It's All Pre-Series A Now

This is a lightly redacted version of an email I sent to my limited partners at Precursor describing something that I've been feeling for a while but was hard for me to describe until now.

When I started Precursor in 2014, I made a conscious decision to position our firm by defining pre-seed very specifically so it was clear to founders and others in the ecosystem what a pre-seed round was. In 2014, there was very little consensus on what constituted a pre-seed round, and there was room to help define the category by putting our own definition into the world. We took a fairly strict definition of what a pre-seed round was, narrowly defined by design:

• Pre-seed rounds were small, typically $1M or less, whereas seed rounds grew larger over time.

• The purpose of pre-seed rounds was to establish sufficient product-market fit and early traction to unlock a seed round in a world where seed investors were no longer the first to invest in many companies.

• These smaller pre-seed rounds were a good way for first-time founders to get into entrepreneurship and work out the kinks in their businesses before raising more capital.

• The business model worked well when we found talented entrepreneurs who allowed us to invest at relatively low entry valuations that compensated us for the risk we were taking.

This served us really well because in 2014, there was genuinely a gap in the market for smaller pre-product-market-fit rounds, for both repeat and first-time founders. As a result, we established ourselves as one of the most well-known dedicated pre-seed venture capital firms.

In the last ten years, things have changed. More firms entered the pre-seed arena. The multi-stage firms started pushing into pre-seed themselves. Most importantly, as happened with seed earlier, the term pre-seed began to be used to the advantage or best interests of the person raising a round. Initially, the evolution was subtle: we went from a world where most pre-seed rounds were $1M or less to one where they were $2M or less, as the pre-seed boundary slowly expanded. Now I routinely see companies raising rounds in excess of $10M and still calling them pre-seed. The round’s naming convention has nothing to do with the work the company plans to do, but everything to do with signaling. Calling those rounds pre-seed gives them the opportunity to raise a much larger seed round later.

Our strategy has always been to back the very best founders that we can find. I still believe that the opportunity to work with teams that want smaller amounts of capital at inception exists, and it has been, and will continue to be, an important part of the work we do as a firm. These rounds will also continue to be an important part of the story of how the most important companies get started.

Based on where the world is today, the landscape is quite different. Being a fund that has a very narrow focus and specific definition of what constitutes pre-seed has probably outlived its utility for us. One notable byproduct of this narrow focus has been that, while I think we see and have good coverage on many of the companies that are raising rounds of $1M to $2M at pre-seed and maybe $3M to $4M at seed, there’s a gigantic and important growing ecosystem of companies that are raising rounds at prices that have historically been beyond our remit as a fund.

Our goal has always been to find the very best founders who are building companies from scratch. Whereas we previously had a pretty hard cap on valuation at around $20M and a round size of roughly $4M, those constraints feel limiting for what we want to see in today’s market. We need to see the full landscape of the best new companies being created, whether those rounds are called pre-seed or seed deals and whether they are first-time or repeat founders. I’m not entirely sure this will change what we end up investing in, but it will certainly change the top-of-the-funnel opportunities we evaluate. We have always done well with pre-seed and seed-stage entry points and first-time and repeat founders, and it’s time we updated our messaging and work to better reflect today’s reality and the work we actually do as a firm.

We are also in a period of unprecedented change and upheaval within many venture firms. Given my relationships, I have the opportunity to speak with many managing and general partners at other firms. Precursor is not unique in doing introspection about our firm’s strategy and our role in the ecosystem; I don’t know many serious firms that aren’t going through the same exercise we are.

I believe all of this turmoil, change, and strategic upheaval in venture really comes down to one core question: In this AI era, is it really different this time? Some in the industry thought it was different in 2021, but that turned out not to be the case. Most of the core questions every early-stage firm I know is grappling with boil down to the following core beliefs:

1. Does entry ownership still matter, and is it worth holding the line on target ownership?

2. How important is entry price in the equation? To what degree does entry price matter?

3. Can I get into the top 15-25 companies that will become far outliers each year? If not, why am I in this business?

If I were to summarize the consensus view of the job of an early-stage venture capitalist today, it is fairly simple: do you have a model that’s going to give you a chance to win a spot on the cap table of the small number of companies that will end up driving the majority of returns per fund cycle? If the answer is no, I think you need to go back and look at your strategy, because you might not be competitive.