5 tips for start-ups on how to raise funds from VCs during the pre-seed round

5 tips for the start-ups that began their first fundraising process (pre-seed round)

This post diverges from our traditional UX-focused topics. However, we believe our experience in fundraising might help other entrepreneurs in the UX space (or any other market for that matter).

You’re passionate about your idea, but getting investors as passionate might mean life or death for your newly founded business. We’ve been there ourselves, and that’s why we’re sharing this story with you. In the hope that you either learn from our mistakes or that it helps you successfully raise funding in general.

Our story

Today weave.ly is a prototyping tool that enables software designers to generate web apps from their (Figma) designs to test out new digital products. At the time of writing, we’re a team of 5, working hard on helping designers get superpowers.

But what if we tell you that just 2 years ago not only did we not have any funding, we didn't even know in which industry we would like to apply our technology. Our business story takes its roots from the Vrije Universiteit Brussel (VUB) Software Languages Lab. The VUB encourages researchers to turn their research artefacts into actual business products through creating spin-offs. Using internal resources, the university tries to support researchers in figuring out how they can valorise their results.

Before weave.ly became weave.ly, it took a year of research to define the market niche and the problem we could solve. After 150+ interviews with people from various markets, the market problem that could be tackled with the technology was finally found — helping companies to build high-fidelity prototypes from their designs. And that's where the fundraising journey started!

Steps we took to get our first funding

Spoiler: we completed our pre-seed round in the summer 2022. 

Yet, prior to that, there was a long path of cold-calling, emailing, pitches, presentations, and of course rejections.

There were two aspects that helped us a lot though. Firstly, we were closely cooperating with the VUB to make sure that weave.ly would become an official spin-off. Secondly, we got accepted into Start It@KBC — Belgium’s largest accelerator program. The program taught us some really useful entrepreneurial and presentation skills, which we lacked at the moment. We could not recommend Start It@KBC enough, whether it’s for its business mentorship, exposure to the business world or networking opportunities.

Initially we had foreseen to first do a small pre-seed round with business angels. We already had an oral commitment of one to fund us and were looking for other interested parties. Over the summer of 2021 we got funded by VLAIO, a Flemish governmental organisation for innovation and valorisation. Technically, it was not a funding round but it enabled us to extend our runway and skip the “business angel” round. Therefore, we directly went for a pre-seed round with a venture capital fund Qbic.

Close work with our first investors

Qbic expected us to showcase minimal commercial traction. So, we started to focus on getting paid proof of concepts with interested parties. Before entering the “bootcamp” phase with us, our investors wanted us to finalise the spin-off procedure. During this phase which lasted for around 3 months they were narrowly following up on the progress before continuing to deal negotiation. Having fulfilled all the criteria required, we got a green light. We then used Qbic’s willingness to invest to attract another investor, finance&invest.brussels, which decided to co-invest with Qbic.

Our startup journey has only begun, and although the road ahead is paved with successes, failures and additional funding rounds we figured we’d share 5 things that we believe made the difference in raising a pre-seed round with VCs.

*Have a look at the glossary at the end of this article if you’re unfamiliar with any of the terminology we’re using

1.  Act as if you are a salesperson 

Fundraising is essentially a sales process. And that's the kind of attitude you should acquire at the very start. This will come in handy when you structure your plan of actions and will put you in the right mood when reaching out, talking to and getting feedback from investors.

Similarly to “typical sales", you want to create a process for your outreach to investors: what is my message going to be, which channels will I be using to contact investors. You’ll want to try out various processes, measure how they are doing and optimise accordingly.

Present the VCs with a solid competitive advantage of yours. Why should they invest in you? Why should others buy your product? There’s plenty of posts describing what a good VC pitch contains, but in the end you need to explain what the problem is you’re solving, why it’s a big problem, why you’re the right team to solve it and why the time to solve/invest in this is now.

2. Consistently say what you do, do what you say

You don’t get funded after the first meeting with a VC (or at least most people don’t …). This means that you will need to build and maintain relationships with interested VCs before they end up investing in you. The earlier stage you are, the longer you’ll need to have a relationship before sealing the deal. What a VC essentially wants to find out is whether you are trustworthy. And of course this is harder to do if you are early stage and nobody invested in you yet. We first got in touch with Qbic in March 2021 and with finance&invest.brussels, our second investors, in February 2021. They ended up investing in us in the summer of 2022.

If a first meeting goes well, and the investor shows interest, we add them to a list of investors we want to “keep close”. Every quarter we send an update to everyone on the list. This update basically lists what we did in the last quarter and what we aim to do in the following. It enables investors to get an idea of how we work, how we set goals and how we deal with reaching or not reaching these goals.This update doesn’t need to be the “good news show”, it needs to showcase how you’re learning and executing what you want to do.

3. Make sure you're on the same page with the funders

There are two world visions at play when you’re fundraising. You have your world view: timeline, metrics and goals and the VCs have theirs. For example, it’s essential to know how far they are into their current fund, the kinds of metrics and KPIs that they are looking for when investing in a start-up. Also, make sure that you understand their own process: what are the different stages they let potential deals go through and what is needed for a deal to go from one stage to the next.

Don’t be afraid to clearly ask what will be needed from you to be “investable” by a certain VC: “If I can showcase X by Y, that means that we could move to the next stage?”. Making this explicit will serve as an informal agreement on what is required and will enable you to plan ahead and work towards a specific goal. Make sure that this goal coincides with your strategy as a whole.

