categories

HOT TOPICS

NEWSLETTER

If you are considering becoming a 1M/1M premium member and would like to join our mailing list to receive ongoing information, please sign up here.

Subscribe to our Feed

9 Udemy Courses on How to Raise Pre-seed Startup Funding

Posted on Tuesday, Sep 14th 2021

The toughest round of funding an entrepreneur seeks to raise is pre-seed investment. It sports the lowest probability of success, the highest amount of ambiguity, is poorly defined, and is causing the greatest amount of confusion and road wreck out there.

Over 99% of the entrepreneurs who seek financing are rejected. I run One Million by One Million (1Mby1M) – a global virtual accelerator for startups. 2021 is our 11th year supporting entrepreneurs.

Thousands upon thousands of entrepreneurs have approached us for help with their funding at a stage where their chances of getting funding is ZERO. We can’t help them, regardless of how powerful our investor connections are. We can’t help a startup get funding before they become fundable. It pains me to see how many entrepreneurs have no idea what makes a startup fundable.

Sadly, less than 1% of businesses are fundable. What that means is more than 99% of the entrepreneurs waste their energy on pitching their unfundable businesses to investors. Hugely unproductive and unhealthy.

Here’s a quote from Marc Andreessen who has a rejection rate of 99.3%:

“At our venture capital firm we only invest in a sort of Silicon Valley–style tech. We see 3,000 inbound deals a year. And those are inbound and coming through our referral network, so those are sort of prequalified. We can do maybe 15 or 20 investments out of the 3,000 a year. So I like to say our day job is crushing entrepreneurs’ hopes and dreams. Our main skill is saying no, and getting people to not hate us.”

There is a reason why savvy entrepreneurs have been using the Bootstrap First, Raise Money Later strategy.

Generation after generation of entrepreneurs have used bootstrapping to get to a fundable stage, so they can call the shots at the negotiation table with their potential investors.

If you get rejected by Accelerators, Angels or VCs, and they don’t tell you why, you need to understand the objections and the analysis that led them to their decision. Most good investors take the time to explain. Also, there are some fairly standard reasons why entrepreneurs get rejected by investors.

At Y Combinator, the rejection rate is 98%. Geoff Ralston, President of Y Combinator, explains in a recent interview:

“You have to understand venture math. Venture capitalists have limited partners who invest the money that they then invest. They demand returns. That doesn’t mean that that’s not a perfectly valid way to build a company and have a successful outcome. In fact, what I like to tell founders is that you can get very wealthy doing their business without a VC. We support that. But it is true that for our batch program, we’re assuming that you’re a startup that will grow fast and are going to need VC and that you’re not looking to create a lifestyle company.”

Is there a strategy for raising your odds of getting into YCombinator?

The short answer is yes.

One way is to spend 18-24 months with a non-equity based accelerator, get your business positioned and validated, learn what it takes to get funded, and only then apply to YCombinator.

Your odds of success will be orders of magnitude higher.

So, my humble advice to all entrepreneurs: please learn to assess your own probability of getting funded.

Over the last decade and more, I’ve had the privilege of working with a large number of bootstrapped entrepreneurs. These include self-financed companies and also modestly capitalized startups that operate in a capital-efficient manner applying the principles of bootstrapping.

For our Seed Capital series of podcasts and blog interviews, I’ve interviewed hundreds of investors, especially micro-VCs and angels who are playing and important role in the early stage game.

I’ve asked all of them the following questions:

The commercial Internet has now been around for almost 25 years. Lots of stuff have already been built. Nowadays, there aren’t so many wide open opportunities out there. But there are many, many niche opportunities.

Some of these businesses need to be built for very small amounts of capital: Invest $1-2M, and sell for $10-15M. Do you have appetite for this type of investment?

What about a notch smaller? Invest $250k-$500k and sell for $5-$10M? What about a notch larger? Invest $5-10M and sell for $50-$60M? 

