How do you choose between seed stage and later stage investments?

Seed investing is not for everyone. But we need Seed investments for the startup eco-system to further evolve. Yes, it is very risky, but keep in mind why you are an investor. Is that purely to make financial returns? Or do you also want to contribute to the industry, to the eco-system? Investors in this stage bet on the founder. Value propositions evolve, and it is the founder who needs to make it happen. The question you should ask yourself is, do you want this industry to evolve? Do you want to support this founder and invest in talent?

The world is littered with the debris of failed seed investments. Which means getting it right as an investor is a major challenge to say the least. I've seen too many seed stage investors get caught up in the buzz and excitement of what might happen, rather than playing to their strengths of doing solid due diligence, and applying what they know, i.e. their sector experience, to decide a) whether that investment is likely to succeed and b) what the likelihood is of that success happening. And if you hear that faint sound of doubt talking in your head, listen to it and walk away.

You have to understand that this is the riskiest stage of investing, and there aren’t isn’t safety in data. It largely comes down to evaluating teams, vision, and markets, with the biggest focus on the team. That is who is signing up for a 10-15+ year journey against this problem. Figuring out their why, what insight they have that no one else does, and whether they have the grit and determination to see navigate the rollercoaster of emotions and challenges one faces when starting a company are key.

In my experience, seed capital is very risky. Even if you find a great idea with very skilled management, the required infrastructure to build out the business is often lacking. Therefore, the business is basically burning capital quickly on the assumption that if they build it, clients will come. There is nothing wrong with providing seed capital for good opportunities since the upside rewards can be huge. However, preservation of your capital should be your top priority. Only invest in seed capital opportunities if you can honestly say that you can afford to lose your capital plus you 100% support the opportunity for strong personal or business reasons.

Perhaps the most important consideration when deciding which stage to come in as an investor is time horizon especially as it pertains to your need for liquidity. A successful seed investment likely will not liquidate for 8+ years. Yes, you can sometimes get some early cash out in the secondary market (i.e. selling your seed shares to a later-round investor) but to get all 100 cents on the dollar, you're either waiting for an M&A exit or an IPO If you're not comfortable holding an investment, through the rollercoaster of ups and downs, without liquidity for almost a decade, frankly... you just don't have the stomach to be a seed stage investor.

Consider various factors, such as risk tolerance, investment horizon, and available capital. Seed stage investments are typically riskier, as startups have a higher likelihood of disruptions. However, these investments can also offer significant returns if the startup succeeds. Later stage investments are generally less risky, as startups have already demonstrated traction and a proven business model. The trade-off is that returns may be lower. Investors should also consider their investment horizon, as seed stage investments may require longer time horizons before an exit. Also, investors should assess their available capital and appetite for risk, as seed stage investments may require more hands-on involvement and higher risk tolerance.

Risk factors associated with seed investments are many and include the following: 1. Risk of product development (will the company succeed in developing the product with the required functionality?) 2. IP risk (will the company be able to protect their product by patents or trade secrets? Will the company be infringing patents owned by others?) 3. Leadership risk (will the founders be able to rise to the occasion and grow into effective leaders and executives?) 4. HR risk (will the company be able to attract top talent?) 5. Financial risk (will the company be able to continue raising capital?) 6. Marketing risk (will the market accept the product/service?) 7. Manufacturing risk (will the company be able to manufacture the product

Investing at Seed stage is a different game in itself. By the time a company reaches Series A, its operations have been thoroughly validated and refined, with a clearer understanding of market dynamics and pathways to success. Leadership, scalability, and macrotrends become pivotal factors. At Seed everything is yet to become: great ideas, promising leaders, and early indicators of traction. Seed investment is not a financial transaction; it's a personal commitment to the success of a business. There's a leap at stake and every string pulled - decisions, connections, and resources - plays a critical role in navigating the uncharted waters. If you are a Seed investor, you are all in - get ready for a journey!

Decide where you as an investor have the most edge and find the most conviction. Do you feel more strongly about underwriting the durability of business momentum and size of market potential? Or are you more excited about predicting which ideas will resonate in the market and which founders will be sucessful?

Consider your risk tolerance and their growth needs. Early investors build, later investors reap, know what success looks like for your venture.

