4 Reasons Why Pre-Seed VC Firms and Startups Are So Much Alike
And why reviewing every cold email is a Partner Job in a Pre-Seed Venture Capital firm.
We decided to become full-time investors and created Lombardstreet Ventures because we have been founders for our entire life, and, over time, our passion moved from building our own companies to helping others create theirs. The other truth is that after 20+ years as founders, we didn’t want to manage many people anymore.
In 2016, after studying the VC business model for over a year, Luigi and I—the only two GPs at Lombardstreet Ventures—understood that a small and experienced team could make a difference in picking the right companies and that way of building a VC firm perfectly aligned with our goals. Some other firms are pursuing different objectives, raising monster funds with hundreds of people on their teams. I’m not saying that bad, but honestly, I don’t think this business can scale that way—at least not at the pre-seed and seed stages.
Our choice was all about backing “uncommon entrepreneurs.” Some experts in their field, some others very young and first-time founders. Our goal was to evaluate thousands of opportunities every year, schedule Zoom meetings with the most promising ones, and invest in a small fraction of those.
After spending some time in venture capital, we realized that the critical task in this beautiful job is managing the flow of deals that keep coming in. Usually, a VC firm at our stage invests in 1% of the deals it evaluates yearly. Our investment rate is much lower: around ten investments a year. That means 0.3% of the startups we meet become portfolio companies.
The more you invest and help entrepreneurs, the more people learn about you and get access to great deals; it is a matter of building the right network of trust. Since founding the company in 2017, our deal flow has increased significantly in quantity and quality.
A few days ago, I began thinking that, as a Partner in a VC fund, making your deal flow better day after day has a lot of similarities with building the right product that people want to buy in a startup. If that is true, then a Partner is like the CEO of a startup and should follow the same handbook.
Follow me for a few minutes, and you’ll see why.
#1 ~ Entrepreneurs Are the Customers
Through daily experience, we quickly face a dilemma. When the Partners of a VC firm have a team to support their day-to-day job, they likely delegate most of the deal flow “pre-screening” to others. You have Associates, Investors, or Principals. Nonetheless, what you discover over time is that by delegating that activity to your team, you miss the most precious—and fun—part of being a venture capitalist: the first-hand connection with entrepreneurs.
Having the whole deal flow reviewed by Partners is challenging, yet it provides the same value as a CEO’s occasional involvement in customer support. That’s the best way to know your customer base.
Founders are our customers; the more we know and provide them with excellent service, the more valuable our deal flow becomes.
#2 ~ Release, Improve, Iterate. Repeat.
By personally reading and replying to every application your firm receives, you can gradually perfect the message to the entrepreneurs and learn to care about every word. The note in your replies is always important, whether you pass on the opportunity, ask for a meeting, or confirm your interest and commit to investing. There are people, dreamers, and brave human beings behind those requests. The entrepreneurs who receive your replies deserve to be treated with respect because they decided to put their lives at stake to pursue one of the most challenging tasks I know: building a company that grows fast and long lasts in business. For this reason, iterating and perfecting your response is fundamental—precisely like you do with your company product. Make it personal whenever you can, even if I know it’s hard because of the amount of connections every day we all have in our inbox.
P.S. There is a small percentage of founders’ emails that lack the minimum level of care needed to be read or replied to. However, in my experience, this is an exception.
#3 ~ Organic Growth is King
To acquire a valuable deal flow, it is crucial to keep track of multiple sources. These sources include accelerators and web portals such as Product Hunt, as well as communities like Hacker News or GitHub. However, the most crucial source is the direct contact from founders who submit their ideas to you. Inbound contacts are the ones who deserve most of your attention because they choose you among everyone else. This has the same value as the organic growth of the customer base for a fast-growing company.
As a Partner, you can definitely delegate scouting external sources to your team, but it’s a mistake to hand over reviewing the inbound deal flow. Of course, some connections may be more trustworthy than others in the inbound flow—like those from the network of people we invested in—but every new contact matters.
#4 ~ Move Fast
Investing at the Pre-Seed stage is similar to angel investing, and in fact, we are often the first institutional check after angel investors. At this investing stage, there are few or no data to analyze. The team is just the co-founders, and the company is very early in its journey.
Ron Conway is one of the most interesting people with experience in the angel and VC world, and everyone considering pursuing this career should read about him. Among the many things I keep learning from Ron’s experience, the one I believe resonates most with me is this: as an angel investor, you must trust your guts. That’s how we transformed a few hundred thousand dollars invested into millions in value when we were angel investors more than ten years ago.
The Pre-Seed stage is about putting people first and trying to decode who is the guy you are talking to; then, by a long shot, comes the idea.
Entrepreneurs seeking capital at this stage collect tens of NO before getting one YES. Still, over time, the pitch improves, and the experiments the company is making produce more promising data. Dealing with investors who move fast in the decision process is of great help, whether they write a check or pass on the opportunity. Taking 3 to 5 weeks to decide is not fair, and for us, it’s also not useful on the investor side. Our policy is to hold all founders’ meetings with all the decision-makers present. In this way, we can decide in a few days—sometimes hours. To listen to your gut feeling, you don’t need weeks.
The same is true for an entrepreneur. Moving quickly and being ready to make decisions fast is essential to the company’s success.
If you liked this article and you want to know more about Lombardstreet Ventures, check our FAQ page to understand how we work and what we invest in.
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