Interview
Adam Besnivick: How to Invest in Pre-Seed & Seed Stage Companies; Looking Glass Capital | E1020
- The venture landscape is projected to bifurcate over the next decade into smaller thematic funds and large "behemoths," with mid-sized firms struggling to differentiate unless they offer distinct value-add or network advantages.
- Current market conditions feature a contraction in deal volume from 50 to 8 annually, creating a "death zone" for C and D rounds while seed funding remains relatively immune to the correction affecting later stages.
- Fund Three is expected to be actively deployed by 2028 with a target size between $40 and $50 million, maintaining a portfolio of 27 to 30 companies while incrementally increasing check sizes from $300–$500k to $400–$500k.
- Pre-seed portfolio performance is anticipated to follow a heavy-tail distribution where 40 to 50 percent of companies yield zero or negative returns, with the vast majority of gains generated by the top 20 to 30 percent of the portfolio.
- Founders raising $5 million at a $25 million valuation face significant scrutiny and pressure to achieve product-market fit within a disciplined two-year window, as they lack the margin for error enjoyed by smaller, more disciplined raises like $2 million at $12 million.
- The market is expected to shift away from the "fervor" of 2021–2022, with founders required to extend runway to reach January 2025 with at least seven months of cash to secure fundraising opportunities in 2025.
- Seed-stage valuations and check sizes are forecast to remain stable, while multi-stage funds moving into seed are viewed as having potentially "destroyed" the asset class by inflating later valuations, though the investor intends to continue leading rounds and setting terms.
- Small funds of $250 to $300 million are predicted to outperform larger vehicles, and successful investors must adapt to avoid becoming irrelevant, as reputation and the ability to catalyze raises now outweigh the signaling risk of their involvement compared to 12 months prior.
- Fund Two will attract a higher proportion of high-net-worth individuals and family offices compared to Fund One, which was raised during the 2020 pandemic peak and relied heavily on individual investors, creating challenges in manufacturing LP urgency.
- Investment strategy emphasizes thematic focus to ensure top-of-mind status for deal flow sharing, with a belief that investors will reserve increasing dry powder for existing portfolio companies rather than pursuing net new deals.
- Future success for companies will depend on growing revenue faster than expenses and reducing burn to avoid reliance on external capital, with the investor expecting to retain well over 85 basis points in portfolio companies to achieve fund returns despite anticipated dilution.