Angels, Pre-seed, Seed, and more: A field guide to the new fundraising landscape
Written on behalf of NewGen Capital Managing Partner Lu Zhang
While the startup bubble has received more attention, these past several years have also seen a proliferation of early stage investors. Previously dominated by just angels and large venture capital firms, early stage funding has become more diverse and segmented. Although each group is similarly named, each have distinct approaches to writing checks. Use this a field guide below to help navigate the new landscape of early stage fundraising.
Individual Angel Investors ($10k-$25k checks)
These are independent, accredited investors who write checks that average $10k to $50k; some are well-known serial angel investors, others also opportunistically invest with angel groups (more on that later), and veteran entrepreneurs with recent big exits. To quickly close, seek out individuals who are most likely to understand your idea or the opportunity you are targeting, such as market veterans in sectors or verticals adjacent to yours, or thought leaders and policy leaders in your target market.
These meetings and pitches should move fairly quickly, and many investors will write you a check after just one or two meetings — after all, there is very little to perform diligence on when you don’t even have an MVP. Some angel investors are well networked and can help introduce you to investors and firms with deeper pockets, but most are less likely to be able to follow on to your subsequent rounds of funding or provide significant strategic support. If all you need is to find someone to make a quick bet on your idea so you can get back to work building your company, focus on finding these individual angels.
Pre-seed VCs ($100k checks)
A recently emerging group is the “pre-seed” institutional VC firm that sits somewhere between individual angels and early stage micro VC firms in terms of the startup stage they target; although the term is new, these firms are largely filling the opportunity that micro VC firms used to target before many of those firms moved on to slightly more mature deals. These emerging firms also tend to focus on specific verticals, so take care to do your research before engaging them.
Diligence will be much slower than the processes conducted by individual angel investors and will likely heavily scrutinize your target market opportunity and your plan of attack. These pre-seed funds are often small (under $30M) and write correspondingly smaller checks than the average early stage firm; the smaller funds might limit the firm’s ability to follow onto subsequent rounds of fundraising. Nonetheless, many of these firms are led by VC veterans with strong ties to larger funds and serve as feeders to larger VC firms and strategic investors.
Angel Investor Groups ($100k-$500k checks)
Some angel investors will join together with their friends and colleagues to source deals, perform diligence, and pool their investments to gain better leverage in deals: many vibrant startup ecosystems have at least one major angel investor group. Notable groups include names such as Hyde Park Angels, Sand Hill Angels, and NY Angels.
Angel groups have existed long before the pre-seed and micro VC distinctions were made. The recent flood of startups and competition for funding, however, has encouraged many of these groups to seek more mature early stage opportunities. Many groups prefer to see MVP and some traction before they invest. Because members of these groups have outside commitments, diligence can take several months to be completed. Although these group similarly have limited follow-on investing ability, many members of these angel groups also serve as venture partners for institutional firms, these groups often serve as feeder networks to longer term fundraising opportunities.
Seed stage VCs/ Micro VCs
MicroVC firms, or seed-stage VC firms, write checks ranging from $250k to as high as $1M. They most often invest during formal seed rounds, but will enter opportunistically at the pre-seed stage as well as in bridge rounds that a company might raise to extend its runway between a seed around and a series A. Diligence conducted by these firms is often the strictest of all and will focus heavily on the market opportunity, your business, MVP, and traction, and the process can take longer.
Although this relationship takes longer to build, the time invested in working with this class of investor will pay off in the long run, as many of these funds are structured to follow on to several subsequent rounds of fundraising. These firms are often great sources for strategic introductions to customers and other growth partners; many strategic investors such as corporations invest in these firms, and working with these firms can be a way to engage such strategics without taking on any potential signaling burden or limitations that a direct engagement might cause.
As you map out your fundraising plans, keep these key takeaways in mind:
-Series A takes at least six months from start to cash in the bank; give yourself plenty of runway to raise in case fundraising takes longer than expected; and,
-Always take a meeting with an interested investor, even if you’re not actively fundraising. Relationships take time to build and diligence takes time to be completed. Use every meeting with an investor as a free consulting session; always ask them to refer other investors or strategic advisors who might be helpful to you.