The increasing capital efficiency of startups has been changing the face of venture for the last decade or so.
- The first thing to happen was that the bar for a Series A went up – unsurprising given that startups could now get much further with pre-Series A amounts of capital (2005-2010)
- That created a gap in market which sub $100m dedicated seed funds (aka micro-VCs) stepped into – there are now over 300 of them (2005-2016)
- Then competition in the seed market led to increased round sizes driving the Series A bar still higher and causing seed investors to in turn look for more progress before investing (2013-ongoing)
- Creating a gap for Pre-Seed which is beginning to emerge as a category (2015-ongoing)
NextView Ventures recently published this graphic which captures the trends nicely.
Note that they have added a ‘Second-Seed’ stage which I haven’t described above. Their point is that as the bar for Series A rises an increasing number of companies are raising second seed rounds to get them there. That’s definitely happening, but I’m not sure I would have broken it out as a separate category on this chart as the goals and investing disciplines of Seed and Second-Seed are pretty much the same – get from early traction to the scaleable economics that yield a Series A.
However, Pre-Seed is very different. The criteria and evaluation are very different and the goals are to be ready for Seed rather than Series A. As you can see from the table below, the most significant difference is that Pre-Seed investors base their decision on team, vision and desk research whereas Seed and later investors also look at companies’ products and customers’ reaction to them.
Note that venture is an industry of exceptions and whilst this table is accurate for the middle of the bell curve there are plenty of companies that have raised outside of these criteria. The exceptions come for a myriad of reasons, common ones include experienced founders are able to raise seed or even Series A size rounds at the pre-seed stage, companies in hot markets or sectors (e.g. current account startups in the UK last year), and situations where tech development or regulatory costs demand more capital.
Forward Partners invests at the Pre-Seed and Seed stages, with slightly over half of our deals coming at Pre-Seed. Our founding vision was to deliver amazing operational support to our portfolio companies through our startup and growth team covering product, design, development, marketing, recruitment and now PR and comms, and what we’ve learned over the last three years is that operational support makes most difference at the Pre-Seed stage (we say Idea Stage). When we invest at Idea Stage our team becomes the company’s team for a few months, and teams execute faster. The leverage comes because founders are able to spend less time on hiring and recruitment and because our experience helps them plot a better path.