What do Pre-seed funds look for?

We just wrapped up one of the biggest celebrations of the Chicago startup ecosystem - TechChicago Week. Among the dozens of amazing events put on by our friends at P33 and others in the Chicago tech community were two panels I had the privilege of joining: Meet Chicago’s Pre-seed to Growth stage venture firms & Pre-seed between the coasts.

In both discussions, my co-panelists and I dove deep into what funds look for in founders & companies when making pre-seed investments. There was serious knowledge dropped, so I wanted to summarize a few of the key points here.

🗣️ Have a compelling story, and tell it well

If you’re constantly on Twitter (never X), like me, this is probably advice you’ve run across a lot: “Be a great storyteller.” But practically, as an early-stage founder, what does that mean?

Ryan Broshar of Matchstick Ventures broke it down this way on our panel.

I think a lot of people at the early stage, where they stumble is that they are not able to tell the bigger vision and bring it back to the reality of where you are today.

For example, from the beginning [Elon Musk] always said we're going to colonize Mars. And we were like, 'What are you even talking about?'‘ But then he brings it back to [reality]: Today we're building rockets, tomorrow we're going to start a satellite company, and then that could happen.

Say less, Ryan! Another framing of Ryan’s advice is:

• Vision = What the world looks like in the future if you’re able to achieve the full ambition of your company.
• Reality = The milestones you need to achieve in the next 6-12 months that will be a stepping stone to that future vision (and the tactics you have planned to hit those milestones).

Sometimes founders struggle in how to speak to “reality” - they fear that acknowledging the ambitions of today are smaller than the larger vision gives the impression that there isn’t a big enough opportunity or market to capture to attract venture dollars. It’s a fair concern, but one that’s mitigated if your narrative blends vision & reality - tell investors where you want to go (the big opportunity) and how you plan to get there (how you capture today’s opportunity as a step in that journey).

🤓 Pro tip!

Don’t start your pitch deck with slides, start with your notes app. Write out long-form the ideal version of your story, almost like a script for an in-person conversation you’d have with an investor. When you eventually move to a slide deck, you’ll have a much better sense of what you want those slides to say and will avoid the sort of “paint-by-numbers” deck that lacks a clear narrative throughline.

🫶 Be direct, transparent & vulnerable

Contrary to popular belief, investors are people too (insert Steve Buscemi “how do you do fellow kids” meme). And especially at the early stage, one of the strongest signals of a company’s potential is the founding team. As investors, every check we write is a commitment to a long-term relationship with founders. So is it surprising that having an authentic connection to those founders is critical in our investment decision?

Here are some do’s and don’ts we discussed in last week’s panels:

Do

• Answer questions directly. Even if you believe the answer doesn’t paint the company in the most favorable light possible, give it anyway. Investors know when you’re talking around a question as an avoidance strategy, so you don’t do yourself any favors with that strategy. And if you don’t know the answer, say so and follow-up with it later when you do.
• Share your fears, needs, and weaknesses. Real talk: if you tell me you have it all figured out, I’m immediately out. The only constant in early-stage companies is change, so when you avoid talking about the risks you see in the business, where you have skill gaps in the company today and growth opportunities for yourself/your founding team, you’re just telling me you’re ill-equipped to handle the journey ahead. Conversely, when you are vulnerable and open in talking about your worries and where you need help, you demonstrate self-awareness, maturity, and begin to build a foundation for the sort of bi-directional relationship investors value.

Don’t

• Speak in long monologues. This isn’t the time to talk over the band playing you off the stage. It may take some reps and rehearsal time, but get good at giving concise answers to common questions investors ask. The pithier you are, the more overall ground you can cover in an investor conversation, which helps us get more comfortable with an opportunity. No one wants to be stuck in the corner at a party with the person who talks their ear off.
• Lie. This should go without saying, but I’m saying it, which means this happens more often than it should. Even small exaggerations or omissions can be uncovered in a standard investor diligence process, so there isn’t anything to gain and lots to lose by playing fast & loose with the truth.

💨 Momentum > “traction”

No, you don’t need $10k monthly revenue to raise from (true) pre-seed investors. Myth dispelled.

What you do need is to show us how you’ve built momentum in your business. As an early-stage founder, it’s a given that you have imperfect resources & knowledge along with a need to do things that don’t scale. What’s instructive to investors, however, is the velocity of actions or experiments you’ve executed as a company given the limitations we know you’re operating within.

You can be pre-product & pre-revenue and still be building momentum. Show us that you’ve taken steps to de-risk your idea, demonstrate customer interest and test your early hypotheses. Ask yourself, “What has the business accomplished in the past 3 months?” - does the answer include a lot of the above? If yes, make sure you tell us about it. If no, then it’s possible you’re not quite ready for a pre-seed raise.

A big thank you to the team at P33, Landon at Drive Capital, Shannon at Matchstick and my co-panelists for organizing these amazing conversations.

Have questions/objections/feedback on anything I shared above? Feel free to @ me on Twitter (nope, still never X) or join the conversation on Linkedin!

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