Table of Contents
Last updated on March 24, 2021 by Hong Zhuang Reading Time:10 min
How have the intelligent entrepreneurs raised pre-seed/seed funding quickly?
They know both themselves and the fundraising jungle so well. So, they can navigate the fundraising jungle efficiently to make sure their startups are funded by the ideal, most supportive investors quickly.
How can an intelligent entrepreneur like you get the funding you deserved? There is so much to learn, let’s think about the following two questions first.
How big do you want your start-up to become, and how fast do you want to get there?
Did you answer something like, “Annual revenue $50 +million in five years”? Then you are in the right place.
Why do you need fundraising?
Most first-time tech start-up founders think that fundraising is just about getting money, but the real power of pre-seed/seed fundraising is the leverage that will help your start-up fast-track to growth and success.
Leverage comes in four forms:
- Money
- Expertise and experience
- Ideas
- A well-connected network
Your business efficiency grows out of business knowledge. If you can enrich your knowledge with tested and proven expertise, experience and ideas of VCs or Angels, you can save yourself valuable time and avoid needless mistakes that can hinder your start-up’s success. In addition, VC and Angel’s well-connected networks will help you get your growth-related resources (i.e., money and talents) faster and easier.
Steve Jobs started Apple in 1976. For two years, sales were slow. The founder of Sequoia, a VC firm, met Jobs in 1978, and had to put an entrepreneur turned investor in charge of marketing and sales because Steve didn’t have any marketing/sales knowledge. and pivoted Apple into a different market. Apple’s sales took off and went public in 1980.
Now you understand why you need to fundraise. The next question is, “When should you raise money?”
You probably believe that you raise money when your startup needs it.
But this is a short-sighted strategy for two reasons.
1) Fundraising can take up to six months. If you don’t have enough money, your startup will starve to death before funding comes. Even if you could find investors, you would be like a defeated country with no choice but to sign an unfair term sheet with your investors.
2) Your startup might not meet pre-seed/seed fundraising requirements. Investors are looking for good investment opportunities —bootstrap startups with a complementary team and a scalable product in a fast-growing market.
When is the right time? When you see a product/market fit. How?
Josh Porter explained it clearly,
Product/Market Fit is a funny term, but here’s a concrete way to think about it. When people understand and use your product enough to recognize its value, that’s a huge win. But when they begin to share their positive experience with others, when you can replicate the experience with every new user whom your existing users tell, then you have Product/Market Fit on your hands. And when this occurs, something magical happens. All of a sudden your customers become your salespeople.”
— Josh Porter
Product-market fit will position your startup as a good investment and enable you to come up with your term sheet.
You probably heard that pre-seed/seed fundraising is like riding a fundraising roller-coaster, and 95 % of them never receive any funding. This reality is especially harsh for a first-time fundraiser like you. What should you do to beat the odds?
Luckily, that’s what you’ll learn in this guide. You are in the right place. We’ll help you to:
- prepare and position your startup to stand out from the fundraising crowds;
- select the right pre-seed/seed investors and the right time for fundraising;
- create and give a winning pitch on zoom.
You’ll follow the specific actionable steps you can take to navigate the complex fundraising process.
Fundraising is like entering a war zone.
What do you need to do to win the war?
The famous ancient Chinese war strategist and author of Art of War said,
Know the enemy, know yourself; your victory will never be endangered. Know the ground, know the weather; your victory will then be total.”
— Sun Tzu
Translating this to your case, you must know:
- yourself and your readiness
- your enemy, i.e., your pre-seed/seed investor and the right type of investors for you
- your ground, i.e., prepare your fundraising logistics
- the weather, i.e., the right timing of your investment market
Keep reading to learn more, or use the chapter links below to jump ahead.
Know Yourself
What do you need to know yourself?
- Check to see if fundraising is aligned with your long-term goals.
- Know your start-up’s strengths and weaknesses.
