How Much To Raise For A Pre-Seed Round

Source: Medium, On Starting Up
Photo: Ricardo Arce on Unsplash

Avoid the pitfalls of trying to raise too little — or too much

Picking the ‘right’ amount to raise is critical. If you pick an awkward amount, you won’t fall into either Angel/Pre-Seed funds or Seed funds. Set yourself up for success by picking an amount that fits well with your progress and the size of investment those investors are looking for.

Risks of trying to raise too little

The check size will be too small for serious investors and not worth their time.

You’ll be seen as not having a realistic plan of how to build & grow your business.

Risks of trying to raise too much

You’ll waste your time talking to Seed funds and larger investors who expect more traction than is reasonable for a pre-seed startup.

What is a Pre-Seed round anyways?

Many new startup founders call what they are raising a “seed” round. This makes sense because, logically, your first round is ‘seeding’ the company.

But in reality, Seed investments now look a lot like what Series A investments used to look like. According to Afore Capital, “In 2011 only 4% of companies raising a Seed round had revenue. In 2017 a whopping 51% of companies raising Seeds had revenue.”

So how do you figure out how much to raise?

First, start with how much the market will give you and then figure out how you’d spend it instead of the other way around. At the end of the day, you have a lot more control over how to spend your money than what the market will give you.

First, come up with a valuation

At the pre-seed stage, it’s much more of an art than a science. The below chart from angel investor Jason Calacanis is comical but accurate for the 2019/2020 market. Notice that traction and whether you’re based in Silicon Valley are the two variables that have the most impact. Fortunately, they are also what you can control.

Other ways to determine a valuation:

Talk to founders who’ve raised recently.

Go to where pre-seed startups are raising, like The Pitch podcast or crowdfunding websites like Republic.

Talk to investors at the pre-seed and seed stages.

Let’s say for our example we’re going with a $6m valuation or cap.

Next, what percent are you willing to sell

Typically the range is between 10–20%. Let’s say you’re aiming for 15%.

That comes out to $900k to raise.

Putting together your use of funds

Take the $900k

Divide it by 18 months

Equals: $50k per month

Now that we have a monthly burn rate, you can start asking questions to put together a compelling use of funds. Here are some questions to ask:

How many customers can we reasonably acquire in that time period? How much will they pay us?

What product milestones do we need to accomplish? How does that line up with our sales strategy?

What team members do we need to hire to execute that strategy? What other resources do you need?

These questions can drive a budget and fit into a compelling reason why the funds will take you to the next level. A critical but often missing aspect of a pitch is a clear narrative about how the funds will get you from where you are to where you want to go.

Closing Thoughts

It’s a good idea to treat every raise like it will be your last. Have at least a workable plan to reach ramen profitability (monthly revenue = low burn rate).

Lastly, if you do this analysis and realize that the amount you can raise won’t have a material impact on your business, it may be a good idea to go back to the drawing board.

https://medium.com/swlh/how-much-to-raise-for-a-pre-seed-round