Financing options for startups

Startup founders have various ways to secure money for their businesses. The decision to choose which strategy to follow depends on multiple factors. In general, there are two financing options: debt and equity. 

Debt financing refers to acquiring money for your business from external sources without giving up equity, for instance, loans. 

In contrast, equity financing is when you sell equity in your business to investors in exchange for capital. The most common equity financing options at early-stage companies are angel or venture capital investors. 

The path until an early-stage company can receive money is full of challenges. Finding an angel or venture capitalist can be awfully hard.

The first step is to evaluate all available funding options’ pros and cons to ensure that you make the right decision. After, you just need to be persistent.

Who is the angel investor?

Angel investors are typically high-net-worth individuals looking to invest their own money into promising startups.

Angels provide financial support and guidance to early-stage companies in exchange for equity. They often bring valuable angel networks, knowledge, and experience to the table. 

Early-stage funding is a risky move. Although angels know this, they typically look for a higher rate of return than traditional investment options. 

Who is the venture capitalists?

Venture capital investors are typically not individuals but rather firms. Unlike angel investors, venture capital firms do not manage and invest their own money. Venture capital firms raise money from institutional investors, corporations, and wealthy individuals, known as Limited Partners (LPs). If the venture capital firm’s pitching is successful, the LP could write million-dollar checks to the venture capitalist.

They expect the venture capital firm to invest that money in promising companies and get a substantial return. But who is the one that makes the calls behind the venture capital firm? 

This person or company is called a General partner (GP). Contrary to LPs, the GP has an active role in managing the investments of the venture capital fund. The primary responsibilities of the GP are to raise funds, make investments and maximize the value of the portfolio companies.

Differences between angel investors and venture capital firms

Understanding the six key differences in angel investor vs. venture capital-related discussions is crucial.

The choice between the two depends on your specific goals, preferences, and the likelihood of successfully acquiring capital funds from either option.

Source of funds

Angels invest their own money, whereas venture capitalists get money from other investors. This fundamental difference in funding sources shapes the decision-making processes. 

Angels have the autonomy to make investment decisions as they are using their own money. They have the freedom to choose which startup company to support based on their personal interests, expertise, and assessment of potential returns.

A venture capitalist has additional considerations and responsibilities. They must ensure that their investment decisions align with the expectations and requirements set by their investors.

So, the LPs of venture capital funds will also impact questions like when they want to get a return and possible exit options. 

Stage of investment

Angel investors mainly invest in the pre-revenue stage. The startup in the pre-revenue stage may have an MVP but still needs traction and many customers. Many angels are taking a gamble with a high risk if the potential for a significant reward is on the table.

At a certain stage in the startup journey, there is an opportunity to seek investment from an angel and venture capitalist. This stage is typically when startups already acquired customers and started to make sales. 

In general, a venture capital firm mostly invests in a startup which already reached some traction and acquired customers. There are some venture capital opportunities for startup companies at the pre-seed round, as some specific venture capital firms focus on early-stage funding. 

Venture capital firms like Forum Ventures or 2048 Ventures fund early-stage companies and invest small amounts compared to later-stage investments. These venture capitalists often invest money within a particular industry or geographical location.

Control issues

It is a common misbelief that if a founder has an ownership greater than 50%, a venture capital firm can not control the portfolio company. The truth is there are two other ways how venture capitalists can control startup companies. 

The venture capitalists can have a preferred stock that includes protective provisions. The bad news is that many vital decisions are subject to protective clauses. So, the venture capitalists must agree with such a decision. 

Another way to control a company is through a board seat. Although it is not usual to negotiate a board seat at the pre-seed or seed stage, founders need to give board seats to investors at some point. 

An angel usually does not have a board seat in general. Their involvement is focused on providing financial support and guidance rather than taking control of the startup’s decision-making.

On the other hand, venture capitalists actively participate in the decision-making by having a board seat in the portfolio company. It means they have higher control over the portfolio company, as founders need the board’s support when making important decisions.

Decisions like an initial public offering (IPO) or appointing executives to the company’s management team are typical situations when the board’s support is needed.

If they do not like the direction where the company is going, venture capitalists can remove founders or block the sale of the startup. 

Investment size 

An angel typically invests smaller amounts than venture capitalists, as they use their personal funds. The angel investment sizes can vary widely. It starts from $10 thousand to $250 thousand. 

