Unlocking pre-seed capital: Six Investor Questions Every Early-Stage Team Needs to Answer

When it comes to raising funds during a startup’s early stage, there is no single secret sauce. Investment criteria vary massively from investor to investor and from vertical to vertical. Even so, many investors (us included) generally want to have these six key “North Star” questions addressed before they will consider writing a check for a pre-seed and seed-stage startup:

• Opportunity: What is your value proposition? 
• Big vision: What category will you lead, and what new future will you invent?  
• Traction: Do you have enough momentum?
• Market & monetization: What is your path to building a profitable business with USD 100+ million in annual revenue in an uncrowded market?
• Team: Do you have a visionary CEO in place that leads a tight, complete, and creative team?
• The ask: How much do you want to raise and for what?

In the following, we’ll give you an overview of what your pre-seed fundraising pitch deck should contain.

OPPORTUNITY: What is your value proposition?

Your value proposition is one of the most crucial elements for your startup’s success and survival. It answers why customers should buy from you. 

Here is our value proposition formula:

We help [ideal customer profile] to solve [key unmet need] by creating [features and services]. 

It comprises three essential questions: 

Ideal Customer Profile: Who is buying from you?

Granularity counts here. Business.com uses: “SMBs that are a top-ten advertiser on Google in their category, with a person responsible for digital customer acquisition and KPIs in place that measures the ROI of online campaigns.” VOIDS, a Techstars company, landed on the ideal customer profile: “Fast-growing small and medium online merchants in Europe selling on Shopify with an annual revenue of EUR 5 to 15 million in verticals with seasonal products and complex supply chains such as beauty & health, food or fashion”. If you can reach this level of clarity, you are all set.  

Unmet Need: Why do they buy from you?

You can sell best if your business is solving a pressing problem. Sales expert Gero Decker, CEO of SAP Signavio, has heard many business customers say to him:

“If you solve my compliance problem, I will give you one euro. If you solve my cost problem, you get two euros. But if you help me to earn more revenue and differentiate in the market, you get five euros”.

Virtually all unmet needs of B2B business problems fall into one of these three categories: compliance, costs, or revenue/ differentiation.

Features: What do they buy?

Some founders confuse an unmet need or benefit with a feature. While a benefit is connected with the results or outcomes that the user experiences, a feature is always connected to functionality. Dan Shewan explains this well in this blog. Examples of features include:

• A carbon credit calculation tool
• A digital campaign management tool to control and optimize marketing budgets
• A verifiable credential issuance and verification SDK
• A personalized identity wallet app
• A dashboard for greenhouses to compare plant growth and recognize plant disease.
• An API connection to a carbon credit sales platform

BIG VISION: What category will you lead and what new future will you invent?

Go big or go home. When you walk the VC path, boldness helps. As you often do not yet have sufficient traction that you can prove with numbers, it is an ambitious vision that investors may judge you on in terms of bringing your business plan to fruition. Many investors see a goal that “shoots for the moon” as an assurance that you are ready to make your startup successful, whatever it takes.  

As a first step for your big vision, you should ideally have a vivid, detailed picture of a new future in mind. This is your future perspective. How will the world look in 10 years after you have succeeded? This is the question you should answer here.

“Today, you sleep in anonymous hotels. Within the next few years, we see a world in which strangers’ couches are open for you to crash on.” This is how the Airbnb founders imagined a different future and dreamt up the idea to “belong anywhere”, i.e. a world where anyone can feel at home, anywhere. Another example: “Today, it’s hard to find what you need on the Internet. Tomorrow, you’ll be able to do just that.” This was Google’s future perspective as it sought to “organize the world’s information and make it universally accessible”.

Techstars portfolio company Telekinesis envisions a world in which robots are taught like children, namely by watching and imitating. With this in mind, they set out to build a visual robot programming platform for manufacturing robots that imitate humans by watching their movements. 

Your future perspective should be closely related to your purpose. It is the fundamental reason why your business exists that goes beyond making money. Remember that profit is an output, not a purpose. A purpose describes a timeless social good that reaches beyond direct stakeholders such as employees, customers, and investors. Monzo’s “make money work for everyone” is a good example here. An article in Sifted has more details.

Once you have your future perspective, you need to set your company’s business ambition for this new future. Strong teams often invent a new category with the aim of leading this category globally (or within a wider geographical region at the minimum). “To become Europe’s leading online fashion platform” is, for instance, Zalando’s business aim. Meanwhile, one of our Techstars companies has set out to become Europe's number one technology-driven storage and inventory management platform by 2030. These companies all have one thing in common: a crystal-clear intention phrased in a bold statement, which can be encapsulated as:

“My startup: the global (or European, US, African) leader of X”. 

A proper category (your “X”) is large enough to build a unicorn but granular enough to lead it globally. Often, you have to invent that granular category. We call it a “third-level category”. The “leading global FinTech” (Level 1) is far too general, as is the “leading global business and banking payment solution” (Level 2). Founders can state a strong case for leading a third-level category, like “Europe’s leading instant B2B payment platform” or “The number one ESG-focused pension platform in the U.S.”.

TRACTION: Is there enough momentum already?

Traction is like a bright, shining light in the room that catches investors' attention and draws them in. If you want to attract investors, you cannot rely solely on telling a good story. You need to prove that your business is gaining momentum, and that's what traction is all about. 

There are three types of tractions: 

Product-related traction is all about showing your product is loved by early customers. This can be demonstrated by a recurring MVP, high renewal rates and low churn, additional sales within business customer accounts, strong customer satisfaction ratings or net promoter scores, referrals from satisfied customers, and strong customer testimonials.

