Why Startups Don’t Always Need an MVP Before Seeking Pre-Seed Investment

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May 4, 2023

Antler
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IN THIS ARTICLE

It’s a subject of great debate within the startup community: Do you need a Minimum Viable Product (MVP) to seek (and raise) pre-seed funding?

Asana didn’t. It’s a project management tool that’s used by a whole lot of companies now, and the market need for a tool like that was self-evident enough that the founders raised $10 million before delivering an MVP.

And if you think that’s good, consider Jet.com. On the strength of its founding team (which included Marc Lore), the company raised $140 million prior to an MVP.

Does having a MVP help your pitch for pre-seed funding? Yes, when the MVP is done well and enhances the overall pitch. But it’s not essential, and a large (and growing) number of startups are able to use the pre-seed funding they attract to build the MVP.

In this article, we will shed some light on how early-stage investors think about product development, why an MVP is not always required to obtain pre-seed funding and how to define the right approach for your startup. 

What is an MVP for pre-seed startups?

An MVP (minimum viable product) is a product that has enough features in it to demonstrate and validate the core idea behind your startup’s product early on. 

In other words, the MVP will address the crux of the problem your startup was set up to solve, and nothing more. Over time, through iterations, the user experience will improve and more features will be added, however, the MVP is the very first time you will give people something to get a “hands-on” experience with your company.

At what stage should early-stage startups look to build an MVP?

Not every startup will follow the exact same trajectory from genesis to launch and beyond, however, as a general rule, there will be steps that it moves through. These are:

  1. Establish the founding team 
  2. Find the first customer with a meaningful problem to solve 
  3. Build the first product
  4. Secure the first revenue
  5. Get external funding to expand the team and accelerate development

Now, where this gets interesting is that the sequence of these activities and milestones can vary completely, depending on the situation and environment a startup is being born into. 

For example, we are seeing an increasing number of startups raise pre-seed funding based on a team, an idea and pitch deck alone, and then use that funding to develop their MVP. And while this growing trend may be true, in some markets it’s still significantly easier to raise funding if you have a first product live and proven revenue.

So, when is the right time to build an MVP for pre-seed startups? 

Every startup is unique, and for this reason, you’ll need to take the time to define the right approach for your business, with following criteria in mind: 

  • The customer market you will operate in
  • The investor market you are targeting
  • Your founding team’s skills, track record and credibility 
  • Your personal runaway before your require external financing 
  • Your business model and how fast you think you it will be to get to your first revenue 
  • Your prior experience with fundraising and existing investor network 

The answers to these questions will help you determine when you should plan to develop the MVP. If you’ve got an experienced team of founders then you can target funding earlier. Likewise, if you’ve got a limited personal runway but are able to substantially prove that first revenue can be achieved quickly, then you’ve got something to pitch to investors. 

However, if your founding team is lacking critical skills, an MVP may be necessary to prove you can execute. Similarly, if you’re targeting more traditional or later-stage investment partners, a product and revenue will likely be necessary to get your foot in the door. 

Take the time to evaluate the situation your startup is in and determine the best way forward for your business. 

Deep tech startups and the MVP

A particularly interesting example of these dynamics comes with deep tech, when the startup is being founded to solve significant scientific and engineering challenges. Advanced AR company, Magic Leap, is a good example of a deep tech company that has been successful at capital raising (having raised $3.5 billion from 11 rounds so far).

Deep tech, by its nature, requires significant (and expensive) investment in R&D to simply arrive at the MVP. Pre-seed startups are simply not going to have those resources available to them, and the expectation won’t be there from investors. What investors will want to see, however, are specific technical expertise and experience to trust that the MVP can, indeed, be built.

Certainly, by the second round of funding the MVP needs to be there, and in this way all startups can learn from what deep tech startups experience. One of the main reasons that investors are comfortable with there being no MVP at the pre-seed stage is that there is the expectation that this is what the pre-seed funding round is for.

Are there risks in building the MVP too soon?

Another consideration that should affect the development of your MVP is whether the timing is right for it. One of the reasons that many founding teams would rather wait to secure pre-seed funding first is that doing so opens several doors that were previously closed to them, including:

1) The ability to hire assistance. If the founding team lacks a particular skill or tool that would help in the development of the MVP, then the pre-seed funding can be used to bring that skill into the startup. The result will be a stronger MVP.

2) The ability to conduct deeper market research. As we know, startups commonly fail because they misread market demand, or fail to find product/market fit. In practice this often happens at the MVP with a product that isn’t properly designed towards addressing the problem within the market. Pre-seed money can be used to conduct the kind of deep market research that can inform MVP design changes and result in a better product.

3) Making sure the MVP delivers for the first customers. First impressions are critical, and an MVP that has had corners cut because the startup’s resources were too limited risks falling flat and hurting the long-term prospects of the company. The MVP might not need rich features or the perfect UI at this stage, but it does need to be usable and solve the core problem for customers in a compelling manner. If it doesn’t do that, you run the risk of losing your first customers, rather than have them cheerlead for the company. 

To MVP or not to MVP

The pros and cons to developing an MVP before approaching investors for pre-seed funding are fairly even. Will it help? Yes, undoubtedly. The MVP acts as validation to the vision and can result in a far more favorable negotiating position.

When approaching your startup’s first initial product, allow the market and environment you’re operating in to be your guide. Consider the strength of your founding team, what investors will want to see and what you actually need to set your MVP in motion. 

Finally, if you know that you require external funding to build your MVP, then make sure you’re speaking to the right people. Dedicated pre-seed firms exist, such as Antler, and they are there to support visionary people from the ground up.

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