Later stage investments offer a proven track record, market validation, and a quicker path to liquidity. It attracts those who seek a more stable investment landscape. Striking the right balance involves aligning investment strategy with risk tolerance and portfolio goals. The decision hinges on whether to embrace the excitement of nurturing nascent ideas or capitalize on established success. Successful investors often maintain diversified portfolios that harness the unique advantages of both seed and later stage investments, ensuring a holistic approach to risk and reward in the dynamic investing landscape.

Seed stage has a near infinite number of execution risks. Without a very large portfolio & being part of a club that has a universe of experienced lenses that have vetted from a universe of vantage points, best of luck. I created and ran a global alliance between a major Wall Street firm & Booz Allen (w/ 500 PHDs) and discontinued despite those advantaged resources. Later stage will have ratified the theses and strategies. The narrowing of risk combined with the right experienced growth equity capital diminishes the aperture of returns, however, overcompensates through the predictability of expected returns making for a more attractive risk adjusted return profile.

Later-stage investments involve injecting capital into more established companies with proven business models, stable revenue streams, and often a solid market presence, offering lower risk but potentially more modest returns compared to early-stage investments. These opportunities are typically geared toward scaling operations, market expansion, or product development in companies that have already passed the initial high-risk phases

For one, the later the stage there more the industry/financial experts play a role in the deal. At $100M+ revenue the company is an active participant in the market and if they are growing against the competition, they need to operate at CAGR plus. But beware of exponential growth, they often implode. Seed stage, pre-seed, early stage, and many other names. I wish the industry would set a standard. Everybody understands something else. Most Angel and VC investors think of Seed already revenue or close to revenue. Anything below is friends and family round (LOL). Going-to-market strategy wisdom, prospective customer feedback and a real value preposition are needed, and just don't write buzz words on your pitch deck.

In later stage investments, like seed stage, founders' execution abilities are crucial. Investors must remain open to necessary changes and improvements. Just as in seed investments, coaching and mentorship play a vital role. Investors should focus on collaborative support, guiding founders through challenges, and utilizing their networks. Whether in seed or later stages, it's about identifying founders who can execute and working together to enhance their strengths and address weaknesses, ultimately driving the company's success.

Late-stage Investors invest in a few companies due to the scale of their investments. They require the investments to work, so are also more involved with the companies, sometimes taking a seat on their board or getting involved with management to ensure higher returns in an investment period.

At this stage, the knowledge and expertise of venture capitalists become crucial. They require deep industry knowledge, a rigorous due diligence process, and a clear exit strategy to navigate these investments effectively. In essence, later stage investments demand a sophisticated approach, balancing lower risks against the promise of steady, albeit potentially smaller, returns.

"Late" stage investments have the benefit of more hard metrics. Typical ratios, margins, and financial data plays a bigger compete. The value here is unlocking bottlenecks and moving towards scale and efficiency. So I look at 1. Can money solve scale? 2. Is branding well positioned to grow to the next stage? 3. Can supply chain inefficiencies be unlocked? Ultimately, later stage investment is about whether money can unlock the right bottlenecks and allow for scale - and that depends on team, market, and industry.

Despite presenting lower risks, late-stage ventures require larger capital investments. Due to this, there is a lack of investors with this capital availability. Consequently, defining the investment thesis on the investor's side is an initial step.

Due Diligence: Investors should conduct thorough due diligence, analyzing financial statements, market dynamics, competitive landscape, and the company's growth projections. Valuation: Valuation becomes a critical factor at the later stage, and investors need to carefully assess the company's valuation relative to its financial performance and growth prospects. Exit Strategies: Investors should consider potential exit strategies, such as secondary sales, mergers, or IPOs. The timeline for achieving liquidity may vary based on market conditions and the company's growth trajectory. Portfolio Diversification: Including a mix of both early and later stage investments in a portfolio allows for diversification.

This mainly hinges on your risk tolerance, investment strategy, and desired involvement level. Seed stage investing involves higher risk but offers potentially higher returns and the opportunity to shape a company's direction. It suits investors who are comfortable with uncertainty and have a knack for spotting potential in nascent ideas. Later stage investments involve higher valuations, meaning potentially lower relative returns. However, these companies often have proven business models, established customer bases, and clearer paths. This stage appeals to investors seeking more stability and predictability. Assess your comfort with risk, the amount of capital you're willing to invest, and how hands-on you wish to be.

