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A Pre-Seed Round Doesn't Replace Hard Work
If you want to increase your odds of raising a pre-seed round, you need to show proof that you can do the work beforehand
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Over the last few weeks I've spent a fair amount of time with Pre-Seed founders looking to raise capital in the imminent future and who are all worried about the state of capital markets.
Most of these founders are still at the idea stage, meaning they likely have some lived experience of the problem, have a pitch deck put together and might have done a handful of user interviews.
However, I find that some founders are hesitant to do much more than that.
The mindset that some founders seem to take:
See a splashy headline for a large capital raise
Look at the company’s website and determine that the idea is stupid and theirs is much better - surely they should also be able to raise a lot of money
Go out with warped expectations and conduct a pre-seed fundraise
This results in two key missteps that are detrimental to the success of a business
Having a high valuation early isn’t a badge of honour. It’s a burden that the founder needs to carry until they hit their milestones before the next raise. If the business struggles for a prolonged period of time, the next round will be infinitely harder to raise.
Raising too early is a curse that can’t be undone. By raising capital early, you are granted the flexibility of being able to deploy capital for any problem that you might have. However, in exchange for taking that capital, you also have a ticking clock to which your business needs to follow. Once you’ve raised capital you have 18-24 months of runway before you need to raise again.
Early Capital is Meant to be Expensive
Let's clear up the valuation point first.
If you've been on X recently and follow US VCs, you might've seen the biannual debate around YC valuations.
In one camp, you've got a bunch of VCs who decry the high valuations YC companies seem to command.
On the other side, you've got Garry Tan, Paul Graham and a host of YC partners and successful YC founders declaring that YC is built different and that the companies that go through YC deserve a high valuation.
A high valuation is fine if a company is able to hit its metrics and justify it by the next round.
However, in early-stage startups that basically never happens. Something always goes wrong, PMF takes longer to materialise or you need to pivot a few times and end up low on cash.
The YC house view is that they are able to help mitigate a lot of the early challenges and fast-track a startup's journey. I think this has been true in the past and will be true in the future, but not to the extent the YC team believe.
Realistically, the problem isn't even YC. Founders are the ones setting the valuations.
Every founder thinks they are worth more than they actually are, and they think they are the exception to the rule. It's only natural for them to think this way. They're going against the grain of broader society and trying to do something no one else has.
My advice - raise at a reasonable valuation for the stage your business is at. If you are at the idea stage, don't price your business like it has $1M in revenue, because 99 times out of 100 it will impede you later on.
You’re too early
Good businesses accelerated by venture capital, not reliant on it.
I know I said that above, but it’s worth repeating.
As a founder, you need to be clear about the fundamentals of your business, before you even entertain the idea of raising capital.
Raising capital early means you can use it to hide and put bandaids on problems that shouldn’t be solved directly by capital.
For example, if you’re facing a churn problem, you can easily pump money into incentives to keep people on the platform for longer. It doesn’t solve the fact that people churn, it just delays it from happening.
In my opinion, you should raise capital once you’ve built a product and are generating some level of revenue. However, that doesn’t work for many people. They need capital to pay early salaries, or to give them some runway to quit their job and fully focus on building a startup.
That’s why Pre-Seed capital exists for founders.
However, founders should acknowledge that Pre-Seed investors are also taking a huge risk in backing a business that probably has 0 tangible assets.
As a result, the onus is on the founder to show that they will be a responsible steward of their capital.
It’s important to keep this chart in mind when thinking about your business. At the pre-seed and seed stages, you want to be thinking about how you can prove that there is a market willing to pay for your product and that your product is actually robust enough to serve this market well.
With that lens, as a founder, it is imperative that:
You show that you have thought about everything
You show that you have initial hypotheses and ways to test them
You show that you have thought about what can go wrong
You show that you know how to mitigate potential risks
It’s a lot of work, but so is building a business. Put in the effort now, and you won’t regret it later.
Doing the right preparation, and startup ‘homework’ will really upgrade your ability to pitch your business, but also handle any objections from VCs. It’ll help you build the right type of business faster and unlock capital should you seek it.
So what type of ‘homework’ should you be doing?
Here’s what I think is the absolute minimum requirement from a pre-seed founder to be ‘investible’. You can definitely raise with less work done, but I think by addressing the below, you’ll be able to level up your ability to sell your startup to investors, whilst also doing the hard work around setting up strong fundamentals for your business - who doesn’t love a two for one deal 😊.
