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?
A Quick Guide To Common Fundraising Rounds
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.
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 on how to raise a seed round you can watch the video below where 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?
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.