How and where to find pre-seed investors for your startup?

by Adarsh Raj Bhatt in August 30th, 2021
man and woman talking inside office

Key Takeaways

  • Most founders raise money in a sequence of funding rounds to help their startups accelerate and sustain their progress.
  • If you're a first-time entrepreneur with a startup that's still in the proof-of-concept phase or doesn't yet have enough income to support growth/expansion, then you might be able to raise pre-seed funds from potential investors to help you get started.
  • The founders, along with close friends, supporters, and family, are the most prevalent "pre-seed" funders.
  • It's also possible that at this point, investors aren't funding in exchange for stock in the company.
  • In most cases, the company founders themselves are the investors in a pre-seed investment situation.
  • A large part of successfully acquiring pre-seed funding lies in the skill of selecting the right investors to approach. 
  • In order to attract the attention of pre-seed investors, it’s helpful to have a positive introduction (a reference) from someone familiar to the investor, an entrepreneurial attitude that shines through, a competent co-founder/founding team, and proven domain expertise.
  • People who are most inclined to invest in your startup will often have three characteristics: they have faith in you, they are willing to commit the necessary funds, and they are fascinated by what you are doing. The higher the degree of overlap between these characteristics, the more likely an investor is to invest in your startup.

What is Pre-Seed Funding?

Pre-seed investment is an early-stage funding round where investors provide funding (often up to $2 million) to a new startup in exchange for equity. A pre-seed startup financing round comes before the seed and Series A stages and may come after an angel round or a spell of hustling with your own funds (known as bootstrapping). Because there are so many early-stage businesses seeking money, the number of startups that obtain pre-seed financing is relatively small. Investors may assess thousands of startups before selecting only a few. 

Continue reading to learn how to improve your chances of getting pre-seed investors for your startup.

How to Acquire Pre-Seed Funding?

Select the Right Investors to Approach

Most businesses at the pre-seed fundraising level don't have much (if any) sales data to back up their business model; thus, investors are putting their faith mostly in the founders (and their storytelling skills) when they engage with them at this level. You'll need to secure financing from groups that are particularly interested in pre-seed investment in startups. These investors and funds will be willing to take a chance and make judgments based on confidence and growth opportunities rather than sales figures and income.

Angel investors —These individuals make relatively small contributions, often between $25,000 and $100,000, and are the most common sort of pre-seed capital investors. Angel investors can frequently provide pre-seed funding rapidly because they are investing their personal money and can therefore make relatively efficient decisions about it. If they were also a part of your company's angel round, they are likely already committed to the prosperity of your startup.

Accelerator or incubator programs - Accelerator or incubator programs are similar to a crash course in starting a business. Through these programs, early-stage startups are given full access to an entrepreneurial community chock-full of useful knowledge and training, community outreach, subsidized resources, They will also gain exposure to top-tier VCs for additional funding rounds in addition to the opportunity to raise initial pre-seed capital (usually around $125,000) in exchange for giving away an equity stake. Founders who think that this would suit them should apply to an accelerator or incubator program and if chosen, follow the instructions to finish the “course.”

Venture capital funds for pre-seed and seed investment — These funds are made up of a number of limited partners. VC funds can make pre-seed investments that dwarf the investments of angels or incubator programs, but they also have a longer decision-making process than their alternatives.

Rather than pursuing hundreds of VC investors, use this strategy: study the funding records of potential investors and call about 20 of them who have worked with comparable startups in the past. If you're selling your startup to a venture capital group, contact the partner who has firsthand experience in the vertical your startup operates in. Keep in mind that you'll get a far greater response rate from investors if you tailor your fundraising campaign to the exact kind of investor that you’re targeting.

Know How to Attract Attention From Pre-Seed Investors 

If your startup is already making money and gaining traction, you'll have a far easier time getting pre-seed capital. 

However, even if you don't yet have a working product/service, four important characteristics can help you persuade pre-seed investors:

An Introduction

The best method to engage with a potential investor is via a reference from somebody they trust, preferably an entrepreneur that they've already invested in.

Entrepreneurial Attitude 

Investors will be looking to see whether you're a go-getter and will certainly take note if you've left a high-paying career and taken real risks to pursue your goal.

A Competent Co-founder

Building a founding team ought to be a founder's first task. Presenting to investors as a solitary founder will drastically diminish your chances of securing funding. Building a tech product or service is especially difficult if you have a business background but do not have a technically proficient co-founder who can put your ideas into action. It's not easy to find a co-founder; therefore, start looking for one as soon as it is feasible.

Domain Expertise

Having an outstanding background in your sector — for instance, being a project leader at a prominent software company or having a degree in computer science - will persuade investors to take you more seriously, even if you haven't yet completely established yourself as a startup founder.

