Recently, early-stage Indian startups Supernova and OhLocal hit the headlines when they raised pre-seed investment. Many such startups look for pre-seed funding to get the much-needed capital push at the conceptual stage or before the official/commercial launch. Given that the startup landscape is becoming increasingly competitive, pre-seed cash can be instrumental to gaining early market traction and competitive advantage.
Here is your comprehensive guide to raising pre-seed capital.
Understanding Pre-Seed Investment
Pre-seed funding is the maiden cash infusion that startups receive from external investors. It is the first funding round for startups to raise money to transform their business idea into tangible business. The contributing investors of this round have a strong faith in the business idea or the startup founders.
Generally, the amount of pre-seed capital may range anywhere from $10,000 to $250,000 for a 5-10% equity stake. Of course there are exceptions to this. Startups can utilise pre-seed capital for the following purposes:
- Develop a minimum viable product (MVP)
- Create a working capital pool for at least 6-12 months
- Build a core team
It is important to understand that pre-seed funding is a precursor to seed investment. Generally, startups can raise money from the seed funding stage only after they have MVP and product-market fit ready.
When Should You Raise Pre-Seed Investment?
The right time to seek pre-seed money is the key to taking your startup off the ground in the early stages. Usually, you can start searching for investors when you meet the following conditions:
- You have conducted thorough market research and analysis on the viability of your product.
- You demonstrate potential for product-market fit even before the final product is ready for testing.
- You have clarity about the business model and initial sources of revenue.
- You have successfully built a prototype outlining the basic features and benefits of MVP.
- You are ready to hire critical team members.
- You may have begun to attract potential customers or received positive feedback from early adopters.
For example, FlashPrep, an ed-tech startup, raised $500,000 in a pre-seed funding round in 2021. At that time, it already had more than 15,000 monthly active users and needed the capital to strengthen its user base and diversify its product offerings.
Tips to Raise Pre-Seed Investment
Thousands of startups contest investor attention at different stages of their business. If you sell your idea well and believe that your startup has immense potential, the right investors may soon come around. Paul Graham, the founder of Y Combinator, says, “That’s the secret. Convince yourself that your startup is worth investing in, and then when you explain this to investors, they’ll believe you.”
Check out the following tips to acquire pre-seed funding.
1. Prepare a List of Target Investors
Create a list of potential investors based on these factors:
- Investing preference (for example, tech/non-tech, product-based/service-based, etc.)
- Industry and domain expertise
- Network (whether they have strong contacts in your industry)
- Investing track record
This will help you to shortlist investors who are more likely to show interest and commitment in your startup.
2. Create a Powerful Pitch Deck
A pitch deck is your only opportunity to tell the story of your business and convince investors to fund it. Hence, it should be both informative and appealing. The pitch deck should contain an executive summary of your startup, including the following:
- Mission and vision
- Founders and core team members
- Problem statement
- Solution statement
- Features and benefits of the product
- Target market and details about the product-market fit
- Competitive advantages (if any)
- Marketing strategy
- Customer acquisition and retention strategy
- Business model
- Financial projections
- Expected pre-seed investment capital and purpose of use
3. Keep Documentation Ready
It is advisable to present all the necessary paperwork supporting the growth of your business to investors. Additionally, you should keep material ready for tackling any objection. Doing this can convey your sincerity and credibility to the investors. Some of the documents that investors may want to go through before funding your business include the following:
- Registration documents (if you have registered your business with the government)
- Intellectual Property Rights (application form or valid certificate)
- Regulatory, legal, or environmental compliance documents
- Relevant permissions or approvals from local/state/central authorities
- Business plan template
- Product development roadmap
- Financial roadmap
- Market research and survey results
4. Reach Out to Investors
Once you are ready with the pitch deck and documents, you can start contacting potential investors. Listed below are some of the sources to seek pre-seed investment in India:
- Early stage accelerators
- Angel investors
- Pre-seed funding platforms
- Venture capital firms
- A personal network of family and friends
It is important to understand that you may not get a response right away; persistence is key here.
Pre-seed investment is crucial for startups, especially during the incubation period, as it helps you to launch your idea and create a feasible business. It also sets the foundation to seek further equity for subsequent rounds of funding. However, it could be challenging to raise pre-seed capital if you lack the requisite guidance and resources.
Scalix can help you connect with potential investors and business partners, share resources to grow, and provide access to future customers with great convenience.