

    Remember that you need to master the story which is what raising money is all about and for that, you need a pitch deck. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

    Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

    What Do You Need To Raise A Pre-Seed Financing Round?

    For most, this is really still the idea stage. You probably won’t have much in the way of financials and data that really proves this is already a profitable and scalable business that can predictably churn out predictable returns for every dollar put in.

    A short, concise slide-based pitch deck and a passionate verbal pitch will go a long way at this stage.

    To be an attractive investment and nail this, you’ll also need:

    • A good idea
    • To be tackling a significant problem
    • To be going into a big opportunity 
    • To have the right timing
    • To have done your homework and research
    • Theory of a profitable business model
    • A strong and capable founding team

    Above all at this stage, it is about the founders. A team that people want to partner with and can believe in.

    If you want to do a deep dive into what are pre-seed rounds of financing you may find interesting the video below I cover it in detail.

    Best Practices For Raising A Pre-Seed Financing Round

    Do the paperwork

    Even if you are raising pre-seed money from your sister, parents, neighbor, or lifelong best friend, do the paperwork and set the boundaries. Otherwise, it can be a legal mess later. It’s better to be safe than sorry.

    Don’t Giveaway Too Much

    Don’t give away too much of your company and future earnings and equity so early. Seed and Series A round investors are going to want big chunks of your business too. They are also likely to be able to bring much more expertise, resources, connections, and other value. Don’t take those opportunities out of the game or wind up selling your company for billions and getting nothing after all of the hard work.

    Raise More Than You Think You Need

    Things will always cost more than you think and take longer than you plan. Plus, it is always wise to have a buffer in case of unexpected events. Like pandemic viruses, riots, or earthquakes.

    Choose Your Investors Carefully

    Your pre-seed is a catalyst for your seed round. So, consider how these investors will set you up well for the next round, or not. What value will they bring beyond the money? How could they become a problem for your business?

    Stay Flexible

    Your pitch won’t be perfect the first time. Allow it to evolve as you learn from each pitch and conversation. 

    Don’t Take Your Eyes Off Your Business

    Having actual customers and revenues are your best pitch. Keep working the business while you entertain the idea of accepting outside capital. 

    Hope this post provided some light when it comes down to figuring out what are pre-seed financing rounds.

    FULL TRANSCRIPTION OF THE VIDEO:

    Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about what are pre-seed rounds of financing? Pre-seed financing rounds are super important. They are the first early-stage round that you’re going to be doing for your startup. In essence, in the video today, we’re going to be covering it, we’re going to be really breaking it down for you so that you understand how to nail it for your own business. So with that being said, let’s get into it.

    First, let’s start with a quick guide into financing rounds. Everything is going to start with putting that house together. Everything is going to happen with the pre-seed or the seed round. That’s the money that you’re raising for getting the first things in place. Then you’re going to go 18 to 24 months into the Series A or perhaps a proper seed round. 

    The proper seed round, basically, they’re going to be expecting that you have the team, that you have the minimum viable product, essentially, something that is already working in the market. Then you go into a Series A 18 to 24 months later where you’re already pitching to sophisticated institutional investors like venture capital firms, where you already have what they call product/market fit, which is validation that there’s a clear need for your product or your service in the market.

    Then, 18 to 24 months after the Series A, you’re going to go into a Series B round of financing. The Series B is grabbing what you are doing that already has that validation of product/market fit, and replicating it on a different geographic location where those investors that you’re bringing in have a good network in order to replicate and scale and grow.

    Then, 18 to 24 months after that, you’re going to go into the Series C and beyond. What that means is just doing more rounds of financing in order to get to a liquidity event, which is that moment in time where your investors are going to receive their returns for the investment that they made, and their money back, and that is going to come in the form of an acquisition, a secondary sale of shares, or an initial public offering, aka IPO. That’s very much the way that rounds of financing rounds work from financing cycle to financing cycle.

    What are pre-seed financing rounds? In essence, pre-seed financing rounds are just like the name suggests. They are the pre-round to the actual seed round. Here, what you’re doing is you’re raising money in order to cover the essential costs. That could be incorporating the business, hiring certain team members that are critical, or certain things that you would need to actually spend on the actual product or service that you need to develop.

