Pre-revenue and pre-product? No problem for founder's fundraise

Pre-revenue and pre-product? No problem for founder's fundraise

Author: Kiley Roache

Published date: 3 April 2024

Cybersecurity company Dapple Security followed up its SAFE with a priced seed round. The keys? Founder-market fit and communicating a vision to investors.

Often, the earliest stage startups raise money through convertible notes and SAFEs. But Dapple Security, a cybersecurity company building a biometric solution to replace passwords for small and medium-sized businesses, recently raised a priced pre-seed round.

The $2.3 million funding was led by First In, and included ex/ante, Access Ventures, and Techstars. The priced round followed a series of convertible notes Dapple raised last spring.

The Denver-based company was founded in 2022 by Gadalia Montoya Weinberg O’Bryan, who previously spent nearly a decade at the National Security Agency as a crypto-mathematician.

Dapple was named a “ cybersecurity company to watch” in 2023 by CSO.

We sat down with O’Bryan to talk about communicating your vision to investors, raising money as a pre-revenue and pre-product company, and options for deal structures at the pre-seed stage.

Highlights

CARTA: What was it like raising a pre-seed round in the current environment?

GADALIA O’BRYAN: We ended up doing it in two phases. We're a really young company, so last year raising money was definitely a matter of survival. And so we raised about $500K on convertible instruments in the spring and summer. And that was great because it gave us enough runway to do our customer discovery, land our first design partner, start product development, get the initial team in place, and say okay, we're a real company now.

And then we could go and raise the real money, which is what we did through a fixed-price pre-seed round that closed in December. I think having the ability to do it in those two stages was really important because the first one was necessary for survival, but we weren't yet at a place where we could have gone out to seek the larger amount of money.

And in the market right now, gone are the days when you can just raise a ton of money on a PowerPoint, so we sort of had to have that phased approach.

That’s interesting that you raised a priced pre-seed round, since often seed or Series A will be a startup’s first priced round, with convertible instruments before that. Tell us about that decision between convertible notes and a priced round.

That was definitely a major thing we had to figure out. Initially we were going to raise the pre-seed round as another convertible note, a SAFE, with just a higher valuation than we had done the first time around. And it wasn't until we identified our lead investor that we switched gears. They had two major reasons for this preference: the first was starting the QSBS clock for their LPs, and the second was establishing a more formal partnership between lead investor and founder through a priced round.

It was definitely harder in some ways: It took much longer to close and was more expensive from a legal and paperwork perspective. But now I'm very glad that we were able to do that because now I see how those convertible instruments convert.

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You raised funding before you had any revenue and before you had a product. Tell us about the pitch: How did you put it together, and what made the difference?

I think back to the initial investor conversations I had when I first started working on the idea. It was valuable for me to have some of those initial conversations before I was actively raising, because it was almost like a dry run—practice when it didn't matter. And repetition is just priceless. So whether it's because you've set up sort of investor calls before you're raising, or whether you're doing it with mentors, friends, even family members, I think having tons of repetition to hone that message is key.

We also went through the Boulder Techstars accelerator program in the fall, right before our raise. And part of that program is mentor-founder matchmaking, where you do a whole week of meetings.

I realized coming out of that week, that not only did we have some great mentors at the end of it, but we also had 70 practice conversations, and that was invaluable.

So in this market, you can’t raise on a PowerPoint or a sketch on a piece of paper. In general, I think what investors are looking for has shifted down a round, so what used to be the bar for Series A is now at seed.

Although everything shifted down a round, we were able to raise money being pre-product and pre-revenue, which I think is not always the case in this market.

It can be difficult for early stage companies to get connected to investors. How did you approach getting introductions and getting connected to potential investors?

In retrospect, it all came from my professional network that I really started putting energy into building two or three years ago.

I started with local connections, and I'm lucky enough that there's a very vibrant startup community in Denver. And then you get introductions outside of the local area from those initial people.

Every founder's journey to closing a round is probably different. But for me, this network was definitely what made it. I was lucky enough that I really didn't do any outbound, cold investor outreach. It all came from sort of this organic either inbound because they had seen some local coverage or a podcast or something on LinkedIn, or warm intros from someone who was already in my network.

Let’s talk about the lead investor relationship. Your lead was First In, a firm that focuses on cybersecurity—was that an important part of the decision to work with them?

It ended up being vital that we had investors who are in cybersecurity and privacy. Because both our technology and the market landscape for these kinds of products is really complex.

So having investors who knew the privacy space and the cybersecurity space was really important. But it's also great to just have them as supporters. Obviously, I'm extremely grateful for the money, but I'm also extremely happy with the group that came together, in terms of the vision and the strategy, and just the operational support that they can bring to us because they come from that world.

Beyond the check, what were the things you were looking for in an ideal investor relationship? What support were you looking for?

I was fortunate to have our round end up being pretty competitive. It was really important that they share a common vision and mission set. Not just around security but around valuing privacy for biometric information. So having that mission alignment with our investors felt really nice.

One thing that our lead First In brought to the table is an advisory network who can help us with things like establishing sales channels. And since we're going after the SMB market, channels are going to be really important to scale revenue.