The average venture capital fund during pre-seed rounds in the US is approximately $500 thousand. However, it ranges between $100 thousand and $5 million. Meanwhile, the average seed funding round is around $5,6 million in the US. 

Not just the volume of funds different, but also the requirements of the investors. While angel investment is often used for product development, venture capital is utilized for market expansion.

Startups usually seek venture capital investment at the stage when they have a PMF and are ready to scale their operations to reach more customers. 

As a startup progresses through its funding rounds, the investment size increases significantly. During later stages, primarily venture capital firms provide the funding, while angel investors step back.

Pitching style

When pitching to an angel investor, the focus is often on building a personal connection. It is more informal than pitching to a venture capital firm. Although it is good if you can show revenue, user numbers, or key partnership, the emphasis is on the team and startup potential. 

Having a co-founder that supplements your skillset can be vital at this point. It shows to the potential angel investor that your team possesses a diverse range of expertise and can effectively tackle various technical challenges that may arise down the road.

On the other hand, pitching to a venture capital firm involves a more structured and formal approach. It regularly takes place in the office of the venture capital firms or remotely. You should clearly communicate your value proposition, business plan, market opportunity, and competitive advantage. 

Venture capitalists are particularly interested in the scalability and potential returns. So, having financial projections supported by data is crucial. 

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Investors’ expectations 

Angels are either looking for ideas with a possibility or may have personal reasons to invest in a startup. The main question of the angel investors is whether the story is good enough to take a risk.

In many cases, founders could raise money with just a prototype or a good story. Although you are in a much better position if you already reached significant milestones like revenue, many angels are okay with taking higher risks.

On the venture capitalist side, it is different.

Venture capitalists expect to see revenue, growth opportunities, and strategy for scaling the business. Most venture capitalists are focused on a particular industry, like AI or FinTech, so they are aware of your possible risk and growth potential.

They have higher expectations for the growth rate, and startups need to have some traction before seeking venture capital investments. They are looking for startups that will transform into the next big thing.

Before trying to acquire venture capital funds, it is essential to have a solid understanding of the current startup landscape and trends. It helps you to see the bigger picture and your startup through the venture capitalists’ glasses.

Angel investor vs. venture capital funds

There are a few essential aspects to consider regarding the angel investor vs. venture capital discussions.

First and foremost, you need to consider the investment size you require. This will help you determine who to approach for funding and how to structure your pitch.

Another crucial factor is whether you are willing to give up some control over how you run your business. Different types of investors have unique expectations regarding their involvement in the decision-making process. In general, angels have a more hands-off approach, while venture capitalists tend to be more active in decision-making. But It can be different on a case-by-case basis. 

Lastly, you should know whether your business can scale before you start reaching out to venture capitalists. It is not enough to have a good story; you have to demonstrate with data that your business shows high growth potential. 

Take a deep breath, evaluate your options, and seize the opportunity that aligns best with your vision and goals.

Aron Kantor

Hey there! I am Aron, the founder of Thebusinessdive. I have been testing productivity apps for almost three years now. I reach 25.000 -50.000 people monthly with the mission to help you find the perfect productivity apps. Subscribe to my YouTube channel, newsletter, and social media to hear more about the best productivity tools. Let’s dive in!

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And probably ask yourself the question: What is an equity stake? What does a 10% equity stake mean, or how much stake should I give to investors? 

Equity stakes meaning

An equity stake is a pretty simple concept; an equity stake represents ownership in a company. When someone holds an equity stake in a company, they have control over its decisions and are entitled to profit but are also responsible for risk. 

An individual, investor, company, or private equity fund can be an equity holder in a company. An equity stake typically refers to the percentage of the ownership interest, not the number of shares in the company. 

The value of your equity stakes depends on the value of the company. Imagine the difference between owning a 1 percent of the equity stake in Apple versus a 1 percent of equity stake in the local grocery shop. 

Share vs. equity stake?

Equity can be found across various business forms, such as proprietorships, partnerships, and corporations. On the other hand, shares are typically specific to companies.

In the context of companies, equity represents the overall ownership stake in the entity, whereas shares serve as a measure of an individual’sindividual’s ownership proportion within that particular business component.

In general, there are two types of shareholders. Minority shareholders own less than 50 percent of a corporation’s shares and lack majority control.

