360 views on tech #39: Pre-seed funding 101

👋 Hi there, welcome to 360 views on tech, a weekly newsletter curating the most insightful news of the week and putting to the fore the latest trends.

🍕 Food for thought

Pre-seed funding 101: What startup founders need to know in 2022

By Alex Oscroft — Sifted

All startups begin with an idea. But having a great concept is only half the battle for a new founder: soon you’ll need some money in the bank to turn that idea into a product, a team and eventually a scalable company. To get that initial idea off the ground, many founders turn to pre-seed funding — one of the earliest stages of startup funding and one that can help propel a nascent company into its next phase of growth.

As Europe has become more flush with VC cash in the last decade and the ecosystem has matured, more funds have surfaced desperate to find future unicorns before they hit the big time. According to Dealroom, there was $385m invested at the pre-seed stage in Europe in 2012. Last year that figure hit $1.3bn.

What is pre-seed funding?

“Pre-seed funding is most likely the first time a startup is taking on capital just after it’s been established and most usually pre-profit, pre-revenue and even pre-product market fit (PMF)”

Pre-seed rounds will vary in size depending on the size and sector of your startup, but the average pre-seed raise in 2019 was between $400k and 500k.

When is the right time to raise pre-seed funding?

The right time to raise pre-seed funding is as soon as possible after you launch your company. Many founders start looking for pre-seed investors before they even launch their businesses, and — especially if they don’t have much of their own money to fall back on — raise a pre-seed round within six months of incorporating the company.

Do I need to have raised money already?

A pre-seed round will often be the first fundraising a startup does, so there’s no need to have raised money beforehand if you want to go straight into equity raising. But some startups will want to delay bringing in outside money, and instead rely on personal savings, family and friends or traditional bank loans.

How do you find pre-seed investors?

The best way to be introduced if you’re looking for investment is by one of the investor’s portfolio founders. This is particularly true at pre-seed, where often the product isn’t fully developed and investors must base their decisions on how much they trust the potential of the team.

Should I take money from VCs or angel investors?

Angel investors can provide personalised and specialised advice to founders, and are a viable investment option at pre-seed alongside or instead of VCs. Angels also come with less pressure to produce returns quickly, while VCs are beholden to LPs (their investors, known as limited partners) for whom they need to turn a profit.

Of course, some founders will want investors who have an emphasis on scaling rapidly and can offer the support to get there. VCs and institutional investors also have huge networks of connections and experience. “One advantage of a venture firm would be the opportunity to benefit from its prior experience in working with other pre-seed portfolio companies, those lessons learned and helping founders with company and team-building with practical and tactical advice”.

Is it better to raise from local or international investors?

At pre-seed stage, finding local investors is a safer bet, as they can provide the networks and support in the local ecosystem that could get a startup off the ground operationally, before it expands commercially. It’s also likely to be easier to find local funding, as early-stage investing is “based on people” — all investors have startups in their own ecosystem that they’ll be much more familiar with than those in a totally different market.

How long does it take to raise a pre-seed round?

Raising a pre-seed round can take anywhere from less than a week to six months. It’s a process that will vary from startup to startup, depending on how much money you need, how developed your company and product are — and how impressive your pitch is.

What are pre-seed investors looking for?

At this early stage, judging how committed and impressive the founders are is more important than combing through very early financial data. Founders raising at this stage are likely to highlight their vision and early team rather than revenue figures. It is fundamental to be prepared on all the aspects concerning the business and own them with confidence.

How long after raising a pre-seed should you raise a seed round?

After a pre-seed round, for most startups, comes a seed round. At this stage investors typically want to see a minimum viable product (MVP), some early customers and signals towards PMF. Overall, founders should start thinking about their seed round as soon as they’ve finished with their pre-seed — what milestones you want to hit, how much money you’d want, whether you look for new investors or stick with your existing ones. Most startups raise a seed round about a year after their pre-seed.

🔴🟠🟡 At 360 Capital, we recently closed a new €45M seed fund, Square II to support entrepreneurs early on. Square II investment strategy is focused on seed stage investments in highly disruptive companies in the digital space.

🧑‍💻 Top readings

• Drowning in trash: Google opens applications for circular-economy accellerator
• DALL-E image generator is now open to everyone
• ESG regulations are changing in Europe: Here’s what growing startups need to know
• Paving the way for payment innovation

💸 Money matters

• Satispay, a payment provider, raised €320M, from Addition and other existing investors, becoming the second Italian Unicorn.
• Gourmey, a cultivated meat startup, raised €48M, from Earlybird Venture Capital, Keen Venture Partners, Heartcore Capital, Point Nine Capital, Air Street Capital, Partech, Discovery, Omnes Capital, Eutopia, Beyond Investing and Thia Ventures.
• 🔴🟠🟡 Irius Risk, a cybersecurity startup which helps software engineers identify high-level vulnerabilities in their systems, raised $28.7M, from Paladin Capital,Bright Pixel Capital, Inveready, Swanlaab Venture Factory, 360 Capital is among the existing investors that backed the round.
• QuantPi, a sturtup with the objective of building a more ethically conscious application of AI, raised €2.5M, from Capnamic, First Momentum aand some angels and industry experts.

😂 Meme of the week

Check out our website for more info on 360 Capital. Any comment or feedback ?=> celeste@360cap.vc