The Battle for Unicorns in Ventureland & New Players in Pre-Seed Rounds

Massimo Sgrelli
Apr 5, 2017 · 8 min read
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Everybody talks about “unicorns” in the VC industry. A “unicorn” is a company with a market valuation of at least $1 billion. They are typically capital intensive companies which have great products, terrific teams and exceptional growth—also thanks to the capital they raised. These are companies like Uber, Thumbtack, AirBnb and DropBox and let me be brutally honest!

Every venture capital firm would give the left nut to have a small piece of a unicorn in its portfolio.

The immediate return is the name of that company well stitched on the VC’s website for ten years and higher chances to provide interesting ROI to its LPs. Of course, just a small percentage of professional investors in this arena have such a privilege and even less have had the ability — or the gut feeling — to invest in these companies in their nascent stages.

Those lucky VCs, with a bunch of “unicorns” in their portfolio, are the only ones which can expect incredibly high returns from their investments. Identify a potential unicorn at the very beginning of its journey is not an easy task though, because at day one there are no metrics to observe and it’s basically a game of decoding the potential of a human being.

Will this guy be smart, strong and persistent enough to create a successful company in the next 5 to 10 years?

When they started, Uber and Thumbtack had a combined valuation of $9M—$5M one and $4M the other, like the average Joe in Silicon Valley.

When you put money in a late stage round involving a unicorn — or a potential one — you are lucky if you make a 2–3x. And even if that it’s a good return, it doesn’t help a lot to get capital back to investors if you manage a billion dollars fund. And, by the way, a valuation in the billions it’s not a guarantee of success: these mythical creatures don’t eat apples 🍏🍏, but they burn hundreds of millions of dollars a month and—typically—they don’t produce enough profits to get sustainable very soon. They use VC’s money and any revenues they generate to grow, grow and grow… until they sell the company—and not everyone can buy a $19B company like Facebook did with WhatsApp—or, more likely, they file for an IPO.


Almost nobody does that, why? It’s very important to understand who are your business partners, how they perform in the investment business and, last but not least, how they behave with founders they invest in.

I know, it’s not so common to evaluate your potential investor’s track record, asking for example some references, but it should be. Remember: even if you are a good guy, with or without track record of previous “provable success”, you will be asked for references both in their and your network.

Few days ago I read an article that can help. It analyzed the historical performance of VC market and you would be very surprised to know the truth. Let’s start with some basics.

By how much do you believe you can multiply your money as a venture capital investor? 2x, 5x, 100x? On average , 90% of the time, the multiple sits between 2x and 3x.

It’s a very good return on average.

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The small percentage of VCs—see the green dotted line above—that return much higher multipliers, have a … “30 years waiting list” on their funds. Actually also most of the guys who on average return more than 2x have a long waiting list and most of them need to have not just unicorns in their portfolio, but also many other companies that will return them 10x, 20x and 50x—even without being a unicorn.

That could be surprising to you, but just a o.4% of all the investments between 2004 and 2013 returned more than 50x:

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The “0.4% guys” are the ones which can claim they invested in WhatsApp, LinkedIn or Facebook at day one—a tiny fraction of the entire market. Like Sequoia for example: they made a bet on YouTube at the right time and with less than $10M, they got back almost $500M.

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In this statistic you can find some interesting information. Alongside the big guys—like Accel, NEA and KPKB—some new players show up, like Felicis Ventures created by Aydin Senkut—a Turkey immigrant. He raised his first institutional fund in 2010 with a $40M under management and he started to invest in Seed Rounds. If you want to know more about Felicia Ventures, take a look to Aydin speech at PreMoney conference of 2015:

Seed funds—and more recently emerging Pre-Seed funds—are small funds, in the tens of millions at most. They usually start with just $5M-$7M.