Contrarily, the majority shareholders hold more than 50 percent of the corporation’s shares, giving them majority control and decision-making power over the company.

A real-life example for equity stake

Imagine you and your friends starting a startup together. You all want to own a piece of the startup, right? 

Well, that is where equity stake and share come into play. People might use them interchangeably, but they are different. 

Consider the equity stake as your ownership slice in the startup. When you have equity, you are like a part-owner of the whole business. Your ownership volume depends on how much of the startup you own.

This is when the shares become relevant. Imagine the whole startup cut into 10,000 equal pieces, each representing a share. These shares are like little ownership certificates that show how much of the company everyone owns individually.

If you have 51,000 shares, you have a 51 percent equity stake in the company. As you own more than 50 percent of the equity, you have outright majority ownership over the startup.

One of your friends has 24,5 percent equity stakes, and the other has the same percentage, so they are minority shareholders.

How to calculate equity stake?

If you own 1,000 shares and there are 10,000 shares in a company, you have 10 percent of the equity stake in a company. It is as simple as that. 

Does it mean you have 10 percent of the profit or voting rights?

Generally, yes, but not necessarily. There are different types of shares. You might have a common share A, and your co-founders have a common share B. Different classes can have various rights in terms of voting or dividend.

Furthermore, the third co-founder might have preferred stock or share. Preferred shares might have priority when receiving dividends or the right to return capital when the company is liquidated. 

Comparing equity stakes and other forms of investment

First, owning equity is like owning a piece of a company, making you a part-owner of the business. On the other hand, other investment options usually involve debt, where you lend money that the borrower must repay with interest.

Now, here are some key differences to keep in mind:

Risk

Equity stakes are often considered riskier than other investment forms, such as loans. The reason behind this is relatively straightforward. The value of the equity is connected to the performance of the company. On the contrary, if you provide a loan to a business, you should expect to receive the principal amount and interest irrespectively of the company’s performance.

While the risk is higher in the case of equity stakes, the reward is also more substantial. 

Profit entitlement

Profit entitlement is one of the most important factors when considering equity stake vs. other investment forms. If you decide to acquire an equity stake in a company, you become a part-owner and get a slice of the profit pie. How much you earn depends on the company’s future performance and the percentage of your equity stake. 

However, it is essential to remember that the profits are not fixed, as they depend on the company’s performance. So, while you have the potential for significant gains, there is also a chance that the business might not do as well. On the flip side, most other investment options can offer a fixed profit level but with a lower return. 

Controlling interest

Once you have an equity stake in a company, you have a specific level of control over the company’s decisions. Although the level of control depends on the percentage of equity stake that you own, you can impact how the business runs. 

Liquidity

Equity stakes in private companies may have lower liquidity than other investment options. Be aware that the equity stakes are generally not freely tradable in the market as it directly impacts the company’s holding.

Nevertheless, if you have publicly traded company shares, it is easily tradable through the stock exchange.

Taxes on capital gains

The capital gain you realize on equity stakes qualifies as taxable income. Nevertheless, the tax rate and implications might differ for equity stakes compared to other investment forms depending on the country. This aspect could also be vital when considering equity investments.

Now that we have a high-level picture of equity investments, let’s move on to the real deal. 

Who gets equity stakes in a startup company?

Co-founders

The co-founder is the person who has the skill or specific resources that the founder needs to implement a business plan. It can be a technical skill, experience, and industry knowledge. A co-founder usually has an active and decisive role in the business, and the co-founder might be involved in a broad scope of duties.

A co-founder generally receives an equity stake depending on factors like skills, expertise, experience, and network the co-founder can bring into the business.

Advisors

Let’s be honest; most of the startups have no money in the early phases. There might be cases when these startups give equity stakes to advisors as a form of payment. Long-term advisors working for the startups less than two days a month generally receive around 1% of the equity stake.

Private equity investors

Individuals and companies have multiple ways to invest in businesses, either by direct investments or through private equity firms. These firms have various types. The general approach for private equity investors, the more established the business, the lower the risk.

On the other hand, venture capital firms typically have an investment portfolio, including startup companies, which involves higher risk. Their investment strategy is simple: take higher risk for higher reward.

Employees

Equity stake is the currency of the startup world and part of the employment negotiation. Key employees at the executive level regularly receive between 1 and 2 percent equity compensation for taking the risk of working for a startup.

