What Most (Series A/multistage) Investors Get Wrong At Seed
There are many wrong ways to do seed investing and basically just one right way. But the most common wrong ways still “make sense” in their own context.
Wrong way #1 - Team and Tam Investors
What: “Nothing matters and nothing is knowable this early so let’s just bet on big markets with known/highly credential teams. They’ll figure it out.”
Why do they do this: this approach makes sense if you’re just buying optionality for a platform. The dollars are small relative to your fund size and real/core checks so 1) you don’t care if you’re wrong and 2) you don’t have time to get it right. This also “makes sense” for folks who are just eager to deploy - the same kinds of people who say “it’s not our job to time the markets.”
Why it’s wrong: quite a lot is knowable early (at least many the negative covenants) and pushing capital before the hypotheses are clear and well-reasoned wastes years of founder time.
Wrong Way #2 - Shitty Series A
What: All the same criteria as a Series A but with lower bars around traction, certainty, and quality.
Why they do this: because they’re looking for “deals and steals”. ~They’re halfway right in that they shouldn’t compete against scaled players but don’t have their own view of the world beyond~ that.
Why it’s wrong: It’s a classic value trap; it feels good to buy revenue at a low headline valuation but you’re usually buying categorically bad businesses because you’re looking for discounted versions of better things.
The right way to do seed.
What: investing against novel and falsifiable hypotheses, that you can test without a lot of time or dollars, where if you’re right/getting a “true” answer matters, and you have optionality to repeat this series at increased scale (call option on being big).
Why it’s right: Team and tam are necessary but insufficient AND quite a lot really is knowable/guessable beyond that from a very early stage. If you don’t do the work you risk wasting your money and the founders’ time - the rare commodity in a talent-constrained world.
Why we do this: We only do this (seed) so there’s nothing else else to distract us and no ulterior motive for seed investing beyond making good seed investments.