Turning a startup idea into reality often requires major support, and raising funds from investors is a common way to achieve this.
Imagine you develop a marketplace to connect pharmacies, healthcare providers, and consumers. Funded with initial savings, you release a beta version that shows promising market traction. Meanwhile, you need funds to build your team, refine your product, and fund your marketing campaign.
During this period, you meet an angel investor who is convinced of your idea's potential and knows exactly what you need to initiate growth. Whatever fund this angel investor commits to your startup within that time is pre-Series A funding since it provides you with the capital to achieve specific growth before qualifying for a more significant funding round.
This happens because you already have a working product and some initial market traction but need more resources to solidify your business model.
You may wonder how pre-Series A funding works. This article covers it, and you will also know what funding is before Series A.
Key takeaways
- Every funding requires investors, but not all investors participate in every funding stage. For pre-Series A funding, investors often include angel investors, early-stage venture capital firms, startup accelerators, and personal investors.
- Pre-Series A funding is usually used to refine the product, build your team, and fund your marketing campaign.
- Pre-Series A funding is usually small, depending on the industry, compared to Series A funding rounds, usually between $2 million and $15 million.
- In pre-Series A funding, investors aim for potential and trust in the founder. They also expect early signs of product-market fit or traction .
- Valuation disagreements, market uncertainty, and proving product market fit are key challenges in pre-Series A funding.
Definition and purpose of pre-Series A funding
Pre-Series A funding is an early-stage round that typically occurs after seed funding but before a Series A round. It occurs when an early-stage startup has a working product and has shown promising market traction but needs more resources to solidify the business model.
MDaaS Global, a Nigerian healthtech startup, i'SUPPLY, an Egypt-based B2B healthtech company and FlapKap, an Egypt-born and Abu Dhabi-based fintech platform are among early-stage startups that recently secured pre-Series A funding.
This funding round helps a startup to fulfill the following purposes before seeking larger investments.
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- Product development: The funding offers resources to improve the startup's products. For instance, a part of the FlapKap pre-Series A fund will go towards optimizing its technology infrastructure to launch trade finance products designed specifically for B2B businesses.
- Build customer traction: Startups can use the funding to acquire and engage customers just like MDaaS Global intends to use a portion of the funds to expand its healthcare network, establishing a presence in each Nigerian state.
- Demonstrate market viability: The startup also validates its market potential through funding, setting it up for potential larger investors.
Investors involved in pre-Series A rounds
While every funding requires investors, not all investors participate in every funding stage; below are the typical investors involved in pre-Series A rounds:
- Angel investors: These investors commit funds to early-stage startups for a minority stake (usually between 10% and 25%). Besides financial support, angel investors provide mentoring and support, access to their contacts and business knowledge.
Olugbenga Agboola, Co-founder and CEO of Flutterwave, is an example of an angel investor. He has invested in Tushop, a community group buying platform where members can sell groceries to those in their social networks and communities.
- Early-stage venture capital firms: These firms also provide funds to early-stage startups, including pre-Seed, Seed, or Series A stages. The firm also offers guidance on running the startup. VC firms in Africa include Vantage Capital, Voltron Capital, and Launch Africa. VC firms also take equity or an ownership stake in the startup.
- Startup accelerators: A startup accelerator is a mentor-based program that provides guidance, support, and limited equity funding. These accelerators also give startups access to top mentors, VCs, and investors. Google for Startups Accelerator Africa and Y Combinator are examples of Accelerators that have benefited African startups.
Key differences between pre-Series A and Series A funding
Pre-Series A and Series A funding have some key differences, including the stage of the startup, the funding amounts, and investor expectations.
| Key differences | Pre-Series A funding | Series A funding |
| The stage of the startup | This funding round often occurs when a startup is refining its product, building its team, and proving its business model’s potential to scale, even if it hasn't yet achieved significant revenue. It focuses on early validation and reaching key milestones. | Here, the startup has most likely achieved product-market fit and gained initial traction in revenue or users. The focus shifts to scaling, optimizing the product, and proving sustainable growth. |
| Funding amounts | Pre-Series A funding is usually not huge, depending on the industry. | Series A funding rounds are usually between $2 million to $15 million. Companies raising Series A funding typically have valuations ranging from $10 million to $15 million. |
| Investors expectations | Investors look for potential and trust in the founder; early signs of product-market fit or traction are major expectations. | Investors in this stage look for startups with clear market demand, a strong team, and a solid plan for scaling, with detailed growth strategies showing potential for significant expansion. |
| Type of investors | Angel investors, family, friends, and accelerators. | Large venture capital or private equity firms. |
How does pre-Series A funding work?
Pre-Series A funding usually occurs after the seed stage and before a Series A round. It acts as a bridge, offering capital to help startups achieve key milestones, including product development, building customer traction, and demonstrating market viability. This stage positions your early-stage startup for more substantial investment in the Series A round.
Often, investors commit funds for a minority stake while also providing mentoring and support, access to their contacts and business knowledge. This funding round is important because it serves as a validation of the startup’s potential, attracting the attention of larger investors and opening doors for strategic partnerships.
Process of pitching to pre-Series A investors
As investors want a clear, data-driven breakdown of your business, highlighting your key ideas and financial projections is important while pitching. But before you pitch, you need to note the following:
- Identify potential investors: Conduct a search based on your business type's needs.
- Evaluate the current investment climate: Assess market trends and conditions, including investor sentiment, to determine the best timing and approach for your funding efforts.