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How much equity stake should I give to investors?

This is a tricky question. It depends on numerous factors, including company value, funding stage, funding amount, and macroeconomic conditions.

Company valuation

The most important aspect is the valuation for most of the startup companies. A valuation provides the basis for determining the fair market value of your business. It is a strong reference point to how much equity you should give the venture capitalist.

When calculating valuation, you should consider factors like the company’s assets, financial performance, customer base, market conditions, and more. If intellectual property is part of your assets, it’s important to hire a patent attorney to ensure proper protection and valuation.

Funding round

Another critical factor is the funding round. While you might need to give up an equity stake between 5 and 10 percent during pre-seed funding, startup companies give more than 20 percent to investors during Series A and B. 

Investment size

The investment size also influences the investor’s equity stake that they should receive. The average size of funding received for the equity stake also varies greatly in the US.

The average initial investment size during the pre-seed funding is approximately $500 thousand, while startup companies acquire $55 million during Series C.

How to negotiate equity stake? 

First, you need to know how much your company is worth. This is the basis to determine how much equity you should give for the venture capital funding. Suppose you are in the early stages and have no revenue. In that case, there are some methodologies that you can use to value your startup company—for example, the scorecard, risk summation, or market approach methods.

Secondly, let the investors say the price first. As investors likely know the market better than you, it is easy to leave money on the table by setting prices too low for an equity stake. 

Another crucial factor is that if you are in the early stages, you should try reaching milestones before equity investment. The higher the level of risk, the more significant the equity stake they ask for. Try to reduce milestones to reduce the investors’ risk and, therefore, the volume of equity stake they would ask for. 

Lastly, you should pay extra attention to unfriendly terms like liquidation preference. There might be uncommon terms that can harm your equity and business.

Aron Kantor

Hey there! I am Aron, the founder of Thebusinessdive. I have been testing productivity apps for almost three years now. I reach 25.000 -50.000 people monthly with the mission to help you find the perfect productivity apps. Subscribe to my YouTube channel, newsletter, and social media to hear more about the best productivity tools. Let’s dive in!

thebusinessdive.com

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Seed and angel investments in the U.S. are facing their lowest quarterly level since the fourth quarter of 2020. While there has been a decline in seed and angel investment, the drop in Series A investment for U.S.-based startups has been even more significant.

Due to the current economic conditions, investors may ask for more startup equity to cover the increased risk. Founders, therefore, must carefully evaluate the trade-offs and decide whether venture capital is the right path for their startup’s growth and long-term vision.

Here are five things you should consider before negotiating startup equity with investors.

Are you ready to give up equity to venture capitalists?

First, you must ask yourself whether you are okay with losing equity and control in your startup. Acquiring venture capital is not for everyone. Giving up equity in your business can be emotionally challenging, especially when you have invested significant time, effort, and money into building your business.

The loss of ownership and decision-making power can impact key business decisions. It also can cause a misalignment of interests regarding the company’s future.

This is the reason why some startups choose to bootstrap. Bootstrapping allows founders to maintain control over the company without giving equity to investors. However, they will have to operate the company with a tight budget, rely on personal funds, and take on multiple job roles versus hiring employees —or explore alternative income streams like get into prop trading to fund the business themselves.

The question is, when should you consider obtaining venture capital from investors?

Lack of money

Founders raise money from investors for various reasons, but probably the main reason is a lack of capital. Founders who start with self-funding generally run out of their personal, friends, and family funds early. So, they require additional money to support their startup growth and cover the incurring costs.

To hire employees

One of the other most common uses for funding is hiring ahead of revenue. Hiring employees contributes to the scale of a company’s operations and increases production capacity. It also helps the founder to delegate responsibilities to employees so the founder can spend more time on critical tasks.

Accelerate sales and marketing

Startups often need venture capital for marketing campaigns, customer acquisition strategies, and user acquisition. Such costs include advertising, content creation, social media marketing, and other promotional activities. Due to limited resources, low brand recognition, and evolving product-market fit, acquiring first clients can be a massive cost for early-stage startups.

Product development

The development of a product or service requires financial resources. In many scenarios, predicting the exact product development costs is tricky. You’ll need to consider everything from the materials involved in the product itself to what kind of packaging you are going to use while trying to keep the costs to a minimum.

