Pre-Seed Funding: Your Roadmap to Startup Success in 2024
February 8, 2024
Adam Wakefield

Pre-seed funding saves early-stage founders from walking tightropes. A Crunchbase analysis shows that startups that raise substantial amounts in pre-seed are more likely to secure advanced rounds of funding down the road. About a decade ago, investors used to be distant sceptics of startups at embryonic stages. But today, ideas are morphing into unicorns at warp speed, and investors are increasingly willing to toss cash at prospects they've only seen on paper.

We're here to help early-stage founders tap into a wellspring of capital and break the shackles of self-funding and personal favours. This manual will help you navigate pre-seed funding and usher in the future you've dreamed of. We’re offering a comprehensive toolkit with a term sheet, a step-by-step guide, investor communication strategies, and more.

Let's dig in and propel your startup to the next level. 

What is pre-seed funding?

As the name implies, pre-seed investment is the initial amount of capital that helps a startup prepare for a seed round. The concept and execution can be tricky, with questions like when, how, and what amount to raise. 

To demystify it, consider pre-seed as the earliest funding stage that transforms your abstract business idea into something more concrete. It gives your concepts a life form and kicks product development into high gear.  Like other rounds of financing, the essentials for pre-seed funding include a solid pitch deck, a term sheet, a team, and a market strategy.

This quick checklist will help you keep things well-organised. 

Perfecting your pitch:   

Your pitch is your calling card. Keep it brief but as detailed as possible. Include the problem statement, unique selling points, target market size, business model, revenue growth, and funding needs.

Targeting the right partners:

At seed rounds, it's advisable to seek angel investors or someone who can offer valuable guidance, expertise, and financial backing. Preferably, source your investors from your inner circles to leverage pre-existing relationships.

Even more importantly, treat your partnerships with investors at this earliest stage of financing as the start of a symbiotic relationship where your success parallels their trust.

Scheduling with accurate timing:

Be highly sensitive with your timing. Like catching a wave, align your campaign with moments when venture capital funding is pouring into your niche.

Turning numbers into narratives:

Numbers should guide your investor communication, and you must relay a narrative that resonates with your pre-seed investors. 

Embracing an entrepreneurial personality:

A venture capital investor will trust your ideas as much as the people behind them. Throughout the funding journey, you must project confidence to potential investors by fully displaying competence, credibility, initiative, and commitment.

Assembling a highly qualified team:

A solo business owner faces reduced chances of securing funds. Build a robust team to cover your startup on all fronts. For instance, if your expertise is in business, seek a technical co-founder to enhance your product development capabilities.

Double-checking your financial preparedness:  

Your pre seed financing checklist is incomplete without your financial papers. That includes your cash flow statement, term sheet, and legal/tax files.

Who needs pre-seed funding?

The importance of pre-seed funding

The benefits of raising pre-seed

People often mix up startup terminology. Early founders can have difficulty figuring out what stage of startup financing to pursue - pre - seed, seed, or series funding. 

First-timers or established founders?

It's possible to skip pre-seed/seed and jump straight into series rounds, so long as you have the chops. On the converse, you might realise you're still in line for pre-seed, even though you’re far advanced in your startup journey.  Some startup businesses rely solely on internally generated revenue until they're due for advanced rounds like series funding or an initial public offering. 

But you can consider pre-seed if you have disruptive ideas yet struggle with financial constraints. Pre-seed, with all the risks involved, works best when you carve out a niche for yourself, push conventional boundaries, or rewrite industry norms. That applies to even long-established ventures introducing new technologies and risk-taking visionaries breaking away from their professional work with revolutionary ideas.

Why consider raising pre-seed?

Pre-seed capital empowers you to assemble the team and facilities needed to develop and deploy your startup project. It minimises the dilemma of opportunity cost and the encroachment on personal finances for founders. 

At what point do you take the plunge? Consider pre-seed funding if you've registered enormous market interest through positive feedback. You can also think of going this route when you have the tools and team to chase a key milestone - viable product prototypes, product-market fit, a sizable customer base, investment opportunities, etc.

How much can you raise?

To calculate how much to target, consider crucial aspects of your running expenses – team salaries, product development, market outreach, or additional expenses.

What is a pre-seed funding term sheet?

 A pre-seed funding term sheet is a one-stop repository of resources for pre-seed funding campaigns

A magnifying glass placed on a spreadsheet

The heart of the pre-seed funding process is the pre-seed term sheet, a document that records your tango with funders. A pre-seed term sheet sets expectations for investors and tracks the investment amounts and the use of funds. Unlike subsequent funding rounds, the pre-seed term sheet is relatively simple by design yet crucially clear.

