Pre Seed Vs Seed Investment

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Grant Funding Might Also Be Available At This Stage

What is pre-seed capital?

Frequently, government and non-profit grants are available depending on your industry. Startup grants are designed to help regional and national economies accelerate startup activity in strategic industries and take on some of the early risk when most private investors wont. In Michigan, there are several grant programs including:

Kim Gamez also had success attracting grant funding through Ann Arbor SPARK. We started working with a great attorney in Ann Arbor, who suggested that we talk to Ann Arbor SPARK. Bill Mayer, SPARK entrepreneurial services vice president looked at our magazine and was probably like, What the heck is this? But we went through the whole startup process with SPARK, and we were eventually awarded grants of $10,000, then $20,000, and eventually $50,000 total. We also went through SPARKs Entrepreneurial Boot Camp and learned so much through the whole process. Through that, I met a bunch of other entrepreneurs and investors. Two of them became close mentors and one invested.

MJ Cartwright, CEO of Court Innovations, shared her story of obtaining significant grant funding for the company in its early days.

Startup Valuation At The Time Of Series A Stage

The average post-money valuation of a startup raising a Series A fund is $22 million however it can range anywhere from $10 million to a few billions, based on

  • KPIs: The key performance indicators play an important role in evaluating a startup for its valuation. These include revenues, customers, repeated purchases, etc.
  • Growth from seed stage: Evaluating how much the startup has grown from the last time it took investment helps the investor negotiate the valuation of the startup.
  • Offering evaluation: By the time of the Series A stage, the company collects enough data to answer the questions like does the offering satisfy market needs?, can the offering be replicated?, do customers come back for repeated purchases?.
  • Customer evaluation: The customers evaluation gives a good hint about the current position and the growth prospects of the startup. This makes the valuation easy.
  • Competitor Analysis: While the presence of competitors means theres a market for the startups offerings, the presence of a big player often makes the investors step back from investing in the startup.
  • Industry: A startup in the booming industry receives premium while a startup in the dying industry witnesses a discount.

Once the funding round is complete, the company usually gets the working capital within six months to 18 months.

Why Raise Early Stage Funding

A vast majority of startups will die without early stage funding.

In nearly all cases, the sum of money required to boost a startup to sustainable profitability is well beyond the financial ability of founders or their family and friends. Before achieving profitability, high-growth companies almost always need to burn capital to sustain their growth. A few startup companies do successfully fund themselves.

Cash not only allows a startup to:

  • Grow

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How Much Money Do We Need

While theres no right or wrong answer here, it is advisable to raise just enough capital to get you to the most consequential initial milestones, with some cushion time before you need to go out and raise again. With some meticulous expense budgeting and contingency planning, you should be able to get an idea of the monthly burn rate you think is appropriate to reach your most vital KPIs. As a caveat here, be mindful of the fact that most projections related to revenues at pre-seed will be approximations at best, if not flat out wrong. Hence, dont rely on projected revenue growth to balance out your burn rate.

Once you decide on an appropriate range, model some different scenarios, in which you simply multiply this burn rate by 1218 months and compare this to the dilution level you feel comfortable with. Its advisable to aim for 10% 20%

As a word of caution before proceeding, it is highly inadvisable to initiate your pre-seed round by asking for significantly more money than you actually need. As a first time founder, investor FOMO can be your best friend. Hence, setting out to raise 800K from the get-go can turn off potential angels or micro VCs who hear you only have 400K of the round committed. As a founder, you may have a far stronger bargaining chip if you can state that 80% of the round is already committed . If you see more demand than expected, you can always opt in to raising more than planned .

Factors Entrepreneurs Should Consider

What

Before you seek out pre-seed financing from angel investors, its important to identify your funding needs to determine if this kind of financing is right for you. As you do, consider the following:

  • If youre working on developing a prototype or have plans for one, pre-seed funding can help you create your MVP.
  • If you need to hire additional employees to build out your MVP or business plan, pre-seed funding can provide the salaries for quality talent.
  • If you believe your product will successfully fill a market need, pre-seed funding can fund the market research needed to prove it.
  • If business development has been more costly than you anticipated, pre-seed funding can keep your startup sustained until you get to the next funding rounds.

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Average Evaluation Of Series C Startup

The average Series C funding amount in the U.S. has reached $59 million in 2020. Generally, Series C funding is between $30 and $100 million settling on an average round of $50 million. The evaluation of Series C companies is often between $100 million and $120 million. However, companies can be worth much more.

Average Evaluation Of Series A Startup

According to the Fundz startup database, just in the U.S., the average amount of Series A investment has grown steadily over the years and is currently at around $15.5 million as of July 2020. It is estimated that around 700-750 Series A deals will take place in 2020. Based on the average Series A startup valuation in 2019, Series A startups have an average pre-cash valuation of $22 million.

