Why I love Investing in Pre-Seed Startups
I've been investing in a Pre-seed startups for the past 7 years and I absolutely love it.
It is a rare privilege for a human being to be able to afford to do what they love, and to find their true calling. I believe I found it in my current job, and for as long as I live I don't intend to do anything else.
As I've written here before, pre-seed investing is fundamentally different from other venture capital stages. So why do I love investing in pre-seed so much?
In a nutshell pre-seed investing combines unique challenges and rewards that fit who I am - a nerd, an engineer, a product and science junkie who loves learnings, finding patterns, and thinking about the future.
My personality and background allows me to build a framework for thinking about pre-seed in a systematic way, and then lead deals with highest conviction.
📖 Thesis, Themes and Verticals
At 2048 Ventures, we are a Thematic and Thesis driven Pre-seed investors. What this means is that we don't just invest in exceptional founders - this is given, we also have a lens and a point of view on business models, themes and verticals we like.
Our core focus is investing in companies that are developing APIs, platforms, and Infrastructure. We are also very excited about marketplaces, networks and specific types of SMB vertical SaaS that lend themselves onto a marketplace and platform plays. We focus on these business models because we believe these types of businesses will have strongest moats and will become the biggest companies in the future.
In addition to our our thesis on business models, we constantly develop Themes we are excited. Themes are nascent trends that we notice and start thinking about. For example, some of the themes we are thinking about now, in no specific order, are: Bio Eating The World and Software is Eating Bio, Digital Therapeutics, Commodity Sensors, Real-Time Information, Disintermediation of Brokers, Video Eating the World. When we identify a theme we start talking about it to develop a deeper point of view.
And finally, we also tend to focus on specific verticals. We are spending a lot of time in Biotech, Digital Health, Vertical AI, and Fintech. The way we think about verticals is this is a third lens to filter the deal flow.
When you combine it all together you get a very specific filter - Business Model, Theme, and Vertical allow us to narrow thousands of deals we see every year to a handful we actually want to dig into.
🔮 What can this Become?
One of the most important questions we ask every single CEO is what is your Vision, what can this become in 5-7-10 years? Surprisingly many founders can't answer this question clearly. Without a strong Vision, a True North, it is hard to build a big, venture scale business.
In addition to asking the CEO, we try to develop my own point of view. We think about things like where the world is going, is the business forward looking or backwards looking? What is the market dynamic - is this a disruption or blue ocean. Most importantly we think about how the business that starts small and narrow today can develop a long term moat, usually through network effects, proprietary data, APIs, and becoming a platform.
📈 Analyze the Data
One of the fellow VCs said once to me about pre-seed - just because there is no financial data in a spreadsheet, it doesn't mean there is no data. I love that, and completely agree.
Unlike what many people think Pre-seed deals aren't just founder bets or random rolls of the dice. There is a system, and it is based on data.
The first thing we look at, of course is the team. Specifically, why are they doing it, what is their Founder-market-fit. Because most investments we make are B2B, Founder-market-Fit is critical. In addition, we dig in on why this team is together, are they complimentary, how long do they know each other, what is their work history together. Are they resilient, how badly do they want this, why do they win?
Can they actually build the product? Most of the time, not having a technical co-founder - an engineer or a scientist is a showstopper for us. We look for product obsessed teams, who create stand out, exceptional products that customers rave about.
When did this business start? What is their early traction? Have they made enough progress relative to how long they've been around? Are they hustling and proving their grit and getting early customers or are they asking for capital before waiting to quit their jobs?
While this data is very different from a financial model you get at Series B, there are many signals in pre-seed to help you make an intelligent decisions.
➡️ Follow the Process
Beyond the signals, I am a huge fan of the institutional diligence process. Our goal is to go from the first meeting to a check in 3 weeks. We can move faster, but we never skip steps. If someone calls us and says the round is closing tomorrow, we will not engage.
We don't believe in investing without running a proper process.
The key pieces of the process is to do the market research. This includes understanding and speaking to customers, speaking to experts, researching competitors, market size and doing founder references. This is a lot of work to do it right and quickly, but it is critical and really helps pick the best, most high potential companies.
Who are the customers and how big is the need? Is this a vitamin or a pill? Would they pay and if so how much, do the unit economics make sense? How do they talk about the product? Do they like interacting with the team? A ton of information about the potential of the company can be discerned from speaking with customers.
