building investor signals for a pre-seed startup

what is a pre-seed startup?

Hey,

Dragos here, from Project Arrow, where we mentor founders about how to build from 0 to 1 and get their startups investable in the process.

Today we’re talking about pre-seed startup signals you will be looked upon when navigating the fund raising process.

The stage labels were invented by investors for a clear demarcation of the signals they judge in order to assess funding eligibility. “Pre-seed” simply means that you have an idea, have worked on it for a while, already have some market evidence that you’re on the right path and would like to get some early investment on for taking it further.

So what are investors looking for at the pre-seed level? TL;DR:

• product/industry insight - opinionated product positioning and expertise showing that you can translate it into a huge opportunity

• strong team - evidence that you have the right background to build a business out of your observations

• skin in the game - product in the market, full time commitment, recurring expenses, employees

• market proof - early users adoption, feedback, customers interest etc

This is an idea-taking-shape period when founders are putting the pieces together in order to get their startup operations off the ground. Talking to investors is demonstrating that what you’ve built (or are building) has the potential to grow and generate sizeable returns.

Pre-seed is also called “the team and TAM stage”, as the signals investors look at are an unique market/product insight showing huge demand for the solution you’re building as well as strong industry/tech/product expertise showing your team is capable to pull things off.

Ideally you have a product also known as MVP available in the market, and evidence of demand from early users - feedback on it, interviews, consumption patterns, repeat usage etc. Other strong signals include having a good go-to-market plan (i.e. acquiring customers) and showing skin in the game (i.e. full time startup commitments from founder(s), expenses piling up, and a few hires to help out)

At this stage, startups usually raise a few hundred thousands $$ for gathering more data supporting the case of a product-market fit within 6-12 months. Assuming you are now burning 5-10k a month, 200-300k in capital may seem enough to get you going. Don’t bet on that though, you will likely spend more and you will need more time to get to PMF, it’s a learning process.

You will rather get money from believers in the idea not from professional investors. Believers are likely to include friends, family, people from the industry and in general folks assessing that the opportunity is interesting (the TAM) and that you’re the right crew to pursue it (the team). If you build your case right, you may also get interest from professional investors - however, they will usually ask for quantifiable evidence (sizeable traction, paying customers) to prove that the risk they take with you is worth 10-20x returns.

Keep in mind that raising money is a process, not a one-off thing, meaning you will get small checks on rolling basis - i.e. 15k from there, 5k from there, 10k from there. That is why part of the founders job is building relationships and trust you don’t have because you have no business yet and a familiar context that should substitute the general patterns investors usually use in order to make a judgement.

This is just for orientation, of course, and each case is different. You will find out about yours as you go and pitch the market about it and show product/business progress along the way - the more you do it, the more you learn how you’re perceived and can adjust accordingly.

Can you raise pre-seed capital without a product or users? Yes, it’s possible, some people raise only with a powerpoint deck (I did!). But this is rare - it’s usually done by strong repeat founders, with solid background and expertise, that already are trusted in the market.

The more advanced on your discovery path with your startup, the better the proof that you have stamina to build a great business. The more data points you have gathered presented on a tight story, the better the odds of getting people to pay an equity check for riding along your journey.

It's not easy to do it and and there is no magic pill overnight. You need to plan it, iterate every day against it and show progress. The market will tell you if you’re on the right track, efforts will usually pay off in 6-12 months and after talking to at least a few hundred potential investors - angels, VCs, advisors and industry experts.

Getting help from the right people as you navigate along the way will help you as well - understand and adapt the feedback (diverse and contradictory), and a support system for when things get tough (they will). That’s what we do at Project Arrow. :-)

- Dragos