Big startup funding rounds usually get a lot of coverage in traditional media. What gets less attention are the checkbooks and piggybanks used along the way by founders to go from zero to one.
In this article, we’ll dive deeper into these hallmark steps of securing funding to build and iterate your startup.
We’ll cover what pre-seed funding is, how to determine how much to raise and how long it should last, what’s the needed material to raise it, and what types of investors are a fit for your early-stage startup.
What is Pre-Seed Funding?
Pre-seed funding is the gateway for a startup to become a venture-backed company by receiving an investment from accredited investors like venture capital funds, angel investors, and/or accelerators. It’s typically the first round of investment a startup gets in its life cycle.
The funds are generally used for:
Developing an early-version of the product by hiring talented engineers.
Acquiring customers by spending on marketing (building a product without talking to customers is the easiest path to failure).
What’s the Difference Between Pre-Seed & Seed Funding?
Seeds are a sacred metaphor for life and renewal across many cultures, hence the terminology. Pre-seed is the newest funding round in a startup land emerging around 2014. Until pre-seed funding came on the scene, seed funding was the earliest funding round a startup went through, hence the addition of the Latin-derived prefix of “pre’ to seed.
Traditionally, the differences between the two were clear-cut, but they’re getting blurrier these days. There are two things you can look for to find if a round is a pre-seed or seed one:
The total amount of money raised.
The traction of the startup at the moment of raising.
Pre-seed rounds typically total less than $1M, and the sophistication of the product leans closer to just an idea, no-product, or alpha product than to a live product, polished enough to be sold.
Your startup should raise a pre-seed round when you’ve done significant research to verify that:
The problem you’re trying to solve has a large customer base with enough willingness to pay that selling the solution can make the returns investors are looking for ($500M-$1B in company’s valuation).
It’s technologically feasible for your startup’s founding team to build the solution to the problem.
Building the business to manufacture and deliver the solution is viable at scale.
One of the best ways to know when the time is right to raise a pre-seed round is by casually asking investors for feedback on your startup. Then, pitch them your vision alongside your traction and ask them if they think you’re ready to raise. If you hear yes from multiple investors, it’s probably a good time to gear up to fundraise.
The worst times to raise are during end-of-year holidays and early summer when investors are off on summer vacations. Investors will typically pause on looking for new deals during these times of the year. So you’re better off focusing on your pitching strategy and securing those introduction paths.
How Much Pre-Seed Money Should You Raise?
How much money to raise depends entirely on your startup's needs, industry focus, and the funding market. However, the general rule of thumb is to raise enough money to hit the milestones needed to de-risk the startup enough in the eyes of your future seed investors.
Discovering which milestones to hit is a collaborative process between your investors and your team, so as to find what must be done to unlock your investors’ following checks.
A quick example: A pre-seed investor can tell you that you need to hit X amount of customers or revenue to convince them that the product the team has built fits within the market.
With that milestone in hand, you can plan the cost (burn-rate) of engineering, marketing, or other resources required to hit that or any other milestones. It’s recommended to add a 25% cash buffer to cover unexpected costs that sometimes arise when executing a plan.
Average Pre-Seed Funding Round
What does this dance of investor expectations regarding milestones and founders being resourceful deploying this money lead to overall?
We studied 3,680 pre-seed rounds, and we discovered that the average amount raised in a pre-seed round by US startups is $626,360, while it’s $538,108 for startups in the rest of the world.
Largest Pre-Seed Funding Round
Like many things in life, the outliers can be entertaining to learn about. At the time of writing, the award for the largest pre-seed funding round goes to RabbitMart, AKA as Rabbit, the Egyptian-based delivery startup building fulfillment centers of groceries to service consumers with 20-minute delivery. Rabbit raised a mind-blowing $11M pre-seed round in Nov 2011.
Realistically, very few startups are building in spaces with such cash-intensive entry barriers. So, don’t expect to raise amounts anywhere near that for your pre-seed round, especially if you’re a first-time founder building a software business.
How Long Should Pre-Seed Funding Last?
Your funding should last you and your team long enough to execute your way towards those pre-determined milestones that will unlock the funding needed to continue to de-risk the business.
A commonly-used framework is 12-18 months of cash runway + 4 months worth of buffer totaling 16-24 months.
How Much Time Does It Take to Raise a Pre-Seed?
