/ / Pre-Seed Funding: How to Attract the Right Angel Investor and Secure Pre-Seed Capital
/ / Pre-Seed Funding: How to Attract the Right Angel Investor and Secure Pre-Seed Capital

Pre-Seed Funding: How to Attract the Right Angel Investor and Secure Pre-Seed Capital

Pre-seed funding is the earliest funding a startup receives to help the founders get their operation off the ground. You can think of it in terms of an analogy for planting a tree — before you get to the seed funding stage where you plant the seed and begin to water it, first you need to prepare the environment and create the right circumstances for the seed to grow and thrive. That’s the pre-seed funding stage: propelling your startup development and preparing you for investor expectations in the coming funding rounds.

Although there are pre-seed VCs that specialize in this type of investing, pre-seed funding typically comes from founders, friends, family, or angel investors that provide capital in exchange for equity in the company. Since the most common investors in this early-stage funding round are either close to the founders themselves or angel investors, like myself, it’s often referred to as angel funding. 

If you’re an early-stage startup preparing to raise your first pre-seed funding, here’s how to attract the right angel investor and secure pre-seed capital.

How To Get Pre-Seed Funding?

There can be more complexity and nuance in any given situation, but here are the basic components to a pre-seed funding round. 

Pre-seed funding usually starts with a friends-and-family round, and then you’ll want to open up your pre-seed funding to further connections in your network, ideally those with connections to local angel networks or experience funding startups. 

Once you’ve identified potential angel investors, you should collect their emails and send first contact emails requesting a pitch meeting.

In pitch meetings, you should present yourselves (because investors know that at this early stage, they’re investing in the founder as much as the business itself) and then your idea, demonstrating exactly how you’ll create it, and how it’s destined to succeed based on a comprehensive understanding of the market landscape. You should also be able to show:

  • Market opportunity
  • Customer interest
  • Financial projections
  • Fundraising plan

The pre-seed stage is the riskiest time for investment, so potential investors are going to want more equity in the company. However, you want to save equity for future financing rounds, only taking the investments you absolutely need to get started. 

As an angel investor, if I see that a startup is giving up too much equity too quickly, it’s a red flag. Giving up to 20% in equity is reasonable, but between 20-50%, it gets dicey. This is because we expect to sell more equity in later rounds, and if the founder gets too diluted they may lose too much control to shareholders. It also demonstrates a lack of business acumen on the founder’s part, which is something any investor, including myself, will want to stay away from.

Different Types Of Pre-Seed Funding Investors 

In your search, you’ll likely come across three kinds of pre-seed investors:

  • Accelerators or Incubators: Joining one of these programs is a gamechanger for founders, providing invaluable resources, information, and exposure to seasoned industry veterans and potential investors. In it, startups gain access to an enriched entrepreneurial environment with opportunities for networking, training, and exposure. To join an accelerator or incubator, you’ll need to be accepted.
  • Pre-Seed and Seed Investment Venture Capital Firms: VC firms represent a group of investors who have pooled their funding so they can offer larger pre-seed investments, however, their decision-making process is much more drawn out.
  • Angel Investors: Angel investors act on their own, often selecting startups that align with their values, interests, and experience. In addition to capital, angel investors can also offer critical guidance to help young startups flourish.

What Is Early Stage Funding? 

Early-stage funding is the umbrella term for the earliest stages of investing, also known as the pre-seed and seed funding rounds. These investments fund the earliest steps of a company’s development. Since there is more inherent risk associated with these early-stage startups, not all investors will have the confidence to fund them. That’s why pre-seed or seed capital typically comes from founders, family, and friends, or from angel investors or pre-seed VCs who specialize in funding and working with these nascent startups.

How To Attract The Right Pre-Seed Angel Investors

When you’re searching for the right pre-seed angel investors, you’ll need to demonstrate that your startup is a worthwhile investment in order to find one that fits the vision of your startup. Here’s what you’ll need to attract pre-seed angel investors:

  • Personal introduction – The best way to connect with an angel investor is through an introduction from someone they have a history with and trust. 
  • Entrepreneurial personality – We’re going to be looking for a driven personality, a history of calculated risks, and evidence of determination, even when things get tough.
  • Qualified founding team – A solid team reinforces our trust in your capabilities.
  • Relevant experience – If you don’t have a proven track record as a founder yet, showing relevant experience in your field will help instill confidence in an angel investor like myself.