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What Is The Difference Between Seed Growth And Early Stage Companies

Seed

Seed or start-up companies are very early stage and pre-revenue. They are likely to be raising funds to develop an idea, product or concept. Investing in a seed company can be risky as they have a much higher chance of failure.

Early stage

Early stage businesses generally have a tested prototype or service model and have developed a business plan. The company may be generating early stage revenue but might not be profitable yet.

Growth

Businesses in the growth stage are in commercial operation with solid traction and existing customers. They are generating recurring revenues and experiencing solid growth, but still may not be profitable.

Do you have more questions?

How To Get To The Pre

Seed, Pre-seed, (Pre-Pre-Seed?): What the Earliest Stages of Funding Mean for Entrepreneurs Today

At the pre-seed stage, startups are evaluated according to a kind of checklist, or scoresheet. Lets take look at the key factors that influence the decision-making process:

  • Team Creating a startup is an energy-consuming process. There might be other barriers such as lack of money and constant pressure, but having a good, reliable team will give you a better chance of implementing your idea
  • Saleable Idea Selling your idea for a new product or business is all about how you present it, justify it and backup your words with solid, dependable business data.
  • MVP Minimum Viable Product is something that can be sold and the customer will be satisfied. Read more about MVP in our separate article How to Build a Minimum Viable Product
  • Capacious market Startups are risky investments and sometimes they fail even after having received the money. This happens if the profit a startup can make is too small
  • Confirmed demand The most popular reason why startups do not survive is a product that no one wants or needs. The sooner the team realizes that people are willing to pay for the value provided , the better their chances of success are.

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Friends And Family Investment Is Very Common At This Stage

Its estimated that friends and family invest $60 billion per year into U.S. startups. After youve put in personal funds, your friends and family are the most likely to invest, based partly on your personal relationship and given the early stage of the business. While it can be awkward to approach friends and family, here are a few suggestions:

  • Schedule lunch or coffee to catch up, or come up with other creative ways to connect.
  • As part of catching up, share your business idea, ideally using a fantastic pitch deck. Throw out that youre fundraising, but dont make an ask right away.
  • Ask if they have suggestions on anyone that might be interested in investing, and feel them out.
  • Dont be shy about asking if theyd like to invest directly youll need to have courage as an entrepreneur.
  • Have your investment materials ready to offer them including your pitch deck and an investment contract .
  • Be completely transparent about the risks of investing at this stage and that its possible to lose all their money.
  • Let them know its completely fine not to invest if theyre not comfortable, and that youre just presenting them with an opportunity.
  • After self-funding Mi Padrino with $50,000 of her own money, founder and CEO Kim Gamez raised money from friends in her community.

    Over the course of more than a year, Kim was able to raise a $1.2 million round that started with friends and eventually transitioned to an equity round lead by Astia Angels.

    What Exactly Is A Pre

    Many entrepreneurs and investors might refer to this as a friends and family round. While companies may take on venture capital especially if they have experience starting companies and relationships with investors this is the first bit of money you scrape together. Sans investors proper, youre essentially asking someone to take a massive bet and hand over part of their savings to fund your idea. And often its probably just that: an idea.

    Still, youre in a position to convince someone that youve built something that has potential. You texted a friend a link to a test URL that does something straightforward and intuitive, and got an It works! reply. At this point, its time to start thinking long term and how youre going to hit the first anniversary of your company.

    Many times this will end up in the form of a convertible note essentially a loan that converts into equity . So lets walk through some of the mechanics of your funding stage.

    In this case, your term sheets are probably relatively clean and straightforward. You might be raising in the early hundreds of thousands of dollars – sometimes from an early stage startup accelerator program, and youre mostly trying to get a run rate of at least a few months to build out your product and show youve found some product-market fit.

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    How Mature Should Your Company Be For Pre

    At this stage, youre very early on in the process. You might have an MVP or even just a mockup in Figma that shows how your product will work. But you likely wont have a team built out or a fully developed product just yet.

    Heres a look at some of the things you should have when youre seeking pre-seed funding:

    • Define the problem youre trying to solve
    • A new or novel solution for that problem
    • A basic understanding of your market
    • Fundraising plan
    • An MVP
    • A plan for how youre going to start getting early users or customers

    During your pre-seed round, people are investing in you as a founder just as much than your actual business idea. Make sure youre able to show why youre the right person to build and grow the company.

    Series B Funding Stage

    Pre

    Startups that go through the previous startup funding stages have already developed a substantial user base alongside a steady stream of revenue. They have proven themselves in front of their investors that they are can achieve success at a larger scale.

