Editor’s note: At a recent team meeting at NextView, we looked at the high number of startups we invested in which were pre-product at the time. The question arose: What is a seed VC’s process like when a company is pre-product? The below article answers that question. You can also find a graphic outlining Rob’s process in detail here.

A big chunk of our investments at NextView have been made pre-product. We have a bias towards very early stage investing for a bunch of reasons, but it’s not easy. It’s often a good idea for founders to find a way to build something and get some early market validation before raising outside capital. But doing that is sometimes not practical given your personal runway or because the product you want to build requires additional capital very early on.

So, how do you go about raising money for a company pre-product? And how does an investor think about a pre-product opportunity? I think this stage, more than others, is very dependent on the individual investor. But here’s how I tend to think about companies at this stage, which I think is broad enough to provide some guidance for founders at this early stage…

Essentially, my pre-product framework is as follows:

1. Is there founder/market fit?

• How authentic is this idea to the founder’s experience?
• Does the founding team have off-the-charts horsepower?
• Does the founding team exhibit specific superpowers that are uniquely well suited to the biggest immediate challenges of the business?

2. How far is the company from product/market fit?

• What evidence do we have that their proposed product will be close to product/market fit (PMF)?
• How quickly and expensively will it take to test PMF?

3. If the company gets to PMF, will it matter?

• How fast can this grow post PMF and what risks are associated with this growth?
• Is the opportunity big, attractive, etc?

I’ll dig into this a bit further…

Founder/Market Fit

We tend to believe that the best companies are born out of authentic experiences — so much so that this is how we define our investment areas of focus. My partner David has also written about this a bunch. In short, I find that authenticity helps a founder more quickly find product/market fit, recruit and inspire teams, and resonate more deeply with customers. All really important things.

Starting a company is hard. It takes a certain level of raw horsepower to create something out of nothing and then lead a company from early product/market fit to scale. We have a very, very strong preference to work with founders who will lead a company through all stages of growth, and so we place a pretty heavy emphasis on the raw horsepower of the founder — both their raw intelligence as well as their strength of will and emotional fortitude.

In addition to raw horsepower, a big part of founder/market fit is whether the strengths of the founding team line up well with the challenges of the business, especially in the early days. We’ve seen companies with very strong founders struggle when there is a mismatch between their strengths and the business they are building. Just like you don’t want a marathon runner to compete in a 100-meter race or a great ping pong player representing you in a boxing match, great teams tend to be great in the context where their strengths can really shine.

For these two aspects of founder/market fit, we rely very heavily on references to get to the bottom of this. Another very strong signal is the quality of the people one is able to surround themselves with. Surrounding yourself with extraordinary people is both a signal of great raw horsepower as well as being the one superpower that matters most for almost any company.

This notion of founder/market fit is incredibly important for pre-product companies who are out raising seed capital or pre-seed (aka genesis rounds) — both of which we invest in. But there’s also a great deal of importance placed on another, more common idea:

Product/Market Fit

When a company is pre-product, it is by definition pre-product/market fit. But typically, I want to have some sense that the direction they are headed is in the general vicinity of good PMF. We could certainly be wrong — and great companies are often born out of pivots or restarts — but to be a good high conviction, hands-on investor, I want to at least be a true believer early on. This is why I’m not a fan of investing based on a space and a team and believing they’ll “figure something out.” I think that taking money at that point in a company’s life isn’t a great idea either.

Even before a company has launched a product, there are ways to show some evidence for potential early PMF. We talk a lot about this in our podcast Traction, particularly in these episodes about NatureBox and InsightSquared. I’m also a fan of replicating a service through human intervention to try to uncover some early data points. One of our portfolio companies Scratch first tested their buying concierge concept by replicating the service strictly through email and humans on the back-end. It wasn’t really “the product” but they were able to get a sense for the breadth of requests they would get and the willingness of a small number of consumers to transact through a shopping assistant. On top of this, I just love companies that take a very methodical approach towards customer discovery in order to get to the heart of users’ needs and thought process. (If you’re interested in learning more, I lay out some thoughts about this and other helpful resources for avoiding pitfalls and executing best practices for startup customer development in this post.)

The other consideration around PMF is the cost and time that will be required to really show demonstrable PMF. For many software products, this can happen relatively quickly. But for other types of businesses, this can take a lot more time and/or money. This is true to some degree for hardware products, some types of enterprise-facing software products, and some consumer products as well. As a firm, we build a portfolio of companies, so we can tolerate a handful of companies that require more time and capital to get to market. But I’ve found that even if this is the case, if a team is pushed to find ways to show market validation earlier, they find that they can shave a bunch of months off their timeline and end up learning a lot more than they ever expected in the process. As result, we tend to be impressed with teams that have a plan to get to market surprisingly quickly with a scaled down version of their ultimate product, as opposed to teams that plan to work in the dark a long time before one big reveal.

Will It Matter?

Some investors tend of think of go-to-market speed or adoption speed first, and I used to be in this camp. But I’ve learned to save this for later in my process, because often the potential of a product is hard to appreciate at first blush. But assuming a company is intriguing based on the first two sets of questions above, I then ask myself, “If everything goes right and you demonstrate great product/market fit, so what?”

One dimension that I think about more today is the speed of scale. If everything goes right and you get to PMF, can this company step on the gas and exhibit hyper growth once they’ve achieved product/market fit? And what risks will be associated with scaling at that point?

For example, the risk of SaaS or subscription-based companies is that (1) they tend to consume cash to grow since your customer acquisition costs are recovered over time, not up front, and (2) companies may need to push hard on scaling before they really know how robust their customer LTV will be over time. For companies that require a geographic rollout, the risks are different: Once you’ve shown what PMF looks like in one market, lots of competitors will replicate you in other markets, so you need to raise lots of money to get there first and launch many markets in quick succession.

None of these are inherently bad, but I want to think about these dynamics and what this means for future financing of the business before making an investment decision.

Finally, I think about the classic questions of, “Is this a big market?” and, “Is this a good market?”

So, these are the areas that I tend to think about. The first (founder/market fit) and the third (implications once PMF is achieved) are relatively straightforward to talk about pre-product. But the second is trickier — how far is the company from PMF at its current, pre-product stage? If I’m a founder of a pre-product company raising a pre-seed or seed round, I’m thinking about all three things, building a strong case for each, and drilling more deeply into the second. But in the end, as we like to say, this process is all about finding the true believers.

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