Pitch Deck: As a pre-seed founder, your pitch deck is probably the first interaction a VC will have with you. It's an insight into your thinking and represents the work quality you stand for. There is absolutely no reason for you to have a poorly formatted (i.e., typos, grainy screenshots and mismatched fonts) pitch deck. The design doesn't need to be amazing, but the content needs to be presented well. If you're not sure how to do that, check out my article here.
Co-Founders: Most VCs will anchor towards investing in businesses with 2-3 co-founders. For some, being a solo founder will be a deal breaker, but for others, you'll be interrogated on how you plan to build the product AND get distribution AND do 100 things as a solo founder - make sure you have good responses to how you'll solve for this and whether this round buys you time to find the right co-founder.
Context Hypotheses: If you're at the idea stage, most VCs will accept that you'll undergo a few pivots, but most will expect you to at least stay in your zone of genius (i.e., where you have the most expertise). For most founders, this will mean staying in the same market and working on solving problems that are somewhat tangential to their original problem. Pre-Seed bets are predicated on investing in great founders and great markets.
You need to showcase why your market is so great (i.e., what tailwinds exist) and why you are the best person to be taking advantage of these tailwinds. You can be expected to be quizzed on anything from unpacking the value chain of the entire market, to explaining the role of specific individuals within a company and the incentives that drive their actions.
Product Hypotheses: If you're pre-product, you'll need to spend a lot of time mapping out your thinking around the following:
Building Product: If you're not technical, how will you actually build your product? Will you use an outsourced dev team? Or use no-code tools? How sophisticated does the product need to be to be useful to customers (i.e., what is the lowest bar to aim for when building an MVP)
Testing Product: How are you planning on getting product feedback and iterating on your product? Some founders prefer to use a group of 5-10 design partners (i.e., early test customers) who fit their beachhead ICP and keep iterating on product until those customers are satisfied before activating a complete GTM strategy. Other founders might release the product on ProductHunt and organically collect feedback over time.
Measuring Product Efficacy: In the testing phase, you need to measure product quality and efficacy closely to find out if your product is being used as intended and if not, what the sticking points are. Usually, this is through tracking various engagement metrics for beta users and understanding the incentives that drive these metrics.
Go-To-Market Hypotheses: Whilst early startup building is largely centred around finding PMF, part of this process is also finding a scalable GTM motion. The best GTM strategies allow you to pump large sums of capital in and extract even larger sums of capital out the other end (i.e., revenue). That's not going to happen on Day 1, but you need to think about how you will get to that point.
Playbook strategies: In your chosen market, what GTM strategies make sense and what have successful companies used? For most software businesses, this will be some form of outbound sales or product-led growth. You'll need to think about the early experiments that you'll run to test your GTM strategy. E.g., if it is a PLG-focused product, thinking about how you increase collaboration or where you might put gates within the product is important.
Selling before raising: A lot of founders seem to think that they should only start selling their product after they raise. It might just be because sales are foreign to a lot of people and can feel hard. In any case, the best way to accelerate a fundraise is by showing that you can execute in a scrappy manner, and you can proactively do things that other founders would hesitate to do. You don't need to be a credentialed founder to go out and build a strong waitlist of customers or start consulting with design partners.
Knowing what you know and don't know: It's important to have an eyes wide open approach to building. It's impossible to know everything about building a business, but you need to be cognisant of that. There have been too many times where a founder will make a definitive claim to sound impressive, when in reality it's just a hypothesis that needs to be tested. As investors this just shows the founder's naivety. Some investors will be forgiving of this, but others will use it as a reason to say no. The best founders know what they know and have early hypotheses over what they don't know and what they need to find out.
The Pre-Mortem: We’ve all heard about the post-mortem, but what if you tried to predict what would go wrong before you even start executing? Write down the top three reasons why you’ll fail at building a $1bn startup and think about how you can mitigate them. It might also be worth consulting ChatGPT to help you brainstorm!
By following the above framework you’ll be able to think critically and with clarity about your own business. This will help you communicate your business better leading to faster fundraise cycles, but also think more strategically about how you actually build your business from the ground up.
Taking on venture capital and scaling a startup will be one of the hardest things you do. You absolutely can raise capital without doing any of the above, but if you’re looking to maximise your chances of building a successful company you shouldn’t be afraid of doing the work required.
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