Especially, if you plan to sell in high volume, you have to check what options you have when it comes to packaging. There are a few popular providers, such as International Paper, but you can likely secure better deals with smaller companies like Ozpack.

But one thing is sure, the product development process can be more effective with the help of angel investors and venture capitalists. As a result, a startup can launch products earlier and achieve important milestones sooner.

Mentorship and guidance

There are cases when a startup has sufficient funds but lacks crucial relationships, networks, and mentors. The main driving factor in getting financing is the investor’s expertise and experience instead of money. Many angel investors and venture capitalists will take an active role in a startup’s life and provide guidance to the founders.

In addition, having reputable investors in your board composition can improve your startup’s credibility and success rate. This factor is crucial when approaching potential customers, partners, and venture capital firms.

Have a valuation to know how much your company is worth

A valuation provides the basis for determining the fair market value of your business. It serves as a strong reference point to how much equity you should give for the venture capital. If your startup already has revenue, the preparation of the valuation should be easy. However, most seed round companies have not started making sales yet.

Having a proper valuation for companies with no revenue can be tricky. Figuring out how much equity you should give to an investor at the seed round is tough. There are some methodologies that you can use to value a business that has no revenue:

Scorecard method

It compares a startup at the seed stage to other startups which have similar sizes and products. Preferably, startups should be at the same stage of the startup journey. The method uses several categories with weighted values to estimate the fair market value of the startup business.

Risk summation method

This methodology does not estimate the chance of success but instead evaluates the startup company’s risk factors. These factors can be management risk, exit risk, legislation risk, and others that can result in startup failure.

Market approach method

This method relies on the startup’s potential market value in the future. Market approach methods consider factors like market demand and level of competition to establish the company’s valuation.

Determining a proper value, however, is more art than science. It is also a common approach that investors postpone valuations until the startup achieves revenue and milestones.

Let the investors say the price first in startup funding

In the case of startup funding, the investors are the buyer and the founders are the sellers. Trying to set a price for startup equity without understanding the buyer’s perspective will likely fail. As investors tend to know the market better than you, it is easy to leave money on the table by setting prices too low for startup equity. And the opposite can be true as well. You risk pricing yourself out of the market by setting a too-high price.

Allowing investors to lead the discussion is the best way to start a negotiation. If investors say a price much lower than what you have in mind, you can always react. In cases when investors are pushing you to give a price, try to provide a range instead of an exact number based on the valuations.

Try to reach milestones before acquiring venture capital

Depending on the industry and the startup stage, venture capitalists typically ask for 15 to 25% of startup equity in the course of seed funding. The higher the level of risk, the more significant equity they ask for. Reducing risk by reaching milestones can decrease the equity you should give an investor.

Such a milestone can be revenue, for example. Even if your startup does not generate revenue before the seed round, other milestones may exist during the way to reach revenue. These milestones influence the volume of venture capital funding, the equity investors may ask, and the types of investors who are more likely to jump on board.

These could be having a mockup, MVP or receiving a patent on your idea, a letter of intent to buy from a customer, or the users you have on your platform. Achieving revenue or non-revenue-based milestones reduces investors’ risk and should be part of the startup equity discussion.

Be aware of unfriendly terms

Some investors use unfriendly terms to ensure they profit most from a startup’s success. You should pay extra attention to clauses like liquidation preference.

Such a clause prioritizes the investor to receive profit from the business’s sale before others, up to a specified multiple of their original investment. If the liquidation preference is set at 3x and the investor gives $1 million to your startup, the investor should receive at least $3 million when selling the company. If you were to sell the startup for less than you expected, it could happen that the investor would take the whole amount of the sales price.

There can be terms giving the right to the investors to expand their initial equity under specific circumstances. Ultimately, there might be uncommon terms that can harm your equity and even your business. Don’t hesitate to hire a lawyer to review the investment contract. A lawyer will recognize clauses that may look good on paper but can damage your chance of profiting from your startup’s success.

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Dealing with startup funding challenges

Finding the right investors can be a major challenge. But it is even more challenging to get things done in a way that you do not give too much equity to investors.

By exploring the right funding options, you can protect your long-term profits and set yourself up for a better exit. Understanding the risks is key—so is learning from others. For example, this Freeport Society review offers useful insights into how a financial platform operates and what to look out for when evaluating alternatives. Don’t hesitate to get expert advice to help guide your negotiation strategy.

FAQ

Should I give up equity in my startup?

