Taking risk at pre-seed in an unfavorable market
Returning to optimism and getting out of the scarcity mindset of declining venture funding
In early fall, I caught up with a mentor.
As is often the case when talking to other VCs, we talked about recent deals we’ve seen, invested in, or passed on, and tried to understand the trend line.
We spent a while talking about the tough fundraising market. Companies are doing some combination of:
dropping valuations
raising as little as possible to quasi or entirely bootstrap their businesses
waiting longer to raise, creating early → growth stage revenue:valuation opportunities at pre-seed
I shared a couple of companies I’ve been excited about recently with early traction and $5m-$8m post money valuations and she laughed.
“That’s not pre-seed investing.”
My initial thought this year was to focus on efficient businesses with early revenue. It feels less risky. Early traction, disciplined cash management and strong operators are important. And there are some great value investments available right now within that framework. Focus on these attributes is a natural, fearful response to a tough market.
But those things are still secondary to the core of a business: pursuing massive longterm opportunities with defensibility and a good technological/regulatory answer to why now.
A recent tweet connected the dots:
If an opportunity doesn’t feel risky, hard, big, or non-obvious, it may not be venture scale. We/I may want to change our evaluation framework in an unfriendly market, if we’re going to continue to target 100x return as pre-seed investors, every company has to be evaluated through a big picture, long-term lens. We need more big thinkers building the future, bravely, and optimistically, regardless of market conditions.