Do you have an idea for a startup, but no product, traction, or even a working prototype?
That’s OK! You could still get up to $US500,000 from a new wave of venture capitalists — “pre-seed investors” — who are happy to fund your future business endeavour.
About six months ago, the term “pre-seed investing” became popular in the startup world, particularly in New York City. Two former Betaworks executives, Nicholas Chirls and Alex Lines, are leading the charge with an $US8 million pre-seed fund called Notation Capital.
“Pre-seed” investing is an alternative to raising a traditional friends and family round of financing, or collecting multiple checks from strategic angel investors to get a a startup idea off the ground. These rounds, which are typically $US100,000 to $US500,000, go to founders in exchange for a piece of their companies (5% to 10%) right at the idea stage, before there’s been any proof of concept.
Really, pre-seed investing isn’t anything new. A few years ago, these rounds were simply known as seed or angel rounds, lead by early stage investors like SV Angel, Lerer Ventures, or Thrive Capital. Startup accelerator programs like TechStars and Y Combinator also use a similar model.
Now many of those firms have gone on to raise much larger funds, and writing relatively small checks won’t yield the returns their funds needed to please their investors (limited partners). In addition, funding rounds have gotten more crowded, often pushing founders to raise millions of dollars before their businesses are ready for the capital.
Jet.com, for example, is a stealth e-commerce site that raised a $US55 million Series A right out of the gate. Clinkle, a payment startup, infamously raised a large ~$US25 million seed round more than a year before launching with dramatically smaller ambitions .
Raising too much money too early can blow up in a CEO’s face. It can cause companies to spend money irresponsibly, before they even know what they should be spending it on, and it can force companies to grow in unnatural ways to earn their lofty valuations.
Pre-seed firms like Notation Capital offer a less aggressive launchpad for founders who don’t want to over-raise or get heavily diluted. Other New York-based investors, including Charlie O’Donnell’s Brooklyn Bridge Ventures, David Tisch’s Boxe Group, and Shana Fisher’s Highland Capital offer similarly modest amounts to founders.
Chirls says he and Lines have already made four investments. But if there’s no traction or product, how can he spot a good startup team?
Notation Capital looks for people with technical backgrounds who spend all their free time trying to solve a problem. And those people, Chirls says, are “everywhere.”
“We try to find two or three really smart people hacking on nights and weekends, building something really cool who really want to go do that full time,” he says. “But those people don’t necessarily need millions of dollars to do it or want millions of dollars to do it, and they are still at early stages and there’s no growth chart.”
New York may be the perfect place for pre-seed investors like Chirls. The New York startup scene hasn’t yet produced tons of wealthy employees who can recycle their riches back into the startup scene like Silicon Valley has. No exit on the east coast has come close to producing 1,000 millionaires like Facebook’s IPO did.
“In the valley there’s so much capital around that it’s unusual for someone not to raise millions of dollars out there even with a napkin,” says Chirls. “We heard it enough times from founders we know and trust that it’s really awkward in this market to raise $US500,000 as a seed round.
It’s really awkward in this market to raise $US500,000 as a seed round.
“There needs to be more capital and support of this infrastructure at this infancy of a project,” he says. “You can call what we’re doing old-school seed rounds, or friends and family rounds. But the point is that hopefully we can provide the right amount of capital for a team to get through first 6-12 months.”
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