Based on our preliminary research, about 70% of all introductions with a given investor are made by founders that have previously raised from that investor. When looking to build access, founders typically lean into their founder networks to see who they know that has raised from a given investor.

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Prior to kicking off a raise process, founders should start by putting together a list of connections with VC-backed founders. From that list, founders can then use software to identify which founders have raised from specific VCs on their target list, thereby using portfolio founders as the primary source of introductions.

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Getting introductions from portfolio founders includes several benefits.

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Ultimately, the effectiveness of a given intro request will depend on the strength of the endorsement, which, in turn, will depend on the relationship the founder has with the person making the introduction. In most raises, however, a vast majority of introductions take place via portfolio founders that have previously raised from a given investor.

Pre-Seed investors routinely invest in companies in the pre-product and pre-revenue stages. With this write-up, we look to bring clarity and precision around what investors look for at this stage.

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Implications of Pre-Seed Valuations

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At Pre-Seed, investors are often investing at a median valuation of $4m. Given the low entry price, Pre-Seed investors end up doing well as long as the Company is able to develop a reasonably strong product.

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Put differently, the factors associated with whether or not the Company grows to a multi-billion dollar enterprise may not be super relevant for Pre-Seed investors. If the Company builds a strong product, and even if the Company is not wildly successful, Pre-Seed investors will still do fairly well.

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Investor X invests $500K in the Pre-Seed round of Company Y at a 4m post-money valuation. Let's assume that the Company succeeds in building a reasonably strong product, but is ultimately unable to scale. The Company ends up selling for $18m (without raising subsequent venture rounds). Pre-Seed investors end up realising a 4.5x return on the original investment.

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Basis for Pre-Seed Investments

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While there are broad variations in how Pre-Seed investors look at companies, a common theme is a clear focus on the founder's ability to build a strong product. How, then, do investors assess whether or not a founding team will succeed at building a strong product?

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At Pre-Seed, the main bet is on the founder's ability to build a great product. Investor discussions are, therefore, focused heavily on developing an assessment on whether or not a given founder will be able to build a great product.

Of all venture stages, Series A shows the steepest drop-off point. Specifically, of all companies that raised Seed rounds in the five-year period from 2015 to 2020, only 45% successfully raised Series A.

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The most common cause of drop-off is simply company performance. Most companies are unable to achieve the growth metrics that are typically required for Series A.

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For companies that hit exciting performance milestones, a sizeable drop-off stems from an inability to work capital markets. In Robotics or Consumer, for instance, raising capital has historically been much harder than for B2B SaaS or Fintech. Relative to the Seed landscape, we believe Series A is distinct in the following ways.

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In how founders manage their financing strategy, Series A rounds generally require a lot more sophistication than do seed rounds. From targeting to process, and from narrative to collateral, the general skill set required at Series A is fundamentally different from prior rounds.