At the pre-seed stage, companies form the foundations that set them up for future success. However, it is also the riskiest stage given the lack of product-market fit, lack of revenue, and unproven strategy.
Robert Walsh, Managing Partner of QVentures, outlines the top things the team looks for in pre-seed companies for a successful investment.
A Strong Founding Team
At the earliest stages of company formation, having a team with ‘founder market fit’, a nuanced understanding of their industry and the problem they’re looking to solve, is key. Alongside this, founders’ skills to build and distribute that solution are foundational in getting the business off the ground.
We often look for domain experts that can drive the market discovery and business development for a new product launch, coupled with technical co-founders that can help bring those visions to life. These complementary skill sets can often drive early success in launching new products into the market.
Beyond this, founder characteristics that we believe increase the odds of success are:
- Previous startup experience where founders have demonstrated that they can withstand the pressure of getting a product to market along with the difficult decisions that may need to be made in order to do so.
- Previous CTO experience where a founder has the commercial experience to build a focussed MVP to test user appetite and iterate rapidly from there without getting wrapped up in building the perfect product.
A Large and Growing Addressable Market
Another important factor to consider in any early-stage investment decision is the addressable market the company is looking to sell into. When reviewing a market, we typically look at the size of the market that the company will be operating in today and the dynamics of that market. This helps us understand the future potential of the market and its ability to support a large business.
Example: Go Instore, RetailTech
When QVentures invested in Go Instore in 2018, the total addressable market was not enormous, but at the same time, we were seeing consumers getting more comfortable with buying online. There was a considerable increase in consumers purchasing both staple and luxury items online and we understood that this industry trend was only set to grow.
Go Instore was addressing the next logical step in the e-commerce industry, which was a technology that enabled consumers to speak to someone directly in the store to view the items and complete the purchase, integrating both the physical and digital worlds in the retail space. Recognising that this trend had already taken off in China, where livestream shopping accounts for 10% of China’s entire e-Commerce market — combined with the rise in personalisation, meant it would only be a matter of time before European adoption.
At the time of investment, the TAM was small, however, video content had already started picking up traction, evidenced by the popularity of social platforms such as TikTok, YouTube and Instagram Reels. Today, 92% of all Gen Z adults have bought an item recommended by a social media influencer — demonstrating early signs that Europe was in a position to capture some of the momentum of its Asian counterparts.
This is an example of how at the time of investment, the total addressable market was small, yet all signs both social and technological were primed towards disruption of the industry.
Product
After looking at both the team and the market opportunity, we then focus on the product or service being introduced by the business.
We look at the product the company is planning to introduce into the target market and seek to understand its business case. Does the value the product delivers to users justify them paying for it? This can be tough to distinguish at the MVP or pre-seed stage, where there is little to no user traction, particularly for more novel products or technologies. However, market research and the use of references can often allay those concerns.
Beyond the business case, we also look at how products weave into user workflows and the defensibility of the technology employed. Is it 10x cheaper or better than current offerings in the market?
State of the Market for Funding
Lastly, we look at the state of the market and determine if there is capital being allocated in that sector at each stage from pre-seed to IPO. This is crucial since taking a novel product to market and building a large business can often require multiple funding rounds — especially in hot or competitive industries. Having investors actively deploying into the industry can significantly reduce the friction in establishing a business as a category leader in its segment.
One of the biggest examples is femtech, which moved from niche to essential as VC investment tripled in the last 5 years to $2.5 billion in 2021, with money being poured into solutions aimed at fertility, menopause, period care, and contraception. We find that investment in the space is directly linked to the growth of the market, with the femtech market now poised to be worth $48bn by 2025, a 16.3% five-year CAGR from 2019 to 2025.
We observed this last year and were fortunate enough to invest in Béa Fertility, a direct-to-consumer at-home fertility product, which makes it easier and more affordable for women who struggle to conceive naturally.
In Conclusion
At the earliest stages of a company’s life, there are often a number of unknowns making it difficult for investors to assess risk and reward in a particular venture. In a now well-established funding environment, pre-seed investors tend to focus on a couple of key factors when making a decision. Having the right founders, with knowledge of their industry and the grit to succeed, coupled with an ability to execute, is just as important as looking at the state of the market and analysing if the industry is ready to be disrupted.
When all these elements combine seamlessly, magic happens and you will automatically put yourself in a better position to secure that pre-seed investment.
This article was written by the QVentures team. The QVentures Pre-Seed Fund focuses on investing in technology companies in the UK and is dedicated to finding and supporting the next generation of best-in-breed entrepreneurs.
If you are looking to invest in early-stage companies, please Self Certify as an Investor at www.qventures.co/register
If you are seeking funding, please apply on www.qventures.co/fundraising
DISCLAIMER
Investing in early-stage businesses involves risks, including illiquidity (the inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio.
QVentures is a trading name of Quintessentially Ventures Limited, which is an Appointed Representative of Brooklands Fund Management Limited which is authorised and regulated by the Financial Conduct Authority (FRN 757575).
