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.
Implications of Pre-Seed Valuations
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.
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.
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.
Basis for Pre-Seed Investments
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?
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.
