The Changing Nature of Pre-Seed Syndication

The syndication dynamics for pre-seed rounds are changing, and things are getting harder for founders looking to raise pre-seed rounds.

When I started making investments out of our first pre-seed fund in 2015, we had a very robust and deep set of co-investors who had the same interest in backing companies searching for product-market fit. Lately, I noticed we were not seeing the same set of firms we used to see on pre-seed cap tables. My colleague Aliya and I recently looked at the changing nature of our most common co-investors across our last few funds and noticed an interesting result. Many of the firms that were our most frequent co-investors in our first two funds are no longer among the folks with whom we often collaborate on new pre-seed investments.

When we talk about pre-seed investing, we are talking about rounds of $1 million or less for companies still searching for product-market fit. That’s the lens through which we analyzed the data. I recognize that many others have different definitions for what constitutes pre-seed, but that is and always has been how we define it

To get a handle on what happened, Aliya looked at our most frequent co-investors from Fund I and Fund II and pulled a bunch of data about what those firms have invested in since ?2018?. We looked at those firms’ investing activities using a combination of public and private data along the following dimensions:

• Investment pace and the number of investments made per year

• Size of the rounds in which they participated

• Check size for new investments

When we looked at the data, a few conclusions jumped out at us and largely accounted for why we see those firms less frequently than we used to. In many cases, the change in firm investing behavior is a combination of several factors noted below.

Some categories are now skipping pre-seed (as defined above)

There are some investment categories where small pre-seed rounds are not where most of the action occurs. This is particularly true in areas like defense tech, AI, deep tech, and other categories where the capital requirements to start are high or where founders can access more capital to do the kind of zero-to-one product innovation that characterizes pre-seed investing. We have not invested heavily in any of those categories, and many of the firms with whom we invested previously have ramped up their activities in those domains.

Pre-seed investing is the domain of new, emerging funds, and many of those folks are on pause or significantly less active than they used to be

Pre-seed investing is largely the domain of small and emerging funds. The period from 2018-2021 saw an explosion of new venture capital firms created, many of which were small firms that focused on pre-seed and seed investing. While many of those firms are healthy, a meaningful chunk of those newly-created firms are less active (when measured by the number of net new investments) today than they were in previous years. Some of those firms have pulled back due to a deliberate strategy to slow investment pacing. In contrast, others have simply invested all of the capital that they have for new investments and are not actively making new commitments. Compared to prior years, this decline in activity from these firms has a big impact on the pre-seed ecosystem.

Some of the firms we used to co-invest with are no longer in business

This one was surprising to me. There is a cohort of firms that we used to co-invest with that simply no longer exist. Many of the investors from those funds are still in the business, but those entities are no longer around and actively investing.

Many of our pre-seed investing partners are investing in larger rounds with companies that have more traction - those look more like seed rounds than pre-seed rounds under our definition

My sense is that this is the single biggest reason we no longer see our favorite pre-seed co-investors as often as we used to. Many of them have become even more successful than when we first started investing together, and they have raised larger funds. With those larger funds, they can invest in larger and more expensive rounds and have the opportunity to do both pre-seed and seed rounds. Based on the data, those firms spend more of their time and dollars investing in rounds that look more like today’s seed rounds. The other trend I’ve noticed is that even some firms committed to pre-seed have decided to move away from pre-traction, pre-PMF companies and focus more on companies with a live product and some early evidence of traction. These companies are still early in the grand scheme of things but more mature than the companies they used to back. Most of the venture industry has been in a more risk-off posture for the last few years (outside of those investing in AI), so it’s not surprising to see that energy trickle down into pre-seed.

Overall, it feels a lot harder to syndicate pre-seed rounds today and founders are working harder to assemble syndicates and find firms who can write meaningful checks in the context of the rounds they are raising. I am optimistic that we will continue to find new, great co-investment partners who love pre-seed, but it does feel like things are markedly different than they were when we first started.