The questions in the table below list what you need to know and why:
| Questions | Why do you need to answer it? |
| What is your definition of a successful business? What are you trying to achieve? | This makes you think seriously about the future of your business. Do you really want your company to grow big fast? |
| What is your exit strategy? | Acquired or IPO? Why and when do you expert it to happen? |
| Why do you need money? | Do you need money for growth, or do you just have money shortage? Remember, that pre-investor will fund money shortage start-ups. |
| Where do you see your company in five years? | Do you just need money now or for the next five years? |
| Is your start-up profitable? | If not, can you wait until you achieve it? You can stand out from the crowd without profitability. |
| How much funding do you plan to seek? | Where you seek funding resources depends on how much money you need. The rule is the funding can cover your start-up for the next 12 to 18 months. |
| Why do you think you can achieve your company goals with VC or Angel investing? | Beside money, what knowledge, expertise and networks do you expect to get from pre-seed/seed investors ? |
| How do you plan to spend your fundraising? | Will you spend money to keep your operation going or for growth opportunities? |
| Are you ready to give up a portion of your equity(i.e., 10-25%) and lose some control? | Although you will lose some equity, think about it this way: Would you rather own 100% of a company that makes $200,000 a year =$120,000 equity,or would you rather own only 30% of a company that makes $20 million a year =$6 millionangel equity? |
| Can you afford to spend the next three to six months on fundraising even if you come back empty-handed? | Are you mentally strong enough for riding the fundraising roller-coaster and handling constant rejection? Does your start-up need you for revenue growth now? |
| Can you delay your fundraising by bootstrapping your start-up? | Later you will be raising much more money and create more value for your start-up. |
| What is the worst-case scenario if you don’t raise capital? | Can you raise money by bootstrapping your business or through a bank loan? |
| Are you a good storyteller? | Communication skills are essential for fundraising success. |
| Do you personally know a pre-seed/seed investor? | “Trust” is the linchpin for securing a solid, sustainable relationship that moves investors to open their wallets. |
It your answers meet the following criteria, you will stand a good chance to obtain fundraising.
- The money from fundraising is not your lifeboat.
- Your goal is to take full advantage of pre-seed/seed investment leverage power to build a big company fast.
- You have established trust relationships with your potential investors.
- You are a good communicator.
Know Your Investors
What do you need to know about your investors?
- Understand what investors are looking for.
- Choose the right type of investors.
- Know how to find them.
- Know how to contact them.
Pre-seed/seed investors are not charity donors who act from the heart. They are NOT pure gamblers who blindly rely on probabilities. Pre-seed/seed investors are looking for investment opportunities that hopefully give them 10X returns in 10 years.
What are your investors looking for regarding the characteristics of their investment opportunities?
| The characteristics of pre-seed investment opportunities | Questions | Why do you need to answer? |
| Start-up type (If your answers are “Yes” to both questions, keep reading. Otherwise we would suggest that you seek other sources to get your start-up funded.) | Are you able to grow the sales $5 million, $10 million or $20 million a year over three to five years? | Fast growth in sales will offer investors opportunities to get their return and reward their risk. |
| Do you have a product that can be scaled fast without having a proportionate increase in fixed costs and head counts? | Only scalable products can grow fast. | |
| New technologies (Pre-seed/seed investors love new technologies that will potentially bring in massive yields. But investing in new technologies can be a risk because no one has a crystal ball. One strategy they use to mitigate risk is to focus on the right time and the right place.) | Does your product involve any of the following technologies: 1) Artificial intelligence 2) Blockchain technology 3) Energy storage 4) DNA sequencing 5) Robotics 6) Cloud technology 7) AR 8) VR Industries: 1) Cyber security 2) Wellness 3) Healthcare 4) CleanTech 5) Finance 6) Agriculture 7) Insurance 8) Education 9) Productivity and collaboration for remote work | The technologies and industries are what whet investors’ appetites. If your answer is “No,” you will have a hard time getting funding, seeing more. |
| A trustful team (Execution is key. For early-stage, investors bet on the jockeys – not the horses (i.e., products). They have a knee eye for the promising founders. This is why they put great effort into studying teams.) | Do founders have vision, energy, intelligence, and integrity? | Vision is important because that excites pre-seed/seed investors. Integrity is the basis for trust. |
| Is the co-founder or full-time employee a tech expert? | A unique core technology is an important part of a competitive advantage. | |
| Do the founders have skills for leadership, business, and especially sales and marketing? | These skills are important business skills for start-up success. | |
| Is the founder or advisor an industry expert? | A start-up is a member of an industry, and must know how to collaborate with their partners and alliances , what regulations must be complied with, where the threats are, including competition. | |
| Business model | How do you make money? | A viable business must have revenue and profits |
| Will your business model allow your start-up to meet the growth goals? | Unlike a mature company, a start-up business model evolves according to market and customer needs. | |
| Survival possibility | Can you outrun your competition? | What is your secrete sauce — technologies, IP or your business model? |
| How will you recruit new customers to achieve your growth goals? | Will you improve your product and have a new product in the pipeline? How will you recruit new customers to achieve your growth goals? | |
| Exit strategy | When will investors get their money and investment returns? | Pre-seed/seed investors take risks so they can see 10X return. Will you be able to achieve that for them? |
Which type of investors will fit your needs?
