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10 Tips for First-Time Founders Raising a Pre-Seed Round
Intro to the “How to Raise a Pre-Seed Round” Series
While raising our pre-seed round a couple of years ago, I started writing about my weekly experience to reflect on what was working and what wasn’t so I could improve. After I closed the round, founders began reaching out asking how I raised an oversubscribed round led by top investors since I had an untraditional background, having come straight from the Army with little-to-no network. It took seven months to raise the round, so hopefully, this series will help you learn from my mistakes so you can raise faster.
I took my original notes and turned them into a Google Doc to share which founders, which then turned into this guide that was originally published in Medium’s largest publication, “The Startup” as part of a 5-part series.
With the fundraising environment increasingly challenging, especially for first-time founders, I thought it would be good to update the series with lessons learned since it was originally posted. So here it is - the pre-seed fundraising guide 2.0!
How to Raise a Pre-Seed Round Series
💰 Intro: 10 Tips for Raising a Pre-Seed Round (this post)
Let’s dive in!
Fundraising is one of the most challenging things you’ll do as a founder, especially if you’re a first-time founder and especially for your first raise.
Every company is different, but here are some of my biggest takeaways from raising a pre-seed round that included Micro VCs, Angels, and Family Offices. The vast majority of investment came from people I knew only at arm’s length before starting the raise. Friends and family investors accounted for less than 5% of the raise.
1. Build something worth investing in
Building something worth investing in seems like an obvious starting point, but this advice is often ignored. You need to build something worth investing in and believe that it is worth investing in. The more traction you have, the easier your life will be. If you try to fundraise too early, you risk wasting valuable time that you could have spent building your product or making money.
In today’s fundraising environment (summer 2022) this often means revenue — yes, revenue — for a pre-seed raise. This often surprises founders who think that the purpose of their first raise is to raise money to then build a team, product, and generate revenue. In reality, if you don’t have a strong pedigree and aren’t working on a deep tech problem, it’s typically expected that you have some revenue. This is because building an initial prototype is cheaper than ever (no-code, AWS, Webflow, etc), so investors no longer need to, nor are willing to, underwrite that initial risk in many cases.
If you’re unsure your startup is worth investing in, I’d recommend reading this article by Paul Graham.
2. Simple sells
People invest in things they understand and people understand simple things. I’d recommend cutting your deck in half and then trying to cut it in half again by removing as much unnecessary information as possible and moving information to the appendix.
Having a solid one-liner, a three-sentence elevator pitch (what you do, traction, and what you’re raising), and a deck with no more than 10 slides is key. Ask a friend to click through the deck in 90 seconds to see if they understand what you’re building. If they don’t, work on shortening and clarifying the deck. When your deck hits an investor’s inbox, this is exactly what they will do, so make sure the deck is optimized for a quick skim.
Optimize for getting people excited and focus on only a couple of key stats as opposed to sharing every piece of information upfront. If you get investors excited, you can always share details later. If they never get excited, there will be no later.
3. Go where founders go
Founders who believed in us were the number one source of investors for the raise. So “go” where founders go: events, podcast interviews, meetups, incubators, VC portfolio events, etc.
Corollary — listen to founders — especially founders who have raised money. Don’t discount founders’ advice because they aren’t investors. In reality, founders are some of the best people to help you find gaps in your logic, polish your pitch, and introduce you to investors.
4. Move to Silicon Valley (if you haven’t already)
This is an unpopular opinion, but I think truer than ever if you can. You can raise outside of Silicon Valley, but I think it’s much easier here than in other places. There are simply many more investors and founders here than anywhere else. This density allows you to get more at-bats and increase your odds of serendipitous encounters.
Although it’s “expensive”, I would argue it’s actually much more expensive not to be here because valuations are lower outside Silicon Valley. For example, during our last raise, VCs outside Silicon Valley would often tell us they had a “max” valuation they could invest at. These max valuations were all considerably lower than what we ended up raising at. Although some founders try to fly here, I think it is much better to move here if possible.
5. Focus on affinity groups
Early on, when the company is new, there isn’t much data to go off of other than — you. Digging into your affinity groups is a great way to find investors: college alumni, past companies, non-profits you were a part of, etc. For us, affinity groups combined with founder intros were very effective.
6. Ask for intros from your investors
Once you start raising money, ask your investors for intros to new investors soon after they invest. The new investor just invested, so their intros will carry a lot of weight. Another way to use investors who have already invested is to introduce them to prospective investors to help close investors on the fence.
7. Be patient, but also move as fast as you can
It took a full seven months and ~150 calls and meetings to close the round. Many of the calls and meetings were with founders or investors’ friends, hoping they would lead to intros.
I spent the first 30 days getting feedback and iterating the deck. I didn’t see significant progress (over $100k) until over four months in. But, once we did cross that threshold, the fundraising picked up. During this time, I spent about 90% of my time each day on fundraising. Hopefully, you can learn from my mistakes and raise faster!
8. Start a newsletter
Start a “Business Update” newsletter for potential investors, founders, and anyone else who may be interested in the business. Don’t be too shy about who you add, they can always unsubscribe.
Highlight what you’re doing, the progress that you’ve made, asks, etc. but you shouldn’t share detailed financials like you would in an investor update. Send it on a monthly or quarterly basis to keep people engaged when you’re actively fundraising and then transition to a bi-annual or annual basis in between raises.
This is a great way to keep the many conversations you’re having up-to-date in a low-touch way. You can also track open rates and reach out to investors who engage with your emails but haven’t been responsive.
9. Treat your process like a sales process
Treat your fundraising process just like a sales process by trying to get as many qualified leads (ie investors who invest in your stage, sector, and you have a connection to) as possible. I’m always miffed by founders who are “courting” 1-2 investors. You should be trying to get as many leads as possible in your funnel so you have optionality and more control over the terms.
Use Airtable or a sales tool like Streak to track your progress. Track qualified leads, committed, and money in the bank each week. Keep a record of it and be honest with yourself about what is working and what is not. Discuss your progress regularly with another founder or advisor for added accountability and an outside perspective.
I also found it helpful to write about the fundraising experience to help reflect on and improve my decision-making. Writing is also a great way to develop quick, well-researched answers to investors’ frequently asked questions. I found that variations of about 10 questions made up about 90% of the questions I received. Become an expert at answering these 10 questions or preempt them in the deck.
10. Approach certain sources of capital with caution
Grants, Non Pre-Seed VCs, Angel Groups, Accelerators, and Equity Crowdfunding often present themselves as good sources of capital for your first raise. However, they can be massive time sucks, resulting in little to no investment. For our pre-seed, VC funds under $50m, but especially under $20m, were best.
But, there are certain cases where these sources of capital do make sense. Here’s an article with more information on evaluating these capital sources.
Raising your first round of funding is hard. You have the least amount of experience and little data on your company’s performance. But, if you can get over that obstacle, you’ll have achieved a significant milestone.
Don’t believe the lie either that good companies have an easy time raising money; investors are wrong all the time. Many great companies like Airbnb and Uber struggled to raise money early on, but went on to be wildly successful. You can too!
Continue Reading → Part 1: When to Raise
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