4. Plan 20 steps ahead

It takes a while to build trustworthy relationships. For your first round you don’t really have a choice but to start from 0 (unless you can get a warm introduction). For your next rounds you’ll want to avoid the “start from 0” part and already have a number of VCs that know you, your company and your progress. Not only will this make fundraising for following rounds easier, it should also make it substantially speedier. Make sure that you keep sending updates to investors even after you raised your round and that you include some investors for which you are “too early” but that show a clear interest in your vision. 

5. Extract the most out of rejections

You’ll get rejected a lot and in some cases quite fundamentally (we’ve had VCs tell us many disappointing things, such as having a lack of competitive advantage, too much competition, a market which is too niche, etc). You can’t let this change your resolve. However, when you get rejected or get ghosted by VCs, you can turn it into a valuable or even a positive experience.

Our message here is: don't just accept the rejection but try to get feedback, as much as possible. Reach out to the investors if you got ghosted to ask for their honest opinion. Use this feedback to enhance your pitch or answer the questions other VCs might have in advance.

Fundraising glossary

Looking for the first funding for the start-up from the investors (VCs)

For those ones new to the start-up/fundraising world, let's break all the above-mentioned vocabulary into pieces!

Pre-seed stage

Pre-seed round is the earliest stage of fundraising - basically, the first cash injection in your business idea. It's the stage when you want to prove problem-solution fit. For example, you’ve found a problem in a market and have a solution that solves this problem. Your product is very minimally viable, but you have some functions to show, even if in a very raw state.

For a start-up, there are several options to receive a pre-seed funding. First option is your own or family and friends' investment in your business. Another possibility is small business loans, crowdfunding, grant financing, and sometimes accelerator programs.

What to expect from the pre-seed round?

A start-up can raise a decent amount of money from this stage of the fundraising process, but usually the amount of money collected does not exceed €1 million, or at least not in Europe. At this stage both equity funding as well as convertible loans are options.

Seed funding

Seed funding is the first official round of investment that startups raise before moving into the next rounds, such as A, Band C. It is typically the stage where you need to start showcasing market traction and prove product-market fit. For example, you’ve turned the solution into a product which people are willing to buy. Now you need to scale your business idea and grow. 

What to expect from the seed round?

Seed funding is to give the start-ups a great boost. The investments can reach as high as several million dollars/euros. Seed rounds are typically more structured, expect equity financing, longer negotiations and more stringent terms and shareholder agreements.

Pre-seed vs Seed funding rounds

For some entrepreneurs it might be confusing whether they are raising a pre-seed or already a seed round.

The main difference with the pre-seed stage is that during the seed you have some active user metric and maybe some revenue. Yet, you're far away from big profits and that's why you need more investment to skyrocket your prior efforts.

Whereas during the pre-seed stage you've only identified a market and possibly designed an MVP, in the seed round you've already gathered a team of specialists and your product has entered the market. And obviously, the amount of funds you collect at these two stages substantially differs. We would say for the seed round it's 2-3 times higher than for the pre-seed.

Funding types

There are two types of funding you can get as a start-up: dilutive and non-dilutive:

Dilutive

In this case, you essentially let a person (or a company) providing the funds to buy parts of your company. For example, you sell 20% of your company for €1 million. You now own 80% of the company, they own 20%, the company has €1 million in the bank to invest.

Non-dilutive

With non-dilutive funding you receive money without having to sell parts of your company. This typically takes two forms: loans (e.g. from a bank) and subsidies (usually from a government). Do note that in contrast to dilutive funding you might need to pay back the investment (e.g. in the case of a bank loan).

Types of funders

In principle, there are 4 types of funders - angel investors, peer-to-peer lenders, banks and venture capitalists (VCs).

It is common to differentiate mostly between angel investors and VCs .The former are private (usually wealthy) individuals that invest their own money into companies. The latter are companies that funds tart-ups on behalf of other funds/private individuals/banks. 

Start-ups typically start raising funds with angel investors. They normally require less “proof” of your business and are willing to invest at a very early stage. However, they also expect you to pay a higher price eventually. After a round with angels (or “friends, fools & family” as it’s sometimes called) start-ups move to next rounds with VCs.

Venture Capitalists (VCs)

Where do venture capitalists come from?

Usually, it's the partners of the venture capitalist firms that invest in the VC fund. This could be simply wealthy people, insurance companies, various foundations, pension funds etc. The decision-making process (who to invest in, when, how much) is normally delegated to the special committee of the fund.

VCs invest in start-ups in exchange for equity, securing a substantial ownership position in the company. So, beware, the funders expect a high return on their investment and try to bite as large piece of the cake as possible (i.e. your company shares ;))

Also, keep in mind that most venture capital firms focus on specific industries. The most commonly funded start-ups today are those proposing innovations in IT, software, fintech, green technologies, biotech and AI. For instance, as weforum.org reports, software investment accounts for 36.2% of US VC funding, while biotechnology comes second with 17.3%.

At what stage can you get funded by the VCs?

There is no one single answer to this question. For each company the stage may be different. Sometimes it happens during the pre-seed round but it means that by that time:

  • a minimal viable product
  • a team of professionals working with you
  • first customers