The decision to give up equity depends on various factors. It is essential to understand your startup’s current and future financial needs. Exploring alternative financing options before deciding on equity funding is crucial. It will help you find a suitable financing option that aligns with your startup’s long-term vision.

What are the cons of giving up equity?

When you give investors equity, you also give them decision-making power and control over your startup. Investors may have different priorities and goals than you do. It can also impact key decisions like future fundraising or exit.

How much equity should I give up in a startup?

There is no one-size-fits-all answer. In general, investors ask for 15 to 25% of startup equity in the course of seed funding. The exact percentage depends on the startup stage, valuation, milestones reached, and funding requirements.

Aron Kantor

Hey there! I am Aron, the founder of Thebusinessdive. I have been testing productivity apps for almost three years now. I reach 25.000 -50.000 people monthly with the mission to help you find the perfect productivity apps. Subscribe to my YouTube channel, newsletter, and social media to hear more about the best productivity tools. Let’s dive in!

thebusinessdive.com

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Acquiring pre-seed funding is a critical step to success. It provides the necessary capital to founders to take their businesses to the next level. However, attracting investors at this early stage can take time and effort.

But what is pre-seed funding, and how can you raise pre-seed money successfully?

What is pre-seed funding?

Pre-seed round occurs in the very early stage of the startup journey. It is typically acquired before the validation of the business concept. At this stage, startups often only have a prototype or a concept without any tangible products or significant market presence.

Until this point, founders mainly rely on personal savings, funds from friends and family, or initial angel investments. Considering the size of pre-seed funding, it may not be significant compared to official funding rounds. However, it is an essential capital inflow for early-stage startups to survive and lay the groundwork for further funding rounds.

When to raise pre-seed funding?

Founders typically acquire pre-seed money to validate their business concept and build a minimum viable product (MVP). There are no rules on when the founders should raise pre-seed funding. The timing of the pre-seed funding depends on several factors.

In some cases, founders acquire pre-seed money even before developing a prototype. In comparison, other startup founders may wait until they have a tangible MVP or some early market validation.

As a rule of thumb, the more milestones you reach, the easier it is to raise pre-seed capital. Using an XIRR calculator to track investments can also help you evaluate how early funding affects long-term returns. Typically, most startups seeking to raise pre-seed capital are in the stage of pre-revenue and pre-profit.

Possible investors in the pre-seed funding round

Every founder starts with bootstrapping. Eventually, they reach that point when the personal or family and friends’ funds are insufficient.

This is when they must choose whether to continue bootstrapping, acquire venture capital, or explore alternative funding sources. When it comes to getting financial support for your business, there are generally two types of methods: debt financing and equity financing. The traditional sources of pre-seed funding fall under the category of equity financing.

Understanding the startup’s current and future financial needs is essential before choosing one or another. Although founders have various funding options, each has advantages and considerations.

The proper management of business finance processes plays a crucial role in determining which financing options are feasible for a startup in the long term. You should consider the impact of funding on the cash flow, financial performance, and overall health of your startup.

If you decide to pursue pre-seed funding, you have a variety of options to raise the necessary capital.

Angel investor

Angel investors are individuals who provide financial support and guidance to startups in their early stages. In exchange for the funding, angel investors receive equity in the startup.

Generally, angel investors are typically high-net-worth individuals or successful entrepreneurs. They can give you a check anywhere between a few thousand dollars to half a million dollars.

Related post: Angel Investor Vs Venture Capital: The Ultimate Guide For Startups

Accelerator and incubator

Startup accelerators and incubators can be an excellent source of pre-seed money. Startups with unvalidated business ideas are a better fit for incubators. Incubators help founders to move forward from the idea stage and create an MVP. They help startup founders to formulate their business models and provide mentorship. They often do not give you capital, but incubators can be a great way to prepare your startup for the pre-seed funding round.

On the other hand, accelerators provide capital to startups in exchange for equity stakes. Accelerators are mainly for startups with a solid business model and MVP. So, an accelerator can help take you to the next stage if you have a startup ready to scale.

Pre-seed venture capital firm

There are specific venture capital firms focusing on early-stage startups. Pre-seed venture capital firms typically invest smaller amounts compared to later-stage investments. However, they play a crucial role in helping startups at the pre-seed stage.