In addition to customers, we often rely on our network of experts, especially in some spaces. Having this network is key for helping quickly filter deals especially in the spaces that we aren't experts in.
Competitor research and market sizing is another critical step - a lot of times, founders under estimate the competition. While it is not a show stopper, we want to get a fairly nuanced view of the lay of the land to then understand what go to market makes sense.
Similarly, we like to run a bottom up analysis to understand if the market supports venture scale outcome. A lot of times, our internal calculation may factor in a future market expansion, that is even though the market today may not be huge, if we believe that it will be expanding, we want to invest.
💪 Develop Conviction
The most amazing thing that happens after you do the work above is you develop a conviction. This happens over the course of several meetings, internal discussions, thinking, and research into the company and the problem they are trying to solve.
At a pre-seed you can never have complete information, you can never not have unknowns and you can never not have risk.
Thats why conviction happens after your brain collects all the data points, and then makes a gut call to invest.
At 2048 Ventures we are highest conviction, first check, lead investor.
What this means is that we do the work and then we lead and co-lead rounds. We are happy to set the terms and we are happy to be the only check in the round. As soon as we compute to a yes, we sign the documents and send the check. We are not worried about the rounds coming together - we are happy to take a risk, along with the founders, to make it happen.
🛣️ Be there First, Follow the Journey
Joining the founder journey at the earliest stage is magical.
I am exceptionally lucky to now be part of more than 130 startup journeys. These relationships start with the first check and unfold over time. It is incredibly rewarding to see the companies grow and to be there for them through these journeys.
The foundation of my relationship with the founders are empathy and trust. I work really hard to earn trust of the founders I back. I earn trust by being open, empathetic, and truthful. Once I invest I am 110% in — pretty much no matter what (I won't stand for fraud and lies), I am there for the founders through ups and downs. I am on your team.
I strive to be the most helpful and the least annoying investor. I am both a cheerleader and a critic. I speak my mind, I don't hold back. I have 24 hours SLA - when you need me, I will be there for you - nights, weekends, holidays - if you are a founder I backed, and you need me, I am there for you.
Thats how I earn the right to walk the entire length of the journey. I love working with the founders at the earliest stage. I also love getting calls from the later stage founders asking for my help with their Series A, B and C, helping with tough situations through the entire journey. This truly is a privilege and magic.
💰 Risk and Reward
Investing in pre-seed, the earliest stage, is incredibly risky. It really is the riskiest type of venture capital investing, which itself is known to be one of the highest risk / reward asset classes.
How to think about managing risk? We do it through a methodical portfolio construction, thematic investing and institutional diligence process.
We recognize that because of the stage we are investing at, we need to place more bets than a concentrated Series A fund. We carefully model out our portfolio construction, think about check size, cost per point, ownership, follow on strategy - everything. We stay very disciplined. It is hard, but we know it is critical in order for us to make money.
After 7 years in the business, I feel confident about our pre-seed investing strategy and have a clear vision for how 2048 ventures will continue to scale and become a world class institutional pre-seed firm.
My previous pre-seed work was at Techstars where I was a Managing Director running NYC program for 5 years. I learned how to invest, and learned the power of discipline, capital efficiency and methodical portfolio construction.
As of now, the 100 companies I backed have raised over $600M and have a combined Market Cap of $2.2 Billion. Both Techstars NYC Funds that are managed are now returned and in carry. The earlier fund is at 1.7x DPI and at a mind blowing 14.76x TVPI. The second fund is also on track to do extremely well - 1.16x DPI and 4.99x TVPI. The two larger pools of capital that I deployed are also doing really well - they are almost in carry with 0.99x DPI and a combined 5.93x TVPI. The best part is — this is still early days for my Techstars portfolio, the best is yet to come.
I do not take all of this for granted, and consider myself exceptionally lucky. My imposter syndrome will never go away no matter how successful the companies will become.
It is exceptionally rare to be able to do what you love and to find your true calling. If you are thinking about becoming a pre-seed investor, and think that you would enjoy it - consider trying it out. It is a unique asset class that doesn't necessarily have the salaries or even the upside of the other venture asset classes.
I think that pre-seed investing comes with incredible, unique rewards - being the first, being along for the entire journey, doing the work, being a nerd and a dreamer, being irrational, creative and disciplined all at the same time.
