Thursday 6th February 2020
6436

How to Raise Pre Seed Funding

how to raise pre seed funding
 

What is pre-seed?

Pre- sed funds are essentially accelerators or incubators that invest not so much in the idea but in the founders. They are usually organised into cohorts, they provide a mixture of financial investment to get you started and mentoring (some funds like Founders Factory will put a value on that).

Often pre-seed programmes are funded by large corporates for whom its a mixture of marketing (we are cool we support startups) and r&d.

Usually, pre-seed funds take 5–10% and give money as well as a network. It is also good to have these brands attached to your companies CrunchBase profile as many angels and some VC funds will see it as a stamp of approval.

I have seen this post on reddit and found it really helpful. Thought to share it with you. It is really helpful for people looking for pre seed funding. 

Who am I?

I'm a startup founder and angel investor. I've started two companies in the tech space.

My first company struggled to raise money, but my current company was able to get a sizeable pre-seed round done in less than 1 month (at good terms!) because I didn't repeat mistakes from my first go-around.

I've also worked as an investor before shifting into tech, so I know how early stage investors approach these types of deals.

So here we go...

Don't do a god damn thing until you're 100% certain a raise makes sense for you.

Raising equity financing, especially before you have meaningful metrics that indicate success, can be a complete crapshoot of a process that wastes valuable time and completely demoralises you.

I would not recommend even attempting a raise unless you have significant belief in your mission and your ability to get in touch with and convince investors. Here are a few things to think about as you contemplate whether a raise makes sense:

Do I "check the boxes" for venture back-ability? To be considered a potential "high-flyer" venture capital eligible business, you'll need to prove that you're attacking a large market (tens of billions or more), that your product is differentiated and a significant improvement over existing solutions, and that your team is uniquely positioned to scale extremely fast in that market.

If your contemplated company is one that can't scale as quick as a software or internet company (ex: brick and mortar retail, construction), you'll definitely have a harder time raising money. If you're a solo founder / first-time founder, you'll have a harder time raising.

If you're in a super crowded / hard-to-differentiate / low barrier-to-entry space (think consumer iPhone app), you'll have an extremely hard time raising. If you're raising money for a more old-school business model or one that isn't built to scale in tech fashion, you're much more likely to succeed in raising a small amount of money at a lower valuation from friends and family.

If you can address core business issues that could hurt you BEFORE raising, do it!

Do I have a means to reach investors? Cold emailing investors rarely ever works, and I wouldn't count on it working.

If you don't have a network that can get you out to 10+ prospective angel investors, spend time building out that network before contemplating a raise. One or two potential meetings will almost never get it done.

If you want 5 checks of $50k in your angel round and you are hyper confident (close 25% of investor meetings), you'll need to get in front of 20 people minimum to get things done.

Momentum in a raise is EVERYTHING, so if you can't have a couple of easy early wins with contacts that may be easier to close, you'll have a hard time raising.

Have I actually developed the business enough? Have you done all you can to develop the business without outside money? Is your product built and are you actively trying to reach customers?

If your product requires outside money to build, have you at least scoped it out in detail and discussed the product in detail with prospective customers who want to buy it? If your business completely depends on raising outside money and you're unable to show any momentum during your raise process, it'll hurt your process of raising. Also, a lot of investors are wary of investing in a company that can't progress at all without outside money. Almost always a bad sign (although there are exceptions).

Materials. Have them ready.

Before reaching out to anyone, you should have a good, short deck prepared. If your business has customers, I'd recommend putting together a simple spreadsheet that details unit economics of the business to help investors better understand your business model. Here are some examples of good early stage fundraising decks. 

MAKE IT LOOK GOOD AND KEEP IT SHORT. Ugly decks will hurt you. Long decks won't get read. <15 pages and minimize text where possible. Focus on only key points - problem, solution, business model, traction, competition, team, funding needs

Have a few smart people look at your deck before you take it to market. If a random person with no knowledge of your space isn't excited about your company after reading the deck, fix it. If a random person doesn't understand what your business does after reading your deck, redo it completely. Sector knowledge shouldn't be a requirement for understanding the deck.

