In recent years, the venture capital landscape has undergone significant changes. Seed rounds have grown in size and companies are now raising seed funding at an earlier stage than ever before. This shift has led to the emergence of a new stage called pre-seed, which aims to bridge the gap between idea validation and Series A investment.
However, many in the ecosystem view investing at pre-seed as equivalent to buying a lottery ticket. We disagree. With careful diligence and the right approach, investors can build the same level of conviction for pre-traction companies that they would for Series A investments.
Conducting Diligence: The Pre-Seed Difference
While conventional wisdom in venture investing emphasizes large market potential and scalability, we believe that this approach is misguided at the pre-seed stage. Here are three core ways in which conducting diligence is entirely different at this stage:
1. Focus on Short-Term vs. Long-Term
At pre-seed, it’s essential to focus on short-term goals rather than long-term projections. This means concentrating on achieving product-market fit and validating the business model within a limited timeframe (typically 6-12 months). In contrast, Series A investments are often based on more ambitious growth plans.
2. Understanding Market Opportunity and Contrarian Thinking
To succeed at pre-seed, founders must demonstrate a deep understanding of the market opportunity and use case. However, they should also be willing to challenge incumbent thinking and propose contrarian solutions that differentiate their product or service.
3. Bias Toward Small, Lean Teams
Pre-seed companies often require small, agile teams with a bias toward lean operations and fast decision-making. This mindset allows founders to adapt quickly to changing market conditions and iterate on their product or service rapidly.
What We Look for in Pre-Seed Founders
When evaluating potential founders for our pre-seed fund, we look for the following characteristics:
1. Market Expertise
Founders should have a deep understanding of the target market and use case, often acquired through extensive research and customer interactions.
2. Contrarian Thinking
Pre-seed founders should be willing to challenge incumbent thinking and propose innovative solutions that disrupt existing markets or create new ones.
3. Lean Team Structure
Founders with experience building small, agile teams are better equipped to navigate the pre-seed landscape and adapt quickly to changing market conditions.
4. Hacker Mentality
Pre-seed founders should embody a "hacker" mentality, prioritizing rapid iteration and experimentation to achieve product-market fit.
Growth vs. Scale
While growth is essential for any successful business, we believe that pre-seed companies should prioritize achieving product-market fit over scale. Founders who focus on growth will be better equipped to navigate the challenges of scaling their business in subsequent stages.
Conclusion
The rise of pre-seed investing represents a new frontier in venture capital. By understanding the unique characteristics of this stage and adapting our approach accordingly, we can unlock significant opportunities for investors and founders alike.
At Afore Capital, we’ve identified great opportunities to invest at every stage – pre-traction or post-traction. However, it’s essential to specialize in a particular stage and orient our fund around that focus. By doing so, we can provide more value to our portfolio companies and achieve better returns for our investors.