(Pre-)Seed Funding Guide: How to Find Investors after You’ve Developed an MVP

Every early-stage startup reaches a point in their journey when fundraising seems the most natural next step to enable future growth. Usually it happens when a company already has the first version of their product as well as some early traction and a specific vision on how to achieve product-market fit.

If you have just developed your minimum viable product, you are probably at one of the early rounds –– Pre-Seed or Seed. There’s not much difference between them. Pre-Seed startups develop project prototypes and test their hypothesis. In turn, Seed-stage companies usually have some level of traction or consumer adoption and want to confirm a Product-Market Fit. Nowadays, the line between these stages is very blurred, so we will use the term (Pre-)Seed Stage in this article.

In exchange for funding and support, accelerators usually take startup shares. And that’s when you need to think carefully.

Having an accelerator in your (Pre-)Seed round may seriously influence your valuation as accelerators usually take shares for a low price. Imagine that you want to raise $350 thousand for 5% of your startup from a VC (bringing your company at a valuation of $7 million) while you’ve just exchanged another 5% 2 months ago with an accelerator for $25 thousand (at a valuation of «‎just» $500k). It will be hard to explain to the VCs you’re approaching how you’ve boosted your valuation at 10x in just 2 months, right?

That’s why it’s better to close deals with accelerators as early as possible (if you need them at all), so you don’t bring in a partner at your (Pre-)Seed stage, who will ruin your startup valuation.

Angel investors

Angels are usually high-net-worth individuals who fund startups at the early stages. Unlike venture capitalists, angels may be not so focused on traction — sometimes they may just believe in your idea or your team, come when you don’t even have an MVP, and provide some funds to get you started. Yet, they still want to see that your company is incorporated and doesn’t exist just on paper.

Receiving an initial boost isn’t the only case for collaboration with an Angel. Often startups sign deals with Angel investors while negotiating with VCs about a bigger round. Thus, teams can quickly cover the shortage of resources, which allows them some months of runway, till the round with the venture capital firm is finalized.

When it comes to stocks, Angels often use so-called «‎convertible loans», which are a great and unbureaucratic way of getting funded. Essentially, it allows startups to receive funding right away in the form of a «‎loan» that doesn’t immediately convert into the company’s share. Instead, angels receive a 15-25% discount on what the shares will cost during your next funding-round. For example, $30 thousand invested in a company that in the next round hits a valuation of $1.5mln thousand will convert into ~2.4% instead of 2%.

Unlike venture capital funds, angels can (но не обязательно/всегда) also be people from the «old economy» that don’t turn investing into their main work or business. They usually have a lot of domain expertise in your niche, they are connected to the market and often understand trends and pains you’re trying to address with your Product.

Thus, when it comes to startup funding, angels want to help and solve some problems in this market, and grow their capitalearn some money doing this. That’s why they usually look for startups from the same industry as theirs so their contribution in the form of experience and contacts can be really valuable.

Sometimes angels may group in syndicates. When you apply to a syndicate, you’ll communicate mainly with lead investors, and they will look for interested members. Usually, it’s easier to get a deal with the syndicate if your project has already been financed by one of the members before and has generated revenue.

Venture Capital Funds

Venture capital funds (VCs) are professional investors who usually work for investment funds and family offices.

Unlike angels who may be driven by an idea, reputation, and industry motives, VCs usually pay attention to a much more practical aspect of funding — return on investment (RoI). That’s why you should consider this type of fundraising only when you already have some traction. For example: a positive cashflow, several pilot clients, a growing number of daily/monthly active users, etc.

Disengage from friends and family. The investors need to show real profits from the actual target audience, which passed strong customer validation. If you realize that the average check or sales volume has increased dramatically, you can already talk about getting closer to the Product-Market Fit. Subsequently, your costs for attracting a customer will go down, which can be presented as positive numbers for investors.

But it isn’t always about revenue. Millions of pre-revenue startups get their funding and are valued for pilot clients, user base growth, or a signed contract with a large enterprise.

Finally, you’ll have higher chances to close the funding round if you’re able to present a solid go-to-market strategy. To be convincing, your GTM plan should explain how you’re going to reach the product-market fit, show deep target audience understanding, describe competition and demand, and provide a clear vision of distribution channels.

Team

Apart from traction and your product itself, both Angels and VCs pay a lot of attention to your startup team and especially the founding team. And getting «‎extra points» in the eyes of your potential funding partners isn’t related only to personal chemistry.

Complementary skill-sets of founders will always look like an advantage. Basically, there are always two key roles in a startup: a technical officer and a sales driver. It’s also possible to create even more effective complementary combinations that can include product lead, marketing expert, etc. At the same time, most investors will tend to avoid single founders and especially ones that have little-to-no tech expertise. In other words, every Steve Jobs needs his Steve Wozniak.

Founder-market fit is another important concept related to this matter. Even though there’s no single formula, VC funds and Angels usually focus on the following aspects of founders:

• Expertise in the chosen industry.
• Healthy «obsession» with the problem you’re solving and your product («‎don’t start a company unless you can’t help but do it»).
• Leadership skills: ability to recruit, founders synergy, feedback receptivity.
• Long-term vision and execution ability.
• Strong values.
• An unfair competitive advantage (why are you the ones who should solve this problem?).
• A track record of execution (if you already built a company in the past, it’s more likely you’ll succeed again).

