When Airbnb first sought funding, its founders faced considerable skepticism from venture capitalists who deemed the idea of people renting their homes to strangers far-fetched. Forced to bootstrap, they turned to inventive strategies – like selling cereal during the 2008 presidential election – to keep the company afloat. Similarly, Uber’s early investors dismissed the ride-hailing concept, believing the market was too niche and laden with insurmountable regulatory challenges.
Fast forward to today, and these once-overlooked startups have defied all expectations, now valued at $85bn and $150bn, respectively.
The eventual success of Airbnb and Uber underscores a challenge for early-stage startups: many investors fail to appreciate the potential of markets that do not yet exist. Since Airbnb essentially created a new market by transforming how people perceive short-term accommodation, early-stage VCs who initially passed on the company likely did so because they evaluated it through the lens of existing hospitality models, which did not account for the cultural and technological shifts Airbnb was capitalizing on.
When a pre-seed investor passes on a deal opportunity, it therefore doesn’t necessarily mean that the venture is doomed to fail. Rather, it is more of a reflection of the challenges that VC funds face in assessing new ventures that are disrupting existing markets, as well as their overall risk appetite and investor bias.
While at later stages, investors have access to a variety of quantitative and qualitative metrics, such as revenue growth, market traction, and competitive positioning, at the pre-seed stage startups are often just ideas with unproven products, little or no market validation, and inexperienced founders.
Due to the lack of metrics available, which factors influence whether an investor is prepared to make a risky bet on a startup’s future potential?
Pre-seed investors often grapple with balancing ambition and risk management. Behavioral biases like herd mentality and status quo bias can make them hesitant to back ventures that challenge conventional thinking or seem too speculative. However, those with a higher tolerance for uncertainty are more likely to invest in unconventional startups, often reaping outsized returns. Successful pre-seed investing requires balancing skepticism with foresight.
Contrarian investors stand out in this space. They prioritize long-term potential over immediate validation, actively seeking overlooked startups as high-upside opportunities. Unlike traditional VCs who prefer some market validation or a proven business model, contrarians focus on founder-market fit and markets that are currently non-obvious or undeveloped. This distinct approach allows them to identify promising ventures that others dismiss.
“The best founders quickly identify new challenges, inspire others, and regularly reassess their approach based on feedback, striking a balance between focus and openness to new opportunities.”
Mathieu Chanson, Co-Founding Partner at veryearly Ventures, and Philippe Bernet, Co-Founding Partner at Backbone Ventures, are among investors who use team quality as an indicator of a pre-seed startup’s potential to become a long-term outlier.
VCs need to be able to distinguish between ambition and overconfidence in pre-seed founders. Ambition is marked by a clear long-term vision that can be realistically achieved step by step. Ambitious founders are self-aware and open to feedback, whereas overconfident ones dismiss advice and ignore risks. Both investors prioritize founders who balance strong conviction with adaptability and a readiness to pivot and learn from their experiences.
The best founders quickly identify new challenges, inspire others, and regularly reassess their approach based on feedback, striking a balance between focus and openness to new opportunities, adds Bernet. A founder’s past pivots (why and how they shifted ideas) offer valuable insights into their decision-making process, helping investors distinguish between strategic adaptability and a lack of direction.
Both investors stress the importance of understanding a founder’s journey and their ability to evolve thoughtfully. Bernet also focuses on emotional intelligence and work ethic, noting that strong references are more telling than pedigree.
The dynamics of pre-seed skepticism have important implications for both founders and investors.
The one takeaway is resilience. Just because a startup is passed over by multiple investors, this does not mean it lacks potential. Founders must continue refining their pitch, product, and market understanding, focusing on attracting investors who share their vision. A founder’s ability to persevere through rounds with either no or few term sheets, despite skepticism from the broader investment community, is often a positive sign of conviction, which can be a critical factor in eventual success.
From an active investor’s perspective (a direct investor such as a GP), the takeaway is more nuanced. A lack of investor interest at the pre-seed stage should prompt further investigation, and not upfront dismissal. Skepticism from peers could indicate the startup is working in an untested or underexplored market, which presents an opportunity. Investors who develop the ability to think independently and to look beyond the immediate concerns of peers may be more likely to capitalize on ventures that others overlook. A GP’s decision-making framework would focus on predictive markers, such as founder resilience, market timing, or technical innovation, which ultimately may correlate with the eventual success of pre-seed deals.
The growth of micro funds, which specialize in early and pre-seed investments, presents passive investors (like LPs) with a way to access pre-seed opportunities without having to analyze predictive markers themselves. These funds allow for early-stage diversification but come with higher risk due to the nature of pre-seed investing. To manage this, LPs should balance their portfolios by investing in both micro funds and larger, established funds. Micro funds often target disruptive opportunities that larger funds may overlook, making them valuable for LPs with a pre-seed focus as part of their private markets’ strategy. However, thorough due diligence is essential, requiring LPs to assess fund managers’ track records and strategies and maintain a long-term outlook.
The most successful pre-seed investments are often those that seem unconventional or overly ambitious
Pre-seed skepticism from other investors is not a signal of failure, as the pre-seed environment is one of asymmetric information, high uncertainty, and cognitive biases, making it particularly difficult to predict outcomes using conventional metrics. As a result, the most successful pre-seed investments are often those that seem unconventional or overly ambitious at the time.
Many regional developers have tried and failed to emulate Silicon Valley’s VC-driven model for innovation. Detroit, the birthplace of Ford, is following an alternative route – with promising results....
Audio available
CFOs must drive a financially disciplined way to manage environmental risks amid growing pushback against environmental sustainability efforts, explains IMD’s Karl Schmedders....
IMD's Jim Pulcrano interviews Ruchita Sinha, General Partner of venture capital firm AV8 Ventures, and explores her approach to early-stage investing....
US President Donald Trump's brazen assault on the global trade order will disrupt international capital flows, affecting everything from supply chains to labor mobility. Here's a checklist for reconsidering corporate strategy....
Explore first person business intelligence from top minds curated for a global executive audience