TBC: Why the Pre-Seed Round Was Created... and How It's Changed

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Yeah. Everyone welcome to the back channel today. I want to talk about a really scary thing in the world of venture capital today. That thing is the pre-seed round. I recently sent out a post on all my social media accounts that said, do you know what the scariest round for a venture capitalist to invest in today is. It's the pre-seed round. Now that caused a bit of a stir some conversation.

So I wanted to record an episode that. Had a bit of an overview of why I think that is so taking a couple steps back. Let's talk about the pre-seed round. So the pre-seed round was a relatively newly invented quote unquote round. Essentially it sprung up. Call it 5 to 10 years [00:01:00] ago. As investors figured out that there was more and more competition at the seed and series a levels.

So as more and more money started flowing in. To this space from LPs who wanted to get exposure. To the great investment opportunities that early stage technology offered. The more money that was coming in there.

More people realize that there was too much competition and They found out they had to go earlier and earlier in order to catch deals before they got to a very competitive level at the seed and series a now, as people started squeezing money in earlier and As capital became cheaper, especially in the ZIRP era where people had money, they wanted to deploy it.

So they would just start throwing money. At founders who had less and less traction, less and less proof points. All the way to seeing $1 to $3 million pre-seed rounds. Sometimes even more for founders who had very little to show. Now. As the [00:02:00] market started correcting. As we started seeing things like Silicon valley banks collapse, and as LPs began to be a little bit more hesitant of backing. GPS or venture capitalists that would put money into very risky bets.

We started seeing venture capitalists lose their risk appetite. Now you started seeing VCs talk about founders, getting to profitability break even much sooner than they used to. It used to be all about blitz scaling, spending money for growth, and then finally turning on revenue and profits much, much later. Today we are at a different place. In a different segment in a different episode and a different essay.

I'll probably talk about how I believe that venture capital has over-corrected. It's no longer funding. Big shots and big opportunities that require investment upfront. It's now become at least right now, a space where venture capitalists only want to bet on things that they feel really safe about. [00:03:00] I think that will change in the future, but for now, Let's get back to it. This means that the pre-seed round is one of the scariest rounds for venture capitalists to invest in.

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[00:04:00] They don't like seeing founders who don't have any proof points. And by proof points, we don't mean just product.

We also mean proof of customers, which means revenue. So, what does this mean for founders who are starting companies today? It used to be that you could raise a little bit of money, maybe a hundred thousand dollars, $200,000. From angels. Friends and family. Incorporate get going, try to recruit a team. And then go out and raise a pre-seed round and say, we're going to go build a product.

Or if you had a light. Proof of concept a light MVP. You're going to be like, we're going to raise this $2 million [00:05:00] pre-seed to build out the product, get initial revenue, and then go raise your seed round. Now, it looks like. Seed investors require something like a quarter million dollars of annual revenue or something similar depending on your business model. In order to get excited. But everything before that. It doesn't look like investors are getting excited to fund. Which means you're stuck in a very difficult place where founders who need to build product in order to get it to customers. Are trying to figure out ways to get to that mark.

So that seed investors want back then, so that pre-seed investors will back them. What I'm seeing is that pre-seed investors really are not backing. Pre-product. Companies and shreds of revenue aren't enough. They need to see acceleration toward that seed round. And so there's a very narrow band. So when I'm actually telling founders now is you should try to go raise a larger [00:06:00] friends and family angel round. Push into that so that you can use that round. To get, as far as you can into revenue. That means being way more capital efficient.

That means pushing sales early on. It means that these earliest stages of. Especially enterprise SAS companies are much more difficult. But I think in the long run. It will create better companies. So it's a bit of a winding way to describe this challenge around pre-seed at the moment. But I think you guys can get it done and reach out if you have any other questions I'd love to hear from you. So, thanks for listening to this episode. Of the back channel. I hope you get through that.

Pre-seed squeeze.

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