    So, who funds the pre-seed financing round? Obviously, pre-seed financing rounds are very, very early. At this point, it’s really people that love you. It could be friends, family; it could be colleagues that you have from work, former bosses that you had that have the money to perhaps give it to you, and also you need to make sure with them that you’re setting up the expectations so that in case you lose their money, which is very high-risk, they are going to not get mad at you, you are going to be able to continue to keep that relationship. In essence, they need to have those clear expectations, not that this is going to be the next Google or the next Dropbox because that’s how you destroy those relationships. These are people that are investing because they love you. That’s why you really want to make sure that you’re nurturing that relationship and not destroying it.

    Now, there are other types of figures or other types of investors that you can bring in to invest in your business. Some of those investors could be the following:

    • Individual angel investors
    • A select few of pre-seed startup accelerators
    • Grants and winnings from business plan competitions
    • Bootstrapping using personal saving and credit cards
    • Loans and debt financings
    • Donations or reward-based crowdfunding

    Raising money, at the end of the day, especially if you are very, very early stage, you need to make sure that you’re not just raising to get by or just for the specific amount of months that you think you’re going to need in order to get up and running because things are always going to be – or perhaps not going the way that you anticipated. I always suggest, and I always recommend to startup founders that you prepare for the worst and that you hope for the best. What I mean with this is that you may have some unexpected calls, like it could either be legal or it could be marketing. So if you’re, for example, looking at raising 18 to 24 months, maybe you give yourself a couple of extra months just in case that you have some costs that you had not foreseen that were coming your way.

    What do you need in order to raise a pre-seed financing round? In essence, a pre-seed financing round, as we mentioned earlier, is people that are going to come in and invest because they love you. Now, there are other instances where you have some exciting things that you have put together in order for them to fall in love with the opportunity with the initiative and to actually give you the money. Again, you’re just at the idea stage. Some of the things that you could do to create that excitement, to make them fall in love with what you’re doing, some of these could be the following.

    • Tackling a significant problem
    • Going into a really big opportunity
    • A market size that is booming and growing rapidly
    • To have the right timing
    • To have done your homework and research
    • Theory of a profitable business model
    • A strong and capable founding team

    Above this, it’s really all about the team. You need to convince the investor that not only are you the right individual to execute on this but that you have that capability and those skill sets that you can apply so that you can adapt to whatever the market is asking. This goes not just to you but then also to your co-founders or to anyone else that could be part of that founding team.

    Some of the things that you can do in order to prepare for a pre-seed financing round or to tackle that pre-seed financing round in the best way that you can are a couple of them. The first one is that you want to make sure that you can raise all the money that you can. There are some people that say that you should raise all the money that you need. My recommendation is that you raise all the money that you can because you’re not able to time the market. You don’t know where the market is going to turn around on you, when the stock markets are performing poorly, which is going to dry up those potential investments in startups. That’s why, whenever you’re offered money, just take it. Even if that means getting oversubscribed, which is meaning raising more than the money that you anticipated to raise. 

    Then the other thing that you want to do is that you want to really nail it on understanding the right investors for your business. It’s not about the money; it’s about what’s behind that money, who is giving you that money, and how can you leverage their knowledge, perhaps their expertise or networks, in order to get to the next level much faster? Here, you want to understand that that investor is in it for the right reasons, that they are clearly aligned with the mission, with the vision of the business, and that you are equally excited with them to embark in this journey together.

    I would love to hear on the comment section below how you’re planning to raise your pre-seed financing. Also, Like this video and subscribe to the channel so that you don’t miss out on all the videos that we’re rolling out every week.

    And also, take a look at the fundraising training, which is the program where we help from A to Z with everything related to fundraising. There you’ll find templates, agreements, live Q&As, a community of entrepreneurs helping each other all over the world, and essentially, you’ll find tremendous value in it. So thank you so much for watching.

     

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    Neil Patel

    I hope you enjoy reading this blog post.

    If you want me to help you with your fundraising, just book a call.

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