How much time it takes to successfully raise a pre-seed round depends on various factors. According to Docsend, on average, it takes founders 26 different investor meetings to close a pre-seed round.
How long it takes to pitch that many investors depends on how good you are at getting introductions to investors through your network, as well as how the opportunity you're presenting compares to other opportunities in your target investors’ pipelines.
According to Docsend, 25.5% of founders close a pre-seed round in 1-6 weeks, 44% take between 7-18 weeks, and the rest take 19 weeks or more.
Your priority as a founder should be to find the most valuable investors for your particular startup at a healthy pace that doesn’t lead to burnout. If it’s taking too long, it’s probably a signal that you should pause requesting meetings and go back to reevaluating your pitching strategy.
What Do You Need to Raise Pre-Seed Funding?
For a couple of years, solo startup founders were able to raise pre-seed rounds with little more than just an idea and a nice PowerPoint presentation, popularly referred to as a minimally viable PowerPoint (MVPP).
Times have changed and pre-seed investors have different levels of expectations for opening up their checkbooks. You still need a nice PowerPoint presentation to convey the information, but what signal you must convey has changed.
Overall, pre-seed investors are looking for a proof of concept of your product or service idea, a clear plan to monetize the business, and references from potential customers that this is something they’d be willing to pay for at all.
For software products, this proof of concept might be a simple Testflight version of your app. For physical products, it might be a rough prototype with visible wires and circuit boards.
If you lack the technical skills to build a proof of concept of the idea on your own, that’s a good signal to find and add a technical co-founder to the team. Some investors prefer founding teams of 2-3, as they’re seen as less risky than solo founders
Besides the proof of concept, here’s some information that’s useful having when pitching your startup to pre-seed investors:
A description of the large problem you’re solving.
An explanation about how your product or service solves this problem.
A deep dive into the features your product or service has.
Some bottom-up estimates of the total addressable market.
A market map of different direct or adherent competitors and how your product is differentiated feature-wise to their solutions.
Your current financial model and revenue.
A financial model containing 5 years of revenue predictions alongside customer acquisition.
A description of your team and what unique insights and skills it has that makes it the perfect team to solve the problem.
Some of the key past milestones in product and company developments.
The ask of how much pre-seed funding you need to hit future milestones and plans for how funds will be used to hit those milestones.
It’s a great idea to deliver all this information wrapped in a compelling story through a pitch deck, which should hold investors’ attention for about 3 and a half minutes, the average time spent by pre-seed investors reading a pitch deck, according to Docsend. Also, according to the report, the pitch deck should include the following slides:
The goal of this deck is to spark the investor's interest enough to merit a more formal in-person or virtual 1:1 meeting which will last anywhere from 30-45 mins.
Given investors' short attention span in this post-pandemic world, some founders are even getting creative and sending short videos of them going over the pitch deck.
As you progress through an investor's specific diligence process, be prepared to answer some tough questions, deliver whatever specific data is required to validate your assumptions, and give the investor enough conviction to invest. Building out extensive data rooms ahead of time has pros and cons so do the research to make sure it’s right for you before spending the time on building one.
An important point: Assume anything you share while raising a pre-seed will not be kept confidential. If there is proprietary information that isn’t protected by existing intellectual property law, you’re better off keeping the cards close to your chest, and consulting with an attorney on specifics on what's safe to disclose.
For startups that don’t qualify for venture funding because of small market sizes, you have very few options other than spending your own money.
If you happen to be a repeat entrepreneur with a large liquid net worth to deploy, you’ve earned the right to bootstrap your startup through those pre-seed milestones to avoid dilution.
Investors love it when founders invest their own money alongside them into startups for preferred shares. It’s viewed as founders having their own skin in the game. After all, if you’re not investing your own money into the business, you’re just playing the game with other people's money and don’t lose anything if a startup fails (other than your time).
However, be very careful when investing your own money. Make sure you have enough money in the bank to satisfy your personal needs; otherwise, founders can easily fail from burnout. After all, it’s extremely difficult for a founder to be productive or innovative if they have to worry about where their next meal is coming from or if they’ll have a roof over their heads at the end of the month.
Working on your startup part-time after work and on the weekends might be a good way for you to make solid progress while still having the safety net of a paycheck
2) Angel Investors
Angel investors are the most founder-friendly source of funding for pre-seed funding. They are traditionally high-net-worth accredited individuals deploying their own money into startups.
