Pre-seed funding: why do investors steer clear?

Britain is fourth in the entire world for producing unicorns.

But whilst the business press adores a unicorn and the entrepreneur behind it, investors don’t actually need one to get healthy ROI; they just need to curate a portfolio of businesses who are out-performing the competition in their vertical and have the potential for unicorn status.

Ideas and innovation are what keeps a country ahead of the times.  If the majority of investors don’t switch their attitude to pre-seed, I’m concerned many excellent ideas are going to fall by  the wayside. In my view, it’s all about need and mitigating risk.

Does tech still have a lure and impact?

Unequivocally, yes. When you look at the aspect of tech from a consumer mindset – physical tech TVs, laptops, phones, are on the rise and sales of IoT are consistent. From a commercial consumer’s perspective, physical tech is still essential to execute jobs, and any form of communication, be it commercial or consumer, runs through some form of tech. My point? Tech is not going anywhere. We consume it, we want ways to streamline our experience of it, it will be a solid vertical in its many forms for many years to come.

Media has got us in a spin about tech companies reporting losses and making redundancies. If you dig deeper, you’ll see that in many cases it’s just the business leveling out. No business can sustain such a high upward trajectory forever – the bubble burst, and the tech companies had to reassess whether they needed the staff they took on to service the spike. Those ‘right-sized’ talented people they let go are now in the tech hiring pool which prompts a good opportunity for smaller businesses to get key hires and grow. 

Are investors right to be concerned about pre-seed investment?

Pre-seed investment is historically considered to be more risky. I’ve been working with pre-seed founders now for nine years and have seen in action multiple ways to mitigate risks – the right questions, the right access to dealflow and suddenly you’re curating a really worthy portfolio of tech innovators at a better price, or, for more equity. For professional investors it comes down to consistent access to high quality founders.

If a founder has come along after working for years in an industry and they can spot a niche opening, a gap that would be willingly filled and of great benefit – why wouldn’t you listen?

This is where it all comes back to the founder. Anyone can have an idea, but investors want to believe in the tenacity, determination and prowess of the founder to inspire them with confidence in their ability to lead the business, and their investment, to attain ROI. 

What can founders do to help turn the perception around?

To protect sanity and the business, founders need to create longer runways for themselves in case investment takes longer than expected. The length of time investment takes is one of the aspects of the funding process that first time pre-seed founders are always surprised about.

Whether it’s working a part time job or looking at running the business on an absolute bare minimum to survive, extending the runway until investment is secured, and/or sales, is crucial to ongoing success.

The largest concern with pre-seed funding for investors is mitigating risk. Here’s what I know works:

• Create backup supply chains. For example, if a founder’s product relies on being 3D printed, it would be wise not to have a deal with just one supplier. Working with two or three suppliers ensures that order will still be fulfilled and the business can still thrive if anything happens with the supply chain.
• Do all of the relevant paperwork to ensure your startup is eligible for UK SEIS/EIS tax relief. This mitigates risks for angel investors whilst showing a savvy head for finance and business.
• Make sure you’re registered on a platform like the Startup Giants Atlas Raise platform to profile your concept to professional investors who are not turned off by pre-seed but are excited to get in early.
• Outsource work to freelancers to reduce commitments on monthly payroll.
• Show potential investors a really strong go-to-market plan and stick to it. Very often companies will cut their marketing budgets at the first hint of a recession. when in fact this is the key time to get in front of competitors and either maintain marketing spend or increase it. 
• Collate as much evidence as possible that your concept is needed. If you can get to MVP stage and have users buying it, testing it with positive feedback, letters of intent from shops, all these help to convince an investor that the concept is worthy of investment.

Final thoughts

It’s not enough for a founder to mitigate risk in just one aspect of the business, it needs to be executed across every aspect of the company to bring the pre-seed investment in.

See more: 2023 UK Fintech report reveals cautious funding trend

Jeb Buckler, CEO and founder of Startup Giants PLC

Jeb has worked across international tech organisations for 30 years to deliver tech projects globally. During this time, he became intrigued by the psychology of Founders and the unrivalled delivery of new tech concepts to push innovation and challenge the status quo. He began Startup Giants PLC in 2015 to spearhead diversity in tech in the UK. In the years since then, his concept has spread, partnering with venture builders around the world to source pre seed Founders and prepare them for investment from professional investors.