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How To Raise Pre Seed Funding

When starting a tech business, the biggest hurdle any entrepreneur will have is financing, especially at the very beginning. There are specific rounds of funding for startups. In the early stages, you want to focus on pre seed, seed and series A funding. Each round has its advantages as you progress and grow with your business.

The pre seed funding stage, for instance, is time consuming and can be difficult to attain from investors, but it is highly valuable for startups in getting their foothold in the industry. Though the process can usually take 6-12 months, the development, mentorship and financing that can result from a pre seed funding round are well worth it when secured.

Below, we focus on the basics about pre seed financing in Canada.

What Is Pre Seed Funding?

Pre seed funding is a fairly new stage in the funding process in Canada’s startup scene, and has been growing organically, and in areas like eastern Canada pre-seed funding is gaining traction. In Canada, pre seed funding has emerged due to a few factors: the rise of seed and series funding amounts, VC firms are raising larger funds, and the emergence of similar startups that make decisions hard for investors.

Pre seed funding usually tends to focus on specific verticals and usually provides startups with $500, 000 or less and is an initial wave of funding that is now supplementing and even replacing the amount of funding collected from friends and family.

Though pre seed funding amounts are not as large as those which are awarded to startups funded by VC firms, raising pre seed funding is a positive step in getting startups to move on to Series A funding rounds.

How To Raise Pre Seed Funding?

The first step to getting pre seed funding actually occurs before you even reach out to investors. Because this is pre seed funding where you may not necessarily have any real traction or fully developed prototypes to sway your investors, being prepared is even more crucial.

-Have a number, financial forecast and budget in place. Map out your next expected financial milestones. The big questions will surround the amount you need (and your terms), what your business will cost, and how much it will make.

-Be financially ready. Have a business account and any other necessary financial paperwork in place even before you approach investors so you can avoid any delays should they decide to invest.

-Research out a list of investors. Start by digging up firms in your region and preferably investors that focuse on your industry. You should be exploring more than one investor, so be sure you have a good starting list of 6-12 investors.

-Have all your paperwork ready. This includes licenses for your creative work or patents for any technology you developed. Also, be sure to have any other legal or official documentation like incorporation papers, relevant certifications, partnership or SAFE agreements.

-Prepare your pitch and plan. Have this prepared well in advance. When investors are interested, they will contact you as an introduction to find out more, and will eventually ask to meet in person in order to hear your pitch and plan during which they can follow up with more detailed questions.

Where To Look For Pre Seed Angel Investors

Next, it is important to find the right kind of investors. If you are starting a tech company, for example, you should focus your search to angel investors who are focused on tech startups, have an existing portfolio of other similar startups, has experience with your type of product and business model, has views that align with your own, are easy to work with, and who can not only invest, but also provide some support during your early stages.

In Ontario and the GTA, firms like Extreme Venture Partners (Mobile, Data & Analytics, or Internet of Things),  Golden Ventures, and Mantella Venture Partners (Internet and Mobile), have been focused on seeding tech startups in the $25K-$500K range.  

There are also Angel network groups that are basically an ecosystem of angel investors you can reach out to. Some in Ontario include  Maple Leaf Angels (FinTech, IoT and ICT, Healthcare), AngelOne Investor Network (SaaS, ICT, Healthcare, CleanTech, and Industrial sectors), and York Angel Investors.

Other places to look for investors:

  • Entrepreneur and startup events
  • Law and accounting firms
  • CEOs of successful startups
  • LinkedIn groups and performing a general search
  • Asking small business networks
  • Asking business advisors

What To Expect When Raising Pre Seed Funding?

Note that every seed investment firm is different. Some may want you to submit an application rather than an inquiry email or they want you to be referred by someone who is connected or was a client of the firm. Make sure you carefully read their website for instructions.

As you know, some investors may lose interest, offer terms you do not agree with, or turn you down. However, in either case, asking for their feedback as to why they rejected your submission is a reasonable request to follow up with.

In general, a pre seed funding process will follow steps similar to these:  

  1. Initial Call / Meeting.
  2. Interest.
  3. Follow-up Meeting.
  4. Due Diligence Commences.
  5. Verbal Commitment.
  6. Negotiation.
  7. Closing.
  8. Additional Due Diligence.
  9. Sharing paperwork.
  10. Negotiation.
  11. Signed paperwork.
  12. Money clears the bank.

When you get verbal commitments and half of the funds in cheques, you can start announcing your window to close. A 30-day window is usually reasonable for Canadian investors.

The advantages of pre seed funding goes beyond just monetary. Investors can help you network with VCs and act strong advisors and mentors. Moreover, they can be an advocate for your company in future.

Overall, pre seed funding will be the first step in financing your journey as a startup. Make sure your pre seed financing strategy is ideal and aligns with your goals by consulting a lawyer. OMQ Law is an Ontario law firm that has extensive experience with startup business models and has offices in Toronto, Oakville, and London.