Secrets to Secure a Pre-Seed Round
Capital raising is not just about asking money but how to really structure a deal, how to make an investor memorandum and how to attract the right investors. Most importantly how to know if it is the right time for you to raise the capital now?
Sarah Reyes, a venture capitalist from Stratogem joined Ylemer as their keynote speaker in the ‘Inspire, We Inspire’ Global Entrepreneurs Online Roundtable on the 29th of August 2020 to share her knowledge on raising capital and how to have a successful deal.
Here are the details of the event:
Why do you want to invest now?
Sarah shared about how you need to be assured of your value proposition and growth proposition to justify raising capital for your startup. But what does it truly mean? This has to be answered positively in terms of your business whether you’re sure that your idea is unique or original? Is it competitive? Is your pitch compelling? Have you tested the market? Is it financially viable? Or is it sustainable?
Where to access money?
So, where can you find money in this market? Especially during these times of the pandemic, where many grants are not pursued by the government, you can still access money through avenues such as loans, debts, special finance and primarily your family and your own network. You also have venture capitalists, corporates and high net worth individuals from where you can raise money. So it’s not mainly what you know in this game but who you know that makes a lot of difference.
Why are you raising money? And do you really need to raise money?
The main question here is what are you raising money for? Is your business capable to raise money and how long will it last? Sarah shared how investors tend to ask the scalability of your business and are interested in finding out what will they make in five years of time with the money that they lend you today.
Also knowing how much you need to raise at this point is very important. Are you raising too little or too much? In some cases, if you’re aiming to raise little amount of money, this may give an impression of little monetary benefit that the investor is going to make out of your business and his money. Knowing your long-term plan is crucial, you may be approaching for a short-term plan but having your future or business vision sorted is extremely important. Sarah believes that these are few of those questions that you really need to answer before you even raise capital.
What kind of investors are right for you?
Well if we look at how most people tend to raise capital during the pre-seed/idea stage then it will be no surprise to say that it’s out of your own pocket or in some cases from friends or family and maybe some accelerator programs. Sarah shared how she and her company promote entrepreneurs to raise capital with not too many investors or shareholders. Because in case of many investors your raised capital is too stretched and you have to deal with all the shareholders. But it still all depends on what kind of business you’re in and may or may not need too many people to fund it.
Sarah discussed the importance of reaching out the right people for fundraising and refining your pitch from the very beginning. She emphasized how important it is to have advisors around you even it costs you money or some equity in your business. These advisors can save you from many pitfalls and doing the mistakes that most people do when starting a business and if you can pitch your business in twenty seconds and convince your investors then you’re on the right track.
What do investors look for?
As mentioned earlier, Sarah emphasized that in getting to the right investors and making it a success, it’s not about what you know but who you know that makes a big difference. For startups, being a part of an entrepreneurial ecosystem plays a very important role in networking and bringing the right people on board. Surrounding yourself with an environment that helps you push through to the next level is crucial for beginners.
Sarah also discussed about what you can possibly look for in different types of investors while working on your pitch deck. Starting with angel investors, they are okay with high risks as long as they find big opportunities in your idea and connect with your passion and show interest in the business area where you want to work in.
As far as venture capitalists are concerned, you may find great potential there but they are not very tolerant of risks. They look for a founder who they can work with and trust him or her at the same time. They want a good deal that offers them at least a 10X exit and are also quite different in structuring their deals. Which means that you may end up with a 49% to 51% equity where the larger share is obviously with the VC. However, they are very experienced and if you’re willing to lose some stake in the business you will still end up with a massive valuation when you exit.
The last category is Corporates, they are looking for a strategic fit with what they currently do and find ways to build positive PR but without the risk of negative financial returns. Corporates also tend to sometimes tag along, drag along which means that you may feel that they take a long time to respond to you and sometimes you may not even get any response.
How can you prepare a term-sheet and structure an agreement?
Sarah explained how companies work with an indicative term-sheet at the beginning which states a proposition and then you can negotiate it later with the founders. This gives the founders an insight on how the business would look like, it will also give them some sort of skin in the game and create an opportunity to build your relationship with each other. You can later work on your final term-sheet and as advised by Sarah include some legal entity in the entire process, especially if you plan to take your business overseas.
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Sadia Mehfooz Khan
Chief Copywriter | Ylemer