#96- Pre seed

Why I would focus on pre seed stage as a first time manager

Everyone who knows me well knows my objective is to be a solo GP at some point in my life.

If I were to become a solo GP today (really optimistic, but bear with me), I'd focus on pre seed startups. This approach involves spending a considerable amount of time, typically 4-6 months, working closely with aspiring founders who are formulating their MVP, and validating it before committing time and capital.

Why?

No AUM allure

I can not (also should not) raise a $100mn fund to invest in pre seed. What shall we do with all this money? A pre seed fund typically can be between $5-20mn depending on the ticket size. A smaller AUM keeps managers honest and earnest. The management fee from this AUM is not enough to live a comfortable life. Hence it is imperative to provide a return to the investors and earn carry.

Lower risk, higher returns

Investing in pre seed startups offers a straightforward advantage - lower initial valuations (typically between $2-4mn entry valuation for 10-15% equity) and higher potential returns. This might seem obvious, but it's a fundamental principle that cannot be overstated. And the capital risk is limited to the first cheque in most cases.

Maximum potential

Pre seed companies have the greatest potential to shape their trajectory. They have not yet made critical commitments to strategies, hires, products, or raised overpriced rounds that may constrain their options. This flexibility is invaluable. You do not need to over-commit to building.

Value add

As an investor, I can’t add much value to the daily life of a founder building their business. Having said that, I’ve found most of my conversations with pre seed founders in the following:

• Finding the first X customers (can be 1-10-100)

• Defining and redefining the value proposition

• Working on marketing and fundraising collateral

• Providing unbiased, straightforward input and feedback

• Giving a bird-eye and worm-eye view of the venture capital world

Time

I’m not investing just capital, I’m investing time. Pre seed startups take between 7-10 years to get to scale. Providing the liberty of time enables founders to make clearer decisions and the freedom to decline opportunities that don't align with their vision. We’re not struggling to survive, we’re striving to grow.

Agnostic to cycles

Pre seed startups are not very susceptible to wild swings in capital markets. Why?

• Require less capital to sustain because of size - agnostic to funding cycles

• Require only a few new customers to keep growing consistently - agnostic to bear cycles

• Require fewer team members - agnostic to hiring cycles

Exploration vs execution

At the pre seed stage, founders can dedicate the majority of their efforts to exploring uncharted territory, navigating the idea maze, and seeking the truth, rather than dealing with the aftermath of past decisions (usually labelled as pivots).

I’m long India and there is nothing else I’d rather do.