How To Raise A Pre-Seed Round

TLDR: A vision without validation doesn’t mean much to an investor. Before seeking capital, make sure you’ve got the proof to back the vision up.

For many founders, one of the big questions they’re going to need to ask themselves is when they’re ready to raise their first round of funding. 

Try and pull the trigger too early and you’ll struggle to get traction with quality capital partners. Wait too long and there’s a chance your competition gains market share while you are unable to invest in growth.

The way I like to think about it is in terms of the difference between vision and validation. The vision is the initial energy and thrust behind the startup – it’s the thing that compels you to found the business. 

The vision is the thing that you use to inspire others. The vision is what will help you find your co-founder(s), first employees and, later, customers. 

The vision is a long-term view that guides your business through all of its decision making and will help you stay the course when the waters get choppy. 

But the vision is not enough, especially in this market.

Validation: The moment you’re ready to raise your first round

To attract capital you need validation. This is the hard evidence that demonstrates your startup is potentially viable. It means validating founder market fit, technology, users, market size, having a clear plan for the use of funds, a picture of the competitive landscape, and a strategy that ties it all together.

There are some questions every founder should reflect on as they think about whether or not they’ve done everything they can to establish validation:

• How can I prove that I’m the right person to build this technology/company?
• Is the technology novel? If it is, you're going to need an MVP to demonstrate it to investors. If not, then investors will want to see proof that you can build it, even if that’s a low-fidelity prototype. 
• Are my first users/customers the right group to focus on, and how do I know I’m right?
• Will anyone become a customer? If you haven’t acquired customers yet, then how quickly is the waitlist growing? If you do have customers, what qualitative and quantitative feedback can you point to?
• Is the market big enough now, or will it be in the future? Do you have objective proof?
• How do you know your business model will scale, and what strategies do you have in place to generate momentum?

Your vision alone won’t answer these questions. When you can answer them effectively, you’re on the path to validation, and being ready to start talking to investors.

Know where to find the capital 

Of course, before you can make the big pitch, you’ve got to find the people that will support a business at the pre-seed stage. You’ll realize quickly that not every investor wants to support businesses that early on.

However, there are many ways that entrepreneurs can find capital. Some of the most common sources include:

1) Friends and Family:

Exactly like it sounds, this is when those closest to you believe in what you are doing and want to help you get started.

2) Angel Investors:

Like family and friends, angel investors are also often amateur or hobbyist investors (though not always), and they put up their own money to support something they believe in. The difference is that angel investors are often experienced operators, have a perspective on the business, and will likely add value in a number of ways beyond what friends and family can do for you. 

3) Venture Capitalists:

VCs are increasingly getting involved in the pre-seed space, and often offer “platform” services in the form of coaching, mentoring, fundraising support, recruiting, and resources to scale effectively. 

4) Crowdfunding:

Platforms in the crowdfunding space make it possible for many angel investors to come together and invest simultaneously. The advantage to a founder is the distribution that can be created by involving more people in your endeavor, but the risk of course is that if it does not go well, it’s both public and a potentially a negative signal to VC’s and other investors. 

Whatever form the money takes, having the right investor is more important. At Antler for example, we stress the importance of investor-founder fit. These individuals will be part of your company for many years to come, and you want to make sure you are aligned in your vision and can work well together. 

There are benefits to a VC like Antler that go well beyond the money. With Antler, founders can access the resources, network and first principles coaching required to develop and validate their ideas before they get off track. We have also recently taken it a step further to develop a fundraising concierge service to help teach our founders how to raise and to support them with introductions to the right investors for their particular business. 

Finding the right support from investors can make all the difference when building a startup.

What fundraising materials do you actually need?

We see thousands of pitch decks every year. Unfortunately, because everyone is using a similar approach, and there are so many template guides to pitch decks out there, we also see the same thing thousands of times. 

Instead, try to stand out. Develop a one-pager that speaks to all of the key points that a deck would. Write an investment memo that is compelling. Craft a founder origin story and a start-up vision story that speak to who you are, the ambitions you have, and the types of investors you want to work with. At pre-seed, these are crucial differentiators from a standard pitch deck that will help you resonate more deeply with investors. 

The problem with following pitch deck templates is that they make you the same as everyone else. And by definition, in order to be better than average, you have to be different.

What gets me excited, as an investor, is the founders that send me a great one-pager or a set of compelling and quantitative bullets that demonstrate the grasp they have on their business, how they are operating, and where they are focused. If the one-pager or bulleted emails are easy to read, crystal clear in terms of their metrics, and explain the position the business is already in, then it becomes quite easy to know who to pay attention to.

Set your fundraising goals

Setting the wrong goal and lacking the conviction to chase what you need can hobble a startup.

Often, it’s because they aren’t ambitious enough with the amount of capital they look to raise. Other times it’s because they are too ambitious relative to how much validation they’ve created. 

