Fundraising as a pre-revenue start-up

As a pre-revenue start-up, raising funds from Angel Investors or Early-Stage VCs can be tough. With no revenue to showcase, it's harder to prove market demand and overcome perceived risks. However, with a compelling narrative, fundraising pre-revenue is always possible.

Challenges

• Lack of traction: It is more difficult to demonstrate market demand without having any revenue to show for it.
• It's risky: Pre-revenue start-ups are also viewed as riskier investments. Investors may be reluctant to contribute capital, as it's difficult to predict future success in the absence of financial history.

Earning Trust

Building a relationship with investors is about building trust. Do they trust you with their money, to execute on a plan?

They need to be convinced of the founders' vision, determination and ability to execute on it.

Think of the "family and friends" round. Yes, your loved ones might have liked the idea or the product that you are building, but ultimately they invested because they believed in you, and they trusted in your ability to build a successful company. Early-stage Angel investors and VCs are no different. They might have more sophisticated mandates, but they need to trust in you as a Founderteam if you don't have financial evidence (yet) to back up your idea.

So how do you earn the trust of a potential investor?

Crafting Your Story: Why You, Why Now

Founders must craft a compelling story about why they are the best team to solve a particular problem and why now is the right timing. Personal experiences that led to the start-up can create a strong connection with investors and make the story more relatable.

Founders should also highlight any trends or gaps in the market that their start-up addresses. Investors want to know that, despite the obstacles, the founders are dedicated to making their start-up successful. They will not back down no matter what.

If you are well-researched, have a deep understanding of the problem, and are equally passionate and knowledgeable about solving the problem, investors will trust you!

Understanding our edge

Earning investor trust involves showcasing the Founders' personality and the unique edge the team brings to the table.

Earning investor trust involves showcasing the Founders' personality and the unique edge the team brings to the table.

• Founders need to deeply understand and communicate their unique strengths to set themselves apart. So what does a unique edge look like?
• Prior expertise in the industry
• Proprietary technology or unique processes
• Strategic partnerships
• A deep understanding of customer needs and pain points from personal life experience

Why Them

All Founders need to understand from the beginning that the Investor-Founder relationship is exactly this - a relationship.

You want to build a strong foundation of mutual understanding and values with your Investors. If you are successful, you will be spending years in communication with them, so assessing a fit for one another in the beginning is key. One serial Angel Investor once said they prefer a "courting period", before they write a cheque, to be six months minimum. Although that might sound like a long time, this trust-building process of getting to know the Founder is the Investor's hedge against the high risk of investing into their unproven (yet) idea.

Understanding why an investor invests in early-stage startups is extremely important too. For early stage VCs, it could be as simple as scanning their website or talking to founders of their portfolio companies. Figuring out why a particular Angel Investor likes to invest in start-ups is just as important, although requires a bit more effort. When raising from Angels you should seek to learn their past investments, and, if you can, ask them about their personal motivations for investing, their investment style ("silent" or "active") and communication preferences. Each investor is different, and understanding what drives them and how they think can help tailor the pitch.

Your vision

Finally, a clear vision for the future is vital. Founders should provide optimistic growth projections and discuss how market trends and emerging technologies align with the start-up's vision. Describing the long-term impact the start-up aims to have on the industry or society can resonate with investors who are looking for those meaningful investments.

Being very clear about how much is being raised and what the funds will be used for is crucial. Avoid presenting multiple plans; focus on a clear, concise plan.

Building proof points while pre-revenue

Establishing proof points is crucial for pre-revenue startups as they help to reduce perceived risk and build credibility. Without revenue to validate demand, you must demonstrate other forms of traction that prove your viability. Examples include:

• Waiting lists
• Pre-orders
• One-off contracts with potential long-term customers
• Free downloads
• Pilot programs or beta tests
• Formal partnerships
• Respected advisors
• Respected investors

Conclusion

Fundraising as a pre-revenue start-up requires a compelling narrative and a strong belief in the founders' vision. By effectively communicating their unique position and understanding their edge, founders can convince investors of their potential for success. A clear vision for the future, backed by a scalable model and continuous innovation, can help secure the necessary support to turn your vision into reality.

Scribe is a private company data platform. We structure data from Companies House, helping Founders find Angels who are actually investing. Welcome to the future of company knowledge.

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