Seeding the Future: Defining Seed

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Challenges & Opportunities in Seed Investing

To help bring to life the challenges and opportunities in seed investing, as well as AVG’s unique approach and assets, we interviewed our Basecamp team. The team includes four full-time Managing Partners, based in three key venture hubs (San Francisco, NYC, and Chicago), plus four other full-time Principals and Analysts. Click here to see our team and their bios.

Today’s discussion with our MPs focuses on defining seed, understanding what’s different about this stage, and spotlighting some of the challenges.

Meet Our Managing Partners

What are some challenges in seed investing?

Catherine: There are a lot of unique challenges, with the foremost being there just isn’t a lot of data that you can rely on. In addition, because these companies are so young and they’re often at the cutting edge of various fields, some ideas may be very novel. That requires more diligence effort and takes more time to get comfortable with the investment and founders.

What makes seed investing particularly unique relative to the rest of the venture capital stages?

Matt: These are immature, nascent businesses, so there’s not a lot of data. You use proxies, but at the end of the day, you have to build conviction around the team. The only thing that is certain in early stage venture is that things definitely won’t go according to plan. The team has to have the chops to navigate the twists and turns ahead.

Can you explain the difference between seed and pre-seed investing stages?

Matt: A pre-seed or seed company is raising the first — or one of its first — institutional rounds. It’s maturity and valuation that distinguishes it. From a valuation standpoint, the earlier a company is in its growth trajectory, the lower a valuation is.

Generally at the seed stage, you look for scalable revenue and demonstrated ability for that company to accelerate their revenue acquisition. They have a product, a business, and a bit of a team in place. You could think of seed valuations in the $10 to $18 million or so pre-money valuation.

Pre-seed is the precursor to that. The company usually has a really strong founding team that we believe can recruit and scale up. They may be pre-revenue, but they’ve moved past the idea stage to have a minimum viable product. Pre-seed valuations are in the $5 to $10 million range.

What excites you about seed investing?

Wayne: I love connecting with people that are trying to change the world! At the seed stage, you focus heavily on the team and their vision. There are fewer metrics and obvious indicators of success, so you’re really trying to find those diamonds in the rough. I love the process of searching for these founders and find it fascinating to connect with talented entrepreneurs who are driven to create a difference and change the status quo.

In looking at pre-seed and seed deals, what do you think are the pitfalls for the average investor?

Wayne: Three major ones.

1. I’d say the average investor just doesn’t see enough opportunities. You have to see a lot of deals to really understand and delineate between good and great companies.
2. There are also problems with quality access. Historically, deals done by top VCs perform much better, which creates a cycle of the best entrepreneurs going back to these great VCs. Most investors don’t have the ability to access this deal flow.
3. To minimize risk, you should try to diversify across geography and sector. Having consistent exposure to high-quality deals across different industries and in different markets is really tough for the average investor.

How does your personal experience inform your view of seed investing?

Andrea: I started a company that failed to find product market fit, and ultimately we wound it down. I like to say that now I know 100 ways to not run a company, because of that experience.

I came away with an empathy for the startup journey. I truly believe that you have to be a little crazy to start a company. It’s not for the faint of heart — or for the strictly logical. Learning that from my own failure has helped inform how I evaluate companies as an investor.