Pre-seed is the earliest possible round of funding for startups. For founders, it is often critical to demonstrate that their product fulfills a market need. For investors, it is a great opportunity for outsized returns, making a meaningful impact on a startup, and getting to know founders before investing in further rounds.
Yet, while there has historically been much media attention on seed to growth rounds, there has been very little on the select group of traditional funds that do that first work of getting founders off the ground.
The goal of our Pre-Seed Report is to gather data and uncover how investors look at this early round of funding. This includes understanding how early-stage investing has changed over time, and what the current market means for founders looking at pre-seed.
We reached out to funds that invest in pre-seed, and many agreed to share their data and insights- we thank them for being our partners in the mission of transparency!
Participating funds
In addition to our survey, the following investors took the time to share their in-depth views on the pre-seed landscape in Israel:
Below are some core insights from these investors.
The Benefits of Pre-Seed:
Attaining pre-seed funding is often critical for startups who need the initial capital to validate their business, yet there are many other benefits to founders than mere necessity.
Lia Cromwell, a Principal at UpWest, shares her insights on why a pre-seed round could be beneficial:
“Everyone talks about the value of resilience in founding a startup, and one of the many things I love about pre-seed is that it naturally attracts resilient founders. There is a big difference in the mindset of a founder whose first check is $500k, versus the mindset of a founder whose check is $5 million plus. Those who raise smaller amounts are inherently scrappy from day one, and a scrappy mindset is always a positive for a CEO -- no matter what stage they are in or what the market conditions may be.”
For Yoav Anaki, a Principal at fresh.fund, raising pre-seed is also a tool to build better business foundations:
“Few companies really need $4 million out the gate. Pre-seed rounds enable founders to achieve mission clarity and build a tribe around their companies - all without being significantly diluted. This sets up a strong foundation to confidently raise a substantial round down the road.”
Maor Fridman, a Partner at F2 Venture Capital adds that pre-seed helps to take risks off the table one by one before raising your next round. He explains:
“You and your founding team deserve to ask and have time to answer a few vital questions before you raise your seed round,for example: Is this something you are happy to pursue for the next 7+ years? Why are you the one that needs to bring this product to the world? Is there a big enough market and an urgent enough demand for what you are developing? Taking the time to answer these questions, validate your thesis, and remove risks from the table one by one will ensure that when you are ready to raise, you are raising with a solid direction and the best chance at scaling your business down the line.”
Product Matters Little, Team Matters Most:
When it comes to analyzing a pre-seed startup, the product matters very little.
Infact, Nimrod Cohen, Partner at TAU Ventures, shares that out of all the companies in which he invested at the very early stage, not one of them has stuck to the exact product they pitched at the time of investment:
“That initial product is overrated, the reality is that you face your competition, you face your customers, you face your markets, and more often than not realize you need to pivot, sometimes a little, sometimes a lot! Someone once told me a line I won’t forget- a great team can fix a shitty product, but a great product cannot fix a shitty team, and that's the truth of it!”
Noa Matz, Operating Partner at F2 Venture Capital, also shares her thoughts on why a team matters most at the early stage:
“At the pre-seed stage, companies have very little to show besides the founders, their relationships with one another, and their good ideas, hence the team element becomes so crucial for the start-up’s success.”
Yoav Anaki doubles down:
“One of the main things we look for is a healthy relationship between the founders. At the pre-seed stage, the most common reason for failure is difficulties within the founding team. So ultimately, pre-seed requires a different diligence process than later-stage companies. We spend less time focusing on the proposed solution, and more on assessing the qualities of the founding team and ascertaining that the problem space makes sense."
The Importance of Founder / Investor Chemistry
A strong and complementary team is just the beginning. Investors and founders need to jive well and be comfortable with the notion of working together for 5+ years of both good and bad times. At the pre-seed stage, when founders rely on investors most, this is especially critical.
As Nimrod Cohen explains:
“If I don’t feel it with a specific team, it doesn't mean that it's not a good team and it doesn't mean that others will not connect to them, and it certainly doesn't mean that they won’t succeed! But, seeing as it's a very long journey with ups and downs, both entrepreneurs and investors need to feel a good connection and real chemistry together because separating along the way is not an option.”