Now that you have a clear idea about your fundraising goals and understand what investors are looking for, let’s decide the type of investors best suited for you. The table below summarizes common pre-seed/seed funding resources.
| VCs | Angels | Accelerators | |
| Deal size | Up to $2.5 million. | Average $378,000. | $120K-$150k + potential funding from VCs and Angels. |
| Suited for your start-up if your startup: | 1) invented a new disruptive technology 2) just experienced exponential growth 3) uses the new technologies listed in the previous section 4) is in the idea, pre-revenue or revenue stage 5) want to grow fast | 1) is in the pre-revenue, or revenue stage 2) has IP 3) does not have a valuation 4)uses the new technologies listed in the previous section 5)isn’t ready to give up equity shares | 1) is at idea, pre-revenue or revenue stage 2) uses the new technologies listed in previous section 3)needs help building a fundable product 4)needs help with investor pitch 5)needs help connecting with investors 6)want to grow fast |
| Time to take | 3 to 6 months | 2 to 5 months | 3 months |
| Pitch deck | Needed | Needed | No, interviews instead |
| Finance option | Safe (a type of equity) | Convertible notes ( type of loan with an option to convert to equity | Safe |
| % of equity stake | 10-20% | 0% (because of convertible notes) | 6-7% |
| Chance of getting funded | 0.05% | 0.91% | 3.8% |
| Help with your next round of fundraising | Yes | Yes |
Three fallacies about angel investors:
- Most angel investors have a preferred industry. In fact, they don’t. Instead, they usually make decisions based on due diligence and other angel investors’ comments. However, you need only avoid angel groups that have listed their investment focus.
- Angel investors invest locally. False. Angel investors can invest anywhere in the US, and the pandemic has accelerated this trend.
- Angel investors are trying to rein their invested startups. Those are rare cases. Why? 95% of startups fail. To beat the odds, most angel investors invest in many startups and heavily bet on trustworthy and promising founders. So they don’t look over the founder’s shoulders. Instead, those founders regularly update me on the progress and seek help if needed.
Where to find your investors?
Have you chosen which type of investors you want? If yes, your next step is to find them. This table shows you where to find them in the U.S.
| Financial resource | Links |
| Angel groups | Angel group directory |
| The top 40 start-up accelerators and incubators in North America in 2021 | https://blog.salesflare.com/top-startup-accelerators-incubators-us-canada |
| Top 100 venture capital firms | https://www.entrepreneur.com/article/242702 |
How to contact your investors?
Only 0.05% of startups received Venture Capital and 0.91 % from angel investors in 2020.
To increase the chance of success for Venture Capital, you should first identify the venture capital firm invested in similar startups.
For angel investors, you should find their top favorite industries.
There are two ways to contact your potential investors: warm introduction and cold email.
The study showed that a warm introduction gives you ten times more likely to get funded than a cold email. Introduction through friends is the best approach to a warm introduction.
For cold emails, you can use samples from professional fundraising experts, and this video shows how to write an effective cold mail.
| Investor type | How to contact them |
| Accelerators | Apply before accelerator deadlines. |
| VCs | a warm introduction or send a cold email or linkedIn InMail. |
| Angels | You can have two ways to contact angel investors effectively: 1) Contact individual Angel investors. a warm introduction or cold linkedin InMail individual angel investors: this one works well if you are backed by famous angel investors. 2) the majority of angel investors deal through Angel groups, and it is their group managers who select a list of start-ups first. Instead of talking to individual Angel investors, you should approach the managers through a warm introduction. |
Now you know yourself and your Angel investors. Next, you need to know your ground.
