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.

1. Pre-Seed Investing and 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”…?

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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…

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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

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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?

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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

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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

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

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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

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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

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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

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