5 Things To Consider Before Raising a Pre-Seed Round
Raising equity financing is a time-consuming process. Doing so before you have meaningful metrics telling you it’s a sure bet can be actively harmful to your business, and to your morale as a business leader. Here are a few questions you may ask yourself to see if you’re ready to make the leap.
Am I “Venture Backable”?
Investors will consider if you are venture capital eligible, especially if you are attacking a large market with a unique product that is a significant improvement on the solutions that are already out there. It is important also to think about scalability; software and internet companies find it considerably easier to raise than brick-and-mortar retailers because of the ease of scaling. If these factors are setting off alarm bells for you, don’t despair! You can address these core business issues before you raise them (and save yourself a lot of hurt in the process).
How Will I Reach My Investors?
Before you consider raising, it is essential that you know where the money is going to come from. A network of dependable investors, that match the stage and sector of your startup, is fundamental to this process. As a startup, you can sign up to Floww for free and start researching and connecting with investors.
Before raising, invest considerable time to identify, engage and build relationships with as many potential, relevant investors as possible. Bear in mind that you will likely close deals with far fewer of these investors than you think. Even if you are hyperconfident, you could potentially expect to close with about 25% of the investors you meet with. If you want 5 checks in your angel round, that’s still 20 connections and relationships you need to build before you can even think about raising.
How Developed is My Business?
Investors want you to demonstrate momentum during your raise process, and so the closer your startup is to product-market fit before you raise, the better. Is your product built, and are you actively trying to reach customers? If not, is it at least completely designed, and have you discussed it in detail with interested prospective customers? Ultimately, the more your business needs outside money to succeed, the more wary investors will be of supplying that money. The more evidence of prior traction in the market and growth you can provide, the better.
Do I Have My Deck Ready?
Before reaching out to potential investors, have a professional, short deck prepared. Make sure it is visually appealing and fewer than fifteen pages in length to ensure it gets read. Focus on the problem your startup solves and a succinct description of the solution you provide. Why are you uniquely positioned as a team to solve this problem? Include your business model, evidence of forward momentum and your plans for overcoming obstacles, including competition from other businesses. Keep a brief but clear description of your funding needs for the end of the deck. Send your deck to the smartest people you can outside of your target sector. If they don’t understand what your business does after reading your deck, it’s too technical. Make sure in-depth sector knowledge is not a requirement for understanding your deck.
What Are My Terms?
Ultimately, your aim here is to secure terms that are favourable to you and the long term vision for your company, but reasonable for all-around participants. Negotiating separate terms with each of your investors is not industry standard and can hurt your momentum during a raise, so striking the perfect balance is key. That said, you will want to be firm on both valuation and structure.
Valuation: Angel round valuations are very subjective, with some software-based companies getting good valuations before they’re much past the “vision” stage. That said, direct-to-consumer products, mobile apps and brick-and-mortar businesses have a harder time securing competitive terms and often need demonstrable traction and revenue to get started. The more traction you can demonstrate, the better terms you will get.
Structure: The YCombinator SAFE template allows you to get familiar with industry norms at a pre-seed and seed stage, without worrying about legal fees.
To learn more about how you can find investors by funding stage, sector and location, sign up to Floww and get started.