The biggest tSaaStr Annual 2018 Takeaways, including why pre-seed is the new seed for SaaS entrepreneurs.
Charles Hudson, Precursor Ventures
(note this is a piece created by Christoph Janz. Its usage here is to provide a barometer for pre-seed vs. seed stage)
Charles Hudson — Managing Partner / Precursor VC
The institutional seed round is no longer the first step in the journey for many SaaS entrepreneurs. As the bar for raising seed capital for SaaS companies has gone up, pre-seed firms have sprouted up to provide that first round of capital to help companies get started. We will explore what pre-seed firms look for in entrepreneurs as well as what entrepreneurs need to achieve with pre-seed capital to unlock the elusive institutional seed round.
What is Precursor’s Pre-Seed Capital For?
- Capital to prove out a thesis you have. Precursor does not have requirements for traction or metrics.
- Aim is to be useful and helpful, not have control (don’t take a board seat).
- 18 month pre-seed map: 3 months finishing getting product into market , 6 months gathering data and refining, 9 months in market.
- 5–10% dilution from pre-seed round.
If you can’t do this, you’re going to have a really tough time raising a seed round.
What Seed /Series Funds Say They Want to See
- Seed funds want to see initial revenue traction: $10-$25k MRR at least. Charles thinks this is a lot to achieve on $1M in capital. You must be capital efficient to ship a product and generate revenues on $1M in capital.
- Seed investors are looking for early indicators of success: Primary indicator is velocity with the best companies going from pre-seed to seed in 12 months: inception to product launch to revenue in under 12 months.
- Series A funds want to see 10x MRR from Seed: looking for $250k MRR.
- Going from Seed to Series A: Companies have to 10x from seed to series A on $2M capital and 18 months. No wonder “Series A crunch” became a thing.
What Charles has seen in his portfolio of companies that have raised a seed round is that the data does not jive with what the seed investors are saying.
Precursor Ventures Portfolio Data
How to make your life difficult when trying to go from pre-seed to seed:
- Choose a category that people believe is too crowded (eg., martech).
- Try to build an Enterprise product on a pre-seed budget (doesn’t give you enough time).
- Make little progress per unit of time (back to the momentum/velocity as a huge strength).
- Have a poor relationship between sales effort and customer ACV (eg., 9 month sales cycle for $5k).
Catch All Takeaways
- Charles doesn’t know if he would raise VC unless the market forced him into it (e.g., because of competition).
- 2 of 4 Precursor’s best performing companies did not have a technical Founder.
- Charles advises companies not to do more than 2 convertible notes between priced rounds.
- It generally requires 40–50 intros and 2 quarters to get a seed round done, so Founders executing that capital path should be raising 6–9 months after taking pre-seed money.