What is a pre-seed round and how to raise one?
A step-by-step guide based on the insights shared in an #EcosystemGiants spin-out panel with Speedinvest and Anthemis on 18.03.2021
Pre-seed, a term thought to emerge in 2014, is considered to be the tranche of funding a startup raises following an ‘angel’ round, prior to reaching the ‘seed’ stage. According to Crunchbase, it is the “pre-institutional seed round that either has no intuitional investors or is a very low amount, often below $150k.”
The definitions of each startup financing have undergone changes over the last couple of years - shifts driven by the increasing amount of capital flowing into startups (2020 was a record year for VC investment in Europe!) and the race to access to the best investment opportunities earlier (and be better positioned at later-stage rounds).
Yet, despite the influx of capital, only a fraction of the funding goes to businesses started by women (800 female-founded startups globally received a total of $4.9BN in venture funding in 2020; a 27% decrease over the same period last year). Furthermore, the proportion of dollars to female-only founders also declined (2.3%, compared to 2.8% in 2019). With venture checks for women founders being at their lowest since 2017, we got together for a discussion all about raising pre-seed funding, with the aim of raising the issue of access to this earliest trench of external capital for first-time, less networked founders, who are in many instances women. Why aren’t there more female founded-companies getting funded at pre-seed and what do VCs look for when evaluating pre-seed startups? Read a few of the insights shared by ‘pre-seed investor giants’ Deepali Nangia (Venture Partner, Speedinvest), Elizabeth Davis (Investor, Anthemis) and Frederik Hagenauer (Principal, Speedinvest) below.
To start off, what is considered to be a pre-seed round?
Pre-seed fundraising is like storytelling. Perfect your play for investors
“You need to tell a story where you have a problem that is massive that you're uniquely well positioned to solve. + The right time and the perfect market. As with any good story, you may need props – an MVP, a wireframe, an actual product or your pilots. I think that's literally what we're looking for as pre seed investors is just your ability to convince us that this, you're the best person to solve that problem.” – Fred Hagenauer, Speedinvest.
Your background as a founder is important
“You don't necessarily need to have been a founder before. But why is your experience and background really unique to solve this specific problem that you’re trying to solve? Why would you win in this market versus some of your competitors?” – Elizabeth Davis, Anthemis.
So is your attitude
“There was a group of founders we were talking with and the only suitable slot was 7:30am their time and their attitude was amazing. They said they loved starting the day early, and that this will just help them hit the ground running. It was such a great attitude from them and I appreciated it so much, because I felt bad asking about this early meeting.” - Elizabeth.
*A follow-on tip on that is to send available slots in the investor’s time zone when scheduling meetings.
“You need a good deck - if you put it on Docsend you can constantly update it and get good analytics on who actually looks at it, thereby retaining control. That's the main thing. Most good pre-seed investors won't ask you for a business case, because they'll know that it won't really mean anything.” - Fred.
Data room and the Investor FAQ
“You can have a Notion page that you use as a as a data room or an investor FAQ - a collection of commonly asked questions that expedites your process. Anytime you realize a question gets asked more than twice, you can put it on there with a really good answer, with sharp sentences, hyperlinking to your sources.
What is the value proposition of your product?
Why do you think the time is now?
How big is this market?
It's a good way to like keep conversation going asynchronously.” - Fred.
Be confident when pitching
“A couple of months ago, I was talking to a chemical engineer (PhD) and thought this woman is such a rock star. But she didn't even talk about her background at all during the pitch. It was surprising to me. Speak about your background and experience.” - Elizabeth
Every interaction you have with an investor leaves an impression
“Any interaction an investor has with a founder is a proxy for how they will build that company. If your deck looks ugly, then maybe your product will look ugly. And so if your deck looks really slick, that's the closest I can proxy how you will build the product. Is that fair? Not necessarily, but it is kind of often the truth, right? Treat all these little interactions with this knowledge in mind." - Fred.
Create urgency - a combination of art and science
“Light the investor on fire. First tell your story. If you create urgency first, they will use it as an excuse to not have to do the work - and can pass if too competitive. You always want to first spark them. And once they're sparked, then the second rule is never lie. Don't say you have a time sheet when you don't as it will backfire. Don't say you have commitments when you don't it'll backfire. You can say you are in conversation with other funds. The formal creation of urgency is a bit of an art form more so than science.” - Fred.
To drive more capital to female founders, investor representation matters
“We need more female role models - we have all these amazing women who have had these exits, and we need to showcase them." - Deepali Nangia, Speedinvest.
There is a common saying that while talent is equally distributed, opportunity is not - and the goal of this ‘Ecosystem’ project is to tackle this exact problem of access to opportunity in early-stage fundraising. Hopefully through the information shared in the weekly newsletter and the knowledge exchange/connections made via the online initiatives; we will collectively succeed in addressing the problem of closed networks in venture so that more opportunities for entrepreneurs raising the first round of external funding and for junior investors starting out (and succeeding!) in VC will be created.
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