    Investors assist startups to expand their horizons by funding their market reach activities, increasing their market share, form operational teams such as marketing, business development, and customer success. The series B funding stage allows startups to grow so that they can meet the various demands of their customers and also compete in tight markets in terms of competition.

    Series B funding stage may appear to be similar to the former funding stage in terms of processes and key players, however, series B funding is often led by same characters, including a key anchor investor that helps you to attract other investors. The major difference is the addition of a new wave of VCs that specialize in investing in well-established startups so that they can further exceed expectations.

    The dilemma is that while your Series A investors were extremely important to you during that round, they may not be the investors you need going forward. If you are in a position where going public is a real possibility, then you need the crossover investors who will be there for you today and when you go public,suggests Praveen Tipirneni, MD & CEO of Morphic Therapeutic Inc.

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    Financial Modeling In Private Equity Vs Venture Capital Vs Angel/seed Investors

    As you can see, there are many differences between private equity vs. venture capital vs. angel investors. The primary identifiable difference really comes down to the stage of businesses they invest in. Everything else tends to blur across the three categories.

    When it comes to skill sets and career paths in all three types of firms, expertise is required in extensive financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model. and valuation methodsValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions.

    If youre looking for an edge in the job marketplace at investor firms, be sure to check out our online financial modeling courses, where you learn to build models like the one below from scratch.

    When Should You Seek Pre

    Before you go seeking investors, its important to understand whether your startup is ready. Investors meet with thousands of founders every month, so you want to be putting your best foot forward.

    These are a few indicators that your startup is ready to seek pre-seed funding:

    • You can speak to product/market fit
    • You might not have a fully developed product or MVP, but you have something to show
    • You have garnered some early interest from potential customers
    • Youve developed a reasonable revenue model

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    Purpose Of Seed Funding

    Technically, seed funding aims to help the founders get the business up and running as it is structured in the business model canvas and business plan.

    Before seed funding, the startup is in its infancy stage and available to the end-users in the form of MVP, beta version, or a limited users version.

    A startup uses seed capital to convert the proven concept into a full-fledged running business, and this to cover the initial essential startup expenses like:

    • Business setting-up expenses: Trademark registration, domain and server fees, etc.
    • Operating expenses: Rent, equipment, payroll, R& D, marketing, sales, etc.
    • Startup-specific expenses: Business model development, business planning, etc.

    In some cases, startups raise seed money internally using the personal savings of the founders and partners. However, in other cases, it requires aid from external investors who pitch in money in return for something.

    How Does Seed Funding Work

    Guide to Pre Seed Investment for Start-ups – Pitching Investors and Pre Seed Pitch Presentations

    Seed money can be raised both internally and externally depending upon factors like:

    • Type and nature of the startup,
    • Present and future plans and requirements, and
    • Founders ability and experience.

    When raised from outside, seed funding round works just like other startup funding rounds. The investment ranges from $100,000 to $5 million and includes three types of contracts. These are:

    • Equity Funding: Investors invest in return for an ownership stake in the business. Since the seed stage is an early stage to predict the startups future, such investors take a lot of equity for the amount invested.
    • Debt Funding: Investors invest the money as debt that needs to be repaid along with interest after a specific time.
    • Convertible Debt: In cases when startup valuation isnt possible, investors invest using convertible debt where the invested money can be converted into equity at a later stage when the startup valuation is possible. If not, it is to be treated as debt and repaid after a specific time period.

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    Investment Team Private Equity Vs Venture Capital Vs Angel Investors

    Seed or angel investors are typically entrepreneurs who founded their own companies and had successful exits. Their main skillset is understanding the role of the entrepreneur in the business, and they often have very specific product knowledge.

    Venture capital investment teams are often a mix of entrepreneurs and ex-investment bankersWhat Do Investment Bankers Do?What do Investment Bankers do? Investment bankers can work 100 hours a week performing research, financial modeling & building presentations. Although it features some of the most coveted and financially rewarding positions in the banking industry, investment banking is also one of the most challenging and difficult career paths, Guide to IB or other types of finance professionals. For example, A16Z hires a wide range of entrepreneurs and professionals, as you can see in their a16z team profiles.

    Private equity firms are typically more weighted towards ex-investment bankers and corporate developmentCorporate DevelopmentCorporate development is the group at a corporation responsible for strategic decisions to grow and restructure its business, establish strategic partnerships, engage in mergers & acquisitions , and/or achieve organizational excellence. Corp Dev also pursues opportunities that leverage the value of the companys business platform. types, or experienced corporate operators.

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