Choosing between seed and later stage investments is a nuanced decision. It hinges on factors like fund size, strategy, risk tolerance, and personal inclination. Smaller funds may favor seed investments, offering higher multiples with less capital. Larger funds might opt for fewer later stage deals, ensuring consistency. Seed investments offer the chance to support entrepreneurs and shape the future, while later stage deals focus on market analysis, optimized returns, and successful exits. Striking the right balance is key to achieving a diversified and impactful portfolio.

Deciding between seed and later-stage investments involves weighing the potential for high growth against the desire for a more stable and established business, and balancing risk and return preferences in your investment strategy. It's about trading the allure of early innovation and growth potential against the stability and proven track record of later-stage companies.

Hopefully your preference for the stage at which you invest is based on something more fundamental than advice from a social media platform...if not, good luck a) raising capital to invest; and b) finding a company that wants you involved in its success.

Investors are usually selective when making the decision to invest in either seed stage or later stage companies. Some may not even consider a seed stage investment because it is is not aligned with their preset risk parameters. It all comes down to their appetite for risk and the exit strategy provided by the company. As a result they would gravitate to later stage companies which are likely to offer an earlier exit.

What holds true in my experience is that in earlier stage investing the quality, vision, and determination of the founders and how well they work together through adversity will be significant factors in their startup’s success. This is hard to test without a prior track record, which is rarely the case. However, questions about their background and those who best know them is an even greater factor than in later stage investment, although it’s still very important to look into. As a result, being a people person is very important in seed and earlier stage investing. Otherwise this art is missed on the investor. Arguably the later the stage of investing, the less it relies on the team and more on the organization being scaled.

There is a lot of satisfaction to be gained from supporting pre-seed entrepreneurs but the risk to benefit ratio is extremely high. I think one way of reducing the risk is to offer support beyond capital, access to networks. Experience as an operator and strategic advice.

In my experience of course and on the perspective of someone involved in transformation as a consultant practician and also investor I would just add that as a consultant you need to be ready to work for equity only whilst you can have interesting assignments in transforming scale ups. As an investor seed is probably the most representative of risk capital : full risk but top leverage potential if it works.

Any investor, whether a fund or non-institutional, must have an investment thesis, as not all of them have the capacity to invest the amount needed in later stages or the tolerance for the risks associated with seed stages. It's important to note that, ideally, ventures also have an investment thesis and will look for investors that align with their expectations.

Lower Risk, Lower Reward: Trade-off: Later stage investments are generally associated with lower risk compared to seed stage investments. However, the potential for outsized returns may be more limited. Preference: Investors seeking a more stable investment environment with a focus on moderate, predictable returns may prefer later stage investments. Proven Track Record: Trade-off: Companies at the later stage have a proven track record, reducing uncertainty. However, this also means that potential for exponential growth may be less compared to early-stage startups. Preference: Investors who prioritize investing in companies with a demonstrated ability to generate revenue and achieve market traction may favor later stage investments.

Given that investing in different stages of companies necessitates distinct skill sets, most funds choose their focus areas before the fundraising process from their LPs. This decision is also influenced by the fund size and consequently, the typical check size. Therefore, the selection of investment focus typically occurs before securing capital from LPs.

Balancing your portfolio means diversifying across different investment stages to manage risk and optimize returns, considering factors like liquidity, growth potential, and risk tolerance. Including a mix of seed and later-stage investments can help spread risk while capturing potential high returns from early-stage innovation and stability from established ventures. Regularly reassessing and adjusting this mix ensures alignment with your investment goals and the evolving market landscape.

In my experience, this sounds great on paper, it is very hard to implement this effectively. You can have a sole focus on later stage or seed stage investments and do the other on a few investments as both require completely different skill sets sometimes as investors to do equally. Investors should figure out their risk-taking capacity and then delve into their portfolio management thesis. Once you have this figured out, then focus on the % of seed and later stage investments.