How to find investors that are most likely to invest

People who are most inclined to invest in your startup will often have three characteristics. They: 

  • Have faith in you (relationship)
  • Are willing to commit the necessary funds (stage)
  • Are fascinated by what you are doing (industry

The higher the degree of overlap between these characteristics, the more likely an investor is to fund your startup. These characteristics are further elaborated on below:

Relationship circle

Potential investors are familiar with you or have faith in someone who is familiar with you. This frequently refers to investors who are based in the same city as you or, perhaps, are part of the same circle of people.

Stage circle

Potential investors invest in startups that are in the same stage as you are, generally with revenues of less than $1 million.

Industry circle

Potential investors invest in businesses that are comparable to yours but are not direct competitors.

Stage Circle

You're looking at two types of people for the stage circle: those who invest their private money (angels) and those who invest other people's money (e.g., Micro VCs, Rolling Funds, etc.).

Angels

Angel investors are wealthy people who put their personal money into a business. “Professionals” and “Non-Professionals” are two categories (under “Angels”) to consider. Startups frequently avoid angel groups because these groups often entail lengthy decision-making processes and rarely invest in authentic pre-seed companies.

Professional Angels are individuals who invest in companies on a regular basis. They know what they're doing and may even publicize that they're an angel investor on social networking sites to attract deal flow. AngelList and Signal are two places where you can locate angel investors. Browsing for an “angel investor” on Twitter and LinkedIn can be an excellent place to start. Angel investors are frequently proactive founders who've had profitable exits or who have been able to cash out a portion of their ownership. Look for entrepreneurs in your field or those who have anything in common with you (and your startup) and reach out to them, especially if their Twitter or LinkedIn bio includes the word "investor."

Non-Professional Angels are wealthy individuals who have never previously invested in a business. Non-Professional Angels can be found among retired executives in your sector or network. They're usually in your network since they're not active investors. You may need to educate them further but they can be useful collaborators. These individuals are a little more difficult to locate because they may not have previously invested as angels. 

Micro VCs, Family Offices, and Rolling Funds

These are institutional investors who put other people's money into their investments. People who invest their personal money (angels) and people who invest somebody else's money have reasons to invest that are similar but not identical. People who invest other people's money have a return schedule in mind and proceed accordingly. First and foremost, they are out to make a profit.

People who invest their own money (angels) desire to make a profit, but they often do so for other reasons. They may, for example, be passionate about the problem you're addressing or may have a personal connection with you. It's essential to consider these distinctions, especially when dealing with angels. Take time to learn about the factors that influence their investment choices.

Micro VCs

Micro VCs are an emerging investment trend that can provide an excellent first round of funding. Micro VC funds are typically under $100 million in size, although they are sometimes under $50 million. Typically, a company will begin as a Micro VC for Fund I and Fund II. However, if they are successful, they will have raised $100 million or more in seed-stage funds by Fund III. Look for VCs who have raised less than $50 million on Crunchbase or Signal. If you google “Micro VCs”, you'll find a list of them circulating around the internet. The closer a firm is to you, the more likely it is to invest; however, this may be changing in a post-COVID-19 world.

Once you've found a firm, check its portfolio for companies that are similar to yours. To verify if you're a suitable fit, go to their website. If you think the company and its partners would be a good fit for you, look them up on LinkedIn or Twitter. To find a decent introduction path, see whether you have any mutual ties.

Industry Circle

Determine which industries you'd like to operate in. SaaS, marketplaces, FinTech, and hospitality are just a few choices. Don't confine yourself to a single industry; instead, think widely about what sector your business can be in. A pet insurance company, for example, may be in InsurTech, Pets, or Consumer. Once you've chosen certain industries, use Crunchbase to look for investors who want to invest within these industries (Crunchbase calls these “categories.”) Check to see if you have any LinkedIn or Twitter contacts who can introduce you to those investors.

Another technique is to look for startups that are similar to yours but are not direct competitors. Look at where they got their first funding and determine if they're a good fit. Check to see if you've any links to the founders of those companies on LinkedIn or Twitter. If you do, request an introduction. If you don't, write them a cold email to see if they'd be ready to give you advice on your deck over the phone. One of the greatest ways to approach an investor is to first introduce yourself to the founder of a successful startup in which they have invested.

Summary

Remember that the people who are most likely to invest in your business have three characteristics: 1) they believe in you, 2) they tend to invest the amount of funds that you require, and 3) they are enthusiastic about what you're doing. 

The greater the degree of overlap of these characteristics, the more likely they are to invest.

We can help!

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