Decks get shared often, so make sure you're comfortable with whatever you send to people getting passed around. DocSend is helpful if you want to be in control of what people can see / version history.

Set the terms so others don't have to

This is where strategy starts to come in.

Ultimately, your aim should be to pick terms that are reasonable but favorable and have all round participants comply, rather than have to negotiate separate terms with a bunch of investors and deal with a messy cap table.

If you can get 1-2 anchor investors who you're close with to close quickly at your terms, you can then stand firm on specific terms as you continue raising the round. You'll want to be firm on both valuation and structure.

Valuation: Angel round valuations are very subjective and heavily "vision-centric". Generally, multiple-time founders, SaaS products (software only, 90%+ gross margins terminally), and online marketplaces can come away with good valuations before having anything done in today's fundraising environment.

D2C consumer products, anything brick-and-mortar, or anything that's a mobile app, will have a harder time commanding good terms and will likely need revenue and traction to get funded. Also, angels will typically want a sweetheart deal on valuation because they're giving you checks early-on and taking on the most equity risk.

From what I've seen, a good angel round company can raise at a $1 - $3M pre-money valuation, $3 - $5M pre-money is great, and $5M+ is excellent. 

Here is a dataset indicated that median pre-seed rounds are at a $3-4M pre-money valuation, but note that this dataset includes small seed rounds / companies with more traction than an average angel round as well.

Structure: I recommend using the YCombinator SAFE template. It's industry-norm now for angel rounds, and allows you to get paperwork done with no legal fees - simply download the template and change the discount rate / valuation cap.

The product is also very founder-friendly. Some savvy investors might not be okay with signing SAFE docs, but if you get a couple of people to sign term sheets and wire money early, you can simply play the "well everyone else is on these terms" card. Also, make sure you know the difference between a valuation CAP and valuation.

Determine your outreach strategy

Your outreach strategy should help you create an element of scarcity around your funding round.

You want people to get the feeling that they're talking to a hot company and that waiting could cause them to lose a deal. For these reasons, I'd recommend talking to investors who you have the highest expectations of close first, and then doing broad outreach after.

Focus early meetings on friends or close members of your network, try to get them to commit verbally to a minimum amount and structure, and then add up what you're able to verbally close.

Then, you can reach out to more investors who you're less close with and say "hey, XYZ and XYZ have already committed to invest $200k in a SAFE at $X valuation cap.

I'm aiming to close the round in 2 weeks and am fine with this amount, but happy to chat if you're interested."

For people that don't know you as well, this will go a long way in conveying legitimacy and scarcity. If you can't close your best prospects, perhaps reevaluate before going out to others.

Also, make sure to be exhaustive.

Closing a round with several investors will take tens of meetings and lots of rejection.

Don't just go to people directly in your network, ask people you know and trust who they might be able to introduce you to. When you meet with those referrals, ask who they might be able to introduce you to. Some of my angel round participants were friends, but others were second and third-degree connections.

If you only chat with 10 people on your round, it's almost impossible to expect even 2 checks.

Close fast

Money isn't closed until it is in your bank account. I've had angel round participants verbally commit and sign term sheets only to pull back in the last second.

This is not just normal, it should be expected.

When someone gives you a verbal commit, get them a term sheet immediately and aim to get money wired as soon as you can.

Investors are fickle and just a few days of waiting can have them waffle on the decision to invest. 

6. Draw a line in the sand

If things are going well, don't get addicted to fundraising and raise more than you need. More stakeholders means more dilution and investor-related overhead. If things aren't going well, don't keep begging for meetings and hoping you'll get a check. Reevaluate your situation and make some progress with the business before going back to market. If you're spending more time fundraising than running your business, you should probably rethink your fundraising strategy one way or another. 

