Pre-Seed Investing is Not About Check Size
Pre-Seed Investing, in my view, should not be defined by check size. I think a lot of people are tempted to describe a pre-seed investment as a “sub $1M investment,” or a ~$500k investment. And while directionally correct, or associated with seed rounds, likely isn’t their definition.
To me, a pre-seed round is a round of capital used for proving whether or not a product can be valuable to a customer.
One thing that has always bothered me is when seed investors, or pre-seed investors ask super cookie-cutter questions, like:
- What is your monthly revenue?
- What is your MoM growth?
To many investors, these are almost formulaic questions that define if they will take a meeting or not.
Instead, we look at companies in the following stages:
Pre-Seed | The stage at which point you are trying to figure out if the thing you are building is valuable to an end-customer.
Example: If you build an efficiency tool, and it saves people $10,000 per month, that’s a more positive sign than if the company was able to grow. And the metric to measure is how much money was being saved, not the growth of the business (new customers acquired each month) or the amount that’s being charged.
An example of why revenue is not proof of customer value is as follows:
“If I walk into a restaurant, order lunch, and hate my food, I’d still pay the bill. That’s revenue. But the “customer value” metric is whether or not I finished everything on my plate, or brought my parents to the restaurant once they were in town.”
For [Co Name], I would argue that at the pre-seed stage, the value accrued to each person was more important to measure than growth of users.
It’s so important to measure “customer value” before growth, because until you know the value to the customer, you don’t know how much money you can spend on growth. If the customer finds the product to be worth $10k per month, you can charge $3k per month, and afford to spend $12k per year acquiring each customer.
If you wasted all your money on marketing dollars cause you thought you could only afford $1k per customer, and marketing/ads didn’t work, you ran out of your super expensive pre-seed money, with nothing to show for it.
The inverse can be true if the product is not so valuable to the customer, and the CEO spends too much money acquiring customers (in an affordable way that doesn’t prove anything).
Seed Stage Investing
The way we define the difference, at least at CoVenture, between pre-seed and seed is that seed capital is used to acquire customers. It’a at this point that pre-seed capital has been used, and now we know what the expected LTV of a customer will be.
in that case, we can come up with a budget to acquire new customers, and build a menu of all the different affordabe options to acquire new customers.
Seed capital should be used to validate or disprove the growth hypothesis at this point.
Series A Investing
This is when we test if the channels of growth are scalable, or just reliant on the CEO’s will power, some fluke, some small customer base that doesn’t scale, etc.
Hopefully this helps in terms of how we think about what defines pre-seed, other than just dollars invested.
In one succinct sentence I’d say: “pre-seed investing, is investing in a company that has not yet proven its product is valuable to customers yet, and is taking in financing to do so.” And our job as pre-seed investors is to find companies that have a hypothesis that their product will help customers, and decide whether or not we want to fund the test.