Article originally published by the Indianapolis Business Journal on September 4, 2020 By Kristen Cooper, CEO & Founder, The Startup Ladies
Despite what you might have seen on TV shows and heard from privileged investors, great ideas are not always funded. Too often, female founders with viable ideas don’t have enough pre-seed capital to prove out the concept and go to market.
Pre-seed money is the first “round” of funding typically sourced from friends, family, accelerators and some angel investors. The total amount of funding raised during the pre-seed stage is usually between $50,000 and $1 million. The value, or “valuation,” of the startup is usually $1 million to $3 million. Individual investment amounts can start at $5,000 and go up from there.
Pre-seed money allows the founder and her team to achieve defined benchmarks. Examples of key milestones and expenses include hiring key staff, developing and testing a product or service, gaining traction by accruing emails and followers and/or acquiring customers. Reaching the milestones helps the founder secure additional funding in later rounds so the company can continue to scale.
Unless a founder is independently wealthy, she can operate for only a limited time with her own savings. Securing pre-seed capital is extremely difficult for founders without access to networks of affluent people conditioned to write checks for risky ventures. This problem is even greater for entrepreneurs who are women.
In 2019, women received less than 3% of the $136.5 billion invested into U.S. startups, despite the fact that their companies yielded higher ROIs than their male counterparts. Investment culture has favored men, but there are signs the tide is changing.
Thanks to the #MeToo movement, the overt and covert systemic sexism rampant in startup culture has been called out. The investment portfolios of venture capital and angel firms (largely dominated by men) are being closely scrutinized. Investment firms are slowly adding women to their teams—even though it tends to be at more junior levels. Female venture capitalists like Jenny Abramson and Heidi Patel, managing partners at Rethink Impact, are changing the venture landscape. They raised $182 million and invest only in tech startups founded by women.
Simultaneously, powerful women investors have risen and built funds that focus investment on both pre-seed and seed-stage companies. Arlan Hamilton, author of “It’s About Damn Time” and founder of Backstage Capital, has invested between $25,000 and $100,000 in 125 companies since 2015. Each one was founded by a woman, person of color or member of the LGBTQ community. Candice Matthews Brackeen, managing partner at Lightship Capital, is en route to closing a $50 million fund that will invest pre-seed and seed capital in underrepresented founders.
While it’s exciting that significant funding has been earmarked for women and underfunded groups, the capital will be deployed quickly. And it doesn’t come close to the number of deals and the more than $100 billion invested into male founders.
For too long, male investors have set higher and unrealistic expectations for female founders at the pre-seed stage, while greenlighting funding for male founders with less experience, traction and sometimes no more than vaporware. Male investors have also relied on others (grant programs, women’s organizations and funds devoted to supporting women) to invest early in women. It’s time for male investors to put some skin in the game at the pre-seed stage.
Female founders need and deserve male investors, business owners and executives as allies right now—not eventually. Specifically, we need more men to invest pre-seed capital into female founders and serve as the lead investor to encourage other investors to invest in the company.
Our economy needs startups to produce jobs more than ever. Moving pre-seed capital into the hands of female founders solving big problems will allow them to prove out their concepts and create desperately needed jobs. The money is available. In May, Kiplinger.com reported that, in 2019, there were a total of 8,386,508 millionaire households in the United States, with 138,739 of them in Indiana. Yet untapped markets continue to go unaddressed.
Anyone with the financial wherewithal can play a dramatic role in transforming the pandemic economy by becoming a pre-seed investor. Join organizations like The Startup Ladies that will teach you the process of investing in a startup and connect you to female founders who are investor-ready. Attend virtual pitch events with PitchFeast and Powderkeg to meet founders seeking funding.
Most important, write checks at the earliest opportunity directly to female founders with a big vision, clearly defined market and strategy to profitability. Infusing pre-seed capital into the startup ecosystem will not only change history for women, it will create long-term career opportunities for countless people in our community.