You can expect a best-case fundraising process to be done in a month, and a more regular process to take 2-3 months. If you're raising for 4+ months, perhaps take some time to reassess. Be cognizant of the message this sends to the market too - nobody wants to buy the house that has been listed on real estate websites for 6 months.

List of Pre-Seed investors in London

Entrepreneur First

Official description: Entrepreneur First is a company builder that invests in individuals “pre-team, pre-idea” to help create new technology startups. (via Crunchbase)

How they are viewed: ‘Love island for co-founders’ is possibly the funniest description I heard and ‘A startup factory’ is possibly the more accurate description, the truth is really somewhere in the middle.

Essentially a bunch of exceptional talent from technical and business development backgrounds are thrown together to mix’n’match until they find their co-founders. Older entrepreneurs tend to scoff saying that EF ‘is only for young people’, according to teh co-founder Matt Clifford the youngest founder was 19, oldest 67, average age around 28.

EF is well liked and well respected with many angels and VCs almost blindly investing into companies that come out. Their network is phenomenal and arguably outweighs most other.

They do focus on founders rather than ideas so if you want to co-found a startup but you don’t have an idea it’ s still worth applying to join a cohort.

Conditions they invest under: EF invest £80,000 plus £6,000 per founder (so usually £92,000) in London at 8% equity share

What are they looking for: deep technology companies, b2b and b2c.

Portfolio companies: 132 including Bloomsbury Ai, GTN, Magic Pony

Active staffers on Twitter: Alice Bentinck (co-founder), Matt Clifford (co-founder), Reid Hoffman (board member), Anne Marie Droste (director of expansion)

Where to find their events: Eventbrite

Founders Factory

Official description: Founders Factory was established to help early-stage companies rapidly become viable and sustainable businesses. They have a blend of what early stage companies require: expedited pre-seed funding, agile technology development, lean acceleration, and world-class mentors. (via Crunchbase)

How they are viewed: Accelerators funded by corporates. Founders Factory has a strong brand and name, money wise their proposition is weak and it's worth reading T&C’s as some of the ‘money’ is received in support and mentoring. This said their network is great, and I have yet to meet a founder who has not enjoyed their time in their programme.

Money they have (how big is the fund): Founders Factory is not a fund they partner with corporates to find new technologies and new products in a certain area/industry.

Conditions they invest under: Accelerator £30,000 of cash Founders they give a three to ten percent stake to the accelerator — and, in turn, its corporate shareholders.

What are they looking for: AI & Big Data, Beauty (supported by L’Oreal), Education, Fintech, Media, Travel (supported by EasyJet)

Portfolio companies: 30

Dollar
 

InsureTech Gateway

Official description: InsurTech incubator meets venture capital, with an entrepreneurial twist. The InsurTech Gateway is the fastest place to build and launch an InsurTech idea. As the world’s first authorised incubator, and with an ability to provide their portfolio with instant insurance capacity, the Gateway can get a business idea into market, with real customers, in just a few months, cutting the cost of entry from £1m to £200–300k.

How they are viewed: The fund is very new and very niche so it is not really known in mainstream tech circles, but it is known and well regarded amongst InsurTech startups.

Conditions they invest under: At Pre-Seed / Seed they invest £200–300k, before following-on at subsequent investment rounds through their LP Fund.

What are they looking for: Highly disruptive InsurTech startups to incubate outside of the industry.

Portfolio companies: 10 including By MilesFloodFlash and Guardhog

money
 

RebelBio

Official description: RebelBio is the London based team of the venture capital firm SOSV. RebelBio specializes in pre-seed investments in BioTech, HealthTech & Life Sciences. It invests broadly in science-based, tech-enabled early stage startups.

How they are viewed: Essentially its Hax for life sciences, or YC for life sciences.

Conditions they invest under: around 100k (200k according to their website) per company, this includes services, and access to a lab.

