Pre-series A Investment Perspectives - Simple Labs, Bluewhale Company
Recently, Ascendo Ventures participated in the Pre-series A round investment of Simple Labs and Blue Whale Company.
One optimal intersection at which venture capital invests in startups is at the stage in which their target customers’ demand for, or usage of the company's technology, products, and services begins to be meaningfully verified via traction. More often than not, such early traction occurs before the given company is well known to the market, and thus it receives less attention from investors and its perceived value is low relative to its progress. In ways this stage, which typically aligns with a startup’s Series A funding, is a sweet spot in terms of investment risk-reward relative to the company’s valuation, traction, and potential upside.
In addition, when a VC investor seeks to invest in a company, an investment committee is held in which committee members discuss a company’s investment points and decide whether to invest or not. This can be a very arduous and burdensome process for all members involved, especially in a contested environment where the deal lead’s investment rationale is limited to simple and qualitative reasons. In other words, hard data and metrics are the best foundation on which to build a case, and can include positive metrics like rapid active user growth, low churn rates, high conversion rates, and high average order value.
That being said, if one runs a venture capital fund in the tens to hundreds of millions of dollars size with investments heavily weighted towards smaller ticket sizes, operational economics may be difficult to achieve relative to the amount of effort put in. For example, if one manages a forty million dollar fund and invests about five hundred
thousand dollars per company, it would take on average 80 investments to fully deploy the fund’s capital. This may be acceptable to some, but the reality is that the consequent follow-on operations and overhead costs are significant, and require sufficient time and resources to effectively execute and manage.
Ascendo Ventures invests across a range of startup stages from both early to later growth stages (pre-IPO). Despite our commentary on the potential downside of having too many smaller ticket investments relative to total fund size, we still tend to invest more at the pre-series A stage just prior to a startup’s full validation of its product market
fit. As such, we view Ascendo’s "sweet spot" to be the pre-Series A round stage for the following reasons:
When operating an investment business, one must research and analyze industries comprehensively, and in the process, become aware of the realities and nuances of markets and their core pain points. This then can lead to the forming of basic views that verbalized would state "it would be great if there was a company that solves X problem
in Y ways in a market of Z size.” When meeting pre-Series A startups, every so often we encounter founders who are making surprising progress in solutions early in development that resonate with our views or vice versa, and in situations like this, evokes conviction at the same level attained with companies we would often meet at the Series A stage.
One recent example for us is Simple Labs, which had the distinct awareness to recognize that large-scale global jewelry brands have not come out of Korea due to the lack of a systematic and industrialized jewelry manufacturing process. Using 3D printing technology, automating various aspects of jewelry manufacturing, and streamlining the
supply chain, the company is spearheading this change and has started to attract many brand customers. Similarly, Blue Whale Company has developed a micro fulfillment logistics model that utilizes idle spaces delivery, storage, and pickups in central locations within cities to solve the limitations that existing hub-and-spoke logistics structures
fundamentally have in efficiently addressing many last mile logistics needs.
Frankly, investing in the pre-series A stage requires more than just deeper industry insight or extrapolation of a startup’s early traction, but rather it requires a more scenario-oriented, future outcome brainstorming skill set when conducting due diligence. In addition, at this stage companies need active support and resources from investors as
they face more concerns and decisions even after closing the round. So when asked the question, do a lot of pre-Series A smaller ticket investments waste resources in terms of fund management? The answer to this question is YES and NO. It may look like that from a short-term perspective, particularly, from a fund management perspective it can be viewed less so.
By simple calculations, you can secure more equity for a small amount of money, so if the company does well, you make more profit. However, when the amount of investment is small compared to the size of the fund, the return contribution to the fund is not as large as expected. More importantly, however, investing at a time of greater uncertainty builds an invaluable trust and bond between investors and entrepreneurs. If the company
has explosive growth, it is obvious that it will give existing investors priority to invest in subsequent rounds of investment. In ways it is a call option for investors. In addition, as an investor already knows the company so well, the level of follow-on due diligence is limited and there is significantly reduced risk of the unknown.
We have been involved in a number of pre-series A startup investments over the past three years since we founded Ascendo Ventures, and many of them have experienced faster growth as we participated in follow-on rounds. For these reasons, we plan to continue investing into great startups at this stage.
To all early stage entrepreneurs, pay attention to us, Ascendo Ventures. Stay tuned!
