Getting Ahead in the Critical ‘Zero-to-One’ Stage: Here’re Some Strategies to Get Pre-seed Funding to Build the Future You Want to Live in
And thoughts on radical change, geniune gratitude and freedom to iterate and experiment
After spending the last couple of weeks talking to entrepreneurs who are raising money in the pre-product/pre-revenue stage and seeing the common challenges they are facing, I want to re-visit this article about early stage fundraising and expand on it.
The ‘zero to one’ stage of tech companies’ lifecycle is the most lucrative from a venture capital economics perspective (higher equity ownership at a lower valuation, assuming a 1.5x-2.5x valuation step up in each of the subsequent investment rounds), but also the hardest at which to raise money: the rate of failure to exit is around 97% at this point, and the rate of failure to raise in the following round is over 79%. For more on this, here’s a good article on startup failure rates by stages.
Most founders that raise at this stage are first time entrepreneurs with limited personal funds and little to no experience in managing a large team, with multiple skill gaps and many ‘don’t know yets.’ These combined factors make fundraising at this stage extremely challenging; it requires building an effective fundraising narrative without the typical measures of revenue run rate, usage metrics, product validation, and growth.
Difficult, however, does not mean impossible, and founders at this stage can present prospective funders with the chance to gain an early stake in a potentially high-revenue venture at the ground level, with a small investment yielding possibly outsize dividends. Effective fundraising at this stage just requires a different approach that takes into account its unique challenges and opportunities:
1. Be strategic about who you approach in your fundraising effort
Angel investors — myself included — spend their personal money, and can therefore be radically bold in placing their bets. They are also fairly flexible with round structure and fast in making investment choices, since most don’t have a formal decision-making process. Most angels I know are particular in their funding interests: they tend to gravitate towards investing in a specific type of founder, and/or in industries about which they are passionate, or in which they have years of experience. This presents an excellent opportunity for smart early-stage founders to do their research and make targeted asks — it’s totally worth finding out what angel investors’ passions and interests are. In my case, I’m interested in funding both consumer and enterprise businesses built by women and immigrants in wellness and healthcare, food and beverages, remote work & collaboration, education, and real estate. I am very curious about the shifting consumer behaviors of digitally native Gen Z and am building a knowledge base around this in my spare time.
Pre-seed funds are mission-critical for the tech ecosystem, as they increase the velocity of the earliest stages of venture capital. Getting quality pre-seed fund among early backers makes angel investors feel more comfortable with joining the round and makes future fundraising somewhat easier. Pear.vc and Precursor Ventures are great and prioritize people over products and markets, which is especially relevant for this investment stage.
If you are in a capital-intense business like biotech or space or military tech and The Lean Startup methodology does not necessarily apply to you, reaching out to a reputable multi-stage VC firm that has decent traction in super-early investments, or a dedicated vehicle like Sequoia’s Seed Fund, is a viable strategy. Early access to a long-term financial partner might be mission-critical for your venture.
2. Be intentional about building a strong network of prospect funders early. Fundraising is a marathon, not a sprint
Managed to secure a commitment from an angel or a VC? Amazing! First, ask her why she said yes and double down on those strengths in future pitches. Second, ask her to refer you to just one more person from her network who could be a fit. That next person said no? Not to worry! Ask for constructive feedback and permission to add her to your monthly update/newsletter circulation list. ‘No’ is not absolute — by showing a steady progress, acting upon feedback, and building relationships proactively, you might get to a ‘yes’ later in your fundraising cycle.
Surprisingly, Zoom video conferencing and Clubhouse have diminished barriers to networking and unlocked a whole new level of building purposeful connections between tech & VC communities. Ed Zimmerman, the Chair of law firm Lowenstein Sandler’s Tech Group, brings together a curated group of startup founders and both institutional and angel investors for his frequent Venture Crush New York events. On Clubhouse, one can find multiple events organized by Startup Club for example, including ‘Fundraising Q&A with Angels and VCs’ whose panelists are very open to making new connections. And these are just a couple of examples of great ways to network and unlock access to capital as you build your company.
And don’t go into networking spaces with a narrow mindset focused solely on getting funders onboard; use these events to build the knowledge base. Many great angel and institutional investors are generous with sharing their stories, aspirations, and interests, as well as elaborating on what they believe is true about markets and what kind of founders they are looking for. Deepen the knowledge you gain here by investing time in reading blogs and books, listening to podcast episodes with their participation, and then reach out to say thank you. Expressing genuine gratitude is a powerful way to build long-lasting relationships.
