When Michael and Danielle founded 1517 Fund in 2015, we were pretty firmly a seed fund. In the six short years since then, the market changed so much that without any major changes in strategy or distribution, 1517 became a pre-seed fund (with the occasional exception). This isn’t a problem for us — we know what we do well and we know what stage we work best with founders — but it can be helpful to get clear on language.
I find more often one of the earliest conversations I have with first-time founders and aspiring founders is the “well, here’s what somebody really means when they say pre-seed or seed nowadays.” A lot of excellent material out there about starting, growing, and funding a startup was written when “pre-seed” wasn’t even really a thing and “seed” meant something entirely different. "Seed" became "pre-seed," and "Series A" even became "Seed," as rounds grew larger and larger. It helps to be clear on language so that founders A) can know what to expect from different investors; and B) spend their time pitching the right people for their goals.
Most of the definitions I offer below are both from my experience and primarily apply to B2B SaaS companies. Biotech, therapeutics, deep tech, space, and D2C companies (all of which we also deal with, so perhaps they are topics for future posts) have different industry standards and your mileage may vary but consider this a set of general conditions.
“Pre-seed” has a more concrete set of definitions than “seed” does. We used to tell founders that “seed” means anywhere from $2mm - $10mm for a SaaS company, but I’ve recently started seeing $12mm, $15mm, and $16mm seed rounds. These are certainly on the larger side and are often led by growth funds but they’re good illustrations that “seed” can be pretty amorphous.
Pre-Seed Means Before Seed
And seed means before Series A.
Instead of focusing too much on specific raise amounts, valuation caps, or other moving targets for what “pre-seed” means, the best way to think about pre-seed is that it’s the round that sets you up for a seed.
“Well, no duh, Zak,” says the skeptical reader, “But what does that mean?”
Well, your seed round is the round that helps you experiment on real traction channels, build out your team a bit, and get to the place where you have strong traction for a Series A. For SaaS, Series A rounds require at least $1mm in ARR (more from robust sources is better, of course, and we have seen some shift here, too, with $1.5mm ARR being a better target).
So, if you figure you have 12 months in between each round (plus or minus a few months for fundraising/burn estimate error), you can think of pre-seed in terms of “how do I set our team up for $1mm - $1.5mm in ARR in 2 years?” This does not mean to raise for 2 years of runway right out the gate. Instead, it means to work backwards from that Series A target and figure out your plan of raising from there. What we’ve seen work is to target at least $250k in ARR for the seed, giving you about a year to 4x that ARR with new sales and upsells. So that means asking, “how do I get to $250k ARR (or whatever number you target for seed) from where I am right now? How much money do I need to raise to get there in 12-18 months?”
The target number to put the most weight on is the Series A revenue target. Seed and pre-seed investors can make bets on founders, teams, and technology with varying levels of traction but Series A investors are far more likely to be sticklers for specific traction targets, with ARR and top-line growth being the highest priorities.
That all being said, in 2021, we’ve seen inflation across the board. Money all over the world is looking for yields and tech companies continue to offer opportunities for yield that are harder to find in your traditional public equities markets. An increase in the global monetary supply adds even more demand for deals to the picture. So what would have been a large pre-seed round even last year may be a normal pre-seed round at the end of 2021. Seed rounds are getting larger. Salaries are increasing for startup employees (e.g., we used to see teams get away with paying pre-seed engineers $75-90k — now it’s hard to hire an engineer for less than $100k) with quantities demanded and supplied barely keeping up with each other. So, round inflation is normal but that also means to expect metric inflation. A Series A may be a larger round at the end of this year than it was a year ago but the traction required to successfully raise a Series A from reputable firms also increases along with everything else.
With that in mind, my advice for founders remains the same: don’t pay attention to specific number targets and instead focus on getting traction that justifies raising the rounds you need to raise to keep growing the company. Hard numbers change with the macroeconomic climate — if you have traction and growth, you should be able to command your raises appropriately.
So, to recap, for SaaS:
You should expect to target at least $1mm in ARR at Series A. I advise teams to target $1.5mm as a minimum. This number will grow if round sizes and economics continue to grow.
You should raise a Seed 12-18 months before Series A.
(Some teams do a Seed+ or Seed II between Series A and Seed. This is neither good nor bad -- depends on the team. It's not a bad idea if growth is strong and you can command the bump in valuation but aren't quite to Seires A levels yet.)
You should raise a pre-Seed round 12 months before your Seed.
Work from that map to figure out how much you need for your pre-seed. Pre-seed rounds (currently) tend to float between $500k to $2mm in size for SaaS companies.