Silicon Valley moves fast and investment rounds keep moving up. What, just a few years ago, used to be a Round B, is now a Round A. Similarly, Seed rounds are now raising between $1.5 and 4M, so there’s a gap to be filled in the early — really early — stages of the company. That’s typically the phase when founders invest time and energies to create a first viable version of their product, they make first tests with users and gather feedback. Sometimes they understand they are on something that people could use and sometimes the product has potential to generate a big enough market demand to convince founders to be committed for the next 5 to 7 years to this idea. If they already raised some capital from Friends & Family and product metrics begin to grow, that’s the best moment to look for investors who want to share — what we think is — the most challenging phase of the startup journey.
Why Silicon Valley Is So Unique At the Pre-Seed Stage
Despite the great risk associated with investing capital at this stage, Pre-Seed is where the best opportunities are and, by the way, it’s when founders really need help. During our last trip to Silicon Valley last December, we met passionate founders, great investors, awesome software engineers and product managers in the Italians tech space. LombardStreet.io — as most of you already know —is the first US venture capital firm investing in Silicon Valley’s startups co-founded by Italians.
Weird, uh? People often ask us why we have such a narrow focus in our investment thesis and the answer is always the same: because we know Italy and the Valley very well and in this way we can intercept the best opportunities coming from Italian founders much earlier than anyone else, even before they become US companies.
We travel a lot between Italy and the Valley and every time our agenda is packed with interesting meetings. In our last trip we met more than 30 Italians who live in the Bay Area. We set up meeting for many different reasons: sometimes to listen their story, sometimes to be the first call when they have a new idea and sometimes because we are just curious. We discovered that meeting smart people and enlarge our talent network is not just a good thing for our investors, but for our portfolio companies too. When high-tech companies relocate their HQ in California, the first need they have is to be part of the local ecosystem as quickly as possible. Identify the right advisors to improve their chances to win big is the top priority for every founder landing in San Francisco. Why? Because he or she need to complement his or her skills with product, growth and customer care abilities — we love to invest in software engineers and they typically lack some of them.
This is what makes Silicon Valley really unique: you can find great hackers in many other places around the world, but a very few people have actually scaled a product from 0 to 100 millions monthly users.
If you have decided to become a US startup, you better think about how to scale your business and how to make it quickly. In this game advisors are very important—maybe more than money.
The Real Challenge in the Early Days
The “early days” of a company is the phase where most of the fun is in the startup business — at least in our opinion — and it’s also the time where you pay the higher price for your mistakes. It seems cool to be a young, hungry to win, fully committed founder who wants “to make a dent in the universe”, but it’s hard and painful. It’s also tough to be an investor in these early stages, but this is the phase we love and know better, because it’s characterized by less spreadsheets and more gut feeling. In the end, the essence of being a venture capitalist in the early stages of a company is to become good at knowing and decoding people in a couple of meetings. “Is this guy passionate and perseverant enough to make something great?” — that’s the first thing we ask ourselves every time we meet some new guy with a crazy idea. “Can we improve his or her chances to create a unique company?” it’s the second key question.
In the early days a startup must be capital efficient: every dollar counts — and I mean that. Half a million dollars in the bank seems like a big amount of money, but it’s not. On the other hand, as a founder, it’s easy to decide how to allocate them. You typically need to focus your efforts on two main areas: team salaries to get the right people on-board and smart strategies to foster your product adoption with essentially zero budget for marketing. It’s interesting to note that most of the companies which became truly successful , started with less than $500K.
A recent article published on CrunchBase, reported a study by Afore Capital, a Pre-Seed investor in San Francisco:
In setting up their fund, the founders performed an analysis of more than 180 unicorn companies — startups valued at over $1 billion — and their earliest funding rounds. They found that, in the U.S., more than one-third of those unicorns started with rounds that today would be considered pre-seed level, including Uber ($200,000), Airbnb ($620,000), Stripe ($120,000), Lyft ($300,000), and Pinterest ($600,000).
Useful Products Sell
The interesting thing for me is not that these companies reached valuations in the billions, but it’s that they didn’t need tens of millions to create a successful first product. We don’t follow the unicorn-only mantra, we look for products that people use day by day, because they love and need them. These products are typically focused on solving a single problem and they are exceptionally good at it, even in the early versions. Sometimes they pivoted before starting to observe a real growth and every single time they struggled to raise their first $200K — and by the way, they didn’t give up easily.
It’s hard and if you think investors don’t understand you, think that 99% of the times it’s your fault. So, don’t come to Silicon Valley because in Italy you couldn’t convince anyone to invest in your project. If the Bay Area investors don’t know you and your English lacks the empathy you need to convince people, start raising money from Italian investors — on your US legal entity — , move there as soon as possible to improve your English and come talk to us. We can help ;).