Our PreSeed Investment Framework

A summary of our ‘pre-product’ investment framework at Predictive

Weekly Short Essay 3 (all thoughts my own) 

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Overview: When considering a PreSeed stage company, I bucket my evaluation into two specific categories: (1) founders and (2) market. Given there is often zero revenue signal at the PreSeed stage, inputs for both categories are generally qualitative. After screening thousands of PreSeed deals at Predictive and witnessing these cycles play out, I’m summarizing our current framework for PreSeed investing below (to check myself, I will literally score an investment prospect on a scale of 1-10 across each of these variables). 

I generally place 50/50 weights of importance between founders and market at the PreSeed stage. Having previously skewed heavily towards founders over market in the past, over time I’ve seen many cases where “successfully exited,” serial founders embark far down a market with a particular solution, only to spend an inordinate amount of time course correcting when signals indicate the market opportunity isn’t there. Great founders can (and do) adjust according to market signal, but there’s often a significant time cost which dampens investment return potential; the ideal scenario is top marks within both the founders and market categories. Let’s dive in:

(1) Founders: We’ve all experienced meeting founders with the “It” factor.. after chatting with them for thirty minutes, you have this gut instinct they’re going to build a unicorn, or even a decacorn. It’s a rare, surprisingly visceral feeling. Several founders that fit this bill that we’ve been fortunate to back at Predictive include John Andrew at Wander, Adam Guild at Owner, Gaston Irigoyen at Pomelo, Jad Antoun at Huspy, Wemimo & Samir at Esusu, and Celine at Loyal (along with many more within our portfolio). Let’s further distill the “It” factor…

• Big vision & ability to sell the vision: The founder(s) have a big vision and the ability to sell it – they are on a mission to build a category-defining company and disrupt the inertia of a legacy workflow, often via a foundational platform servicing a broader industry (rather than a simple point solution). They’re able to uniquely articulate the massive potential and impact of their vision in a way that both inspires & logically conveys the scale and validity of the opportunity to investors, customers, and employees. 

• Pragmatic execution roadmap: In tandem with a big vision, the founder(s) are able to distill the specific & pragmatic step-by-step process to realize their vision – this includes the tangible initial customer workflow they’re addressing with an MVP, and an incremental feature expansion path from there. While this execution plan is bound to change as the business evolves, more importantly, a crisp articulation of this plan upfront illustrates the founder(s) have done extensive groundwork to test and validate hypotheses around their target customers’ workflows. They clearly have a keen attention to detail and a pragmatic approach to distilling and testing specific hypotheses.  

• Adaptability: The founder(s) are able to adapt at lightning pace to market signal. While ego is a fundamental trait of most founders, I believe the magic happens when founders with conviction in their vision are also able to maintain objective (and proactive) reception to market signal and peer feedback – adjusting logically to where the marketing is guiding them, but not overcorrecting impulsively. Strong assumptions, loosely held. For a PreSeed investor, assessing adaptability may seem a bit opaque, particularly when first getting to know a founder, but several tangible signals I look for include: 

(1) willingness to listen proactively, with an innate curiosity (they listen intently & ask thoughtful questions) 

(2) prior entrepreneurial experiences (they’ve seen the value of adaptability firsthand, and felt the pain that follows rigidity)

(3) prior requirements to personally adapt to new surroundings (such as immigrating to a new country)

(4) prior leadership positions (they’ve led teams previously & understand how to constructively receive and share feedback)

(5) prior high level athletics (I find athletes generally tend to be team players). 

• Propriety access to data: The founder(s) have differentiated network or technology-driven access to data within their target market. Either via senior industry connections or unique technical ability, the founder(s) are able to quickly unlock scalable access to relevant data sets that enable outperforming models and unparalleled industry-specific insights – uniquely enabling them to develop the most precise product on the market. 

• Proprietary access to blue-chip design partners: The founder(s) have differentiated senior level access to design partner customers within their target market, given their prior experience & established credibility within the industry. I weigh this variable the least, however, if the founder(s) are able to establish a senior advisory board comprised of leaders within their target market that can open doors – this effectively serves the same purpose. 

(2) Market: The market that founder(s) are targeting plays an instrumental role in the customer reception for a new product, the startup’s ease of go-to-market, and the larger revenue opportunity to be captured. Ideally, great founders are picking a market that checks the boxes below.

