Despite the doom and gloom felt lately in venture capital investments and returns, there seems to be quite a bit of movement in the pre-seed stage.
In the past month, for example, Catalyst Fund, ALIAVIA Ventures, Greylock, Garuda Ventures, The House Fund and Bee Partners all announced new funds to infuse pre-seed investments into startups. If you add all of that up, it’s over $220 million (that’s not including Greylock’s $1 billion) of potential capital flowing over the next few years.
Like all the other stages, pre-seed deals have declined in number and value since 2021, according to PitchBook. At the end of the third quarter, just 788 deals were made globally, down from the 2,572 deals in 2022 and 2,650 investments made in 2021.
You can perhaps blame the decline of deals, and the subsequent fund performance, on a few things, among them being higher valuations, investors not wanting to take the usual risk, and how getting to Series A is a challenge right now.
So why are we now seeing a fair number of VC firms closing new funds?
Good outcomes abound
It takes a certain type of person to want to help founders at their earliest stages. It’s also validating to be able to say that you were involved at the very beginning of a company, when deal size and valuation weren’t as expensive.
For Eric Bahn, co-founder and general partner at Hustle Fund, the flurry of new activity in pre-seed funds “is fascinating to watch,” he told TechCrunch+.
“When we started Hustle Fund in 2017, pre-seed was barely a category,” Bahn said. “It was really just Precursor and a few other funds doing work here. Now this is a huge part of so many funds’ stories. And raising a fund as low as $1 million now is completely feasible, which wasn’t as feasible back in 2017.”
In boom times, markups for a Series A round were being done with upward of $100 million post-money valuation. Today, those same rounds can be as low as $30 million post-money valuation, Bahn said. With an entry point for pre-seed at around $3 million or $5 million in valuation, there are still healthy gains to be had, he said.
In addition, growth-stage investing is not attracting any limited partner dollars, as it’s seeing the most punishing data at the moment. Large funds that raised in 2021 and 2022 that deployed into growth are seeing such a massive hit in their portfolio, as liquidity isn’t available.
“Pre-seed and seed are far more attractive in that it doesn’t require large funds to raise, and given the entry point of such low valuations, there is a better story about finding alpha by deploying in this space,” Bahn said.
Niche can be a bonus
GFR Fund believes those moonshot opportunities are in startups focused on the future of gaming and entertainment. The venture capital firm, which invests at the pre-seed and seed stages, announced this week the closing of its third fund with $53.5 million in capital commitments.
Teppei Tsutsui, GFR Fund’s general partner, said the fund was started back in 2016 and has invested in pre-seed since then.
“This stage is still pretty active,” Tsutsui told TechCrunch+. “We make one new investment per month and haven’t seen a decline, though we have seen big funds come down to this stage looking for better opportunities. That’s created more competition compared to three years ago.”
The gaming and entertainment world is still comparatively small, though, and that has, in some ways, insulated GFR from bigger firms swooping in and gobbling up all the good deals, he said.
Founders see it as a real differentiating factor when looking across more agnostic VC firms. By also having LPs from the gaming industry, it enables GFR to connect portfolio companies directly to those game publishers or companies that might eventually acquire a startup.
“Being different really helps us get to the top with more founders, and they choose us because of that uniqueness,” Tsutsui said.
There is still joy in seeking out new ideas
For VC firms wanting to get into pre-seed investing, one way to do that is to see what new ideas are out there. Bahn said many do this by forming an accelerator or something similar.
This month, Altair Capital, I2BF, Yellow Rocks and Smart Partnership Capital joined to launch their version with an investment program called “Pre-seed to Succeed.”
Startups that have a minimum viable product and first traction can be a part of the six-month program that offers initial funding, fundraising support and access to experts and mentors. The four firms plan to invest a total of $50 million in these companies, including follow-on commitments.
Nikolay Kirpichnikov, managing partner at Smart Partnership Capital, told TechCrunch+ that the program is not an accelerator or an incubator. Every project that comes into the portfolio will go through “a rigid, very detailed process where we select, about 3% to 4% of the total.”
That said, by investing in the pre-seed stage, it provides an opportunity to “identify and nurture promising talent,” and give founders the resources they need to bring those ideas to life, especially in uncertain times, Kirpichnikov said.
“Pre-seed is where innovative ideas are born and initial traction is tested,” he said. “It’s an opportunity to be part of shaping the future. And, yes, it is about profit, but that’s one of the reasons we joined forces: to make sure you can actually pick that moonshot and succeed from the business perspective.”