As I expected, a large number of investors are still chasing Unicorns. They are interested in investing in companies that will go from 0 to $100M in 5-7 years. And they will consume a great deal of capital in the quest of hitting the coveted billion dollar valuation mark.

However, I am pleased to report that I have spoken with a number of investors who recognize the niche opportunities and answer yes to my questions above.

Yes, they are interested in investing small amounts and harvesting through smaller exits.

In that strategy is the recognition that most acquisitions happen in the sub $50 million price-point.

Therefore, for all stakeholders to make money, a capital efficient strategy is required.

I would like you to start with the basics of how we practice startups in 1Mby1M:

  • Do not go to VCs as beggars. Go as Kings.
  • Do not chase Investors before chasing Customers.

Negotiation is a straightforward game. You can only negotiate if you have options. I have mentored entrepreneurs now for well over a decade. I always try to help them create negotiating leverage.

There is nothing that gives entrepreneurs more leverage than customers and revenues.

The further you can get in terms of building traction without external funding, the more negotiating leverage you will have.

Look for every possible avenue through which you can maximize validation and traction

You see, Venture Capital is a game where too much money routinely chases too few deals. Those few deals get an inordinate amount of attention. Valuations inevitably get bid up through competition amongst investors. 

The only way an unproven entrepreneur can enter that exclusive club is by having solid proof points that signal a high velocity business with a large market opportunity.

You may be getting confused because all you read in the media are stories of venture funding. Media, unfortunately, doesn’t report on customer wins. And yet, your route to success rests in chasing customers, not investors.

Your chances of fundraising for a pre-seed startup are vastly higher if you bootstrap first. So let’s start there.

  1. Bootstrap First, Raise Money Later with Sramana Mitra
  2. Bootstrapping a Startup with a Paycheck with Sramana Mitra
  3. Bootstrapping a Startup with Services with Sramana Mitra
  4. How to Bootstrap Startups by Piggybacking with Sramana Mitra
  5. How To Succeed As A Solo Entrepreneur with Sramana Mitra

Next, please try to understand how pre-seed investors think, how they formulate their investment thesis, and create a strategy on how to align your investment thesis to their investment thesis. This is called Investor-Entrepreneur fit. 

Just like you seek product-market fit, you need to seek investor-entrepreneur fit. For instance, if you’re looking for pre-seed Fintech investors, that would be a pretty specialized quest.

Notice, Deep Tech is an area where entrepreneurs seek a pre-seed round more often. I have brought a set of investors on to discuss the issues thereof.

Finally, there is a class of investors that have emerged who are not seeking Unicorns. Your situation may fit some of them better than going after the Unicorn hunters.

One caveat: Not all investors who advertise themselves as pre-seed VCs actually invest in pre-seed ventures. When rubber meets the road, they are actually Seed or Post-seed VCs.

  1. How Pre-Seed Investors Think About Startups with Sramana Mitra
  2. How Seed Investors Think About Startups with Sramana Mitra
  3. How Seed Investors Think About Deep Tech with Sramana Mitra
  4. Alternatives to Unicorn Chasing Investors with Sramana Mitra

That’s it. This is a complete collection of Udemy courses that can help any entrepreneur to understand

  • If and how pre-seed investment can be obtained 
  • What entrepreneurs need to have before attempting to raise a pre-seed round
  • What one could expect in pursuing pre-seed venture capital
  • How pre-seed funding for startups has changed in the last decade 
  • What work needs to be done to get to the pre-seed stage
  • And finally, how pre-seed VCs think and what they really want

We hope you find this set of Udemy courses on  pre-seed investment helpful, timely, and practical.

If you need help, come talk to me at a 1Mby1M roundtable.

P.S. We’re looking to partner with community leaders who write blogs, teach and mentor entrepreneurs, and help support startup ecosystems in every corner of the world, no matter how small or how remote. I have written about my own journey building startup ecosystems around the world, and how you can draw from my lessons from the trenches. If you’re interested in partnering with 1Mby1M, please consider joining our ambassador program.

Hacker News
() Comments

Featured Videos