As I’ve been doing interviews for Fundraising Mastery this week (We launch in 2 weeks!) I’ve found myself having a recurring strategy discussion with founders:
The topic that has come up multiple times is what to call a specific raise.
ie. what’s the difference between a “seed round” and a “pre-seed round”? and how can a founder decide which label to apply to their raise?
I could write a full book chapter on this topic, but for this post I’m going to keep things simple and just point something out:
What you call your raise matters because it signals to investors the stage you are at in building your company.
If you think about it you’ll realize that the labels “Friends and Family”, “Pre-seed”, “Seed” and “Series A” are only useful to the extent that they denote company’s stage of development.
A lot of founders think these labels denote the size of the round, or who the investors are, but they don’t. The labels are primarily useful to denote your stage.
In fact we use this kind of labelling scheme in many other areas:
For example with plants we use the labels: seed, sprout, seedling, and tree
With humans we use the labels infant, toddler, school age, adolescent, young adult etc.
So once you understand that these labels (Pre-seed, seed, etc.) are useful to denote stage, you can start to see how you as a founder can use this labelling scheme to your advantage.
To show you how, imagine you are judging a adolescent talent show.
You sit there watching a series of 13, 14 and 15 year olds performing their talents, and then all of a sudden an 8 year old walks onto the stage.
As the judge your first thought is going to be something like “This kid is at the wrong show” and then maybe “They are going to have to be really good, like uber exceptional, to win this talent show”
More than likely the 8 year old is going to lose the adolescent talent show. (Sad!)
This silly example shows you how developmental stage matters. And it’s the same for companies.
Investors who invest in Series A companies are looking for a certain level of development.
Investors who like to invest in the Seed stage are looking for less development.
And investors who like to invest at the pre-seed stage are looking for even less development still.
So knowing this you can use the labels to help your company stand out during your raise.
For example: Say my company is generating $10k/m in MRR (monthly recurring revenue).
If I set out to raise a “Series A” round I’m likely going to be competing with companies who have much more revenue and/or traction than I do for the same investor attention.
And so my raise is likely to be very difficult because I’ve mislabelled my company in terms of my stage. In this scenario I’m likely to lose.
Conversely, if I set out to raise a “pre-seed round” I’m going to be competing mostly with companies without any revenue or even finished product for the same investor attention.
In this scenario I’m likely to win.
If I haven’t raised before there is nothing stopping me from calling this raise a “Pre-seed”, or even a “Friends & Family” (if you have at least some friends or family in there)
Even if it turns out to be a $5M round there is nothing stopping me from calling it Pre-Seed or Friends & Family round.
So this is what I tell founders: give your raise the label that will make you stand out in that stage
In other words, use the labels to stay at the “top” of your stage as you move through “Friends & Family” to “Pre-seed” to “Seed” and eventually to “Series A”
This way you will always be among the most attractive companies in your stage, get the most investor attention, and likely have an easier time raising (since you will be competing against other companies in that stage).
(And remember I didn’t even mention that you can raise multiple “Friends & Family” and “Pre-seed” rounds before you raise a “Seed” round, etc so you have flexibility)
Bottom line: early stage fundraising is primarily about storytelling and part of that storytelling is how you label your raise.
I hope that’s helpful. Reach out if you have questions about how to label your raise.
And if you are currently raising for an impactful project that will make the world a better place, consider applying to Fundraising Mastery