A startup raising its first funding round can be an exciting milestone. However, it can be challenging to attract investors so early in a company’s history. Without extensive financials, metrics, and sometimes even pre-product, what do private market investors look for in a pre-seed startup seeking its first funding? In this blog, learn more about what investors look for in a startup’s first funding round, key signals, metrics, and statistics that can capture investor attention, and how founders can position their startups to receive their first funding.

What Private Market Investors Look for in a Startup’s First Funding Round

In the absence of concrete metrics, there are a few traction points that may be able to convey to investors the value of investing in a startup:

Compelling Founding Team

A common phrase is “bet on the jockey, not the horse”. In an early-stage funding round, the founding team and their ability to execute is an important foundation.

Investors may look for the following aspects of the founding team:

• Relevant Experience – Have the founders worked in this industry before? Do they have specific expertise that will enable them to scale this business efficiently?
• Technical or Operational Teams – For a tech startups, having a technical co-founder can be a benefit. For other businesses, operational experience can be important.
• Resilience & Coachability – Can the founders handle setbacks and pivot effectively? Are they open to feedback and mentorship?
• Complementary Skill Sets – A balanced team may be more attractive than a solo founder or a team that all has overlapping strengths

How a Startup Can Showcase this Metric

When pitching to investors, highlight the founding team’s past successes. Have they exited a previous startup they founded? Even in the absence of past exits, small wins like scaling a business, working in another startup, and contributing to growth, or even a previous failure, can demonstrate experience and resilience. If the team lacks previous industry experience, consider emphasizing transferrable skills or unique insights into the problem the startup aims to solve.

Growing Market Opportunity

Investors typically want to back startups that have the ability to scale and grow over time. Even if a startup is beginning with a small target market, it may need to prove that the market is big enough to support future growth.

Investors can look at the following metrics to assess the market opportunity:

• Total Addressable Market (TAM) – Is the market large enough to support future growth?
• Serviceable Addressable Market (SAM) – What portion of the TAM can a startup realistically capture in the next 5-10 years?
• Market Trends – Is the industry growing? Are there regulatory changes or technological advancements that might help or hinder the startup?

How a Startup Can Showcase this Metric

Startups can use third-party research from reliable sources to validate the market size and see the projected future size of the market. If a startup is operating in a niche industry, the startup may want to explain how it plans to expand into adjacent markets over time. However, be careful of overpromising SAM and other metrics related to market opportunity. Some investors may see an unrealistic SAM metric as a red flag. Consider finding the balance between a conservative estimate and a goal the startup reasonable expects it can achieve.

A Clear Problem and Unique Solution

Many investors want to see that a startup is solving a real problem that is meaningfully better than existing alternatives.

Investors can look at the following aspects to assess the problem and potential solution:

• Problem Validation – Has a startup spoken to potential customers? Do potential customers actively experience the pain point?
• Differentiation – Why is this startup’s solution better than competitors? Is it faster, cheaper, or something else?
• Defensibility – Is the startup’s idea defensible? Does it have proprietary tech, network events or exclusive partnerships?

How a Startup Can Showcase this Metric

When presenting a startup, founders should avoid vague statements like the common phrase “We’re like Uber but for ____”. Instead, startups should consider explaining why the approach is unique. Startups can also use customer testimonials or provide case studies in order to validate demand. Here is where a startup could also mention beta testing, early product usage, and any engagement or retention numbers through early testing.

Early Traction

While most pre-seed investors don’t expect massive traction at this stage, any sign of demand may make a startup more appealing to investors.

Investors may look for:

• Product Usage – Does a startup have a prototype, beta users, or even paying customers?
• Growth Metrics – Even a small but growing user base can be compelling to investors
• Partnerships or Pilots – Has a startup secured early collaborations with established companies?

How a Startup Can Showcase this Metric

If a startup is pre-revenue, they may want to focus on engagement through beta testing and trials. For B2B startups, they may want to highlight pilot customers or inbound interest. Visuals can be beneficial to demonstrate early traction to make any progress, even small, feel more tangible.

Scalable Business Models

One thing that is typically important to early-stage investors is scalability. They usually want to see a path to profitability and growth.

Investors may look for:

• Revenue Model – How does the startup make money? Subscription? One off Purchase?
• Customer Acquisition Cost (CAC) vs Lifetime Value (LTV) – Do the current unit economics make sense when scaled up?
• Distribution Strategy – How will a startup acquire customers cost-effectively?

How a Startup Can Showcase this Metric

To showcase this metric, a startup should have a clear explanation of pricing tiers and assumptions. In the absence of hard data, a startup may be able to benchmark against competitors. Finally, highlight any existing viral or organic growth mechanisms like referrals or social media buzz.

Realistic Funding Ask

Finally, investors typically look for founders that have strong knowledge on when to raise, how much to raise, and how to use the capital efficiently.

Investors may look at:

• Clear Use of Funds – Will the money go toward product development, hiring, or marketing?
• Runway – Will this round get a startup to its next major milestone like product launch, revenue targets, or even profitability?
• Valuation – Is the targeting valuation ask reasonable? Over or underpricing may raise red flags to investors

How a Startup Can Showcase this Metric

Startups may want to tie funding needs to specific milestones – for example, “this seed round aims to help us get to 10k users”. Startups should be able to back up these numbers and metrics with a solid plan of how the funding could help them achieve that milestone. Startups should also be prepared to justify the valuation ask.

Final Thoughts

A startup raising its first funding round is as much about storytelling as it is about metrics. Since early-stage startups lack extensive data, being able to present narratives based on the founding team, market opportunity, and any current traction can help investors see the bigger picture about how the funding will be used and if the startup might be able to grow.

Is your startup looking to raise capital? MicroVentures may be able to help. Apply today to raise capital with MicroVentures!

Want to learn more about fundraising for a startup? Check out the following blogs to learn more:

• Financials and Fundraising: Financial Reviews vs. Financial Audits
• Flexibility vs Ownership: Revenue-Based vs Equity Financing
• Cap Tables 101: The Foundation of Startup Investment
• Raising Capital with MicroVentures

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.