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.
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.
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.
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.
Be highly sensitive with your timing. Like catching a wave, align your campaign with moments when venture capital funding is pouring into your niche.
Numbers should guide your investor communication, and you must relay a narrative that resonates with your pre-seed investors.
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.
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.
Your pre seed financing checklist is incomplete without your financial papers. That includes your cash flow statement, term sheet, and legal/tax files.
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.
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.
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.
To calculate how much to target, consider crucial aspects of your running expenses – team salaries, product development, market outreach, or additional expenses.
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.
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:
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.
Now, let’s get down to the brass tacks. Here’s how to assemble your pre-seed stage funding term sheet in 7 steps:
To wrap things up, here’s a list of tips to help you maximise the effectiveness of your pre-seed funding stage term sheet:
Start the conversation with investors early in the fundraising process. Leverage milestones and industry trends to drive investor interest.
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.
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.
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.
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.
