How a Pre-Seed Startup VC Thinks Case Study w Sramana Mitra

The 1Mby1M Methodology is based on case studies. In each course, Sramana Mitra shares the tribal knowledge of tech entrepreneurs by giving students the rare seat at the table with the entrepreneurs, investors and thought leaders who provide the most instructive perspectives on how to build a thriving business. Through these conversations, students gain access to case studies exploring the alleys of entrepreneurship. Sramana’s synthesis of key learnings and incisive analysis add great depth to each discussion.

The toughest round of funding an entrepreneur seeks to raise is pre-seed investment. It sports the lowest probability of success, the highest amount of ambiguity, is poorly defined, and is causing the greatest amount of confusion and road wreck out there.

Over 99% of the entrepreneurs who seek financing are rejected. I run One Million by One Million (1Mby1M) – a global virtual accelerator for startups. 2021 is our 11th year supporting entrepreneurs.

Thousands upon thousands of entrepreneurs have approached us for help with their funding at a stage where their chances of getting funding is ZERO. We can’t help them, regardless of how powerful our investor connections are. We can’t help a startup get funding before they become fundable. It pains me to see how many entrepreneurs have no idea what makes a startup fundable.

Sadly, less than 1% of businesses are fundable. What that means is more than 99% of the entrepreneurs waste their energy on pitching their unfundable businesses to investors. Hugely unproductive and unhealthy.

Here’s a quote from Marc Andreessen who has a rejection rate of 99.3%:

“At our venture capital firm we only invest in a sort of Silicon Valley–style tech. We see 3,000 inbound deals a year. And those are inbound and coming through our referral network, so those are sort of prequalified. We can do maybe 15 or 20 investments out of the 3,000 a year. So I like to say our day job is crushing entrepreneurs’ hopes and dreams. Our main skill is saying no, and getting people to not hate us.”

There is a reason why savvy entrepreneurs have been using the Bootstrap First, Raise Money Later strategy.

Generation after generation of entrepreneurs have used bootstrapping to get to a fundable stage, so they can call the shots at the negotiation table with their potential investors.

If you get rejected by Accelerators, Angels or VCs, and they don’t tell you why, you need to understand the objections and the analysis that led them to their decision. Most good investors take the time to explain. Also, there are some fairly standard reasons why entrepreneurs get rejected by investors.

At Y Combinator, the rejection rate is 98%. Geoff Ralston, President of Y Combinator, explains in a recent interview:

“You have to understand venture math. Venture capitalists have limited partners who invest the money that they then invest. They demand returns. That doesn’t mean that that’s not a perfectly valid way to build a company and have a successful outcome. In fact, what I like to tell founders is that you can get very wealthy doing their business without a VC. We support that. But it is true that for our batch program, we’re assuming that you’re a startup that will grow fast and are going to need VC and that you’re not looking to create a lifestyle company.”

Is there a strategy for raising your odds of getting into Y Combinator?

The short answer is yes.

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