PRE-SEED FUNDS

WHAT IS THE VALUE OF HAVING A PRE-SEED FUND INVEST IN YOUR STARTUP?

Pre-seed funds have exploded in popularity. We’ll list out some of the most active and best pre-seed funds below.

But, first, what is pre-seed funding and how is it different than a seed round?

What is pre-seed funding?

Pre-seed funding is a round of investment in a very early-stage company designed to help the founders 1) form a company, 2) get operations going and 3) achieve the milestones they need to hit to raise a seed round. Pre-seed rounds often leave “room” in the cap table for one or more subsequent seed financings. 

Of course, like any round of financing, actually raising the capital is easier the more traction or proof points the startup has.

Certain funds are specialized in this stage of investing. Does your startup need one when you first start raising outside capital?

Advantages of Raising from a Pre-Seed Fund

It turns out that pre-seed funds are filling a really important niche in the market. These firms actually help increase the velocity of the earliest stages of venture capital. Greasing the wheels of Silicon Valley, in a way. 

The first thing that pre-seed funds do is they set the terms and actually price a deal at the really early stage. This is incredibly valuable, because angel investors feel so much more comfortable coming into the deal and following a named institutional pre-seed VC fund. 

And so, one of the core services a pre-seed fund is doing is just giving you a term sheet  that sets the terms of the deal (such as the security type SAFE vs convert vs preferred, valuation, etc.). You can use them as the anchor investor, and use those terms to fill out the rest of the round. This is probably the most valuable thing they do. 

The next thing that a pre-seed fund will do, is that they get you thinking like a VC-backed company. It’s a huge shift from being bootstrapped or just a super scrappy, three ladies in a garage type of startup. When you take professional money, you have to start professinalizing in a way that helps the company and that helps you be prepared for your next round of financing. Professional financials, real board meetings, producing KPIs and metrics… The pre-seed fund really helps you make that shift. And they do it kind of in a lower stakes environment than trying to do that after you’ve taken a 20 million dollar round and learning on the fly. 

Another benefit is with recruiting. A well-known pre-seed fund can recruiting so much easier for you, because you have some incredible logos. Then you can put on your website that people recognize. And when employees are taking a job at your company, they’re really betting their capital, like their time. They’re gonna be working for you and spending a lot of time on your company. And so, knowing that some bigger players, some institutional players are behind you really makes recruiting a lot easier. 

It’s the same thing with customers, which is the next benefit of taking an investment from a pre-seed group. Small customers probably don’t really care who the backers are. But, when they’re signing a multi hundred thousand dollar or a multimillion dollar deal with your startup, it really helps to have some institutional VCs that they can reference, that are on your website, and that they have confidence that will help get the company funded. If they’re signing up to use your service, they don’t want it to go away in six months because you ran out of money. This helps make your sales process easier.

Another huge benefit of pre-seed funds is that seed and Series A funds follow the best pre-seed investors like crazy. Leading seed and Series A investors want to see the deals that come out of the good pre-seed investors’ portfolios. The next stage of investors are going to trust the general partners of the pre-seed fund. Their reputations and contacts will make the next round of financing so much easier.

And the final big value-add from pre-seed funds is their LP-base. Now, LPs are investors in the funds. The investors in the pre-seed fund tend to invest in a lot of other kinds of funds including seed and Series A funds. It’s very common for positive word of mouth to start circulating on a company that they have seen in great updates to the LPs or even better at the Annual Investor Update Meeting. If you get to present to the LPs that’s really really valuable. You’ll have positive buzz. The LPs will probably mention your company to the Series A funds that they invest in. Again, valuable introductions.

These are some of the big benefits you get out of raising from a quality pre-seed fund.

So who are the best pre-seed funds? 

BEST PRE-SEED VENTURE CAPITAL FUNDS

We are labeling these “venture capital funds” since they function as VC funds - a partnership raises capital from outside investors (“LPs”), and typically charges those investors the same rates that VCs charge their LPs. This list is based on the investors we see actively investing in the clients that we service.

  • Pear.vc
  • Precursor
  • First Round Capital
  • Susa Ventures
  • Alumni Ventures (and their affiliated, school-focused funds)
  • Slow Ventures
  • Initialized Capital
  • Notation Capital
  • K9 Ventures
  • Founder Collective
  • Maven Ventures
  • Start Fund
  • SOSV
  • Right Side Capital
  • Village Global

WHEN IS A STARTUP READY FOR PRE-SEED FUNDING?