Ami Dagan, Partner at Random Forest VC, puts founder/investor chemistry at the top of his list when it comes to assessing founders:
“When I look at founders it is less about looking at their individual character traits and more about the chemistry between our team and them. We work so closely with our founders, without that chemistry, the hard journey you are embarking on becomes 10x harder which is not a good place to start.”
Market Validation Starts Early Too
While the team is universally recognized as the most significant factor at the early stage, the market in which your startup operates is a close second.
Ori Barzilay from Pitango touches on why he finds the market so significant:
"When looking at a pre-seed company, you have to understand their target market and answer some important questions- How big is the market? How is it scaling? What trends are we seeing and what could we foresee? Understanding if a market is ripe for disruption is vital at the pre-seed stage. You simply can't innovate where the market doesn't want to innovate. An implicit willingness may be sufficient, but a good way to make sure that happens is by carefully defining your buyer and your GTM strategy and reducing friction in your market penetration"
Maor Fridman continues to emphasize why asking hard questions about the market can help at pre-seed stages:
“Understanding the market means talking to customers or potential customers to validate the need your company aims to address. You should understand the pain points and ensure the product being built is a must-have rather than a nice-to-have, as well as assess the size of the market you aim to address with this question in mind: Is this market large enough to result in a billion-dollar company?”
The Edge of Israeli Early-Stage Founders
Israeli early-stage founder looking for pre-seed often come with unique pros and cons. For example, their military experience. A large portion of founders come out of the military, specifically the intelligence unit 8200. Upon leaving this unit, these young men and women often have the skills, the network, and have built up the resilience needed to face the challenge of building a startup. Yet this isn’t the only advantage
Nimrod Cohen emphasizes another benefit of the early-stage Israeli founder: The fact that they try to conquer their primary market from the get-go:
“In Israel, founders never begin by aiming for their local market, because there is no local market in Israel big enough to make their business viable. In many other places in the world, founders start off focusing on their local markets to create a solid business and go from there. This may seem logical, but going from your local market to then infiltrate the global market later on is a very difficult transition. Israeli founders who are forced to conquer large markets from the get-go must set up those foundations early-on and often come out on top.”
While military experience and aiming for large markets gives Israeli early-stage founders a certain edge, there are also pitfalls unique to Israeli founders that pre-seed investors can point to. Noa Matz expounds on one of these:
“Something we often see with Israeli founders is skill sets which are too similar. A founding team should aspire to be complementary and with many founders coming from similar backgrounds, this can be challenging. The classic case of co-founders who met in 8200 with the same technical skillset may be useful when building their product in the beginning, but when it’s time to launch, their lack of basic commercial abilities: pitching, selling, forming business relationships, and reaching product-market fit, is a roadblock.”
The Market’s Effect on Pre-Seed
The market has heavily shifted, and the downturn has had catastrophic effects on some companies, especially those in their later stages of funding, many of which are struggling with bloated valuations and tight runways. But has the current market affected those earlier stages?
According to Nimrod Cohen, the effect on earlier stages is minimal:
“The obvious victims negatively impacted by the market downturn over the last year are companies at later stages- those pre-IPO and growth stages. This has obviously affected those later-stage investors too.” He adds, “At the stage, we invest in, the public markets are not relevant, we need them to be good in three to five years from now.”
Maor Fridman adds that the harsh market could, infact, be good for early-stage investors and companies:
“If you are building in these times, you are going to make sure your product is a must-have at the earliest stage, one that could exist in the harsh market of its inception. So,if anything, this market gives early-stage founders a healthier mindset from the get-go.”
Having gained insights from several pre-seed investors, a few points stand out. Perhaps the most prominent being that, in this climate, conducting a pre-seed round is both a popular and a strategic choice for founders and investors alike.
For founders, it is an opportunity to validate their product, assess their market, and understand their willingness to commit to the long journey ahead, all while establishing a relationship with early investors with minimal dilution. For investors, it is a way to gain confidence in founders, make a real impact on the trajectory of a company, and build future pipelines during manic market conditions.
Pre-seed investing will likely only gain in popularity among founders and investors who understand better than ever the need to build healthy foundations.
We look forward to maintaining a pulse on the pre-seed landscape as we enter 2023!
