Pre-Seed Financing: An Entrepreneur’s Guide
Do you have a brilliant business idea but don’t know where to find the money needed to get it started? Well, this is the case for many entrepreneurs who are looking to get their startup business up and running. The good news is that there are many investors out there who are willing and able to give you the necessary capital in exchange for ownership. This does not need to be the full seed financing. This is pre-seed, intended to get your MVP or prototype up and running before going after larger dollars.
What is Pre-Seed Financing?
Pre-seed financing occurs when an investor gives money to a startup company in exchange for equity ownership very very early on, usually pre-product. This can also be structured as a straight debt loan, or other structures. This financing method is usually one of the first capital raising activities that startups go through, oftentimes being the founder’ own capital, or close friends and family. Pre-seed financing precedes the seed and Series A rounds. The funds raised from pre-seed financing are generally used to help get the business off the ground, to the point of being attractive to larger investors.
Where Can I Find Pre-Seed Investors?
The term pre-seed investor does not apply to just one type of investor. In fact, this term is used to describe many different investor classes with the same target investment: startup businesses.
I’m sure you’ve heard the saying “Friends & Fools.”
Pre-seed financing can come from a variety of sources, including family and friends. Anyone with capital that is willing to invest in your startup can be considered a pre-seed investor, so don’t automatically rule out family and friends, as this is likely your best early-stage on option.
Real Life Scenario from one of my projects:
In 2013, I was looking for $10,000.00 to jumpstart a project with great potential. I successfully raised $10k from 5 friends. $2,000 each. It took about 3 weeks to meet, discuss, answer questions and collect funds. The idea was exciting and now we own the patents together.
Breakdown:
$7,000 — for lawyer fees for filing 2 of my patents.
$2,000 — for additional lawyer fees for creating the entity,
forming the investor documents, getting ready for larger fundraising, etc.
$1,000 — to hire a designer to help me make an incredible pitch deck. (this included some basic designed wireframes for the deck)
After officially having two submitted & pending patents, and adding those IP’s to the pitch deck, I was off to go raise $300,000 to build my product.
Then I started to approach…
Angel Investors
Angel investors are one of the most popular investors in the early stages of startups. Funding is usually between $25,000 and $500,000 per investment.
Depending on your team, or lack thereof, you may choose to approach…
Accelerator Programs
Investments aren’t always in the form of just financial contributions. Instead, they might be in the form of resources, like an accelerator program. Accelerator programs target young entrepreneurs and gives them the resources needed to fully understand starting and running a successful business. The entrepreneurial community they become a part of can lead to inside access to top venture capitalists all while furthering their business development skills.
What Needs to Be Done to Attract Pre-Seed Investors?
In order to increase your chances of securing a pre-seed investment, there are a few things to keep in mind. The first is to have an entrepreneurial attitude. Investors want to see that you are driven and excited to create a successful business despite the risks. Moreover, you want to present yourself to investors in a professional way.
This means having expertise on the technical, operational, and financial areas of your startup. If you lack any of those skills, consider bringing on a co-founder that balances out the teams overall skills. Finally, focus on networking and building your circle. Investors are more likely to invest in a startup when there are similar contacts between the two of you.
Very Basic List of what you need to raise pre-seed money from friends & family. Of course this varies based on your network & project, but this is what I do in a nutshell.
1st: Put together a budget and what you need the money for. Be detailed & specific.
2nd: Collect visual assets. Hire someone on Fiverr to make make simple wireframes that help showcase your idea / project.
3rd: Develop simple terms for your pre-seed deal. The sky is the limit. Do your research and offer what is exciting for all parties.
4th: Put together a simple, yet specific presentation. Show the budget & terms!
After executing these steps you can then consider other options, like equity crowdfunding.
PRO NOTE: THE NUMBERS ARE THE NARRATIVE. DO NOT FOCUS ON THE PRODUCT. SPEND TIME TELLING INVESTORS HOW THEY BENEFIT.
Confused on pre-seed financing? I’m ready to answer any questions you may have. Don’t let your business idea sit any longer! Reach out to me on one of these avenues / channels here.
I AM NOT A LAWYER, CPA, OR TAX ADVISOR.
THIS IS NOT LEGAL OR FINANCIAL ADVICE.