Know Your Ground
Your ground must include:
- What you need to prepare before meeting pre-seed/seed investors.
- A fundraising strategy.
- Pitch presentation.
- Documents.
What are required documents?
| Document Name | Why needed |
| Certificate or articles of incorporation | Proves your start-up is legitimate(needed if investors invest in your startup) |
| Trademark(s) and intellectual property agreements | IP is a proof of your superior technology(needed if investors are interested in deep dive meetings with your startup after the presentation ). |
| Product document | explaining technology used and product (needed if investors are interested in deep dive meetings with your startup after the presentation ) |
| Customer reference | listing your best customers and their contact info (needed if investors are interested in deep dive meetings with your startup after the presentation ) |
| Your startup organizational chart | (needed if investors are interested in deep dive meetings with your startup after the presentation ). |
| Cap Table | A record shows all the equity shares your company has issued and the owners. If you don’t have one, you need it now. Read this article to understand start-up equity. |
| Investment agreements for all shareholders and note holders (for Angel investors) | This document will be signed between you and Angel investors. Lean more about convertible notes here: https://www.seedinvest.com/blog/startup-investing/how-convertible-notes-work (needed if investors are interested in investing in your startup). |
| Safe related document (for accelerators and VCs) | This document will be signed between you and Angel investors. Learn more: https://www.ycombinator.com/documents/ (needed if investors are interested in investing in your startup). |
| Balance sheet or income statement since incorporated | Investors will check your financial fitness (needed if investors are interested in deep dive meetings with your startup after the presentation ). |
| Bank account statements since incorporated | Investors will check your financial fitness (needed if investors are interested in deep dive meetings with your startup after the presentation ). |
| Tax returns since incorporated | Investors will check your financial fitness(needed if investors are interested in deep dive meetings with your startup after the presentation ). |
Your startup valuation
The table below shows some informative about valuation approaches. If you need to get a specific valuation for your start-up, contact us, and our financial expert can help you.
| Valuation | Pre-revenue | With last two- year revenues |
| Valuation method without a similar company that is currently funded. | No valuation. | Valuation based on revenue and growth. Formula=multiplex last year’s revenue: * multiplex is determined by both Angel investors and start-ups. A start-up growing at 40% per year may receive a multiple of six to 10 whereas a company with 10% growth may only receive a multiple of 1 or 2. |
| Valuation method with a similar company that iscurrently funded. | Use a similar start-up valuation. | Use a similar start-up valuation. |
What slides are in your pitch deck?
| Pitch deck slides required | Why you need this slide |
| Your company / Logo / Tag Line | First page |
| Your vision | Tells why your start-up exists, and where you are in your vision. |
| The problem | Shows that your customers have a real problem and the size of it. |
| The customer | Shows who your customers are and how you reach them. |
| Your solution | Shows how your product is solving the problem. |
| Your product market | Shows why your product has a large market. |
| Market landscape | Shows why the market is growing, and why you can outrun the competition. |
| Current customer traction | Shows how you will scale your customer acquisition and product roadmap. |
| Business model | Showing how you make money |
| Critical risks and challenges | Presenting when investors ask it. |
| Team | Shows why you are the right team to build the product and achieve your vision. |
| Exit Options | List all potential buyers |
| Summary | Three take-aways: your product, team and why together you and investors will create a fortune and make the world a better place. |
| Fundraising | Shows what you have raised, and what you plan to raise, financial projection and your term sheet. |
Pitch deck template
Good news! You don’t need to reinvent the wheel. Just use the Airbnb pitch deck ,recommended by many investors, as your template: https://www.slideshare.net/PitchDeckCoach/airbnb-first-pitch-deck-editable.
Pitch deck power point tips
Here are some tips about your Power Point presentation:
- Guy Kawasaki , venture-capitalist, invented a famous Power Point presentation rule called “10/20/30:” 10 slides, lasting no more than 20 minutes, and containing no font smaller than 30 points.
- The 5/5/5 rule: no more than five words per line of text, five lines of text per slide, or five text-heavy slides in a row.
