People have often asked me how I make decisions at pre-seed when there is no information.

@HustleFundVC we invest pre-revenue (I don't care about traction at all).

A thread >>
1) At a high level, the startup idea matters a lot.

In fact, I personally think (and my own teammates will certainly debate me on this) the idea matters more than the founders. 😮

(Que the tomato throwing)
2) This is NOT to say founders don't matter. They DEFINITELY DO. There's something special when amazing founders work on amazing business ideas.
3) But, I've just seen so many amazing founders - almost because they're so amazing - make a bad idea work out mediocrely successfully when if they had been working on a great idea, it would have gone spectacularly.

It is always more fun to push a boulder downhill than uphill.
4) As a result, there are a lot of amazing founders I'd love to back if they were doing something else. This is one reason why I might pass on a business but then later invest post-pivot. I'm honored when a founder comes back to me with a new idea.
5) On the flip side, I've also seen founders whom I thought were "just ok" do wonders with a fantastic idea. Product market fit is a spectacular thing.

These founders can attract a lot of talent, because the business has a lot of market pull.
6) Another nuance around "the idea matters" is that our fund size dictates *what* ideas work well for *our fund*.

There are a lot of companies that have great ideas but will need a LOT of capital. That's probably not a good fit for a microfund.
7) So just because I pass because of the idea does not mean the idea is bad. It could just be a bad fit.
8) Ok, so on to the meat of it -- what makes for a "good idea" in software?

We're in an age where cust acq is often the most important factor. Tech is largely commoditized. There are definitely exceptions, but I believe marketing is eating the world:…
9) What makes for good customer acquisition?

Low cost to acquire customers (CAC). High lifetime value (LTV). Shorter sales cycles.

All at scale.

Very simple but I've done a LOT of marketing in my life, and it's hard to find a business that has all these characteristics.
10) So through gut feeling, I think through for a given biz if I think it will have those characteristics.

Let's talk about CAC. CAC is driven by competition. Direct competitors as well as indirect.
11) Competitors run up CAC in mktg channels. As well as in mindshare.

For example, everyone gets TONs of emails. Which ones do you read? The Macy's newsletter might get archived while @MorningBrew doesn't. They don't do the same thing at ALL but your mindshare is limited.
12) Channels matter. If you're launching a mobile app, how are you going to rise above the noise of all other apps -- even the ones that are different?

It's not to say it can't be done - e.g. Clubhouse has risen above the noise in a crowded channel. But you need a clear path.
13) So if a co is in a noisy / crowded channel. How will it compete?

Let's take Clubhouse. Their CAC has to be super low. They were able to rise above the noise because their VCs were their evangelists who brought in famous ppl. And everyone else wanted in to hang out.
14) Some qs I ask myself: if you're competing in ad channels, will the CAC be high or low at scale? Are there a lot of companies going after that same audience in the ad channels? CAC only goes up in these channels.
15) Same for SEO - is there heavy competition?

Although CAC tends to go DOWN in SEO because you pay for writing / links once and hopefully traffic over time brings the CPA down, heavy competition can still keep CAC quite high.
16) Partnerships: is the product / solution unique enough to be able to partner (or do outbound sales)? To rise above the noise for attention and keep CAC low-ish.
17) So that's the thought process that goes through my head re: CAC.

Then there's the other side of the equation - LTV.
18) Could this solution be valuable enough so that someone will pay a lot for this? and often? And how valuable? Or is it just a nice to have. Or maybe only use for a short period of time.

Retention is a big factor and high retention drives up LTV.
19) Now keep in mind, these are all just mind games that go through my head. When I meet a company, I don't care what their LTV or CAC is (if they even know) because it's pre-seed and not at scale.

CAC and LTV change dramatically over time.
20) Lastly sales cycle -- this is more of a factor of fund size. Enterprise software companies w long sales cycles can do REALLY WELL. But if I'm writing a $25k check and no one funds a co for another 2 yrs, will it survive long enough until the first real customers come in?
21) Sometimes the answer is yes - and in these cases, I care a lot about team scrappiness. Often the answer is no -- the company will die without a big round.

In which case, it may be a great idea but not great for our fund size.
22) A lot of this subjective guessing is based on having seen a lot of customer acquisition. So what areas tend to have a lot of these characteristics?
23) A few thoughts:

-Really unique offerings (where the critique is often that there is no mkt or that no one will use this)
-Emerging mkt opportunities (where there isn't a lot of software)
-Non-english language marketing channels are generally not competitive

24) (cont)
-Products conducive to celebrity evangelists
-Products where the UX / design / engr is 10x better than competitors in a field where this matters (generally selling to techies)

What the unit economics *could be* at scale is how I think about pre-seed startups.
25) Final thought:

This is just how *I* think about pre-seed startups. Even my business partners @HustleFundVC evaluate startups in a different way. And that's great - there's no right or wrong.

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