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The business plan for pre-seed financing into a must-have

The Start-up landscape is growing from year to year. Only one in three start-ups survives the first three years of business and makes it to the successful market launch. Pre-seed financing within the framework of venture capital is all the more important, especially for development-intensive products. This gives start-ups the opportunity to test the product on the market before it is successfully launched and marketed. In exchange for the provision of capital, entrepreneurs give away shares starting a business or raising capital through a loan.

In order to get the pre-seed capital, founders have to create a coherent business plan that convinces investors, business angels, banks or venture capitalists. When creating a business plan, however, some special features must be taken into account. This article addresses the most important components of a pre-seed business plan.

What does pre seed mean?

The pre-seed financing concept, which originated in America, has meanwhile also arrived in Germany for the market launch of development- and cost-intensive products. The aim of pre-seed financing is to secure the necessary capital for a young company to achieve the next milestones, i.e. successful market entry.

Pre-seed is the phase in which the completion and market launch of the products or services has not yet been completed or has just been completed. In this phase, the Minimum Valuable Product (MVP) is usually developed by start-ups and launched on the market. The MVP is the minimal product version, which can generate sales on the market. Accordingly, the MVP is no longer a prototype.

However, the prototype (external link) is just as important for a young company start-up in the pre-seed phase. Because this is the predecessor to the MVP and can provide evidence of a strong product. Because young companies usually have innovative product ideas that stir up the existing market or even open up new markets. This fact entails high risk for investors. Accordingly, these two concepts, which are important for investors, are designed to keep the risk of the investor as low as possible when it comes to investing money in a start-up. As a result, if there is a strong proof of concept and letters of intent, there is some evidence that the product will also be successful when it goes to market.

Start pre-seed financing with a perfect business plan

A complete and well-designed business plan is the first step to successful pre-seed funding. This serves above all to summarize all considerations, plans and forecasts of the business start-up. A well-prepared financial plan is essential for this door opener for financing by investors.

Since in this phase of company maturity no sales figures can convince investors, it is important to pay special attention to the following areas in addition to the general content contained in a business plan:

The founding team and their competencies: What skills do start-ups have in the desired industry? Are the entrepreneurs up to the task? (If not or in case of doubt: What type of specialist advice was obtained?)

Proof of Concept and Letter of Intent

  • proof of concept: The proof of concept is a term from project management and describes a test phase in which strong evidence is provided that the business model and the product are fundamentally viable. Evidence can vary widely by product and industry. The criteria usually lie in technical or business factors.
  • Letter of Intent: In the start-up context, this means that the founders persuade test customers, pilot partners or interested parties to sign a letter of intent that they are interested in purchasing the product or using the service.

Rough assessment of the business idea

  • Discounted Cash Flow (DCF): This type of assessment is based on projected payment surpluses for the future. In order to present future sales values ​​correctly, the future cash flows must be discounted. The problem with this form of evaluation lies in the persuasiveness of the desired cash flow. It can help here if comparable competitor data is used to provide the forecasts with evidence. It is problematic when a completely new market is opened up.
  • Pre-Post Money Assessment: Here, an evaluation is made based on data, which presupposes that a young business start-up has already received capital. For example, a start-up has a pre-money valuation of 150,000 US$ and an investor now pays in 75,000 US$, then the post-money valuation is 225,000 US$.
  • venture capital method: This is the classic among the evaluation methods. This method uses the DCF model as a basis. Here, EBITDA (earnings before interests, taxes, depreciation and amortization) is used for calculation. In turn, EBITDA is offset against an industry-specific multiple to calculate the market value of the company. Example calculation: According to the forecast, a start-up has an EBITDA after three financial years of 50,000 US$ and an industry multiplier of 17.8, then the valuation is 890,000 US$.

Top notch market and competitive analysis: Anyone who wants to become self-employed or has just founded one should ask themselves whether all competitors have been identified and whether there is a clear distinction between them. They also have to answer what makes the product better than that of the competition and whether there is a strong unique selling point.

From when a start-up can get pre-seed financing

Once a complete business plan with the appropriate financial planning is available, things get serious: the approach to investors is now imminent. Here it is advisable to obtain expert advice in the form of business start-up advice when calculating the business forecasts, as well as when creating the business plan and especially when drafting the articles of association.

The business mission of a startup is often on lack of commercial and legal competence attributed to the founder. Especially in the initial phase of a company, you want to save money, but it often turns out that comprehensive advice can save a lot of money later.

Find the right financing partner

Finding the right financing partner depends on a number of factors. The following Questions can help here: How much capital is required? What securities and capital contributions do business founders bring with them? What form of capital is desired? First and foremost, friends, family and acquaintances come into question for small financing volumes to support the start of the business. In start-up jargon, this is referred to as “friends, fools and family”.

For larger financing volumes, on the other hand, banks and venture capitalists can help. If you need know-how and rather less capital, accelerators, start-up programs and incubators can be used to go through the pre-seed phase.

Would you like to start a company or expand your business start-up? Then you can take advantage of a government-sponsored business consultancy and help yourself with this important process and the preparation of a business and financial plan be accompanied professionally. Simply fill out our free funding check and benefit from our know-how.