• Large & growing market: I’m looking at omnipresent markets that are generally recession resistant – these include financial services, property management, healthcare, manufacturing, legal, logistics, and entertainment. Each of these markets are global, with a $100bn+ TAM, and will continue to grow in an increasingly digital and connected world. By targeting a large market, founder(s) also give themselves the breathing room to pivot within the same established customer base, according to market signal – I.e. if their initial product hypothesis prove false, there’s tremendous potential to iterate rapidly towards a better opportunity within the same customer base. 

• Emerging categories within large markets: Within the above large markets, I look for windows of ripe timing for new, emerging categories. These may be catalyzed by new policy measures, macro tailwinds, technological developments, or changes in consumer behavior. A few “emerging category” examples may include global payroll (accelerated by COVID), banking APIs (accelerated by open banking policies), B2B2C cannabis solutions (accelerated by federal & state cannabis legalization), or AI-driven patent analysis (accelerated by advancements in precision of LLMs). 

• Category leading position: With a new category pinpointed, I look at a company’s position within said category – is there obvious potential for them to slot into category leading position? To unpack this further – I generally view "category-leading position" as a confluence of factors including market share, public market signaling (i.e. notoriety within their target market), reputation to top talent, and deployable capital. A startup can jump to category leading position by raising the largest amount venture capital funding, from the world’s most highly regarded venture capital funds, for example; if a startup is able to jump into category-leading position, they’re subsequently able to build customer, staffing, and investor signaling moats that create higher barriers of entry for competitors or new market entrants. In my opinion, if a startup is entering a market in 3rd place or beyond, they’re generally already too late (of course, there are occasional exceptions to this). Several examples of category leading companies include Open AI within general LLMs, Harvey.ai within operational AI for law firms, Elise AI within operational AI for property management, Deel within global payroll, Rippling within workforce management, and SpaceX within reusable rockets.

• Clearly defined & mission-critical customer workflow: As a product person, I look particularly closely at the founder(s)' understanding of the specific customer workflow they’re initially solving for. Have they done the work to map out each granular step of a target customer’s existing workflow? Is this workflow critical to the customer’s success as a business? What is their daily, weekly, and monthly process? What are the key friction points? Where are the notable opportunities within said workflow to give the stakeholder superpowers – not only saving them time and money, but bringing “delight” into their workflow. Ideally the workflow they’re solving for is mission-critical to the success of their target customer’s business. A clear articulation of target customer workflows by the founder(s) illustrates customer empathy, and implicitly conveys the founder(s) have done the foundational work to build target customer relationships. They’re not throwing darts in the dark. 

• Strong & immediate customer forcing function to adopt a better solution: Arguably, I think this is the most important variable within the “market” category – how eager are target customers to adopt this solution now. Does a new solution provide an incremental improvement (a vitamin), or does it unlock a 10x faster, 10x more cost efficient workflow for the stakeholder (a painkiller)? Once they have this solution, can the stakeholder envision living without it? When conducting reference calls with PreSeed design partners, I’ll look for a visceral reaction amongst stakeholders when a proposed solution is a true painkiller – “This is a no brainer!”... “We plan to onboard our entire org.”... “We’re willing to pay whatever it takes to use this.”... “Such a lifesaver!”. Conversely, a lukewarm stakeholder reaction is telling.. the solution may be compelling in theory for them, but not an immediate painkiller.

Conclusion: While I do believe PreSeed investing is predominantly psychology driven, I’m convinced there is tremendous clarity and accountability that can be established with the above framework – a simple scorecard of 1-10 for each variable yields gaps that we may have overlooked in favor of the sheer passion of a founder, a termsheet from a Tier 1 venture capital firm on the table, or external market FOMO. With this framework, we’re able to pragmatically check our assumptions, consider a prospect holistically, and assess how we prioritize our due diligence. There will always be great deals ahead; no need to rush deploying into a PreSeed opportunity if there are obvious grey areas. 

We continue to sharpen our PreSeed frameworks at Predictive. If you have any thoughts or suggestions, reach me anytime at Kevin@predictivevc.com. 

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DISCLAIMER:

Content contained above is not intended as, and shall not be understood or construed as, financial advice. All views and ideas expressed are my own.