What are they looking for: Life sciences

Portfolio companies: 44

Active staffers on Twitter: Eleonora Mantovani

Donald with money
 

The Bakery

Official description: Innovation programmes to enable corporates to innovate at speed. Powered by entrepreneurs and startups. (via website)

How they are viewed: Wait what, they are a pre-accelerator now? The Bakery got its reputation as a connector of startups and corporates, in fact in one Crunchbase profile their category is advertising, and in the other its everything but ‘investor’. They started their first cohort in Jan 2019 and knowing the team it should be great.

Money they have (how big is the fund): The Bakery is not a fund they partner with corporates to find new technologies and new products in a certain area/industry.

What are they looking for: here is a list of their programmes

Active staffers on Twitter: Alex Dunsdon (co-founder)

Tweet Money
 

Wayra UK

Official description: Wayra is Telefonica Open Future’s start-up accelerator that promotes entrepreneurship and accelerates disruptive start-ups in Europe and Latin America. It supports entrepreneurs grow and build successful businesses. Wayra’s acceleration program gives its users funding up to 50,000 U.S. dollars, a place to work, mentors, business partners, access to a global network of talent, and the opportunity to reach millions of Telefónica customers. (via Crunchbase)

How they are viewed: Accelerator funded by Telefonica. It exists in multiple locations and each one of them is different.

Money they have (how big is the fund): £8M

Conditions they invest under: Each accelerator has a different objective, check their website. The investment can go up to £50,000.

What are they looking for: Each accelerator has a different objective, check their website.

Portfolio companies: 961 (21 exits)

Zinc VC

Official description: Zinc.VC is a London-based business builder that runs 9 month mission-led programmes to build scalable commercial impact-led businesses. (via Crunchbase)

How they are viewed: EF for tech for good. You don’t need to have a business to apply an idea you want to explore is enough.

Money they have (how big is the fund): £3M

Conditions they invest under: At the end of the six-month programme, Zinc expects to form between five and 10 early-stage companies in which it will take an 8% stake.

What are they looking for: Social good and social impact companies.

Portfolio companies: 16

Where to find their events: Their website

HS VC

Official description: HS build, scale and invest in the best health-tech companies. (via Crunchbase)

How they are viewed: EF for health. Founders can apply without a team and without an idea.

Conditions they invest under: Being part of the programme does not guarantee investment.

What are they looking for: Health startups and founders.

Antler

Official description: Antler is a startup generator & early-stage VC that enables the world’s most determined people to build global businesses from the ground up. (via Crunchbase)

How they are viewed: Asian EF.

Conditions they invest under: Selected founders get a stipend of £2,500 per month the first two months. We invest £120,000 for a 10% equity stake in each company selected by our investment committee.

For all companies we invest in, £40,000 is used to cover the program fees so you get £80,000 in the bank to start building the foundations of a great business.

What are they looking for: Talented people who want to become founders.

Resources for super early-stage startups that do not give money but are still amazing opportunities.

Color in Tech — 5-week pre-accelerator in the evenings — at no cost to you (we also don’t take equity!). Requirements to join: You have a startup idea & You’ve bootstrapped or have raised less than £500k & From an ethnic minority background & You can attend evening sessions.

Founders Programme by Forward Partners — a five-week evening course run by Forward Partners, on customer development, ideation, growth, product/solution, and investor readiness. If they like you they might invest at the end.

FFWD — FastForward, the UK’s Pre-Accelerator Programme (FFWD for short) is an initiative by City University and the Accelerator Academy to prepare startup teams for first funding and successful application and entry to leading accelerators.

Hatch — Since 2013, Hatch has pioneered a unique approach to enterprise incubation and entrepreneurship support activities across London, and we are one of the UK’s leading community enterprise charities tackling social inequality.

Campus Residency — The programme is application based and is run every 3- 4 months. The teams get free office space from Google for Startups as well as mentoring.

The Family — you have to be invited to join The Family. Which provides founders with a wide network and various introductions. The Family does take equity though :)

 
Comments
 
Comment