Since it formalises your agreement with investors, your pre-seed term sheet needs to foster commitment by giving investors a clear understanding of their involvement and expectations. To minimise the speculative nature of your early-stage startup, your pre-seed term sheet must state clearly the valuation, equity stake, and other crucial components.

Here are the elements to prioritise in your pre-seed funding term sheet.

Common terms in a pre-seed funding term sheet

There’s no iron rule on what to consider in your pre-seed term sheet. However, there are critical terms that can shape your pre-seed round. 

Here’s what you need to include:

  • Valuation – Determine your startup's initial worth. It’s essential for negotiations.
  • Investment amount – Decide how much capital each investor will contribute.
  • Equity stake – Devise a formula for allotting pre-seed investors a percentage of your company in exchange for their investment.
  • Investor rights – Determine who gets board seats, information rights, voting rights, co-sale rights, etc.
  • Investment timeline – Schedule your funding-related events coherently.
  • Use of funds – Provide a transparent record to show investors how you use your pre-seed money.

With these terms fully accounted for, you can enter negotiations with greater confidence. You’ll get a firm grip on the complexities of pre-seed startups with the clarity and strategic foresight to build strong partnerships.  

How to create a pre-seed term sheet

Now, let’s get down to the brass tacks. Here’s how to assemble your pre-seed stage funding term sheet in 7 steps:

  1. Explore templates - If you're unsure of what your pre-seed term sheet should look like, there are many templates to inspire you.
  1. Define the terms and figures - Once your spreadsheet is ready, you can start fleshing out the sections – deal terms, amount, valuation, equity-based financing terms, investor rights, protective provisions for investors, funds allocation plan, etc.
  1. Initiate a communication strategy - Identify ways to open contact with potential investors. Create your pitch deck and plan on how to discuss expectations, goals, and commitment requirements with them. 
  1. Establish milestones and triggers: - Consider structuring the investment in tranches tied to specific milestones. Clearly outline any trigger events for these milestones. That includes achieving a specific revenue or user level, product development milestones, etc. This ensures that subsequent funding is contingent on the achievements of previous rounds.
  1. Establish timelines - Include a timeframe for the closing stages, the validity of the terms, and other relevant events.
  1. Iron out the legal framework - Engage legal counsel to ensure that the pre-seed term sheet aligns with legal standards and protects your intellectual property and the interests of both parties. Specify the governing law under which the agreement will be interpreted and enforced.
  1. Iterate and finalise - Maintain open lines of communication for feedback. Iterate the term sheet based on discussions until both parties reach a consensus. Once all parties agree on the terms, you can finalise things with signatures from the startup founders and the investors.

When and how to use your pre-seed funding spreadsheet 

To wrap things up, here’s a list of tips to help you maximise the effectiveness of your pre-seed funding stage term sheet:

Master your timing

Start the conversation with investors early in the fundraising process. Leverage milestones and industry trends to drive investor interest.

Negotiate your term sheet strategically

Introduce your pre-seed funding spreadsheet at the initial stages of your investor conversations.  Clearly articulate your proposed terms, ensuring transparency and avoiding misunderstandings. Emphasise crucial aspects such as valuation, investment amount, and equity distribution. Be open and lean toward collaborative relationships with investors.

Know what NOT to include in your spreadsheet:  

Avoid complex financial models that may confuse or overwhelm investors. Ensure that all terms are clearly defined to prevent misunderstandings or disputes. Base your financial projections on realistic market conditions. While promising startups are often speculative at early stages, steer clear of overly optimistic projections.

Educate your investors

Provide clear explanations for the rationale behind your projections. Transparency and attention to detail prevent overcommitment because it sets realistic expectations for growth and other critical milestones.

Pre-seed funding is your launchpad to startup success 

By its very nature, the pre-seed funding round calls for more than just financial infusion. It requires a strategic partnership that sets the course for a startup's trajectory.  We’ve provided a comprehensive toolkit with a step-by-step guide on implementing pre-seed funding, when and how much to raise, a pre-seed term sheet, how to use it, and what to avoid.

Perfect your pitch and optimise your investor targeting strategy. Get your finances together and weave your numbers into a convincing narrative. Gather a well-qualified team, and embrace an entrepreneurial spirit. Follow the guide above to optimise your spreadsheet, ace your term sheet negotiations, and crush your pre-seed campaign and future funding rounds.

Need more expert advice on funding matters for your startup? Our experts are eager to hear you out. Get in touch with Founders Factory Africa today.