What It’s Really Like to Run a Pre-Seed Stage Firm
Thank you to Graham Pingree, Beezer Clarkson and Yoni Rechman for feedback and improvements.
Running a pre-seed stage firm is incredibly exciting, humbling, and exceptionally difficult.
It’s the hardest job I’ve ever had because it is so many jobs in one. Here is what it’s like…
Job 1: Raise Capital
Raising money for VC is much harder.
LPs are even more complicated and nuanced than VCs.
Pitch and Targeting have to be exceptional.
2048 Ventures Fund II is $65M and has over 100 LPs. It took more than 400 meetings to raise it!
Job 2: Source Exceptional Deals
It’s a myth that the best founders just show up on your door step.
The opposite is true.
Competition in VC is BRUTAL, because of Power Law outcomes everyone is competing for best deals.
You need to build a reputation and sourcing machine so the best deals come to you / you find them first.
Btween sourcing and winning there’s picking!
Job 3: Pick Well and Win Deals
This is a separate skill - you could see a lot of deals but what is your strategy to pick and then to win them?
Picking involves knowing which founders you want to back. Thats based on founder archetypes, founder market fit, team, your excitement and conviction in the space and many other factors. If you can’t pick well, you won’t make money.
In addition to picking you need to be very skilled in winning the deals you want to be in. This involves strategy on when and how to make an offer as well as correct pricing and, of course, having a strong reputation in the market.
Again, VC is exceptionally competitive - everyone wants to back best founders and best deals.
A huge part of the job is winning the deals you want to invest in.
Job 4: Research and Thesis Development
We said that you need to pick well to win, but how can you pick well without having a knowledge base or a thesis?
Many VCs focus on specific sectors so that they can ramp up and be more knowledgable. This is particularly challenging at pre-seed stage and a lot of managers choose to be generalists.
The downside is that it is MUCH HARDER for them to analyze markets, and instead they are forced to make decisions based on the rough size of the opportunity and the quality of the team.
At 2048 Ventures we are a thesis driven / thematic investor with a strong focus on business models that we believe lead to the biggest moats - APIs, Infrastructure, Marketplaces. In addition, we focus on specific sectors like biotechnology or machine learning. Given the pace of our jobs the research is not easy, and we constantly need to make tradeoffs between spending time getting smarter on specific sector vs. moving quickly on the deals at hand.
Job 5: Portfolio Construction & Fund Management
VC math is crazy. To just return $65M you need to own 10% of $650M exit or 5% at $1.2B exit etc.
That is REALLY HARD!
You can’t be in best deals but not own enough and not be successful.
Portfolio strategy is key.
Follow ons present another challenge. The conventional wisdom of the later stage venture, which is often incorrect at pre-seed is — follow on in your winners. First of all, it is easier said than done because you may still not know which ones are the real winners. For pre-seed stage funds follow ons in later rounds, series A+, are often very expensive because pro-rata maybe several million dollars.
In addition to Portfolio Construction, you also need to think about Fund Money Management holistically. This includes thinking about things like Capital Calls, Recycling and Distributions which are very complicated topics.
LPs commit capital to GPs but don’t send it all at once. Instead, GPs call capital when they need it. There are lots of nuances, including optimizing for IRR. If you call capital upfront before deploying it, the IRR clock starts ticking while money is not earning anything. A lot of firms call capital just in time to do a deal. At a pre-seed this is hard, and very suboptimal because there are a lot of deals being done, and calling capital per deal is likely to be inconvenient for LPs. For this reason, at 2048 ventures we call capital every 6 months instead.
Recycling is focused on deploying 100% or more of the capital given to GPs by LPs. At pre-seed recycling is really difficult, so our firm chooses not to do it. Instead, we decided to reduce our management fee over the lifetime of the fund, so we can deploy more of the LP capital.
There are other nuances including when to get out of the position or when distribute capital. The stock of many fast growing companies is sought after by downstream investors. As an early / first check investor you may have an opportunity to sell some of your position before M&A or IPO. Should you do it? The conventional wisdom is that yes, you should sell a portion of your position if you can return 1/2 or more of your fund. But in reality — everything depends!
Job 6: Build the Firm
Small VC firms are like Startups - you need to hire people, manage them, motivate them, pay them.
Only the best people can win in VC, so you need to hire and motivate the best team you can find.
You need to manage vendors - lawyers, accountants, etc - legal and taxes for VC are INSANELY COMPLEX - it is it’s own job!
Vendor management is very time consuming and fund managers are required to carefully review all legal and financial documents. For that reason larger firms hire in house CFOs and General Counsels, but pre-seed firms can’t really afford them.
Job 7: Help Portfolio Grow and Raise More Money
We regularly meet with companies we backed and help with growth, product, hiring, founder issues, and fundraising.
Early stage VC’s job is to help their investments grow and then raise more capital.
On any given week we manage from 5-10 ongoing capital raises.
It is another full-time job.
Job 8: Networking
You network to get deal flow.
You network to build trust with downstream investors.
Like no other job VC requires CONSTANT NETWORKING.
Relationships with partners at top firms like a16z or Union Square Ventures take years to build.
You need to know who to send what & when.
If you are too noisy or irrelevant people lose trust and start ignoring you.
Job 9: Manage LP Relationships
VCs want to know what’s going on, so do LPs.
Like clockwork we send quarterly updates to LPs for both funds we raised. The more funds the more reports.
We also do 1-1 updates - because LPs want to know what’s going on! High touch.
Job 10: Financial Reporting
Finance in VC is a BEAST.
Security and vendor management, sending checks - that’s the easy part.
TAXES ARE CRAZY!
100+ LPs, Mgmt co, GP and LP - so many entities, and geos, and complexity!!
Job 11: Brand Building
Tweeting, blogging, panels, going to events and conferences all takes additional time - there is only so many hours we have every week.
We also mentor and give back at Techstars, Harvard Business School, and other places.
This is all needed as in today’s increasingly noisy world if you are not top of mind you won’t get deals from co-investors. Founders won’t reach out to you.
Beyond pure marketing the brand building is critical. Founders want to know what you stand for and why they should take your money!
Job 12: Calendaring and Prioritizing
All of these jobs are hard and the only way to manage is to constantly prioritize and re-calendar.
Unless fundraising, deals are always P1, you can’t miss a great deal.
We’re constantly prioritizing and watching the calendar.
I am sure I miss some things but you get the idea.
Running early stage VC firm is not just THRILLING it is mentally and physically GRUELING.
It’s like MARATHON and SPRINT at once.
You have to be very disciplined to survive and lucky to thrive.
