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Notation: Pre-seed Investing & Risk

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Notation: Pre-seed Investing & Risk

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At the Notation annual LP meeting this past fall, we gave a short talk on how we think about pre-seed investing & risk, and why we think there's a particularly interesting risk versus reward tradeoff at this stage.

At the Notation annual LP meeting this past fall, we gave a short talk on how we think about pre-seed investing & risk, and why we think there's a particularly interesting risk versus reward tradeoff at this stage.

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Notation: Pre-seed Investing & Risk

  1. 1. Pre-Seed Investing and Risk
  2. 2. 2 What is “pre-seed”…? So what does “pre-seed” actually mean?
  3. 3. 3 What is “pre-seed”…? Investing in Zuck’s unborn children?!
  4. 4. 4 Notation est. Total Pre-Seed Rounds Per Year Source: Crunchbase 2005 6 pre-seed rounds 2010 22 pre-seed rounds 2018 2,000+ pre-seed rounds Exponential growth in “pre-seed” category What is “pre-seed”…? 2015 310 pre-seed rounds
  5. 5. 5 What is “pre-seed”…? Seed round sizes have shifted... 2010 2019 Age of first institutional seed Total Seed raised before Series A Series A size % Companies with revenue at A 1yr $1.3M $5.1M 15% 2.5yr $5.6M $15.7M 82% Source: Wing VC, Techcrunch.
  6. 6. 6 ...but perhaps it's just the nomenclature? time value “Drunken walk” Product Fit Growth Scale 2019 2010 2005 Product Market Fit Pre-Seed Seed Series A Seed Series A Series A Source: https://www.pear.vc/the-new-seed-landscape What is “pre-seed”…?
  7. 7. 7 Beyond semantics, we think about "pre-seed" investing as a specific type of (smart) risk.
 
 Let us explain...
  8. 8. 8 Pre-Seed is a type of risk Let's first play a game: Which company below is the "riskiest" WeWork $8-48B Stripe $35B Coinbase $8B Series B Company$200M Series A Company $45M Seed Company $8M
  9. 9. 9 Pre-Seed is a type of risk Let's first play a game: Which company below is the "riskiest" WeWork $8-48B Stripe $35B Coinbase $8B Series B Company$200M Series A Company $45M Seed Company $8M Well, it depends…
  10. 10. 10 Pre-Seed is a type of risk We think the answer is found in this chart… Product Traction Revenue Unit economics + Defensibility valuation risk likelihood of failure time Growth Pre-Seed Seed Series A Series B - F potential upside
  11. 11. 11 Pre-Seed is a type of risk If valuation is determined by the market, what’s your view on the risk curve? Product Traction Revenue valuation risk likelihood of failure time Pre-Seed Seed Series A Series B - F Unit economics + Defensibility Growth potential upside
  12. 12. 12 Pre-Seed is a type of risk Product Traction Revenue valuation risk likelihood of failure time Pre-Seed Seed Series A Series B - F Unit economics + Defensibility Growth potential upside Does it look like this?
  13. 13. 13 Pre-Seed is a type of risk Or this? Product Traction Revenue valuation risk likelihood of failure time Pre-Seed Seed Series A Series B - F Unit economics + Defensibility Growth potential upside
  14. 14. 14 Which means we believe that for each individual startup, we should be taking A LOT of risk. Pre-Seed is a type of risk We think it looks like this… Product Traction Revenue valuation risk likelihood of failure time Pre-Seed Seed Series A Series B - F Maximizing upside before valuations go exponential Unit economics + Defensibility Growth potential upside
  15. 15. 15 Taking pre-seed risk Risky All risk is not created equal Go-to-market risk Product risk Technical risk Reckless Team risk Ethical risk Idea discovery risk
  16. 16. 16 Lots of ways to diminish risk during and after investing Smart portfolio construction Disciplined valuation & ownership Actually helping out Taking pre-seed risk
  17. 17. 17 Since 2015 (est. Notation), the data supports our thesis that pre-seed risk is rewarded Source: Cendana Capital Annual Meeting - Data in first chart since Q3 2016 Taking pre-seed risk
  18. 18. 18 So why aren't more firms focused on a dedicated pre-seed strategy? • AUM creep • Shlep factors (pre-seed startups are messy) • Higher failure rate = scary Taking pre-seed risk
  19. 19. 19 Pre-Seed investing "Pre-seed" investing is a specific way of thinking about early-stage investing risk. It requires a dedicated approach and skillset to do well. Although it feels "risky," with smart portfolio construction and disciplined entry valuations, it’s the best bet in venture right now. The best bet in venture right now
  20. 20. notation.vc

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