Part I - Pre-seed & Seed: What does all this jargon mean?

Sometimes, you meet great entrepreneurs; working on a fantastic idea. Everything is going great until you hear the ask and the valuation expectation. The problem is that these terms do not have standard, universal definitions. Furthermore, most content is written based on mature markets. The numbers & meaning make little sense in emerging and frontier markets.??

The following is a framework that hopes to shed some light. It's helpful if you're a first-time founder in an emerging market like Sri Lanka. Note that the round will change based on the market size. For example, Sri Lanka & Bangladesh are both emerging markets, but Bangladesh is a much bigger market.

Pre-requisite ?

If you're raising a pre-seed funding round, you need a Minimum Viable Product (MVP). Some traction (a few users/customers) is also favourable. You also should have at least one other co-founder with different but complimenting skills. While revenue is not mandatory, you should know how you will make money.?

Goal

A pre-seed round aims to validate the idea. In particular, you want to validate founder/problem fit & problem/market fit. Founder/problem fit shows that you indeed want to solve the problem. In some instances, the initial excitement can die if there is no personal link to the problem. Problem/market fit is finding evidence that the problem is widespread and is worth solving.?

Amount

A typical pre-seed round would range from $25K - $100K. The amount depends on a few factors, the founder's maturity being an important consideration.?

Two key questions run through an investor's mind;

1. Can this person attract talent and hire the right people??
2. Can this person manage money, plan expenses etc.??

Valuation

Valuation = Team + Traction

The founder's track record, network, domain expertise, and level of traction determine the valuation.?

For example, a founder working on a solution for the fintech space without prior experience, insights or network within the same will be risky.?

Pre-requisite ?

You have grown beyond an MVP and can demonstrate demand for the solution. There is revenue, and you show other relevant metrics important to growth. You also have a core team in place with clear responsibilities. Finally, you can articulate how your solution is better, known as problem/solution fit.?

Goal

A seed round is to go from problem/solution fit to product/market fit. Brian Balfour has written?a great piece on PMF, which he defines as;

• Strong user or revenue growth?
• High retention
• Meaningful usage of the product by the users

Before you raise, you should define what PMF would look like at the end of the round. Not only this helps you to be focused, it also helps build a better relationship with investors. Look for proxies from similar markets and products to support your goal.?

Amount

A typical seed round would range from $50K to $250K. Founders with prior experience or an unfair advantage can directly raise a seed round.??

Two key questions run through an investor's mind;

• Can this person speak/negotiate with potential customers?
• Can this team attract follow-on funding?

Valuation

Valuation = Team + Unit Economics

A good team should be able to articulate the cost structure & unit economics in their industry. They should also have a strategy to ensure they hit the projected revenues & costs. These factors should be part of your pitch and help you defend and negotiate your desired valuation.?

Summary

In Part II we can look at Pre-Series A & Series A. If this was helpful, do like and share. Please ask a questions or share your experience, I would like to learn from you as well.