With Anna Barber, Heather Hartnett, Helen Min, and Jessica Peltz-Zatulove

This year’s downturn in the venture market began at the later stages of the startup lifecycle. But as 2022 draws to a close, a panel of investors at the 2022 Carta Equity Summit said the side effects of the market shift have trickled all the way down to pre-seed companies, many of which are still little more than a twinkle in their founder’s eye.

“Expectations have changed quite a bit. From founders, I’ve seen an extreme amount of humility,” said Heather Hartnett, CEO and general partner at Human Ventures, an early-stage investor and startup studio based in New York. Gone are the go-go days of 2021, when pre-seed valuations and round sizes soared. “And look, it’s the investors that were pushing large valuations. So it’s not the founder’s call to have to adjust those expectations. But I think it’s come back more to reality.”

Still, the shift has been less significant at pre-seed than for more mature companies, Hartnett said. Much of this year’s broader dip in activity has been due to falling valuations and other uncertainty on the public markets. A shaky stock market might unnerve late-stage startups planning imminent IPOs, but they’re of less concern for nascent companies that won’t begin thinking about exits for several years.

There’s also another factor at play, according to Anne Barber, partner at M13, an early-stage fund focused on consumer tech. Since valuations tend to be so small already at the pre-seed stage, they don’t have that far to fall.

“Pre-seed is the most insulated from what’s happening in the macro market of any category,” Barber said. “I do think we’re seeing a little bit of valuation compression. But there just wasn’t a lot of room for compression, because pre-seed has always been on the lower end of valuations.”

Finding the right investors

Raising pre-seed capital is one thing. Finding the right investors to raise it from can be another issue altogether. The panelists advocated that founders take a thoughtful, measured approach to picking an early-stage collaborator. Ask questions of the investor. Ask questions of other founders who have worked with the investor. What’s their fund strategy? How do they approach the investor-founder relationship? What problems do they care about?

There are hundreds of firms out there investing in early-stage startups, and they probably aren’t all the perfect fit.

“I feel like sometimes, founders look at the name brand of the venture firm as almost proof that they’re doing a good job,” said Helen Min, a longtime marketing executive who’s co-founder and managing partner at early-stage firm Phenomenal Ventures. “This is the time to be selfish. Find the people who are going to help you achieve your objectives.”

Communication is key, agreed Jessica Pelz-Zatulove, founding partner at early-stage firm Hannah Grey. Pre-seed investors are often a company’s first outside backers. If all goes well, it will be a long-term relationship. Treating it as such can go a long way.

“However you can stay in sync, align, open dialogue, be transparent and vulnerable—all of that with your founders just makes for a really healthy long-term relationship,” Pelz-Zatulove said. “You cannot fire an investor, so choose wisely.”

More advice for early-stage founders

The panelists offered up other advice for founders embarking on a startup journey. While investors these days are increasingly concerned about a path to profitability at later stages, Barber cautioned founders about getting too carried away. At pre-seed, perfecting your idea is still the priority.

“It’s not about generating revenue,” Barber said. “It’s about making enough progress on your learning journey to be able to tell the story for the next round of investors.”

Min compared starting a company to getting a Ph.D. You’re going to be spending a lot of time thinking about one topic or problem, so it better be a topic or problem you love. She also advised founders to avoid chasing the twists and turns of market trends. Don’t pivot to some new, red-hot sector, because it might not stay red-hot for long.

“It’s always helpful when you’re fundraising and that happens to be the thing that is in favor, right?” Min said. “But then what happens a cycle later, when now those valuations have dropped? The thing that will stay steady throughout time is your belief and commitment to the idea, so really love it.”

Another helpful trait for a founder? A thick skin. No matter how fantastic their ideas might be, every founder is going to hear a lot of the word “no.” Hartnett advises founders to remember that rejection is part of the game.

“If you’re not coming up against some naysayers,” Hartnett said, “I don’t think you have a big enough idea.”

Create more owners
In 2018, the #ANGELS hypothesized that the equity gap was worse than the salary gap. Carta has the data to help track and analyze what they called #TheGapTable. Together, we created the first ever report on equity distribution by gender and have continued to create it every year since. Equity is the largest lever for wealth creation in Silicon Valley and beyond; we believe it should be distributed equitably.