The State Of Startup Fundraising: Different Tales For Different Stages
Sam Bogrov·1 min
Fundraising & VC
Have A Startup Idea? How To Raise A Pre Seed
Amit Garg
August 16, 2021·5 min read
The term pre seed has really become institutionalized in the last couple years, before that the idea / powerpoint stage wasn’t called by any other specific name. Let’s delve into definitions before
Typical dilution is about the median and the mean, the hottest companies obviously command terms at or beyond standard deviation. Also in the last year our experience is that dilutions have trended downwards in many geographies including Silicon Valley, for instance series A being done at 15-20% and series C at 10% dilution. At Tau we posit it will take another year to be clear whether this is a permanent change in norms or a temporary trend.
Originally published on “Data Driven Investor," am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
1) Definitions
There is no body or organization deciding what exactly is a seed or series A, it’s more about norms that do vary based on verticals or geography. Also, the terms are not about the amount raised or valuation, it’s about what you use the money for. At Tau I have seen a seed of $5M, a series A of $5M, and a series B of $5M -- it’s the purpose of the funds that was different. With all that said, the most commonly accepted definitions are as as follows:| Stage | What It Often Means | Typical Dilution |
| pre seed | idea / powerpoint | N/A, often done as a convertible note |
| seed | prototype pipeline of customers | 20-30% |
| series A | product-market fit | 20-30% |
| series B | business model taking off | 20-30% |
| series C and beyond | growth | 15-20% |
2) Do I Need To Be Full Time?
This is the number one question we hear from entrepreneurs at the pre seed. The short answer is ideally yes as being full-time is a strong signal for investors. Now, many cofounders understandably are nervous about going full-time into a venture without some certainty of funding. So it’s common for one cofounder to be full-time and the others part-time, or for cofounders to commit to being full-time as soon as the pre seed closes. The more experienced as an operator and / or entrepreneur you are the more leeway you also get.3) How Do I Handle IP?
That is the number two question we hear at this stage. If you have current or potential patents then this is absolutely the time to have a strategy around them. If you are spinning out of a university or corporate then chances are you will likely have ready access to an IP lawyer. Obviously you will have to balance against competing interests so having an independent law firm may make the most sense. The key is to maximize ownership within the new company, or perhaps have an exclusive license. If your IP or for that matter your cap table is held hostage by someone spinning out, it will essentially stifle your fundraising prospects and eventual growth off the gate. As an example on cap table, venture studios (firms that incubate startups) have historically taken 30% of the company but the trend has been to go lower, increasingly matching accelerators that typically take 7%.4) Who Should I Raise From?
For pre seed it's really about raising from individuals (angels, family, friends etc), grants, or accelerators. A handful of microfunds are emerging to focus specifically on pre seed. More commonly a larger fund will invest with the expectation to be able to lead the next round. The caveat about raising from VCs at such an early stage is you are essentially tying yourself to them for at least the next round -- if they don’t invest it’s a very risky signal in the market.5) How To Go About Raising?
The strategy is similar to fundraising for any round, with the difference that it is more about individuals than institutions. Reach out first to your network, namely people who know you and are the most likely to take the bet. You can pitch also at business plan competitions or to angel syndicates. If you have a marquee name that is committed then definitely leverage that person’s reputation and contacts. If you are stuck after a month then go back to the drawing table and assess whether it’s a problem of style or substance. If you have the means you can obviously also fund yourself partly or fully -- at this stage it’s overwhelmingly a sign of belief in your idea, rather than an inability or unwillingness to raise externally. There has been a recent movement to create alternatives to VC for startups, they are mostly focused on seed or A but may apply to some pre seed startups, more in this great article from The Generalist.Originally published on “Data Driven Investor," am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
Amit Garg
I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.