A guide to pre-seed financing in Europe
This article is for all the founders and investors who want to know more about a *relatively* new kind of financing round, the so-called “pre-seed”. Much has been written for Seed and Series A (arguably the most popular rounds) but pre-seed is a not-so-covered topic in comparison. More specifically, I would like to provide data (mostly EU-focused) and arguments trying to answer the following questions:
“what is a pre-seed round?”
“how much can I raise in a pre-seed round?”
“how much dilution is OK for a pre-seed round?”
“what does it take to raise a pre-seed round?”
“who should I take pre-seed money from?”
“what are pros/cons of a pre-seed round?”
So let’s get started — “what is a pre-seed round?”
A pre-seed round is a round that happens before a seed round 🤭🤭🤭
On a more serious tone: there is no official definition of a pre-seed but one could say that pre-seed is an angel round but with the presence of an institutional fund. Another way to look at it to say that pre-seed in 2020 is what seed used to be in 2015 because round sizes and requirements in seed have gone up so much that another financing round came in to fill the spot. Whatever way you look at it, a pre-seed round is the first external institutional money in a company that quite likely is not making any meaningful revenues, yet.
Based on the definition above, I downloaded and cleaned up the data from CrunchBase on all the pre-seed rounds in Europe from 01 January 2020 to today and came up with the following data:
- 330 pre-seed rounds
- USD 127M invested
Here below you can see a split of countries and cities with the size of the square/ circles representing the total amount of funding.
→ here you can access the interactive chart with industry filters and data) ←
Next one up: “how much can I raise in a pre-seed round?”
Looking at the data, you fall within a realistic range somewhere between 200k — 1M of funding and like many other things in Venture Capital, pre-seed round sizes tend to follow a power law distribution (note that to make the graph look more readable I cut out a monster 12M pre-seed round).
- The average pre-seed round was USD 386k
- The median pre-seed round was USD 150k
- Top quartile cut-off was at USD 410k. This means 25% of the rounds were higher than the cut-off (410k) and 75% lower.
As a next logical question— “how much dilution is OK for a pre-seed round?”
a very relevant commercial point for both founders and investors is the dilution for the round. But as one would expect there is no public data available. Nonetheless, instead of relying on gut feeling I would argue that is possible to gauge an acceptable dilution range by reverse engineering known patterns of later rounds. Given that the pre-seed is a relatively new round that it has to fit-in with an existing pattern (seed, A, B etc.) one can think along these lines:
- A healthy/ average cap table after Series A would typically have the ownership of Team + ESOP at 55%+ (See data from Index Ventures)
- Series A average dilution ~20–25%
- Seed average dilution ~15%-20%
- As a result, a pre-seed round should have a ballpark dilution range of ~10%-20%
If you want to check the numbers here is the gsheet with the calculations
Question four was — “what does it take to raise a pre-seed round?”
At minimum you should have:
- a team, fully committed
- a rather precise idea of what market you want to address and how
Optional factors that can increase your chances:
- An MVP or Beta product
- A live product with customers
- A deck 🙃
I found some pretty interesting data points shared by Docsend (2019, US-focused). They analyzed metadata of 180 pre-seed decks and surveyed the founders. They quantified how much having at least an Alpha version of the product can bump up your chances of raising a pre-seed round. I would argue from my personal experience that team seniority and industry expertise can greatly counterbalance the absence of an MVP.
“who should I take pre-seed money from?”
Let´s break down this answer into two points:
- Selecting a VC
- Round composition
Selecting a VC
If I were myself a founder fundraising a pre-seed for my company I would look for a VC that:
- is investing often at this stage and is therefore used to the level of risk and lack of KPIs
- has the appropriate fund size (ballpark max 60–80M) so that the ticket in my company is something meaningful for them and not a rounding error that can be written-off in a second
- is offering a clear and compelling operational support (for example we at Paua delivered to every portfolio company warm customer leads from our networks of LPs, advisors and portfolio companies) also do reference the fund by talking with their portfolio founders about their support at pre-seed
- has a strong network of follow-up investors and can help in the following round (to verify this, just go on the investor CB profile, look at their portfolio Series A and B+ rounds and look at the investor leading those rounds)
- has a strong network of great angels to fill the round with (see next point about round composition)
Round composition
Ballpark round composition example of a strong pre-seed round:
400k pre-seed VC + 100k old-economy angels + 100k new-economy angels = 600k round
With regards to angels, when we lead pre-seed rounds at Paua, we help our companies to find angels coming from the “old-economy” i.e. former board members of listed companies and “new-economy” i.e. founders of already successful or exited scale-ups. The idea behind is that old-economy angels can function well as door-openers to decision-makers in corporations, while new-economy angels can be a sparring partner for operational and scaling topics.
As a last note, if you already have a strong MVP and are an industry veteran/ repeating founder and are able to raise 1M+ it might make sense to have 2 VCs at best from different ecosystems bringing different networks.
and finally…“what are pros/cons of a pre-seed round?”
To help you to decide if a pre-seed round is something for you and your team, I summarized in the table below positive and negative aspects of a pre-seed based on the experience gained with rounds that we led at Paua and also based on conversations with other investors and founders who recently raised pre-seed rounds.
As discussed in the previous point “who should I take pre-seed money from?” selecting the right VC for the round will maximize the PROs of the round and minimize the CONS side.
All in all, a pre-seed round with the right VC partner and the right angels will optimize your chances of raising follow-up rounds from top VCs and prepare your ship to sustain a journey at warp-speed. In a world where power law is the norm and capital is abundant (*also for your competitors*) I strongly believe a pre-seed round can make the difference for a company.
That´s it, folks!
If you are thinking about raising a pre-seed round and look for VC partner that has done it before at pre-seed feel free to ping me at federico@pauaventures.com
If you have feedback feel free to leave a comment here or leave a clap if this was useful for you!
