Learnings from Raising Our Pre-Seed

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Written by Wen Shaw, CEO & Co-founder of Cooby

⭐️We’re always hiring! Send your resume to recruiting@cooby.co.

This article discusses what we learned from raising a pre-seed round in late 2020. As the CEO of a new startup, fundraising is part of my core responsibilities.

We ended up raising funds from Sequoia [1], Pear VC, and Hustle Fund, plus many marquee investors. That seems like a pretty good outcome, but that’s just the results. I wanted to focus on how to get there, not the results.

A bit of context for Cooby: Our situation is rather unique. Cooby is a startup based in a small country that targets fragmented markets. Our operation is mostly in Taiwan, but we target non-U.S. international markets.

As a result, our institutional investors are a mix of typical Silicon Valley-based seed-stage VCs, regional-focused, India-based investors, and cross-continent global investors.

When you’re trying to fundraise during a global pandemic, everything is virtual. I hadn’t met any of my institutional investors when we fundraised. Geographical barriers are no longer an issue. Investors are taking calls from every corner of the world.

This guide is not intended to be comprehensive. There are plenty of other ways to fundraise. Let us know what you think. Or even better — tell us what you would have done differently.

I. Preparation

A. Use SAFE

Most startups use SAFE (Simple Agreement for Future Equity) for pre-seed. I encourage you to do the same. Study up on how SAFE works. SAFE is great because it’s fast and founder-friendly. At a minimum, there are only 2 numbers to decide:

• Post-money valuation cap
• Investment amount

There is also a discount in case you have a down round. I’ve found the best investors don’t care about discounts, because at this early stage, minimizing downside makes no sense.

Using SAFE, you can raise funds from investors on a rolling basis. As soon as they wire the money, the SAFE is legally established.

🛑 Don’t do an equity round

I’ve met lower-tiered investors that pushed to do an equity round instead. DON’T. If investors can’t trust you enough to use SAFE at such an early stage, they likely won’t ever trust you.

B. Determine your fundraising goal

You raise money to achieve a milestone in your business, so the amount of money to raise depends on the milestone you want to achieve. Venture-backed startups usually plan their milestones based on the criteria to raise the next round of fundraising [2].

In the pre-seed stage, the money is used to build a PoC, a beta version, etc. in order to validate the product-market fit (PMF). The amount of pre-seed should be determined by how much you need proof of PMF so that you can raise the next round (i.e. seed round).

The desired proof of PMF will vary depending on the vertical. You should collect data points for your vertical. For example, back in 2019, in SaaS, you needed around $20,000 in monthly recurring revenue (MRR) to raise a good seed, but the criteria for seed change constantly. The exact number is far less important than having concrete proof of PMF in terms of market size, monetization, and value creation [3].

So, the steps to determine the fundraising goal are:

1. Determine the team you need to hire to validate PMF.
2. Estimate the cost of running that team for 18 months + other expenses, such as sales and marketing.
3. Add another 50–100% cushion, just in case. The pre-PMF “drunken walk” period is highly uncertain, so it’s good to have an extra margin of safety, especially for first-time founders.

That’ll be the amount you need to raise.

We set out to raise just $500,000, but we’re oversubscribed. We ended up raising just over $1,000,000 in our pre-seed. It turned out that we needed more than $500,000 (including a good margin of safety).

C. Set a Post-Money Valuation Cap

Study up on what post-money vs. pre-money means. And understand how a post-money valuation cap and discount works.

Unless you already have proof of PMF, your post-money valuation cap is largely a function of your background, your geolocation, your industry, and the type of investors you raise from).

A serial entrepreneur with successful exits gets a higher cap because, statistically speaking, they are much more likely to succeed again. Silicon Valley VCs offer the best valuation because of the insanely successful startups there.

🔑 Find a benchmark for a valuation cap

Startup valuation is often confidential, so it takes effort to find benchmarks, but it’s definitely possible. Many seed-stage VCs and angel groups publish these data points. Tech news coverage of startup fundraising stories sometimes reveals their valuation. (see this article on Playbook, a startup launched in 2017). Accelerators promote their investment terms for accepted participants, and they are good benchmarks (for example, the $10M post-money cap from Pear Accelerator). YCombinator’s terms aren’t market rate because they can significantly undercut thanks to their brand value.

Even if you’re outside of Silicon Valley like us, based on our experience, it’s possible to align your fundraising goals and valuation with SV-based startups. In fact, investors are more global than ever. Make sure you don’t limit yourself in terms of who you raise from.

🔑 The cap can change over time

If you start low, you can increase the cap over time when you have momentum in fundraising. This might be a good way to accelerate momentum building. The cap of your last SAFE might be in multiples of your first SAFE, and that’s okay.

You want to be transparent with investors about a higher cap because trust is key to founder-investor relationships, and transparency leads to trust. They’ll know anyway when they see the pro forma cap table at SAFE conversion. VCs ask for information rights in the side letter, so they can (and likely will) request all your previous SAFEs.

II. Fundraising

A. Key to Success

Once you determine the amount and the cap, it’s worth thinking through how you want to fundraise.

The key is to build up momentum, so that at some point, you’ll have more investors that want to invest than you need. That yields bargaining power for you.

But unlike selling software, issuing more equity has a marginal cost. In that sense, it’s more similar to auctioning. Essentially, you’re trying to find a few good buyers (investors) for your limited equity. So you don’t want just any money. You want smart money from best-fit investors.