Pre-Seed VCs: working alongside founders

With companies like Lyft and Twillio in its portfolio, K9 Ventures is a raising star in the Pre-Seed funding. Pre-Seed VCs have an innovative approach to investment: they think small, but in a good way. For them:

Venture Capital is a boutique business, not a big corporation game. As a Pre-Seed investor they work with entrepreneurs in their portfolio as much as they can, because Pre-Seed investment is not just providing “connections”: it ‘s actually working, sweating and struggling hand to hand with them.

Not everything in startupland can scale, not every process can be industrialized and replicated over and over—especially at the very beginning.

In a world where every investor talks about data, Manu define his strategy differently: “I’m the opposite of data!”, he said at PreMoney conference 2015.

This sounds really good to me, because in a business where you look for hidden tech gems to invest other people’s money in them, you should do whatever you can to help your founders in their journey.

Take a look at this speech to get a full understanding about how a Pre-Seed venture should work:

David Coats of Correlation Ventures published a great article in November 2016 which stated:

Shouldn’t we celebrate the entrepreneurs and VCs, for example, in an investment that generates a 15X return on a $200M exit more than we do an investment in a Unicorn that generates a 2X return?

That’s exactly what I think should be done and that’s what we’ll be doing at

We want to work as much as possible with our founders hoping that we’ll be the first call they do when they face problems or need to take critical decisions along the way. Data driven companies take better decisions, but at the end of the day, human being are called to take those choices and we want they feel free to ring our phones in the middle of the night, if that can help.

Besides, something tells me that you will not be the first person in founders contact list if they see you as a dollar bill…

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For example. Who needs a board seat? I don’t need it if that’s not in the best interest of founders. They need to create companies that last and if they think I can help, I’m sure they’ll want me to be in their board of directors.

Anyway, unicorns are not evil and some healthy species exist on the market. Sometimes you got lucky and your gut feeling can help you to intercept one them. If that happens, your entire fund might be returned by a single investment: it’s huge and… lucky.
At the same time I think it’s insane to base your investment strategy on something that nobody knows whether it even exists or not—and if it exists, you cannot prove that it will generate enough profits to become a long lasting company eventually.

This “innovative” new way of thinking about venture capital business is fostering the creation of new firms with a different vision about investing wealthy people money.

The game is called “work hard with your founders”.

Pre-Seed VC is a new species of investor which spend 100% of its time working with portfolio companies, with a small initial fund, often below $10M.

Realities like K9 Ventures started with just $6M. Some others with $4M. They caught an opportunity a few years ago, when Seed Rounds stopped being $500K, to become $2M and more. Nowadays it’s the same—or even worst—and to go raising that amount of money you better have great numbers to share with your investors. Seed is the new A—people say— and new investment players—Pre-Seed VCs—popped up to catch opportunities in a new uncovered niche, in a scenario where the gap between angel investment and seed investment became too wide.

So, what’s a Pre-Seed round?

  • It’s the very first round or the first institutional round just after F&F
  • It’s a round that fit’s a $500K need
  • It’s a round that should bring you value in hands-on support beyond the actual cash itself

When should I go to raise money from a Pre-Seed VC?

  • At least one in the founding member of your team is Italian
  • You don’t have that much to show to investors apart from: a) 2 founders strongly resolved to make something great, b) a working prototype and c) a few market tests—if you are smart
  • You or your co-founder can build release 0.1 of the product
  • You got the first spark of traction, something like 3–6 months on the market and people seems to like—and use—your “product”
  • You are already experimenting on—at least—a revenue model
  • You have a fair valuation in mind—I would have a lot to say about this

We think that choosing the very first investor in you company must be done very carefully. He must be passionate to work hand to hand with founders, as a hidden and humble member of the team.

Why? Because a $100K investment from a Pre-Seed VC, when you want to raise $500K, it’s just a fraction of what you need. But, if your new partner can help you to compose the rest of the round and work with you to build the best possible company, than it’s not just about the money. It’s about how much of a difference it can really make as an investor.

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That’s our plan at and if you think we can help drop us an email.

Thanks to Martino Bagini for reading drafts of this.

Lombardstreet Ventures Blog

Pre-Seed Venture Capital Firm

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