You're Investing Earlier? Ok, HOW Early?
Some thoughts on the pre-seed investing space
I don’t believe pre-seed VCs should exist. The only reason pre-seed investing exists in the first place is because series A investors needed to move earlier to get ownership in the best startups, then seed investors needed to move earlier to continue to get ownership in the best startups once seed got too competitive. VCs “moving earlier” may make sense for a VC with a portfolio, but it doesn’t do founders any favors. Here’s why:
Angels Already Serve This Space
Angel investors have different motives from VCs. They are generally rich people that like to fund companies and are okay if their investment goes to zero. They like making money but it isn’t their job to make money. But when a VC invests in a company, it enter the VC treadmill. It is expected to grow at a certain rate, on a certain timeline, and in a certain way. In addition, a VC has ownership requirements and angels don’t. This can totally mess up a cap table down the line, bringing me to my next point.
100% Can Only be Split so Many Ways
Pre-seed investing makes life much harder for a startup to get truly huge. If pre-seed VCs need 10-25% to fulfill their ownership requirements AND seed investors need 10%-25% as well, there is a lower chance that there is enough room on the cap table for a Series A investor to take their standard 20%-40%, let alone leave room for future rounds and keep the team motivated. As mentioned, this isn’t an issue for the VCs though. They run a portfolio, so the chances of a few of their startups breaking out are high. But founders have a portfolio of one and a pre-seed VC taking 10% of their company at the founding stage is not necessary at best and criminal at worst.
A Founding Team Finds PMF Alone
A startup needs months, if not years, to explore their space and find product market fit before getting the institutional backing and venture building help from professional VCs. VCs are value add but after finding product market fit, not before. Since one of the largest benefits of working with a top VC is their value add, this should be pushed out until product market fit is found or is within reach. VCs who try to help a startup find PMF likely do more harm than good.
You’re Going Earlier? Ok, How Early?
As mentioned, VCs are paid to get rich. It is common sense to keep expanding earlier to get equity in companies, but where does this end? Is pre-PRE seed investing in someone’s future company when they get a job at Google? Is pre3x seed investing in a famous founder’s daughter for when they start a company? This obviously breaks down somewhere, and i’ll argue it already has. This is why I think we need to revert to a world where pre-seed VCs don’t exist.
The common question here is if VCs shouldn’t go earlier to pre-seed, how do they make their numbers work at the seed stage? I have lots of views here, but the primary answer is to expand where they’re getting their deal flow from. Do they only rely on warm intros? Only invest if someone else has already invested, even if the company is at the seed stage? Only invest in accelerator companies? If they answered yes to any (or all) of those questions, I encourage them to expand where they look for deals to help them find great companies at the seed stage while still hitting ownership goals.
At the end of the day, it’s just strategy. With that said, it seems like in a game where being contrarian is where alpha is, reverting to seed investing in deals outside the scope of most VCs is probably how to become a billionaire in a decade. But hey, if investing in Mark Zuckerberg’s future grandson is the future of “early stage investing”, i’ll grab the popcorn.