The #1 Mistake With Everyone Asking For A Pre Seed Investment.
I see this on weekly basis.
I’m starting a set of articles that are based on my voice recordings. Consider these podcasts, but then transcribed. The reason is that it feels more authentic and it clears the AI-writing competition from the scene. This article is an example of that.
The Pre-Seed Mirage: Don't Put All Your Eggs in One Basket
Alright, so let's talk about the number one mistake that everyone makes when they ask for a pre-seed investment. I have been a business consultant for 12 years and I get requests on a weekly basis for creating a pitch deck or an investment document of some sort for a seed, pre-seed, or Series A investment. For instance, this week I was just helping a startup that raised with a valuation of $100 million and they were needing a revamp of their pitch deck to work on fundraising even more. Now, there is a mistake that people always go through when they are asking for pre-seed investment. So let's dig into it.
Pre-seed investment is one of the most annoying rounds that I would ever want to go through or that I ever have to talk to with clients simply because you are in a stage that you are asking for money and you do not have a lot to show. Most probably, pre-seed rounds involve ideation companies. Some startups actually have something to say like they have traction or they have a little bit of an MVP or so, but in the majority of cases, the companies that are in pre-seed don't really have a lot to show and they have ideation and they call themselves wearing the pre-seed round. Now we need the money to fulfill our vision and make it into a reality.
The truth is when you are trying to raise a pre-seed round you need to consider, and that's the number one thing that most pre-seed entrepreneurs don't consider, you need to consider that there is a high chance that you are not going to get this pre-seed investment and that this should not stop you from continuing the work you worked on your startup. It's as simple as that. If you are not going to be able to run your startup without the pre-seed investment then you don't have a startup. Then you have a wish and you are waiting for Santa Claus to come and give you the Christmas gift.
When to Ask for Pre-Seed (and When to Hold Off)
There are some moments to ask for pre-seed investment and I've seen them firsthand with some industries that are a little bit hard to get into. Let me give you an example. I had a company that was working in aerospace and in some cases, startups need to run a business that is very high in starting costs that you can't do it without an investment. You have to answer this question honestly in order to know whether you actually require pre-seed investment to get your company started.
The question is can you not build a proof of concept? If you have an idea of a company like Facebook back in the days, can you not build a small website that does something similar? It doesn't have to be as big as Facebook but something that would prove to you that there is a demand of some sort. You don't have to put all the features. An alpha version working on a lean startup methodology could get you something that would prove to you that this is right or this is imperfect. Because the truth is when you start a company or a startup it's always a gamble whether you like it or not. Even if you strongly believe in this company, there is a chance that it will not succeed and that's the reality of the business world. So ask yourself if you can do that and then you'll be able to determine whether you require or optionally want this pre-seed round of funding.
Setting Realistic Expectations: What Pre-Seed Money Can (and Can't) Do
If you do not need it then always remember that there are companies that have succeeded very well with bootstrapping. If you're starting to generate revenue, which is perfect, that way you can actually easily raise pre-seed investment. But do you have to raise a pre-seed investment? You don't really have to do that because you already have a proof of concept and you already have a product-market fit as in the market is accepting your product so you're already generating revenue. Pre-seed investment is perfect in this case because it would make you grow faster and possibly sell your startup faster or exit your startup faster but it is not a requirement at that stage to actually raise funds.
You would have a theory, you would have a thesis and you would say okay we're generating this amount of revenue and we're burning this amount of costs, of running costs, and we're going to reach this level by this year. You have a lot of options aside from investment. You have a loan. A loan is always a good idea in this case. If you have a restaurant that is making money, most restaurants apply for loans because they know they can pay those loans. These are some of the options that you have when it comes to pre-seed investments.
Pre-Seed vs. Pre-Traction: Spotting the Difference
There are terminologies that you need to know. Pre-seed is not the same as pre-traction because you could be in pre-seed and already have traction as I mentioned before and you also could be in pre-traction and you could be after seed or even I wouldn't say in Series A because most seed investments already have traction but you could already have raised a seed investment or pre-seed investment to create an MVP and then you would not have traction yet. That's alright. Whatever works for you. You see all those terminologies pre-seed, pre-traction, post-seed, post-traction, it doesn't really matter as long as you understand. It's a simple game of do you need money to accelerate your product's growth or not? What will happen if you do not get this money? These are the questions you need to ask.
Bootstrapping Your Way to Success: The Pre-Seed That Never Was
The good thing about the investment world is that it rewards people who actually start to raise because it's as simple as if you had fundraised before that means there is a startup or an investor who believed in you which shows that you have a character of leadership or of convincing of some sort and most probably people don't throw their money on the floor. They usually just put it in something that they think is a little bit safe. If you have an investment from A16Z, Andreessen Horowitz or Y Combinator for example, then that means they already vetted you and they believed in you. This gives you sort of a track record or reputation which makes it easier to raise later on but remember in the business world, the business world does not forget screw-ups at all. It rewards people who raise. Yes, you're going to be on a Forbes article probably but also remember that the founder of FTX and the founder of Theranos were both on the Forbes magazine or the Forbes cover one day or another.
(For Paid Subscribers) My Pre-Seed Playbook: A Step-by-Step Guide
Keep reading with a 7-day free trial
Subscribe to Al Anany to keep reading this post and get 7 days of free access to the full post archives.