Remember that you’re giving the investor a percentage of the business with the potential for huge returns, but in order for that to happen the business needs to succeed. This may sound obvious, but so many founders ask for the amount of money they think they can get rather than the amount they think they should have to be as successful as possible. The investor is going to be more interested in providing capital to the founder who knows what they need to make that happen.

There are no specific numbers, formulas or targets that I can provide here, as what you’re building, the industry that you’re in, and how you’ll take it to market can vary wildly in terms of what it will cost to do. You are the CEO and you need to be the expert in this area. Teach me something and demonstrate that you are the leader to make this happen for those reasons. 

If you’re unsure of where to start, look 24 months ahead and consider what you’ll need to get there. At the pre-seed stage you’ll want at least 12 months of runway, but as you mature you’ll want to aim for 24-36 months to provide you leverage in the form of time and capital required to find product-market fit and justify a higher valuation to continue resourcing your growth. 

Consider when calculating this number, what needs to be true for your next round of financing. What type of growth, core competencies within the team are needed, and what you need to prove as a business to demonstrate the scale you’re describing is possible. This will help you determine who and how many people you’ll need to hire, what sort of technology you’ll need to build, and how much that will cost. Additionally, you’ll want to consider a margin for error and the ability to withstand economic conditions and obstacles you may not see today. 

While raising enough money for 24 months or longer and including a margin of error may appear like unnecessary dilution, it will be offset by the leverage you create in terms of optionality of when to time your next raise, how focused you can be on your product and customers, and allow you to retain a position of strength in the market. 

Choose the right investors to approach

In the early stages you will likely sell 15-20% of your business. That’s a substantial chunk, and you need to make sure the investor is the right fit.

Ask yourself whether you want to work with this person for a long time, if they share your values and leadership approach, how they will support you beyond the capital offered, and if you align on the strategy going forward. The last thing you want is a voting member of your board making it harder for you to build the business you envision. 

Whether you decide to include angel investors and friends and family in your target list or not, you should be disciplined and methodical in your approach to secure the right investor.

The first thing you should start to do is build your own curated investor list. Building this list will allow you to eliminate investors that don’t support early stage startups to the level you need, as well as those that have a conflict of interest such as competitive investments. 

You should make your own list because that will push you into doing your own research.

What you should not do is pull lists of investors and scattershot your deck out to them. Investors will say “yes” to one percent of the deals they see, if that, and the getting this many no’s will give you a negative signal as a founder, testing your emotional fortitude. Don’t subject yourself to this unnecessarily, or waste your time trying to convince those who will never be a fit. 

Instead, work your network and organize warm intros to the investors that your curated list tells you are the best potential partners for you and your company. Focus your energy on the quality of your interactions, and it will save you time and energy in what can otherwise be a demoralizing slog for a pre-seed founder.

When is the right time to raise?

From the point that you pull the trigger to start looking for an investor, you’re looking at around 90 to 120 days – three to four months – to find and secure the investment. 

It could be more or less, but working to that range allows you to plan—and it is very important to plan to be available for the full quarter of the year that it will take.

There are holidays to consider—perhaps not for you (after all, you’re deep in the weeds of building a business!) but investors will usually take time off around major holidays and summer months. 

Momentum across the investment landscape is important, too. Investors talk and networking is a big part of what we do for a reason. To create your own momentum, you want to be creating a drumbeat of positive news to demonstrate the pace of your company and the effectiveness of your leadership. 

Ideally, you will want to have 50-100 first meetings within two or three weeks. This will help you to build momentum and to run a tight process, rather than letting a fundraise expand to fill endless hours and taking you away from running your business.

Navigating term sheets and closing the deal

Once you’ve secured the interest of an investor, the last step is navigating the term sheet.

A term sheet outlines the proposed key terms of an investment into your startup. It’s a legal document that covers what the investor will put into your company, and what they’ll get in return. It also covers liabilities and actions that might be taken. For this reason, many inexperienced founders find term sheets intimidating, and it’s important to be clear on what the document sets out in full. 

To be clear: most investors aren’t out to trick founders. In most cases the purpose of a term sheet is to formalize an investment that is mutually agreeable. However, more than a few founders have discovered too late that they’ve given up too much control of the business due to details in the term sheet they glossed over. 

This is one of those times where spending some money for the right guidance is highly recommended. Having a lawyer read over the agreement to make sure it’s aligned to your expectations and provides you protection against predatory terms is a good investment.

Pre-Seed VCs are your longest-term investor

VC’s, and particularly your early-stage investors, will be your business partner for a very long time. In the most successful companies, for 10 years or more. 

The right partner will provide you with a wealth of expertise and experience, and access to networks that are critical to building your startup. They give you the resources you need to realize the vision.

Finding that first capital partner should be taken as seriously as possible. Calibrating the pitch means finding a way to distinguish yourself, timing your outreach properly, and having both vision and validation. You need to prove that your startup is a good idea and that you are the best person in the world to build it. 

Importantly, you are about to embark on a journey of a lifetime, and you deserve investors who are as enthusiastic about the problems you’re solving as you are. Your vision, your time, and your customers deserve that.