Angel investors invest anywhere from $1,000 to $1,000,000, but the average check size is in the range of $25,000 to $100,000.
Since they aren’t deploying others' money, they are often the sole decision-makers. This allows them to decide whether they want to invest in you quicker than institutional funds.
In the U.S, to be considered accredited by securities law, an angel investor must provide documentation that proves:
Their annual income has been at least $200K ($300K with a spouse) for the last two years.
Their net worth is over $1M, individually or together with their spouse, not including their primary residence.
Make sure you verify that your angel investors are accredited investors by asking them directly or checking with other founders that they’ve invested in. Otherwise, you might be stuck during the due diligence phase of future rounds with institutional investors. For more information on accreditation documentation, check out this AngelList article.
Angel investors run different investment processes and have different selection criteria than more sophisticated investors, so they might feel comfortable investing in startups targeting smaller markets.
The best way to know what angel investors are interested in is by asking them directly. As a founder, time is your most valuable resource, so don’t waste your time having various 1-hour meetings with an angel investor that has no intention of investing in your startup.
The exception is if they consistently provide valuable counsel or advice to merit continuous meetings. Angel investors are often seasoned operators with lots of connections across industries and range across skill sets. Their expertise makes them a great addition to any pre-seed rounds cap table, especially if they’ve built successful startups in the same space or adjacent to your startups.
3) Pre-Seed VC Firms
Venture capital (VC) funds are investment vehicles that manage the money of Limited Partners (LPs) like high-net worth-family offices, University endowments, and employer pension funds, by deploying them into startups. When VCs raise money from LPs, they have to give their own compelling pitch on what stage they’d like to invest in.
As more and more VC funds started emerging, investing in the most in-demand startups in the later stages became very competitive. The idea behind pre-seed focused VC firms is that, to have access to these startups in the later rounds, you have to meet them as early as possible. Even if the startup has very little product and market traction. Therefore, VC firms started raising and establishing pre-seed funds.
Pre-seed VC firms can write sufficiently larger checks than angel investors; checks are in the ballpark of $100K-$1M. They can even fill out your whole round single-handedly, but they also have a longer investment decision process than angel investors.
Pre-seed VC funds tend to be more founder-friendly than later-stage funds as they are used to interacting with first-time founders at the earliest stages. Some active pre-seed VC firms that have built successful brands supporting founders and their visions are:
Precursor Ventures: A sector-agnostic fund that invests $100K-$500K checks 30-40 times per year and feels comfortable in pre-launch and pre-product startups. They’ve invested in startups like Scribe, On Deck, and ClearCo.
Background Capital: A SaaS-focused fund that invests $100K-$250K checks. They’ve invested in companies like Instacart, Blockchain, Webflow, and Clearbit.
Long Journey Ventures: A deep-tech focused fund that invests $100K-$1M in early-product startups. The founding partners track record includes investments in Uber, Postmates, Flexport, Carta, and SpaceX.
A pre-seed VC’s website should have all the information you need to determine if a firm fits your startup. By looking at their portfolio companies, you can understand what sectors they focus on. Moreover, you can always reach out directly to their portfolio founders to get more context on what it’s like to successfully pitch and work alongside the firm.
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4) Rolling Funds
Rolling Funds have grown in popularity since their launch in 2020 by AngelList, the fundraising platform that connects early-stage startups with angel investors. Rolling Funds are essentially mini-VC funds used by angel investors/aspiring VC fund managers to collect smaller checks, typically in a quarterly manner, from accredited investors LPs to invest in various startups.
Traditionally, becoming an LP in a more established pre-seed fund required you to be ultra-wealthy due to LP number limitations set by securities regulators. Rolling Funds make it more accessible for lower-net-worth accredited investors to invest in angel investors and aspiring fund managers who they believe will make great stewards of their money deploying it into pre-seed startups.
Rolling Funds are continuously collecting money from LPs in the form of subscription fees, so they are a good target for early-stage founders to pitch. In contrast, traditional VC funds often deploy their funds within the 1-3 years of closing a fund and then stop investing in new deals.
According to AngelList, the average check size from a Rolling Fund into a pre-seed startup is $100K and the largest check written was $1M.
