Fundraising 101: a guide to fundraising for a pre-seed startup

Having a great idea is easy: I myself have four before breakfast (usually including two in the shower). But if founders hope to change the world, they need more than just a great idea. They need the conviction to believe in themselves against all the odds and the gumption to take a risk, and try something that goes totally against the grain.

It’s also almost certain they’ll need some form of funding. In this blog, I’m going to go back to basics, to explore the fundraising options open to founders at the very earliest stages, and to highlight a few of the things investors are likely to be looking out for – or looking for reassurance on.

Raising, 101

While many founders bootstrap (use their own funds) in the early days, it’s generally speed of execution that sets a successful startup apart from one that fails to return on investment. Bootstrapping is a fantastic way to build your business with market traction, channelling revenue back into the business as you go. It can be slow to build, but comes with the benefit that you retain full control of your company.

Still, bootstrapping is almost certainly not going to let you reach the degree of acceleration you need to scale to world-changing heights. For this, the vast majority need to look for external capital. Big, bold visions are capital intensive, top talent is expensive and depending on the sector of your industry, some businesses require large, high-risk investments upfront – particularly deep tech and life sciences.

Here in the UK, pre-seed stage businesses enjoy access to a plethora of funding support, such as grants and loans from Innovate UK. One of the key advantages of these sources of capital is that they offer non-dilutive equity – capital without dilution to ownership. This allows you to test and iterate with your business model, giving you the freedom to make mistakes, with far less pressure on the company.

Founders often turn to people in their network for pre-seed funding.  A former employer with sector knowledge can be a real feather in your cap when it comes to pitching to investors: if you’re building in a related vertical, it offers investors reassurance that your solution could solve a real problem, as well as an implicit character reference. At the pre-seed stage, founder confidence is an outsize reason investors commit capital, which makes green flags like this all the more important.

Angel investors can also do a lot to boost your credibility with institutional investors. Former operators with expertise in your vertical reinforce the quality of your solution.

And then there’s venture capital. Some VCs specialise exclusively in the very early-stages. Others, like us, offer a specialist focus on pre-seed while also supporting businesses at a later stage in their growth journey. One of the benefits of this breadth of investment is the network it opens. Across Octopus Ventures we’ve supported over 200 businesses – beyond the various resources we offer our founders, they also enjoy access to this institutional-scale and continent-spanning network.

Finding investment – and securing it

Fundraising is hard, and macroeconomic uncertainty doesn’t help, but it’s also important to remember that at the very early stages, backers have much longer investment horizons: they’re not expecting businesses to generate enormous returns overnight. This also gives them (and, by extension, you) some insulation from the macro effects of uncertainty. Still, it’s a competitive business. Here are a few strategies you can employ to ensure you’re in the best position to receive investment possible.

To avoid a hard no, it’s important to do your research and make sure you have fund fit. Building in a contentious space? Make sure you’re approaching investors who’ll be sympathetic.

Testimonials, letters of intent and market research supporting the desirability of your solution will all help generate investor confidence in the market’s interest in your solution. As we’ve described, a great idea can be all it takes to get someone to listen – which makes it a question of delivery, persuasively telling the story of why you will succeed against all odds? To which point…

Think about your position. Are you a solo founder with an exceptional track record or experience? Are you still working elsewhere while building your startup? Do you have founder-market fit, or is this niche entirely new to you? These aren’t always dealbreakers,  but if you’re building in a specific sector investors will expect at least one of the senior team to have a deep and proven understanding of the space.

Building a startup is an incredible challenge. Rewarding, yes, but also hard. If you haven’t done it before, investors may be reassured to see you partnered up, ideally with someone who brings a complementary set of skills. And if you still have a job elsewhere, be ready to leave it. It’s a leap of faith, but you will have budgeted your salary in any business plan so with funding in the company you should go with total conviction in your business.  If you don’t have it, it’s unlikely investors are going to find it themselves.

Do you know your market? Know your competition, and can you point to your differentiator? In a pitch, investors will want to hear what makes your solution your solution. How is it different from anything else out there, why is now the right time for it – and why are you the person to bring it to market? If you’re facing stiff competition from VC-backed innovators in a crowded market, VCs are likely to pass. If your market is filled with slow incumbents, with plenty of room for disruptive innovation, they’ll certainly be more interested. There is always competition, direct or indirect. Highlight it to investors and reassure them that you can out-compete.

Similarly, know your market size. At this point, all numbers are going to be approximate but try and give them some basis in fact – and prove the scalability of your solution. Many VCs will have guidelines that require them to hold belief that you can reach a certain size if they’re going to invest. Ensure you have a thesis on your scaling pathway (and the numbers to back it up) to hand before you sit down with institutional investors.

A lot of this is common sense – but it bears repeating. The truth is every pioneering founder started somewhere and received some mentorship or guidance along the way. We’ll be sharing our own advice as we take a closer look at some of the other challenges surrounding very-early stage startups, including the critical importance of getting the first hires right, in forthcoming blogs, so keep an eye out. And if you’re building a world-changing solution and thinking about approaching your own funding round – read about what we have to offer here.