Pre-Seed VCs The UK Shortlist

Pre-seed VCs

What came first, the seed or the plant? The Pre-seed! 😊 … A pre-seed VC will invest in ranges between 100K-500K. At this level of investment, it’s generally all about founders, market size and experiments.

Visit our venture capital database for the full list of UK venture capital firms.

As seed rounds have become bigger and require more proof of traction and product-market fit, a gap has been left for very early stage investors. This is for founders that have an idea and are testing things in an exciting market.

At this stage, the goto fundraising strategy for early startups used to be “love money” from friends and family and small business angels. 

These options are a great character reference, a real proof that people believe in you. However you can get stuck. You can build a product, get a bit of traction but still finish in no man’s land. Absolutely nobody will know you in the VC world. You’ll have to stop everything to jump through the hoops of the seed raising process with all the required due diligence. 

A Pre-seed fund will make you a part of an ecosystem from the start with investors and startups ready for your next steps. Although they are not generally as hands on as an accelerator or incubator, they can provide quality intros and have standard templates for term sheets.

If you add a Pre-seed VC to love money and business angel investments and you could have the perfect combo.

Here is a list of UK based Pre-Seed investors

Click here for a full list of 206+ VC funds in the UK

VCs are not the only pre-seed investors!

Pre-seed VCs are just one way of raising very early stage funding. And venture capital funds will probably want to take the lead at this round, however, very often their investment will be a complement to one or two of the below investment options:

pre-seed investors

Love money

Love money is seed capital that has been extended by family or friends to an entrepreneur who starts a business venture.

You know that old saying "love means never having to say you're sorry"?

Well, it's true. When an entrepreneur raises love money from friends and family they are doing so because their dream is worth the risk - but only if both sides understand what this investment entails beforehand. In other words: make sure everybody onboard knows the risks related to your business or you may make your personal relationships complicated in the future.

Angel investors

Angel investors are high-net worth individuals who provide financial backing for small startups or entrepreneurs in exchange for ownership equity. The funds that this type invests can take many forms:

  • one time injections when startup cash is tight
  • ongoing support as your company grows & expands into new markets

There can be crossovers between angel investors and love money, however with angel investors should come with less emotional ties and may be harder to convince.

Angel networks/syndicates

Some angel investors get together in groups or networks. This allows each angel investor to see more deals than they usually would on their own. It’s also a great way for angel investors to share the costs of sourcing and vetting potential investments.

For entrepreneurs, angel networks are a great way to confront your project to multiple investors from different backgrounds. These structures often do pitch events and one to one consulting sessions.

A lot of angel investors are previous founders themselves and will recognise your struggles. It’s a perfect place to get quality advice and start building your own network even if you don’t end up raising funds with them.

Startup accelerators

Pre-seed accelerators are a type of startup program that offer investment, mentorship and educational components, culminating in an event on demo day. These programs are generally cohort based and can last between 3 months and 1 year with the goal of helping startups get ready to raise VC funding.

Startup Incubators

Incubators or startup studios have been created to help you grow your idea with you. In the UK, we’ve seen 2 main formats:

Founder studios: These studios are looking for founders to run with ideas generally in a sector that they know well, and where they are confident about the roadmap and KPIs to optimize. Founders will also be able to share resources such as office space, accounting services, HR.

Corporate or University incubators: These incubators are often started as the innovation arm of large organisations or universities. The equity agreements are generally a lot lighter than founder studios as the main target here is to grow an ecosystem.

Crowdfunding

Crowdfunding is a type of angel network. You basically present your project to online platforms such as crowdcube or seedrs and offer equity in exchange for investment from individuals. Each investor will be hands off compared to a typical pre-seed investor.

For some reason, crowdfunding has this image of being easier for founders. However the required documentation and management of your investor community with updates is quite demanding.

Founder money

This isn’t always included as pre-seed investment but it is probably the most common way that founders fund the start of their business. If you believe in your project enough, it’s a good signal to other investors that you are prepared to put funds in yourself. However, you also need to remember that once you take on outside investment, the equity/cap table structure will probably make you the last person to get their investment back.

Believe in yourself yes, but if you’re planning on raising further funding be aware of your own risks.

What do you need to get pre-seed funding?