Here are a few examples of well-known pre-seed venture capital firms:

• Forum Ventures: It is based in New Your and funds mainly early-stage B2B SaaS companies.
• 2048 Ventures: Focusing on Biotechnology, Digital Health, AI/ML, Robotics, AR/VR, IoT, Hardware, Blockchain, Climate, Energy, Space, Mobility, Logistics, Security, and Developer Tools.
• Hustle Fund: Has a focus on FinTech, Healthcare, AI/ML industries.
• The Fund: They invest locally, fueling startups in the cities, mainly in the US.
• NFX: Their investment focus is industries like Gaming, Bio, Generative AI, FinTech, Marketplaces, and many others.

Crowdfunding

Crowdfunding is also an option at the earliest stage. Founders can collect contributions from many individuals, typically via an online platform. There are many crowdfunding platforms where you can try your luck.

Before starting a campaign, consider the platform fees, terms, and who is your target audience.

Pre-seed versus seed funding?

The first official funding round is seed funding. The main difference between pre-seed and seed funding is the investment size.

The average size during pre-seed rounds in the US is approximately $500,000, but it has a wide range between $100,000 and $5 million. Meanwhile, the average seed funding round is around $5,6 million in the US.

Since the seed round is the first official investment round, it involves more formality and due diligence.

Before the seed round, investors typically want the startup to have traction and a well-defined product already. In contrast, the main aim of the pre-seed funding round is product development in most cases.

4 tips to secure funding at the pre-seed round

The question is how you can increase your chances when raising pre-seed funding. Here are the 4 most important tips to successfully raise pre-seed money.

Solid business model

Every startup begins with an idea. But having only a startup idea is not sufficient. To attract investors, you need to have a solid business model.

In most cases, startups before the pre-seed funding stage did not manage to create a substantial user base and revenue. Therefore, pre-seed angel investors or venture capital firms take a significant risk when investing in a pre-revenue startup.

To minimize the risk in the investors’ eyes, your business model must demonstrate that you clearly understand your target market. It should accurately identify the customer needs and outline how your startup will generate revenue.

When crafting your plan, remember that the startup trends changed in 2023. Investor demands are shifting from growth to profitability during the current economic slowdown. 

Fast revenue growth is still the most relevant factor at early-stage companies. However, it is also essential to have a clear strategy for how your startup will make a profit in the longer term.

Reaching milestones

Achieve milestones at early stages are essential, as it helps build investor confidence and shows that you are progressing. Most of the startups at the earliest stages are not generating revenue. So, you need to find milestones that are not revenue related. This help to attract investors and show you are serious.

Depending on your startup’s industry and stage, many milestones can be essential for a pre-seed investor. This can be a received IP, a finished MVP, a letter of intent to buy from a customer or an existing user base on your platform.

The aim is to achieve the critical milestones before seeking pre-seed investment. Achieving revenue or non-revenue-based milestones can significantly increase your chances of securing pre-seed funding.

Create a standout pre-seed pitch deck

Creating a pitch that clearly communicates your value proposition, market opportunity, and competitive advantage can improve your chances.

Provide an overview of your financials, including revenue projections, cost structure, and key financial milestones. It is even better if your startup already generated revenue, as it helps to support your projections.

Investors are mainly interested in the potential return. Therefore, having the right data to support your projections is vital. Investors want to see that your decision-making and strategy are based on a data-driven approach. Presenting well-researched market data, customer insights, and financial analyses can help you to secure pre-seed funding.

Have a competent team

During pre-seed funding, the team is the number one reason why investors give money to startups. There are many great startup ideas. However, few teams can execute them. Investors understand that a startup’s success significantly depends on the team’s capabilities and expertise.

Having the right co-founder or co-founders that supplement your skillset is vital to securing pre-seed funds. A team with deep industry knowledge and a strong network can provide a competitive advantage in the early stages. The potential investors are looking for teams that understand the market landscape, customer needs, and industry dynamics.

From an investor perspective, investing in a startup is a long-term commitment. A team open to feedback and mentorship is more likely to secure pre-seed funding.

Aron Kantor

Hey there! I am Aron, the founder of Thebusinessdive. I have been testing productivity apps for almost three years now. I reach 25.000 -50.000 people monthly with the mission to help you find the perfect productivity apps. Subscribe to my YouTube channel, newsletter, and social media to hear more about the best productivity tools. Let’s dive in!

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