⚠️ Signaling risk: It’s a psychological game, too. The impact of signaling plays a huge role in fundraising. Investors look to each other to make investment decisions, especially the most renowned investors. If you can show a lot of good signals in a short period of time, you can generate a lot of interest. Then, you’ll close deals quickly with the best terms [4].

B. Tactics

Now that I’ve provided an overview of how fundraising works, here are a few tactical suggestions:

1. Start with likely unfit investors: Practice with your investors who aren’t a likely fit first, before you pitch to the big ones. You’ll get feedback and iterate on your pitch deck. Our last pitch deck was version 8. (That said, I don’t recommend talking to someone you would never take money from. It’s a waste of your time and their time.)
2. Track opens and views of your pitch deck: Use tools like DocSend to track investor activities on your pitch deck, just as you would with sales emails. These signals show the interest level of investors who can help you adjust your efforts and respond quickly. (Here’s a tip: Sending a follow-up soon after an investor opens your deck yields the best result.)
3. Set a deadline: investors should be able to decide after a few calls, and that usually includes an initial call, plus a few deep dives and in-person meetings. Reference checks may replace in-person meetings. You should set a deadline by sending an email titled “Please Decide Before MM/DD/YYYY.” A clear NO is a sign of professionalism and clear communication. On the other hand, I’ve met investors who never say no. Instead, they ask for constant updates or energy-draining marathon meetings. Steer clear of those sorts of investors.
4. Schedule all your best investors in a week: When you feel ready and have commitments from smaller investors, pack all your best investors in one week. That way, you’re more likely to get a YES from one while you’re still in discussion with others. Use this tactic to urge other investors to decide. They’ll feel the momentum, and that will save you lots of energy and time.
5. When you get an offer: You can only take in a few big VCs, since they generally want a big enough stake. So when you get an offer from one investor and you have a few others you want to meet, tell that investor that you have a few other meetings already scheduled and you’d like to finish them.
6. Always be able to walk away from a deal: Always have a Plan B. Having a plan B will give you the option to walk away from a deal if you have to. Your best bargaining power is to say NO. Find a backup plan from other sources. Keep your burn rate low at this stage.

Finally:

Everything can be discussed, but play in good faith.

C. Be Selective of Your Investors

There are many types of investors out there, so it’s important to be really selective. Here are key considerations:

1. Choose angel investors that are previously operators (e.g. ex-CEO, ex-COO). They are the highest value adds.
2. Do due diligence on your other investors, too. I asked our investors for references from entrepreneurs they’ve previously invested in. You’ll want to talk to investors’ references, but also use the backdoor reference approach to find people in your network who took investments from them as another way to confirm information.
3. Corporate venture. CVCs may bring you customers and resources you want, but their money isn’t “neutral.” Big corporations have positions in the market, so they could sway your strategy by using the power their shares yield them. We personally chose not to raise from any CVC before our PMF is clear.
4. Don’t go with a “rich by luck” investor. They’re often problematic (meaning they’re often jerks). On a similar token, avoid someone that seems sketchy. I’ve come across a few like this. Running into not entirely ethical investors is unfortunately common in places outside the U.S. where the ecosystem of venture capital investing isn’t as well developed.
5. Communication matters: Make sure you like an investor’s communication style. If you don’t like the way they communicate before they invest, you won’t like the way they communicate after investment, either.
6. Choose Investors for a specific goal: Ideally, you want investors with a brand name (e.g. Sequoia, A16Z, Benchmark, Accel), as well as investors with a specific purpose (like Stanford affiliation, or introduction to corporations).
7. Consider helps offered by investors. I’ve personally seen investors offer sales and marketing expertise, and I’ve been involved in communities where people share useful services and info, such as tax consultancy, dealing with GDPR compliance, contacts at certain companies (Stripe, PayPal, etc.). I should also mention that VCs usually collect software perks for their portfolio, like AWS and Notion.

When we raised pre-seed, we chose to pitch to referrals only, not cold leads, as part of our fundraising strategy. This gave us the best quality and highest success rate. We curated an email list of connections at Facebook before we left. And we asked for intros to quality VCs and angels from them after we left.

It’s just the beginning…

There is a lot more to fundraising than what I’ve talked about here. The goal of this article is to share things we’ve learned that will be useful for entrepreneurs raising for the first time.

By the time of this writing, we’ve already raised our next round, which is an equity round. So fundraising with SAFEs feels like ages ago. SAFEs keep things fairly simple — no lengthy negotiations around governance and control. No data room for due diligence, and so on.

Fundraising is only the beginning of company building. I know fundraising might feel like “mission accomplished,” since it’s such an important milestone. But the ultimate goal is to put that money to use and start building.

At Cooby, we put that money to use and work towards our mission: Bring Visibility to Business Messaging. We started building sales engagement and management solutions for WhatsApp and LINE. Read why this mission is important in our company narrative:

Wen Shaw on LinkedIn: Our Narrative

🙋‍♂️ Talk to us about anything about sales and revenue: sales@cooby.co.

Footnotes

[1] specifically Sequoia Surge, a Southeast Asia-focused seed-stage fund.

[2] That’s because they require venture money to grow to a certain size where they can either be profitable, or other funding channels become feasible (e.g. debts, private equity, or going public).

[3] Your concrete proof of PMF should meet the following three criteria:

1. You have real, paying customers [monetization]
2. Your customers get true value from using your product [value creation]
3. Your customers represent a massive attainable market [market size]

[4] In that sense, it’s similar to finding a job. You get better terms when you have a few competing job offers. Employers don’t refer each other to hire the same person — but investors do.