If you’re at this level of funding you are probably starting off in your business journey. You won’t have a long track record of sales or a strongly developed product. So it’s important to reassure potential seed investors with supporting information.

What do you need to get pre-seed funding?

Do you really need a pitch deck?

There are debates on whether pre-seed pitch decks are useful. But, if you don’t have much to show it’s the minimum you should provide to convince investors. It’s also a great exercise for founders and it can highlight strengths and weaknesses that you don’t really see when you are head deep in the weeds of your business.

Some kind of prototype investors can play with

This can be an MVP, a clickable wireframe, a packaging, an ugly nearly functional piece of hardware. This is not mandatory, but it shows progress and will also stay in the investors mind for longer.

A clear plan of what happens next

Here, nobody is asking you to have a detailed day by day timetable for year 3. But you should clearly know and structure what you’ll be testing next. This is also a great way to regularly start updating investors: “This is what we’re planning on doing next”, Update: “this is what happened, so this is what we’ll be testing next”.

Get hold of our venture capital database with 206 VCs, 41 angel networks, 32 startup accelerators

What can you expect in a pre-seed funding term sheet?

You’ve navigated through all the investor questions. You’ve jumped through hoops and over hundreds of venture capital hurdles. And you’re so close from getting that very first pre-seed term sheet.

What will be inside ? And how far are you from really getting your pre-seed funding?

pre-seed funding term sheet

Term Sheet Basics

A term sheet is a non-binding agreement that shows the basic terms and conditions of an investment in your startup. Once everybody agrees on the details of this document, these are then used to create the contract that will tie all parties together.

All term sheets will start the same. Who are you (the business and the founders)? Who are the investors ? And when is everybody expected to complete the transaction?

  • Company
  • Investors
  • Founder
  • Completion date

Show me the money ! It's time for your investment offer

This is what you’ve all been waiting for : the investment offer !

A pre-seed investment offer will typically include :

  • the number of shares
  • the share price
  • the percentage of the fully diluted share capital for an aggregate of [pound amount]

In this section you may also see a link to a cap table.

And some pre-seed investors will include further staged funding options depending on certain milestones being achieved by the business.

What else is the investor offering ?

Some investors (mainly VCs and accelerators) may try to differentiate themselves by offering further perks to the monetary investment they are making.

It’s quite common to see extra services like :

  • Free desk space
  • Free support for HR and accounting
  • Mentoring
  • Discounts on tools such as AWS or other SAAS products

Terms for current and future employees

Here we need to talk about ESOPs.

An ESOP means Employee Share Option Pool. It is a number of shares that represent a percentage of the company’s fully diluted share capital following the funding.

ESOPs have become quite popular and are a great way to incentivise employees to join and stay in the business for a long time. Most VCs and investors know this and tend to recommend an ESOP structure in their term sheet.

The percentage value of an ESOP really depends on the key employees that are missing in your business. So the % is quite flexible but will rarely be higher than 20%.

Who will be on the board of directors?

Obviously founders will be on the board. However lead investors will often want to get a say in any substantial decisions that the company will be making.

An example of this could be :

“any spending over £XXX XXX will require consent from at least one other non founding board member”.

Founder shares

This may come as a surprise, but often investors will add reverse vesting provisions for the founder shares.

Basically if you leave the company before X number of months, the investors can have purchase rights on your shares.

Other clauses

It doesn’t stop here!

Pre-seed VC term sheets then will list a series of clauses to control the company's future journey :

  • Pre-emption :

    This clause allows shareholders the right to participate in further investments in the company. This is based on their ownership of shares and is in no case an obligation.

    It just mainly rewards early investors.

  • Right of first refusal :

    If a shareholder wants to sell his shares, then, with this clause, existing shareholders will have the right to buy shares before they are transferred.

  • Tag-along
  • If a majority shareholder sells their stake in the company, then this clause allows minority shareholders to sell their shares with the same conditions.

  • Drag-along
  • If a majority of shareholders wish to sell their shares to a third party, then all other shareholders are required to sell at the same time.

  • Information rights
  • This clause covers the information that the company will provide to the shareholders. This can be annual budgets, monthly PNLs, weekly catch ups etc.

  • Good leaver / bad leaver / intermediate leaver
  • What happens if the founder is convicted of gross misconduct, or fraud? This clause will cover all the eventualities of the founder leaving the business. Good ones and bad.