December 01, 2017
Mary Ann Azevedo is an Austin-based business writer who has written for Venture Capital Journal, San Francisco Business Times, Crain's and Silicon Valley Business Journal.
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The rise of pre-seed may be a relatively new phenomenon, but industry observers believe it’s here to stay – despite the fact that the number of deals being made under $1 million appears to be dipping.

Several weeks ago, these pages covered how pre-seed aims to help startups do more with less. We looked at how – as the venture landscape has evolved over time – seed rounds today closely resemble what series A funding looked like five to 10 years ago in terms of round size and valuation. We concluded that it’s probably safe to say that pre-seed capital is what seed funding was ten years ago.

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To add to the picture, we decided to delve into the data to better understand what exactly is going in the world of pre-seed.

What we found is not clear-cut, but it is interesting nonetheless.

The Fewest Of Millions

The definition of pre-seed is any deal under $1 million that was raised via angels, an institution, or in a convertible note.

And while pre-seed funding surged between 2012 and 2015, according to Crunchbase data, it has since taken a dip.

Pre-seed’s funding peak in 2015 was comprised of 3,176 deals under $1 million—totaling $1.03 billion in funding. That compared to 2,138 deals totaling $694.5 million in 2012, marking a 33 percent increase in dollars raised and number of deals.

But deal and dollar amounts started to go south in 2016. The number of deals during this period fell to 2,401 while dollar volume declined to $803.4 million. So far in 2017, we’ve seen just 1,152 rounds in which $381.6 million was raised. However, it is likely that pre-seed deal counts and dollar amounts will go up as more deals are reported.

Due to the enthusiasm, we saw from investors, and our readers, about pre-seed stage deals, we were surprised to see a decline. So we turned to a few of the venture firms focused on pre-seed to get their thoughts.

The Investors

Michael Berolzheimer founded San Francisco-based Bee Partners in 2009 ­long before the term pre-seed was even born.

“When I started Bee Partners, I termed the type of investing we did as providing genesis stage capital,” he told Crunchbase News. “While the term didn’t catch on as a moniker, the concept has.”

For Berolzheimer, being the first investor in a company – even one without much of a revenue or product – has always been appealing.

“We’ve always made a bet on the people themselves more,” he said, noting that Bee Partners has been the “very first check-writer” for half of its portfolio.

About 80 to 90 percent of its portfolio includes pre-seed investments, according to Berolzheimer.

To the entrepreneur-turned-investor, how to define a pre-seed firm is simple.

“If you ask a firm if they ever pass on a deal because it’s too early, and they say yes, then they’re not truly a pre-seed firm,” he said. “Pre-seed is made when everything is too early and sometimes even just an inkling of an idea.”

Berolzheimer likens pre-seed firms to being the wolf instead of sheep in the venture ecosystem.

“We’re out there making a first decision without any signal from anybody else, rather than being a sheep,” he said. “And there’s plenty of sheep out there, waiting for a proof point.”

Despite his confidence in Bee Partners’ approach, Berolzheimer is not necessarily surprised by the Crunchbase pre-seed data.

“In spite of our seeing a significant uptick in deal flow volume, some founders have decided to start with a large seed raise,” he said. “Since more is expected at the Series A stage, they are looking to raise more upfront.”

He also believes the party rounds of yesterday are “largely over.”

“Some founders may be ceasing their projects earlier given the illiquidity that persists in the system, particularly with angels that perhaps got over-eager in the 2013-2014 vintage,” Berolzheimer said. “We’ve also seen data to suggest that aggregate volume is down, so in spite of ours being up (significantly), it may be the case that our brand and market position has sopped up volume hadn’t been seen until now.”

Anamitra Banerji, co-founder and managing partner at San Francisco-based Afore Capital, believes there are a few factors contributing to the lower numbers.

“Pre-seed companies that have raised $1 million or less aren’t announcing the raise or aren’t announcing how much they have raised, and are choosing to remain stealth,” he speculated.

Banerji also believes that angels, friends, and family may be retreating and are increasingly being replaced by institutions.

And lastly, he believes that many pre-seed founders are pitching seed funds and ultimately abandoning the raise because they are told they are “too early.”

The Founders

Perhaps as evidence of that point, Identify3D CEO and co-founder Joe Inkenbrandt admits it was very challenging to raise his company’s pre-seed round in March of 2015. The San Francisco startup provides intellectual property protection, quality assurance, and data security in all phases of digital manufacturing.

For a variety of reasons, the startup did not want to raise more than $1 million. When Inkenbrandt went to angel groups, he was surprised to be turned away for being “too early.”

“I thought to myself, ‘But you’re angels,’ “ Inkenbrandt told Crunchbase News.

Ultimately, he found an investor with Bee Partners.

“Today, I think we’d have more options,”  Inkenbrandt said. “As the idea of pre-seed is taking off.”

Earlier this year, the company closed on a multi-million dollar seed round and is in the process of trying to raise a Series A.

Despite the challenges, Inkenbrandt is happy that he took the pre-seed route.

“The cap table would have been much more diluted if we’d taken more money earlier,” he said.

Charles Hudson, managing partner and founder of Precursor Ventures, agrees with Banerji that many companies are likely choosing not to report deals. This could lead to misleading numbers when data is crunched.

“We have about 82 companies in our portfolio and my guess is that only 30 to 35 have disclosed their fundraising,” he told Crunchbase News. “A bunch of them don’t see a lot of upside to announcing it. Some are holding their fundraising news to announce in conjunction with product milestones.”

Photo courtesy of Precursor Ventures

Hudson also believes that a lot of pre-seed rounds get done on convertible notes and aren’t reported.

“What then ends up happening is that round never looks like a round until it converts to a seed,” he said. “And then the seed rounds appear larger because people are raising money out of notes before the equity rounds. There’s all these hidden rounds you don’t see.”

Hudson believes the concept of institutionalized pre-seed funding is still “really nascent.”

And while it’s growing, he acknowledges that “investing in people you don’t know is not an investment category that most people find attractive.”

So even though it’s not clear just how much pre-seed money has gone into companies in recent years, it appears the demand for it is there and that it’s one area of venture capital that is nowhere close to being oversaturated, according to Hudson. What most remains to be seen is just how quickly the emerging stage of pre-seed capital is adopted and accepted by founders – and other venture capital firms.