You can prove sales-related traction with metrics like monthly recurring revenue (MRR), the number of pilot projects currently running, LOIs in your sales funnel, user or business customer account growth, order growth, increasing liquidity, or sales velocity.

Finally, recent fundraising success is a type of traction that can genuinely create a fear of missing out (FOMO) among investors. This includes the amount of capital you have “soft-committed” (i.e. an investor has confirmed verbally or via email, but has not yet signed a contract) or which is already in your bank account, the number of angel investors you have onboarded in the last few months, and any grants or awards your business has received.

MARKET & MONETIZATION: What is your path to building a profitable business with USD 100+ million in annual revenue in an uncrowded market?

To develop a convincing monetization strategy, as founders you should focus on answering three key questions about revenue, unit economics, and competition. 

Revenue: What is your path to achieving USD 70-100 million in annual recurring revenue in 7-9 years without capturing more than 10% of your market? 

A bottom-up market assessment counts here. First, you need to be clear on your revenue streams. In his blog, Dave Parker lists more than 20 different revenue streams a startup can create. Popular ones include B2B subscription-based models (e.g. Salesforce), lead generation models (e.g. Groupon), transaction-based models (e.g. Airbnb), and usage-based models (e.g. AWS). After having selected your revenue streams, you need to estimate the number of customers in your target region, the price you can charge them, and your target market share. 

Unit economics: Can you build a highly profitable business?

While it is fantastic if you can build up revenue, you aren’t likely to attract many investors if you have a profit margin along the lines of a supermarket or an average restaurant. For investors, “unit economics” is especially relevant. This concept describes revenues and costs for an individual unit, i.e. either for one customer acquired or for one unit sold. Venture capital investors look for very profitable businesses on a per-unit basis. While the exact benchmarks vary greatly depending on the industry, contribution margins that exceed 50% and LTV/CAC ratios of better than 5:1 in the early startup phases are often seen as attractive by investors. 

Differentiation: Are you avoiding crowded markets?

Are you the only startup in your space and are facing no competition? For many investors, this is not a good sign. After all, no competition equals no market. Likewise, many investors stay away from crowded markets. In particular, if you have well-financed competitors operating in the same region, you need to very clearly show how you differentiate from them. The best way to do this is by grouping competitors into categories and showcasing the fact that only your startup offers a unique set of features. Many startups in the pre-seed phase fail to compare themselves to their competition on a feature level, so don’t fall into this trap.

TEAM: Do you have a visionary CEO in place that leads a tight, complete, and creative team?

When it comes to early-stage startups, investors like us pay very close attention to the founding team. Why? Because in the early stages, the idea is not yet fully formed or proven and the market is still being explored. Often, startups pivot away from their initial idea, meaning it is the people behind the idea who will make or break the startup. To convince investors and secure funding, founders should ideally meet four essential requirements: a visionary CEO, a tight, complete, and creative team. Check out this article for more.

THE ASK: How much do you want to raise and for what?

If you ask for money, it is essential to communicate how you will spend it efficiently. Here are a couple of principles to follow in order to do this well:

• Make the financing round big enough. The money you are raising should either allow you to hit the next milestone, enabling you either to implement another round or achieve profitability. There are many pre-seed startups in Western Europe that aim to raise too little. If you are aiming to raise less than USD 1 million, many institutional (pre-)seed investors will not take the round seriously and may refuse to engage with you. In times of crisis, many investors expect that the next fundraising round creates a runway of more than 18 months.
• Demote the round. If you are raising a seed round, it can make sense to call it a pre-seed round instead. If you are raising a Series A, a large seed round might be a better framing. This often leads to lower expectations, making it easier for you to exceed them. 
• Don’t pitch a valuation. This is down to negotiation, but many institutional investors will aim to achieve 20% equity in the pre-seed or seed round. 
• Be explicit on your milestones. You need to tell investors what you will achieve with their money. Examples include acquiring 10 new business customers, launching a new generative AI model, or achieving an NPS of 60.

A good way to get started is by filling in the blanks below:

My goal is to raise €____ from an investor/investors who are ____. This money will allow me to hit milestones ____, ____, and ____ within ____ months and allow me to 1) raise my next round of capital and/or 2) achieve profitability.

Here is a good example of how this can look:

The fundraising deck

With so many pitch deck structures out there, it can be hard to know where to start. Our favorite pitch deck structure is the following, where most of this content should be on one slide:

• Logo & business ambition 
• Big vision 
• The problem
• The value proposition 
• Demo
• Traction
• Business model
• Differentiation 
• The ask 
• Team and advisors 

Alex Iskold has put together some alternative ways to compile pitch decks in his blog here. And you can find a good pitch deck database by Business Insider here (Paywall).

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Dr Martin Schilling is the Managing Director of Techstars Berlin and co-author of “The Builder’s Guide to the Tech Galaxy”.

Brian Daly is a serial entrepreneur and Investment Principal at Techstars Berlin.

Thanks to the following friends and colleagues from our network for their relevant input to write this article: Andres Barreto (Managing Director Techstars Miami, Founder Socialatom Group, Founder & General Partner Firstrock Capital, Founder & Board Member Coderise), Gloria B?uerlein (B2B Angel Investor, former Index Venture Principle), Eamonn Carey (General Partner Tera Ventures), Isaac Kato (Former Managing Director Techstars Seattle), Matt Kozlov (Managing Director Techstars Los Angeles), Jens Lapinski (Founding Partner & CEO Angel Invest), Pete Townsend (Managing Partner Techstars Web3.

And special thanks to Ties van der Linden & Rozsa Simon from the Techstars Berlin team for their research, writing, and graphics efforts for this article.