Send the Wire, Then Start the DD
#159 - Reflections on investing and life from building my holding company
3 minutes to reflect
“Hey Simo, we’re leading this round, there’s room. Want to talk to the founder?” writes my friend, an associate at a VC fund. “Very much so, thanks,” I reply.
Two days pass. I speak with the founder, I like him. On the call, I express my willingness to invest the smallest ticket the founder finds acceptable. He suggests 50k, we settle on 20k.
I hang up, but not before giving myself 2-3 days max to confirm. What happens in those 2-3 days? I make 5-6 calls. I reach out to founders and angels I trust who know the founder I’m thinking of backing.
I don’t ask what they think of the project, but of the person. In pre-seed, the only thing that matters is the person. Everyone gives me a positive take on the person and a mediocre one on the business. I agree—the project didn’t blow me away either.
Armed with this feedback and based on my gut, I invest 20k. And now? The due diligence starts now. Do the founder’s updates arrive every month like clockwork? From one month to the next, are things evolving? Is there execution speed that produces results?
I don’t know if for this founder the answer will be yes or no. But if I get it right every 20 investments, the math works out and I’ll make my return. When the seed comes after the pre-seed, I’ll have collected 6/12/18 months of data points to decide whether to double down, exit, or let myself get diluted.
The pre-seed round is an option on the future results of a talented team. Nothing more. That’s why I don’t believe in convoluted due diligence that gives false security about a future no one can know.
2 tweets
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1 Reason to smile
This approach to preseed is pretty refreshing honestly. The whole "invest first, DD later through monthly updates" flips traditional VC logic but makes alot more sense at this stage. When I backed my first couple startups, I wasted so much time on financial models that basically ammounted to fiction. Betting on the person's execution over 12-18 months gives you way better signal than any deck analysis could.