How to close a pre-seed round in a virtual world?

You, as a founder, must have knowledge of these rounds to raise funds for your startup successfully.  Let’s start with understanding the first one.

What is a pre-seed round?

The amount of capital or funds which are raised pre-product is referred to as pre-seed. A pre-seed round is also known as pre-seed capital or pre-seed money. It is basically the round that concentrates on raising funds for the product or service before it is launched. It is the initial round of funding that is conducted just based on the idea of your project.

In this round, investors don’t look at the revenue or sales of the product or service. The factors that matter are the customer discovery and segmentation the idea resembles. The insights of the idea are based on its aspirational value.  The main factor which is considered in this round is the innovative idea which is brought by the promoters. Apart from this, funders would view how the product is beneficial to potential customers.

The pre-seed fund can vary according to the segment, reach, uniqueness, and region of operation. It can get you started to think about the idea and research it to build a successful product or service around it.  The pre-seed round is effective in decision making and pre-product design for the start-up.

Where is Pre-seed Funding Obtained?

Securing investment for your start-up at the nascent stage can be a daunting task. Hence many start-ups and entrepreneurs would rely on the capital obtained from family, friends, and relatives. Many angel funds and private equity investors would not be willing to fund this round. However, there are small companies and investors who consider investing in such rounds. 

Pre-seed funding is the main phase between the launch of the product and successive funding rounds. Pre-seed funding would usually be determined by the size of the start-up. If the product launched is innovative then more funding can be secured. However, securing some form of funding through this round is crucial for the successful launch of the start-up.

Funding in the Virtual World

Ideally, funding rounds would mean meeting investors in person and pitching them your ideas.  But we live in a world that is being predominantly run on technology. With the advent of technology and urbanization, businesses have crossed boundaries with revolutionary products. Businesses are depending more on virtual services.

This adds a whole new dynamic to the funding process. 

The funding process has been transferred to a virtual world, wherein the founders have started to meet investors over video conferences. There are different platforms that are developed and evolved as a result of remote work. Pre-seed funding rounds have more value when they are presented directly to an investor. However, with the advent of technology, funding has found its place in the virtual world. 

Using technology, promoters depend more on mailing such presentations and pitches to investors, rather than presenting it to them. It has changed the dynamics of the funding process. Due to this, investors are meeting more founders and getting to hear more idea pitches. Founders have to use innovative methods to attract investors. With the increase of competition, securing investment can be more challenging. 

Important Things to do before a Virtual Pre-seed Funding Round

The following are the things to consider before your pre-seed round: 

• Presenting a Business Idea

The business idea plays the most important role in the pre-seed round. Hence, your pitch deck shall determine if you can impress your investor. 

Keeping your pitch deck compact and to the point is crucial. In a pre-seed round, an investor will spend a maximum of three to five minutes on the pitch deck. Hence, it should be kept attractive with a clear indication of what your next step would be after the funding. 

A promoter should focus more on quality presentation. As each pitch deck round, would be a matter of a few minutes, the promoter has to win the ball game within a short span of time.

Make your investor absorb everything in the prescribed time. Using graphs or tables instead of words as pictorial representation creates a better impact. Graphical representations and images are more attractive to the investor. 

• Perfect Team: 

Another thing that matters is the presentation of the team. You must ensure at least one to two members of the team belong to the vertical that you are focusing on. This will give more confidence to the investors. 

The team should reflect the aspirations of that idea. In a pre-seed round, investors shall give equal importance to the capabilities of the team to see how they take the projected idea forward. Hence when it comes to selecting the team, equal importance must be given in training for presentations.

Hence, you should build your team’s repertoire in such a way that it gives confidence to the investors. 

• Right Set of Investors: 

Your idea can have many takers, but you should focus on the right set of investors who shall invest in it. 

It would be crucial to pen down your thoughts and plan related to this. You can either go for individual investors who have a portfolio of investments in your domain or go for funding agencies. Accelerators are also a great place for pre-seed funding. 

Other than professional investors, you can also seek out corporate-backed investment funds or top executives of a company who might show interest in the idea. You can also consider family, friends, or relatives to carry out the phase of pre-seed funding.

Above all, you need a perfect source to not get disappointed at the end of all of it. The right idea will always have the right taker. Hence prioritizing the right investor is equally important in the pre-seed round. 

Focus on these things and it can ensure a smooth ride for the pre-seed round.

Now, that you know what you have to do, let’s take a look at how to close a pre-seed round? 

How to close a Pre-Seed Round?

Closing a pre-seed round appropriately is crucial for getting your business started. 

Let’s take a look at how you should be doing it?

• Raise the Right Amount: 

The right amount should be the main focus for your pre-seed round. You should always seek the right amount for your idea based on future products or services, office space, the region for operations, employee hiring, and others. 

For a pre-seed round, up to $2,000,000 is the basic amount that a founder can go for, based on their domain. This can help you start easily and sustain until the next round of funding.  You must ensure that you are not underfunded and fall into difficulties at a later phase. Hence raising the right amount for your product is crucial.

• Terms:

After the amount, comes the terms of ownership with the investor. For a pre-seed round, the terms should be anywhere between 12% and 15%, which can be ideally increased to 20% in the subsequent rounds. 

Founders should be very clear and reasonable with the terms of ownership. You shouldn’t end up diluting too much of the ownership with your investor. Set your terms based on market research and competitor analysis. 

Settling on bad terms can result in dire consequences that can hamper operations. 

• Duration of the Funding:

The final and crucial aspect of the pre-seed round is the duration of the funding. Such duration of funding would usually help your business to sustain itself for a period of 18 months. This period is seen as a usual threshold for which funding should be raised.

The minimum threshold is compatible with the needs of the startup such as research and development, product development, hiring, and other important factors. It would always be crucial to research and carry out market analysis on the duration of the funding.

You should focus on this minimum time threshold while closing the pre-seed round. 

Conclusion

Pre-seed funding is a crucial process in any founder’s startup journey. As it acts as the stepping stone for the journey, founders need to close using proper strategies.

Right from forming the rights ideas, selecting the right kind of investors, raising the right amount and the processes involved in pre-seed funding can be extremely time-consuming and cumbersome. However, at the end of all this, your idea would get nurtured and help the start-up in securing more funding. 

Hence, pre-seed funding must always be carried out in the right way and utilize investment from the right source.