3. Do not over-plan but show how you think
The product that makes you successful tomorrow may look nothing like the product you’re planning to sell today. So many companies make major changes to their product, business model, and go-to-market strategy on the fly as they launch MVP, gather feedback from early adopters, and make improvements in a perpetual cycle.
More than 90% of founders in my portfolio pivoted in the quest for a different product of greater value, including ClassPass and Axle Payments. Radical change is an inevitable part of the entrepreneurial journey and, while pivoting is certainly a risky enterprise, getting fixated on the initial product idea might be life-threatening for your venture.
At this stage of your business, as investors, we care way more about whether you have a deep understanding of the market, competitive landscape, and customer pain; your vision and ability to adapt; and your determination to build a big, long-lasting company — and do so in an unconventional fashion — than about highly optimistic five-year revenue projections. Sell the problem, and your vision about the solution.
I love founders that go after a niche market vertical, establish themselves as category / segment / geo leaders, and then scale to adjacent markets. It’s a path less traveled, and one that is frequently overlooked and dismissed; it requires a certain personal relationship to the problem in order to carry it out successfully. Victor Lysenko, CEO and co-founder at my portfolio company Osome, whose platform uses ML to automate administrative, accounting, payroll and tax-related work for SMBs, started the company to address the pain he constantly experienced as a serial entrepreneur. Osome, which was started in Singapore, reached $1M in annual recurring revenue (ARR) from that market by the end of the first year of operations — that’s how painful the customer problem was. At the pre-seed stage, I would strategically prioritize the need of the market over its total size, and vertical vs horizontal application.
Another area in which to be creative is customer acquisition strategy. ‘Do things that don’t scale’ is advice that Paul Graham gave to startups in 2013 and is as relevant now as it was then. Too many companies aim to acquire customers through channels controlled by GAFAM (Google, Apple, Facebook, Amazon, Microsoft) and hence deliberately lose control over unit economics. When I work with the founders I’ve backed, I often recommend that they think about content strategies to build direct lines of communication with aspiration customers and help establish credibility, which is incredibly important for young startups aiming to sell to mid-market or large enterprise. What type of content is your audience demanding? And what valuable experiences you can provide to you customers? These are two great questions to ask to kick off the thinking process around content strategy.
To have a shot at challenging the status quo, founders need a lot of passion, grit, humility, and… freedom. Don’t rob yourself of the freedom to iterate and experiment; get to know your customer really well by focusing on tactics rather than executing a little too soon.
3. The startup of you: put yourself and your team front and center in your narrative
Only 0.05% of startups get VC funding, and over 75% of venture-backed companies never return cash to investors. As VCs, although we mentally accept the fact that we will lose money on most of our investments, we look at every founding team from the perspective of ‘do you have what it takes to build a monopoly in your industry and become a home-run to compensate for all the losers in my portfolio?’
At the stage when there is no revenue, no customers, no scalable product, and oftentimes no legal entity, your personal story, team, deep connection to the problem, and unique insights based on your experience are your strongest hook for potential funders. It’s also helpful to feature whatever pre-MVP traction (surveys, pre-registrations, smart content marketing strategies) you can showcase, as well as a solid plan for the next 6–10 months. Aim to have good answers to basic ‘how?’ questions, like: how will you build the product and at what point you will bring it to market (move fast and break things?)? How will you discover early adopters? What are the major drivers and inhibitors of product adoption?
Get comfortable with being uncomfortable: control your tone of voice and body language. I know how hard it is to go out and ask people for money, and I think it’s important to remember: when raising money, you are not asking for a favor, you are instead offering an opportunity to become part of something that can be massively great if everything goes right. Experienced investors treat losing money as a default option and focus on the upside.
One of the ways to get comfortable with pitching and master storytelling techniques is to watch and listen to variety of speeches delivered by excellent fundraisers like Daniel Ek or, on the other side of the spectrum, Adam Neumann, and reflect on them.
5. And the last but not the least — choose wisely
When things go south — and they absolutely will — what will investors you’re bringing on board so early in the company’s lifecycle do? Will she stay with you through the highs and lows in the next 10–12 years or so? Early investors can be either some of your greatest assets or your worst liabilities; each investment is an opportunity to build a lasting relationship with a funder that potentially extends beyond just one company into other future ventures. Look at it as building a partnership rather than securing a one-off investment; is this a person or entity you could see yourself working with long-term? How do they handle challenges and unforeseen changes? How do they deal with conflict? Take the time to get to know potential investors; it can majorly pay off — or save you the trouble of a relationship gone awry — down the line.