We are so excited to welcome in the new year at Afore and hope this note finds your 2019 off to a wonderful start. To kick things off we’re sharing our blog post on pre-seed diligence that was originally published in TechCrunch earlier this month. In addition to being an investing guide, our latest article serves as a detailed primer for very early stage startups who are seeking the kinds of pre-seed investments Afore makes. Start reading the article here…
By now it’s clear that seed is the new Series A. Seed rounds have tripled in size and companies have been around for 2.4 years before they raise a seed round. A new stage called pre-seed has emerged to fill the gap.
But many in the ecosystem equate investing at pre-seed to buying a lottery ticket. We disagree.
We believe that with the right amount and type of diligence, an investor can build the same amount of conviction pre-traction that you need to make a Series A investment.
Here are three core ways in which conducting diligence is entirely different at this stage (and how founders raising pre-seed should position their company).
Focus on short term versus long term
Conventional wisdom in venture is to invest in companies that are going after large markets and can be worth billions of dollars one day. While we agree that venture returns are based on the power law, we think it’s pretty much impossible for founders and investors to truly predict at the pre-seed stage how large a potential outcome the company is capable of.
In its first pitch deck, Airbnb (called AirBed&Breakfast back then) projected that their entire addressable market was 10.6 million trips/year, a meager 0.6 percent of the larger hotel market. No wonder they struggled to raise their first million dollars! Even the founders couldn’t have imagined that within a few years they’d pose an existential threat to the entire hotel industry. Airbnb now hosts more than 2 million people each night!
Uber’s “pre-seed” pitch deck stated that the entire market for Uber was $4.2 billion. Amazingly, the company is on track to do over $10 billion in net revenue 10 years later (and more than $40 billion in bookings).
So, instead of overly analyzing the market size and how this company can gain large market share, we focus on what the team can achieve in the short term: the next 6–12 months. Typically, the initial market tends to look pretty small, but there is a path to a larger adjacent market. If the company successfully captures the initial market, they can raise more money to go after the larger opportunity.
The question we ask ourselves is simple — can this team get to “first base” and, if so, is this the kind of team that can then figure out how to get to the next base? Once they wedge themselves in the door, do they have what it takes to pry the door open? In our experience, the best investments were in companies that went after seemingly small markets that upon years of incredible execution, eventually ended up owning markets no one could have predicted when they got started.
Continue reading the article on TechCrunch now.
Read on for more portfolio news and updates below. Share this newsletter with colleagues and founders who should be in the know. And follow us on Twitter at @AforeVC for more news, insights, and upcoming events too.
Portfolio in Focus
Turning The Payday Loan Industry On Its Head — Meet Ennie Lim, HoneyBee Cofounder and President
It’s the early 2000s and Ennie Lim is what creditors refer to as credit invisible. Despite touting a bachelors degree from a prestigious university in Montreal and logging several years of work experience in the US working for San Fransisco nonprofits, Lim has no history with any of the US banking institutions and therefore is unable to get approved for any of the major credit cards.
Working in Silicon Valley, her funds are understandably tight and once she goes through a divorce — in spite of the fact that she was working a good job with a steady income — she finds herself unable to afford San Francisco rent prices. She applies and feels a bit hopeful after getting accepted for a T.J. Maxx store rewards card and begins purchasing everything she needs from there in order to have a regularly paid off credit bill. Credit building; however, takes time and Lim’s store rewards card isn’t doing enough to keep up with the climbing costs of the Bay Area.
As a last-ditch-effort, she researches payday loans only to find that they all come with exploitative interest rates. Eventually, without any other options, Lim packs her bags and moves 3,000 miles away to her old room in her parents’ house in Canada.
It was a humbling experience for Lim, but today seems like one of those hardships that happened for a reason.
Portfolio News and Updates
Meet the hottest NYC startups to watch in 2019, according to Inc. Including Overtime and Petal. Read the article here.
Overtime continues to make waves. Read about their pop-up shop on Front Office Sports.
Visit Forbes to read about Modern Health and why companies are supporting emotional wellness in the workplace.
Most businesses are focused on tech that enhances jobs, not ends them. Read Forbes now to learn more about Swept — the startup that helps janitors track and manage their work.
Learn more about startup Fauna who built a “relational NoSQL” database for distributed transaction processing. Read about in TechTarget, InfoQ, and watch Ryan Knight of Fauna at Scale By The Bay 2018 discuss data consistency patterns in cloud native applications.
Active Motif Partners with Benchsci to increase discoverability of epigenetics-related products. Learn more now.
Sara Mauskopf, CEO and Cofounder of Winnie, is a mom on a mission. Read more of her story on milkstork.
8 robots racing to win the delivery wars of 2019. Learn about automated delivery startup Boxbot at Fast Company now.
Discover more about the state of seed funding with the new article by Kate Clark in TechCrunch.
Cushion is being recognized among 50 young companies attempting to fix the world’s most pressing problem. Read about in Inc. now.
Thanks for reading,
Gaurav Jain and Anamitra Banerji
Afore Capital’s portfolio companies are hiring.
Apply at AngelList now.