In a recent webinar, I had the pleasure of speaking with Ihar Iharouski, a fellow pre-seed or seed venture capitalist based in New York. As early-stage VCs, we delved into various aspects of venture capital, particularly focusing on what we look for in both red flags and green flags when evaluating pre-seed companies. Through our conversation, we aimed to provide founders with insights on what differentiates a promising startup from one laden with potential risks.
Watch the full length webinar here:
Quick Overview
Our discussion was centered on distinguishing the red flags and green flags that pre-seed venture capitalists look out for. We covered definitions of pre-seed, team dynamics, market size considerations, go-to-market strategies, competition, unit economics, and round sizes. Here’s a recap of what we discussed and some takeaways for founders seeking to raise capital.
Introduction and Fund Overview
We began the session by introducing ourselves. I’m Martin Tobias, founder of Incisive Ventures, and Ihar is running Geek Ventures in New York, which focuses on immigrant-founded US companies primarily in the AI sector at pre-seed and seed stages.
Defining Pre-Seed
To frame our discussion, we clarified our definitions of pre-seed investing:
Martin’s Definition:
– Post-angel round.
– Expectation of $200,000 to $300,000 raised from friends and family to create an MVP.
– The first institutional round following the angels.
Ihar’s Definition:
– Very top-bounded.
– Companies can be considered for pre-seed as soon as they incorporate.
– Important to have a clear track record or potential capability to raise without an MVP for some founders.
Red Flags and Green Flags
We then moved into discussing red flags and green flags, starting with evaluations of team dynamics.
Team Dynamics
Red Flags:
– Age of the Company: If the company is too old and still seeking a pre-seed, something might be off.
– Crowded Team Slides: Too many non-essential members early on.
– Single-Person Founding Teams: Indicates risk as fewer perspectives.
Green Flags:
– Clear CEO Identification: Shows leadership.
– Founder-Market Fit: Founders with background and expertise in the relevant sector.
– Team Coherence: Prior relations or work history among team members.
Market Size
Red Flags:
– Too Generic Market Slide: Unreliable total market valuations, like trillions spent on food or travel.
– Crowded Competitive Landscape: If it’s a heavily contested space with many startups.
Green Flags:
– Clear and Growing Market: Precise market size potential, preferable around $10 billion.
– Bottoms-Up Market Analysis: Detailed customer and revenue breakdown.
Go-To-Market Strategies
Red Flags:
– Lack of Unique Distribution: Solely relying on things like Google ads shows lack of creativity.
– Undefined Entry Point: Vague plans without clear execution metrics.
Green Flags:
– Thin Edge of the Wedge: Specific strategies and early traction, like connections with first clients through founders’ networks.
– Unique Distribution Advantages: Partnerships or exclusive channels.
Competition
Red Flags:
– Unrealistic Competitive Chart: Oversimplified and overly optimistic competitor comparisons.
– Limited Competitive Awareness: Misjudging the number and strength of competitors.
Green Flags:
– Unique Selling Propositions: Clear articulation of how the product or service stands out.
– Acknowledgement of Competition: Realistic assessment and transparency.
Unit Economics
Red Flags:
– Absence of Unit Economics: Lack of understanding or inclusion of a unit economics slide.
– Unrealistic Margins: Overly optimistic or unsustainable margin expectations.
Green Flags:
– Clearly Defined Metrics: CAC, LTV, and other unit economics shaping business viability.
– Comparative Analysis: Before and after scenarios demonstrating economic benefits.
Financial Projections and Round Sizes
Red Flags:
– Over-Valuation: Unfounded high valuations, especially from non-professional investors.
– Rolling Rounds: Seeking incremental funding without securing a complete round.
Green Flags:
– Realistic Projections: Sensible financial models that align with market and stage.
– Complete Funding Rounds: Clearly defined fundraising targets aligning with strategic KPIs.
Concluding Thoughts
Our discussion provided a rich tapestry of considerations for pre-seed founders. From honing in on essential team dynamics to meticulously detailing go-to-market strategies, every element plays a crucial role in securing venture capital.
Founders need to be storytellers, communicating a compelling vision and demonstrating unique insights and execution strategies that differentiate them from the competition. For investors like us, investing at the pre-seed stage is not just about the current product, but also about the team’s ability to adapt, pivot, and grow in the dynamic market landscape.
For more detailed insights, watch the full video of our webinar and read the transcript available on our blogs at Incisive Ventures and Geek Ventures. Happy funding!
