Investing Notes From The Inaugural Pre-Seed Summit

Earlier today, the folks from Afore Capital hosted their inaugural “Pre-Seed Summit” in San Francisco. About 150 people showed up, a healthy mix of founders, seed-stage investors and big fund VCs, and a bunch of LPs of various sizes. Some press showed up, too. “Pre-Seed” is somewhat of a controversial term in the investing world, triggering reactions questions its validity, its effectiveness, and even its contribution. While the term “Pre-Seed” may have been what grabbed the event headline, today’s conference was really about how seed continues to change and presents both opportunities and challenges for investors, founders, and LPs. Below are my brief notes & high-level takeaways from the sessions.

But, before I share those notes, let’s quickly revisit how the entire Bay Area seed stage ecosystem has been been reset. As I argued at the start of the year, there are no longer any rules about what constitutes seed and who can play in the game. As evidenced by today’s investor panel which included managers who focus on pre-seed, or traditional seed, or larger VC funds that can go from seed all the way to growth. Let’s pause here and take stock of the stats, which are incredible: According to Pitchbook, the current median deal size for a seed deal is $2.2M with a median post-money valuation of $10.7M — these are the highest Pitchbook has recorded. For 15 consecutive quarters (nearly 4 years), the venture money going into seed has been consistently over $1.5B; the Afore blog notes “data from PitchBook and the National Venture Capital Association shows that fundings of $1 million or less are at their lowest point since 2011,” which are what folks call “pre-seed” rounds; First Republic’s Samir Kanji blogs that nearly 66% of individual venture fund vehicles raised since 2007 are considered microVC funds under $100M.

Um… wow.

OK, so microVC funds and smaller pre-seed financings could really be a thing. Back to today’s summit, here are my high-level takeaways:

1/ Like it or not, enough people are curious about “pre-seed” that lots of people showed up to this event. Over 100 invited guests got up early for a 9am mid-week summit about pre-seed.

2/ Putting labels aside, there is a string of examples historians can cite about huge companies raising very small, modest rounds at low prices. A number of companies that will go public this year and next (like Dropbox) didn’t raise obscene rounds of funding early. This narrative was laced through the event, especially with the founder of Thumbtack, Marco Zappacosta, recounting his company’s financing story. We’ve already begun to see the effects of the 2014-2015 bubble in growth investing, and it’s comforting to know we are moving in the other direction, however slowly.

3/ Investors across seed and larger venture firms all hold slightly different definitions of various “seed” stages and are positioned to invest in them at any time. Ask 101 seed investors for their definition of “pre-seed” or the various phases in seed and you’ll get 101 answers. I continue to contend there are potentially four stages of seed — pre, seed, second/extension, and post — and that as a manager I designed my fund to be able cut a meaningful check at any phase.

4/ LPs noted that the term “pre-seed” is really a U.S. phenomena and the contagion has yet to spread to other geographies, though they expect it to eventually. This was interesting to me. Startups and the business of financing them have, with the help of Twitter, HBO Silicon Valley, and Shark Tank have become part of the global business lexicon. It’s all just a matter of time.

5/ The $3M-ish seed round is like the “traditional” Series A round in that it takes a while to get done, the lead gets real ownership, and that lead seed funds cannot make competing bets in the same category. We’ve heard this trope below, but the data does show it and in the last year, this is what I’ve observed — it’s easy to the pre-seed round, but then folks line up to pitch the best seed funds, but those seed funds are drowning in deal flow from the pre-seed funnel. I would bet most of them can barely cut through the flow, and then they have to find the best deals and look over their shoulder for a larger VC who can pick off the deal, give the founder more money, and ratchet up the valuation in the process.

The side conversations today were the best part, of course, seeing old friends and old faces, and meeting some new friends, as well. It’s hard to launch a new event in today’s crowded market for attention, but Afore did a great job getting folks together and let the crowd drive the conversation.