Every industry will have specific milestones on when professional pre-seed funds are ready to make an investment. And other important variables may make it easier for a younger company to raise pre-seed funding - such as an experienced team, pre-existing/strong relationships with funding sources, hot hot markets, etc. However, there are a few KPIs that we can broadly generalize to that help founders know that pre-seed funding from professional investors may be an option: 

  • MVP: if your startup has a Minimum Viable Product that is being embraced by the target customer, you’ve got an edge when it comes to raising this type of capital. That’s not to say that you can’t raise without and MVP, but it sure helps. If you don’t yet have a product:
  • Crystalized product vision and market need: you’ve already talked to potential customers, and several have said that they are willing to start paying for the product as soon as you have it ready/built. The more “firm” these promises to pay are, the better vis a vis getting capital raised.
  • Revenue: going the other direction from a not yet developed product to actual paying customers! If you have paying customers and are growing revenue from a small base by 50%+ month over month you are likely to be exciting from an investment standpoint. 
  • Team Team Team: an experienced team will always make it easier to raise; some funds like Notion love to find small teams with ideas and provide light amounts of capital to get the ball rolling
  • Strong hires lined up: perhaps the most difficult “metric” to raise off of, but if you have experienced industry veterans ready to come on full time you MAY be able to raise pre-seed funding. However, keep in mind some investors may ask “why isn’t that person willing to work nights and weekends on the idea for free if it’s such a great concept?”

WHAT TO PITCH WHEN TALKING TO PRE-SEED INVESTORS

We’ve written extensively about what goes into a VC pitch deck - the concept is the same for founders raising pre-seed funds.

  • Industry problem
  • Your solution of unique value proposition
  • Market size
  • Go to market strategy (how you’ll sell or marketing into the industry
  • Competition, or what the existing solution is that customers are using to solve the problem
  • Business model - high level projections on how big you can get, how much it will cost to get there. More granular on what you’ll use with the pre-seed funds: you want to prove that you’ll spend the money to produce a company that can raise a real seed round.
  • The team

Check our our pitch deck piece to get more detail and more ideas on what you can include.

Did you just raise funding? Congrats! Now you have professional investors who expect professional financial statements. Check out our low-cost, high-quality bookkeeping service pricing for funded startups.

How Big are Most Pre-Seed Rounds?

The average amount of capital raised in a pre-seed round is typically $100,000 to $1,000,000 - although CrunchBase reports pre-seed capital raises of up to $7.3 million in the first three months of 2021. 

Most of our clients who raise this type of capital raise under $2,000,000, with this round of financing being a bridge until they can raise a larger seed round. And seed rounds have become quite large in 2021; we are regularly seeing seed rounds raising $10 million or more in capital.

How much pre-seed funding should a startup raise?

Most of these capital raises are $100k to $1M in size, but the “correct” amount of capital to raise in a pre-seed round depends on how much capital the startup needs to achieve the milestones to successfully raise a seed funding round. An MVP, revenue traction, strong customer logos, proof of concept from a scientific perspective - these are all good milestones to shoot for with the pre-seed round.

How to Meet Pre-Seed Investors

The first step in how to get pre-seed funding is to get in contact with possible investors. Meeting pre-seed investors can be daunting, especially if you are looking for pre-revenue investors. We’ve worked with hundreds of founders who have successfully found very early-stage investors. Here are some of the strategies that they’ve used:

  • Networking - networking through trusted contacts into investors is the highest probability way to get a first meeting. However, it’s not easy if your startup is not based in an area where there already are a lot of investors, or if you are new to the startup landscape. If you already know other founders who have raised angel or seed financing, get them excited about your idea and then ask them for introductions. If you don’t already know CEOs who have raised money, ask them for advice! Many founders are open to mentoring and meeting with exciting startup founders. 
  • Friends and family - again, this assumes you have a network of friends and family with money to burn. 
  • Cold emailing - this method works surprisingly well, but it takes time because it’s 1) a volume game and 2) you need to personalize every email. Keep the email tight, supply some traction or other exciting statistics, and link out to a way for the investor to learn more and get excited.
  • Lawyers, bankers and accountants - service providers do make introductions. That’s where choosing to work with lawyers, accountants and banks that are in the startup ecosystem really helps.

See some other tips on how to raise angel funding here.

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