Pre-Seed Funding Pitch Deck 

Your pitch is your chance to tell your startup’s story and provide an overview of your goals and opportunities in the market. A deck is a slideshow-format presentation that gives prospective investors an overview of your idea and business plan. 

As an angel investor, here’s what I’ll be looking for in your pitch deck:

  • The problem – current need in the market
  • How you’re solving it with your unique solution – your “how”
  • Business model – your “what”
  • Founding story – your “why”
  • Estimated market size – your “who” 
  • Why now? Why you?
  • Your competitive advantage 
  • Fundraising plan to get additional capital
  • Proof of traction
  • Goals or milestones
  • Financial projections
  • Funding needed

Pre-Seed Funding Vs Series A, Series B, & Series C Funding: What’s The Difference

Here’s what the progression of funding looks like, from pre-seed and seed to Series A, B, and C.

Pre Seed Funding

Pre-seed funding is the earliest stage of funding, usually raised before you have an MVP and as you form your company. This funding typically comes from angel investors or friends and family of the founders and comes in exchange for equity.

Seed Funding 

Seed funding takes place after the pre-seed round and before you get into series funding, typically from angel investors, friends and family, accelerators, and incubators. Seed funding usually goes toward creating a prototype, market research, hiring employees, and essential operating costs.

Series A Funding 

Series A funding is a startup’s primary acquisition of capital that may come from angel investors or traditional venture capital firms. 

Series B Funding 

Series B financing is designed to help your startup scale to meet a rising demand for your product in the market and usually comes from a new wave of VC firms and angel investors to support further growth.

Series C Funding

Series C funding is often used to increase the value of a company before going public. This capital, typically from private equity firms and hedge funds, boosts an already successful startup by creating new products or expanding into new markets.

How To Know If Pre-Seed Funding Is What I’m Looking For

If you’re in the early stages of your startup, pre-seed funding may be the next logical step for you. The right time to seek pre-seed funding will be different for everyone, depending on the industry you’re in and what your product/service is.

Factors Entrepreneurs Should Consider

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

  • If you’re 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.

Raising Pre-Seed Funding For Your Startup

Raising pre-seed funding from your startup is a critical first step in developing your product, confirming a market fit, creating a superstar founding team, and positioning your startup for success. 

The process begins with a great idea, then it needs to evolve into a strong pitch deck that illustrates the most important factors an angel investor will be looking for. Once you’ve identified interested investors, you’ll want to ensure you choose an angel that you look forward to working with and can provide insights from relevant experience (not just funding). Finally, you’ll submit your business plan and get to work with your new investor and, potentially, mentor.

The Competitive Edge

I hear a lot of startup founders ask how they can compete with the funding other companies in their field have raised, but the trick is in not making these comparisons and simply executing better than anyone else in the game. It’s likely that many of these founders are in the network of these big investors or close geographical proximity, but you can’t get discouraged by these circumstances. 

You win by doing it better – running your company better, being more efficient, having better people, a better product, a better outcome.

In my personal story, I once went up against two multi-Billion dollar incumbents and successfully outcompeted them until they got smart enough to buy my company for a pretty penny. I didn’t have the networks or the funding they did. I bootstrapped it without funding and executed far better than my competition – that’s what made me successful.

MacDonald Ventures: A Premier Resource for Angel Funding

Steve MacDonald is a top angel investor with decades of experience in founding and funding disruptive, cutting-edge technology startups. He takes a rebellious approach to angel investing in early-stage startups that show traction and offering his experience and mentorship to guide them as they develop world-changing solutions.

If you’ve got an idea for a world-changing tech startup, have made it through the pre-seed round but need additional funding and guidance to begin the real work, reach out to Steve MacDonald of MacDonald Ventures

Pre-Seed Funding FAQ

What’s the difference between pre-seed funding and early-stage funding? 

Early-stage funding is the umbrella term that includes both pre-seed and seed funding. Pre-seed funding is the earliest stage of the early-stage funding category and the ideal time for approaching angel investors.

When should a business consider pre-seed funding? 

If you need funds to develop a prototype, hire a founding team, perform market research, or keep your business sustained through the next funding rounds, you should consider pre-seed funding.