Progress

For investors, progress is not always about traction. It’s also interesting for them to invest in a project that shows what progress the team has made over a non-fundraising mode.

Progress is not always about users and sales. Sometimes progress can be defined as hard technical work in a short period of time or working with clients. Small but real successes will be valued higher than fictional traction.

Many funding partners will also pay attention to your future plans and vision. From this perspective, one of the things you may be asked to explain is market readiness (or the «‎why now?» question). For this, you may need to prove that your team is ready to scale and you have clear investment plans.

Also, VCs and Angels are more likely to support companies that offer painkiller solutions rather than vitamins:

📌 Top Tips on How to Raise (Pre-)Seed Funding for Your Startup

When you get serious about finding a funding partner, you’re likely to have some questions. Here we have a couple of tips for you to make your fundraising road cloudless.

Pitch deck creating

It is the first thing investors will see about your company. Here is a good complete structure for your future pitch deck:

• Title slide includes your company’s name, logo, and short information about the work you do. It’s the one section where you can use only 1 slide. Other slides should be organized into groups depending on the section. But don’t use more than 3 slides to illustrate the topic –– this will really lengthen your pitch.
• Executive summary reviews all the information about your business and idea in the shortest brief. When your pitch deck is sent back and forth, C-Level executives don’t get into details. They only look through the executive summary.
• Problem slides focus on a problem that you’re going to solve with your startup.
• Solution section includes your idea of how to fix this problem and its realization.
• With traction slides, share which numbers your PMF demonstrates.
• The market section should answer what your Total Addressable Market is and how large it is.
• In competition slides, describe who your competitors are, what disadvantages they have, and why your startup is more viable than theirs.
• Roadmap slides show your vision of go-to-market or scaling strategy.
• Team slides explain why you are capable of solving the chosen problem and what your unfair competitive advantage is.
• The funds section clarifies how much money you need and how you will use it.

It’s important to make two versions of the start-up deck: a short one that will complement your 10-minute pitching session and an extended one with all the information you wanted to communicate to investors.

It’s better to prepare a simple but colorful presentation –– a classic white background won’t make you stand out among hundreds of startups. Same situation with language: use simple sentences but not with several verbs in one.

Slides should be readable –– not all investors have good sight, so take care of:

• Simple font.
• Large size.
• Bold type.
• Contrasting color.

Add charts and diagrams to illustrate your words, but make them legible. Prepare for an explanation of what these data mean.

Don’t raise too much at the early stage

If you’re at the Pre-Seed stage, you have to take as much money as possible without overdoing it. You’ll extend your startup runway, which will help you increase your project valuation and raise more capital at the next round. But if you’re at the Seed stage, you, on the contrary, shouldn’t take too much money.

Before looking for funding partners, think about the approximate amount of money you need. Although it takes great effort to get capital, it is possible to raise too much. This can lead to problems, as well as a lack of money.

One of the difficulties is overvaluation and impossibly high expectations. If you are ranked too high in the early stages like Pre-Seed or Seed, it will be harder for you to increase valuation the next time you raise money. Ideally, it should grow with each new round. If it doesn’t, it is a bad sign for investors. Then the chance of getting funding will decrease.

The second problem is high spending. The more money you get from investors, the more you spend. Usually, the main reason for spending is people. The more capital you have, the more people you attract to your project. But it is more difficult to change direction if you have a big team. High spendings can make it challenging to make a profit, which can be devastating for early-stage startups.

The third factor is too high investor expectations. To avoid this, you can underestimate the amount you plan to fundraise. And when you raise that amount of money, you can tell investors that you have decided to get more. Many people do this, and there is no deception, but investors understand that your project is going well.

Either fundraising or project development

The search for investors is very distracting. When founders start looking for capital, all other processes automatically stop. Fundraising becomes the only thing you can think about. A startup suffers from this, as it grows just because of the founders’ actions, especially at the early stage. Therefore, to continue to grow, choose whether you are in fundraising mode or not.

When you do decide to start attracting investors, give it your full attention. Thus, you will quickly complete this process and be able to get back to work on the project itself.

You can take finance from investors out of fundraising mode if they are ready to invest, and you don’t have to pay much attention to them. It takes a lot of effort and time to persuade investors: meetings, preparing materials, and pitching. So, in this case, it is better to postpone negotiations until the next round. If the investor is ready to close the deal on terms that you can easily accept without discussions, you can do it.

If you aren’t in fundraising mode, and the investor is ready to fund you now, but after meeting with donors, it’s best** to decline politely**. Tell him you will get back when you enter a new fundraising round.

Divide your shares accurately

If your startup is successful, you are more likely to make it to the Series A round. To reach it for sure and get new funding, don’t sell many shares at the Seed stage. Otherwise, donors will question whether you have enough shares to keep you motivated to develop your project.

The ideal option is to sell no more than 10-15% of the stock at the Pre-Seed stage and up to 20-25% at the Seed. If you get funding from the sale of uncapped convertible notes, you will need to calculate the eventual equity round valuation.

The founders must have a significant stake in the company to have the highest interest in its success.

Convertible loans vs. Equity

Early-stage startup founders may not understand what would be better for their project –– to sell shares or convertible loans. It is better not to dilute stock for a young project so that once when you look at the cap table, you will see you have a minimal share. That is why founders often think about convertible loans. We prepared the pros and cons of these ways of investing and will explain to you the differences between them.