5) Accelerators & Incubators
Accelerators and incubators are the closest things the startup world has to a University for startup founders. They teach you the first principles of ideating and building startup companies.
Startup accelerators provide three major areas of support:
They provide you with critical connections as they work closely with angel investors and pre-seed VC funds to get you the funding you need after you’re done with the program.
They provide invaluable business, engineering, and management support from seasoned specialists.
They create an environment where peer-to-peer mentoring occurs. You’ll get counsel from other startup founders going through some of the same challenges you’re going through and create a peer group that can last a lifetime.
Going through an accelerator’s application process closely resembles a Universities’ admission process of short-response answers to questions about you, your history, and vision of your startup, as well as an interview.
Leading accelerator programs have acceptance rates similar to top-tier institutions, admitting 1%-3% of thousands of entrepreneurs who apply every year. With a little bit of luck and a competitive application, your startup will join the cohort and receive a check in exchange for equity.
Different accelerators write checks ranging from $25K-$500K at different terms, but they generally take between 5%-10% equity of your company in exchange for their services.
Here are three of the most popular accelerators:
Y-Combinator: Based in Mountain View, California, is the first mover in the startup accelerator space, having made over 2,000 investments in startups. Some companies that have gone through its program include Airbnb, Dropbox, Stripe, Reddit, Twitch, and Coinbase.
TechStars: Started in Boulder, Colorado. It has evolved to investing in over 1,000 startups through various sector-specific accelerators, like MusicTech and Sports Tech, across different regions in the US. Unicorns that went through some TechStar programs include Uber, Twilio, ClassPass, PillPack, Zipline, and SendGrid.
500 Startups: It's the global accelerator behind the VC fund 500 Global with locations across the US, Middle-East, Africa, Eastern Europe, and South-East Asia, that have hosted over 2,400 companies, including Canva, Udemy, RidePal, Little Eye Labs, and Visual.ly.
Since the vast value of accelerators comes from the quality of the mentors, make sure you do your due diligence on if the mentors are a fit for your specific startup sector. These days there are accelerators and incubators for every sector so don’t be ashamed of prioritizing a lesser-known brand if they have dynamite mentors.
Equity Crowdfundings are becoming a popular source for pre-seed funding among startups. Equity Crowdfunding platforms use a loophole in the 2012 JOBS Act to allow early-stage startups to raise up to $5M in capital per year from the crowd, including non-accredited investors. Thanks to Regulation CF, you can raise as little as $50 checks from thousands of people through platforms like Republic, Start Engine, and WeFunder.
What should founders look for in an ideal Reg CF Equity Crowdfunding Platform to host your campaign? The number of active investors, average check size, platform fees (a small percentage of the total money raised must be shared with the platforms), and due diligence/deal curation process. Here is a guide from CrowdWise that can help you determine which platform is best for your pre-seed round.
7) Friends & Family
Raising money from your friends and family to support your startup sounds like a good idea in theory, but it can often lead to some major headaches.
The vast majority of founders don’t come from a place of privilege where their friends & family meet accredited investor guidelines. Investing in startups is risky, the vast majority of startups fail. Sophisticated investors like the ones we’ve mentioned above know this already and have strategies to combat this risk.
Your typically rich uncle/aunt aren’t professional startup investors, so you can ruin close relationships if your startup fails after you’ve taken friends and family money. It’s best to avoid any animosity with people that you have to spend decades worth of future family gatherings with.
If your friends and family do give you small checks of $500-$10K in exchange for equity and are not accredited, you can expect that the legal counsel of VCs and angel investors will quickly push to return the money with some interest, in turn buying out your friends and family from your cap table.
Once founders “make it”, it’s not unheard of to spoil those friends and family that supported you with lavish gifts and trips. Of course, there are also stories of friends and family being accredited and making life-changing money supporting their loved ones with pre-seed checks. Jeff Bezos’ parents, Jackie and Mike Bezos, famously invested $245K into Amazon in 1995, and their investment could be worth as much as $30B today.
Now that we’ve dove deeper into one of the most critical early milestones of your startup's long journey, you should feel comfortable with what lies ahead.
You’re now armed with the knowledge needed to determine when angel investors are a fit for you as well as how to navigate the murky waters that are raising funds from friends & family. Also, you know how to prepare to pitch to other more sophisticated investors and strategize your approach to make sure it’s successful.
I wish you the best of luck on your fundraising journey!