For a startup to begin operations, it needs capital. This is known as pre-seed capital, which is the first attempt to gather financial backing for the startup to begin developing its business model product, service, minimum viable product (MVP), value proposition, and similar.
Personal cash/assets and family and friends are the usual sources for pre-seed funding. But there is a growing trend of investors and other pre-seed funding sources–including government programs–that are willing to commit to startups if they firmly believe in its vision, business model and more importantly, that the founder/founding team has the skills and commitment to take the vision from concept to reality. Securing pre-seed funding is obviously important and usually spells the difference between boon or bane for a startup.
Ideal Time to Seek Pre-Seed Funding
The ideal time to seek pre-seed funding will vary depending on the startup, your product or service, the business model and experts to whom a founder speaks. In any case, before seeking pre-seed funding–especially from friends and families, founders should have a compelling elevator pitch, a clearly defined value proposition, business model, market opportunity, the competition, barriers to entry, should prepare its prototype or proof-of-concept pitches before seeking pre-seed funding. Just like pitching any other type of investor, just because they may be friends or family, that doesn’t mean that they will invest in your startup idea “just because.”
When seeking pre-seed funding, having a time frame for the next steps is essential, as well, because again, you need to treat investors who are friends and/or family just as you would any other type of investor. Before initiating pre-seed funding, the goals, and value proposition and business model of the startup should be clear, as well as details of the finances.
Other items to consider including when pitching friends and family is the amount of pre-seed funding required, the overall expenses necessary to get the startup to the next stage (and how you plan to fund it), and even profit projections. Also, make sure the paperwork is ready, from the right type of incorporation papers, partnership agreements, and relevant certificates.
Finding the Right Pre-Seed Investors
Not just any pre-seed investor will do–even if it’s friends and family. I have entered into friends and family investment pre-seed rounds that I immediately regretted. In fact, two were just disastrous. Don’t make the same mistakes I did just because you want cash. Regardless of who you are approaching for a pre-seed investment, you need to find the right one that fits the mission and vision of your startup.
Finding the right pre-seed investor is sort of right finding the right partner in life. You need to be compatible on many levels. You also need to be certain that you will be able to work together.
Here are some other points to consider when choosing a friends and family (or any other type, for that matter) pre-seed investor:
Pre-seed investors that believe in you, your product or service and your business mode are a must. They must commit to it enough that they won’t leave or create unnecessary distractions during the inevitable rocky times.
Startups will encounter several struggles, if you are seeking pre-seed funding from accredited investors, venture capital firms or angel investors, if possible, seek out ones who have experience in your field or sector so they can offer advice or perhaps you can even leverage some of their industry connections.
Before accepting pre-seed funding from any type of investor–even if it’s friends and family–find out how ‘hands-on,’ they intend to be in your startup. If your potential pre-seed funding investor is a micro-manager and you can’t work with that type of person, then you are far better off to just walk away than to accept a pre-seed funding deal from someone with whom you are incompatible.
Sources of Pre-Seed Funds
There are many types of pre-seed investors. Each has their strengths that startups can harness for their needs. In many cases, how much you can accomplish with your first round of pre-seed funding can set the stage for how easy or difficult it will be for your startup to secure additional funding.
Some startups are lucky to get by with a little help from their friends (and family).
Harnessing the power of the people through a crowdfunding campaign can work if you have an exciting concept. $5 billion has been raised through this method with over 500 crowdfunding websites around the world. Some of the top ones include: Kickstarter; IndieGogo; and GoFundMe, among others.
A growing number of Angel investors are interested in providing pre-seed funding for startups. Check out Angel.co to check them out.
Some venture capital firms are doing what they call micro-venture funds that provide pre-seed funding for projects that are too small to get the attention of ordinary venture capitalists. FloodGate Fund is one of 250 micro-VC firms using this approach. You can find others at Crunchbase.com.
Corporations that offer seed funds for startups should also be considered. Google, FedEx Small Business Grants, and Intel, for instance, have offered startup funding and in some cases, pre-seed capital to promising startups with cutting edge innovations.
Non-dilutive government grants and business grants. For startups in certain industries aligned to strategic state or national government national interests, there are billions in non-dilutive government grants, business grants and non-traditional funding instruments of all types available to startups and companies at all stages. Some of the best places to find these types of opportunities include Grants.gov,SBIR.gov, and the Defense SBIR/STTR Innovation Portal, among others.
In this day and age, tech startups are those that benefit tremendously from pre-seed funding because they lead the way when it comes to innovation. But whatever the industry, it all boils down to an exciting concept that will make it worth the while for investors to commit their money.
My particular area of expertise is non-dilutive government grants, business grants and non-traditional, government-backed non-dilutive funding. Interested in learning if your startup is a fit for this type of non-dilutive funding? Contact me today and let’s talk!
Ron Flavin is a growth and funding strategist who helps entrepreneurs and organizations to develop innovative growth strategies, identify new revenue sources or secure the funds they need to grow and prosper. Using his own unique methodology, he work with his clients to develop a step-by-step growth and funding action plan that builds a bridge between vision and financial goals. Using this model, he has obtained more than $200 million in funding for his clients, and been part of decision-making teams that have allocated more than $1 billion in funding. As a result, Ron knows first-hand what those who hold the purse strings look for when determining which proposals get funded and which ones get tossed aside.