How to make a pitch to pre-Series A investors
- Briefly and precisely present information about your startup. Walk the investors through your business type, company structure, founders, and other necessary details.
- Tell your story properly: Clearly explain the problem your startup addresses, including the uniqueness of the solutions. Show the market size, growth potential, and your company's competitive edge. Also, clearly analyze your revenue model, costs, and financial projections.
- User acquisition: Show early user adoption, customer testimonials, and metrics, such as user growth or engagement. This helps demonstrate credibility.
- Highlight how you intend to attract business: Investors back projects with clear demand. You should explain your strategy for attracting new customers, including your marketing channels and key growth metrics such as customer acquisition cost (CAC), customer retention rate (CRR), and conversion rate.
- Showcase your team: Investors often want to know their investment is secure. To achieve this, highlight your team's strengths while being transparent about current weaknesses. Clarify how you intend to address these gaps to assure the investor of your ability to execute effectively.
Types of funding structures commonly used in pre-Series A
- Convertible notes: Convertible notes are short-term debt instruments that allow an investor to convert debt into an equity stake in a startup. Newly opened startups typically issue them.
- SAFEs: Simple Agreement for Future Equity, is a type of investment contract commonly used by startups to raise capital from early-stage investors. With a SAFE agreement, you can secure funding for your startup while offering investors the right to convert their investment into equity in the future.
- Equity-based deals: Equity financing refers to raising capital through the sale of shares in a startup. This method allows early-stage startups to acquire funds without incurring debt.
Challenges and Considerations in pre-Series A funding
Considerations in pre-Series A funding
During pre-Series A funding, considerations for both startups and investors include risk tolerance, expectations, and the potential for future dilution during the Series A round.
1. Risk tolerance
- Startups: As a founder, you should properly explain your methods to handle risks because investors are often interested in how you intend to address potential disruptions.
- Investors: Here, investors check whether your business model aligns with their risk profiles.
2. Expectations
- Startups: You must ensure your growth projections match potential outcomes, indicating product market fit and a clear plan for profitability.
- Investors: Investors often expect strong traction and a coherent plan that indicates higher returns and valuation in the future.
3. Future dilution
- Startups: As a founder, you should properly negotiate the terms of your equity to minimize dilution in subsequent rounds. A lower valuation during pre-Series A can cause you to lose a larger dilution if the startup's growth does not meet expectations.
- Investors: Dilution percentages vary by funding stage. In a seed round, dilution might be between 10% and 25%. Series A rounds often see a dilution of 15% to 25%. As you move to Series B and beyond, dilution per round decreases, ranging from 5% to 20%. Because of this, investors often seek protective clauses, such as anti-dilution provisions, to protect their stake and investment value.
Common challenges startups face during pre-Series A funding
Should you have a startup idea with the potential to become a reality soon? This section will be useful as you move to secure pre-Series A funding. Below are common challenges startups face during this funding stage.
- Valuation disagreements involve disagreements between potential investors and startup founders over the startup's valuation. This may arise because of different views on the startup’s growth potential and risks and the founders' likely overestimation of the business. The founders’ startup valuation may not convince investors compared to similar startups.
- Market uncertainties: The unpredictability of market conditions can be a major challenge. In situations of recessions or inflation, investors may be doubtful about the startup's future, leading to lower valuations.
- Proving product-market fit: American entrepreneur and investor Marc Andreessen defines product-market fit as “finding a good market with a product capable of satisfying that market.” Proving that your product can solve customers' needs can be challenging, especially when seeking pre-Series A funding.
How to overcome common challenges in pre-Series A funding
- To avoid valuation disagreement, you need to ensure proper communication, use credible valuation methods, and maybe engage a neutral third party to mediate and validate estimates. Through this, you can avoid over-raising or under-raising capital.
- You need to prepare a strong pitch and financial projections for your startup because investors look for clear signs of scalability and resilience.
- Focus on raising only as much capital as needed to avoid unnecessary equity dilution and focus on key milestones before seeking more funds. Startups and investors benefit from fair evaluations based on realistic growth projections. Build trust with a clear vision and strong metrics while investors balance caution with potential returns.
- Startups and investors benefit from a fair evaluation that matches realistic growth projections. As a result, make sure you build trust with a clear vision and strong metrics. Investors will also balance caution with opportunities for high returns.
FAQs about pre-Series A funding
What is pre-Series A Funding?
Pre-Series A funding is a financing stage that occurs after the seed stage and before a Series A round. It offers capital to help startups achieve key milestones, including product development, building customer traction, and demonstrating market viability.
How much funding is typically raised in pre-Series A?
Pre-Series A funding is usually not huge, and it varies depending on the industry.
Who invests in pre-Series A rounds?
Pre-Series A funding investors often include angel investors, early-stage venture capital firms, startup accelerators, and personal investors.
What funding is before Series A?
The funding before Series A includes pre-Seed, Seed, and Pre-Series A.
How long does it take to raise pre-Series A funding?
Securing pre-Series A funding takes 22-24 months after the seed stage. This largely depends on the market conditions, startup readiness, and alignment with investors' expectations.
Conclusion
Having highlighted that the pre-Series A funding round often occurs when a startup is refining its product, building its team, and proving its business model’s potential to scale, you should also understand the challenges and considerations as it will help with proper planning.
Investors won't commit funds unless you properly convince them, so you must clearly define your startup's objectives, the problems you intend to address, and your solution strategy. Also, ensure you build an early and strong relationship with the investors, as this will set you up for future investments, like Series A funding, through their network.
