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Pre-Seed Investing and Risk
2
What is “pre-seed”…?
So what does “pre-seed”
actually mean?
3
What is “pre-seed”…?
Investing in Zuck’s unborn
children?!
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
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
...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
Beyond semantics, we think about "pre-seed"
investing as a specific type of (smart) risk.



Let us explain...
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
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
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
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
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
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
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
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
Lots of ways to diminish risk
during and after investing
Smart portfolio construction
Disciplined valuation & ownership
Actually helping out
Taking pre-seed risk
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
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
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
notation.vc

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Notation: Pre-seed Investing & Risk

  • 2. 2 What is “pre-seed”…? So what does “pre-seed” actually mean?
  • 3. 3 What is “pre-seed”…? Investing in Zuck’s unborn children?!
  • 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 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 ...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 Beyond semantics, we think about "pre-seed" investing as a specific type of (smart) risk.
 
 Let us explain...
  • 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 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 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 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 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 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 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 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 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 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 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 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