- Duplicate Final Slide: never accidentally double-click and skip to the black screen of death before it is time.
Fundraising advisors and legal counsel
There will be some term sheet negotiations between you and investors if they decide to invest in your start-up.
You need to have a list of advisors and legal counsel. For each investor’s request, reply only after discussing it with your advisor or legal counsel.
Fundraising strategy
What should be included in your fundraising strategy? According to the author of ‘Kernel of Good Strategy,’ it should contain four elements:
- The main problem or challenges that should be addressed. In the case of fundraising, your main challenge is securing a targeted investor from unknowing investors.
- Timeline: 3 months.
- Approach:
- Trying both direct and indirect connection to investors,
- Positioning yourself as a good investment,
- Negotiating the best term sheet as possible. If failed, in the case that investors are neither interested or the term sheets are not acceptable , you will keep in touch with investors to establish trust relationships with them for future fundraising.
- Actions to take:
- Indirect connections: getting investors’ reference from other funded start-ups or friends and family.
- Direct connection: sending cold emails or linkedIn inMail.
- Pitch deck presentation: focusing on why your start-up can make the world a better place by explaining your vision, strong team and product market fit.
- Before replying to a request from investors, discuss with your advisors and legal counselors.
Pitch deck presentation on Zoom
Why do you pitch investors?
Did you answer “Asking for money”? Absolutely not. You are not a beggar. You are a visionary leader who is selling your vision to investors.
How do you communicate your vision effectively?
You must clearly communicate the following three elements:
- how your start-up will impact this world
- how your product will produce 50+ million annual revenue in 5-10 years
- why now because timing is the most important factor in startup success
But you also should put your communication in context because context helps your investors understand why your startup matters to them.
How?
Before the presentation, you need to talk to a few members of the group to:
- understand what they care most about
- make them your fans so they can support you during the post-pitch discussions
Common presentation mistakes
These can include:
- Not emotionally connecting to your audience,
- Not clearly explaining the product and your business model,
- Bombarding investors with lots of messages, but not the right details.
How do you fix these issues? Below are a few powerful tips you can use when delivering your next Zoom investor presentation:
- How do you emotionally connect to your investors?
- When you first introduce yourself, DO NOT launch your PowerPoint presentation OR show a video about your product. Instead, you smile and look at your webcam or camera on your laptop all the time until you finish your introduction. It will let you build a good rapport right from the start.
- Your opening introduction must stir emotion. Remember that a picture is worth a thousand words. In your introduction, create a mental picture using metaphors to show your vision.
- Usually, start-up founders use jargon a lot. Before your presentation, explain your product and business model (i.e., how do you make money) to some laypeople (e.g., your mother), and make sure they understand it fully.
- Focus on just these three core messages about your idea: why your product is fundable, why you have a great team, why together you can build the next great Facebook. Have you heard Steve Jobs’ 2005 commencement address? Why is this still one of the most shared and watched speeches today? It focused on three things. He started by saying, “Today, I want to tell you three stories from my life. That’s it. No big deal. Just three stories.”
Know Your Investment Mark
Imagine that this is your first trip since the pandemic. You are excited and ready to take a flight to your dream place. Suddenly you receive a flight cancellation due to bad weather. What can be bad weather in a pre-seed/seed investment market?
Investment markets change according to macroeconomic cycles that are repetitive cycles of economic expansion and contraction.
When the economy expands, your start-ups will have more fundraising opportunities because VCs can raise more money, and Angel investors can invest more. In contrast, during economic contractions, both VCs and Angel investors will invest in fewer start-ups.
Therefore, before fundraising, you need to check where the economy is in the macroeconomic cycle to avoid bad weather.
Conclusion
As Bo Bennett said, “I like to think of sales as the ability to gracefully persuade, not manipulate, a person or persons into a win-win situation.”
Your fundraising should be a win-win situation for both you and investors. You use the leverage to achieve bigger success faster while investors make a meaningful investment.
Our mission is to match more ambitious tech startup founders and women entrepreneurs to their ideal investors. I hope this blog has dispelled pre-seed/seed myths and helped you get ready for fundraising. If you have any questions, you could reach out to us via email: info@zettasher.com.