In any investment portfolio, asset diversification is the main strategy to mitigate risks, and with venture capital, it is no different. Although we know that venture capital is already a form of asset diversification, one way to diversify this segment of the portfolio is to look for ventures from different markets and stages of development

Diversification: Strategy: Spread your investments across different asset classes, such as stocks, bonds, real estate, and alternative investments. Diversification helps reduce the impact of poor performance in any single asset class on your overall portfolio. Risk Tolerance: Consideration: Assess your risk tolerance, which is the level of risk you are comfortable taking on. Your risk tolerance should align with your financial goals, investment timeline, and emotional capacity to withstand market fluctuations. Investment Horizon: Strategy: Adjust your asset allocation based on your investment horizon. Longer-term goals may allow for a more aggressive allocation to growth-oriented assets.

Balancing a portfolio with both seed and later stage investments, while theoretically beneficial for diversification, is not typically practiced in the venture capital world due to the stark differences between these stages. This dichotomy suggests that specializing in one stage aligns better with developing deep expertise and maximizing success rates. Hence, most VCs tend to focus on one stage, aligning with their team’s core strengths and strategic focus, rather than attempting to master the nuances of both.

If your startup is in the seed phase, it is most likely that, beyond banking entities, you will get investment from business angels or other investors in startups. These 'angels' focus their attention on companies in early stages, such as the seed phase, that have already passed the first phase, that are already on the market with the minimum viable product or that simply need investment to develop the product and the sales channels (marketing and advertising).

Despite it is harder to be implemented in real life, diversication it is always important, remember that diversication it also geographical location -markets, do not invest in many companies of one market only

VC’s that target later stage startups should be able to provide more focused advice on the sectoral connections, exit path and especially on hiring. At those stage founders need connections to be provided to get to talent to grow the structure and to plan for exit so that added value is more critical than the money. Early stage investors can be generalist but partners of later stage startups should have a focus to add more value and get into competitive deals.

Growth Mindset: Belief System: Cultivate a growth mindset by embracing challenges, seeing effort as the path to mastery, and persisting in the face of setbacks. Embrace the belief that abilities can be developed through dedication and hard work. Resilience: Adaptability: Develop resilience to navigate challenges and setbacks. View failures as opportunities to learn and grow. Resilient individuals bounce back from adversity and maintain a positive outlook. Emotional Intelligence: Self-Awareness: Enhance emotional intelligence by developing self-awareness and empathy. Understand your emotions and those of others, fostering effective communication and relationship-building.

In venture capital, it's essential to 'choose your battle' by selecting either seed stage or later stage investments, aligning with your strengths and interests. Seed stage investments develop skills in nurturing startups, while later stage investments focus on scaling and optimizing mature companies. While exposure to both can be insightful, specialization is key for effectiveness in this field. Venture capitalists should focus on the stage that best matches their skills and professional inclinations for greater success.

In an ideal world; majority of the startups should require funds in the initial stage and self-sustain as they acquire scale. Late-stage funding should not be spent on customer acquisition and retention - it should be spent on investments needed for growth. With this, early-stage investments are probably going to grow more. As long as the investors are in sync with high risk / high reward philosophy, the VC community probably will shift focus on early stage investments. There too, the sweet spot appears to be Post MVP / Early Traction companies. Late stage is well-suited for PE / IPO kind of structures.

Investing is a skill. It is impossible without a growth mindset. Both shall be built and nourished along the way. Seed and later stage have their advantages and risks. The question is which one you understand better, because you either went though it as a startup founder or have reliable, wise mentors who can guide you through it, or both. No matter which stage you choose, don't rush it, take calculated risks.

Investment skill is expected for the seed stage and later stage. The significant difference may be that the seed stage involves numerous small investments of time and money. Improve skills such as designing business models, working with unknowns, testing and reviewing, and networking. Later-stage investments involve large but few investments. A shift from seed-stage skills to later-stage skills such as scaling business, exit strategy, stakeholder management, and corporate governance.

It is also the phase in which the startup can think about an accelerator, in which to stay and obtain advice and contact with potential partners and collaborators. The required capital also makes it easier for private investors and family offices to also be sources of investment for the company.

The difference between seed and later stages are in risks you take, portfolio construction, size of the fund you raise, networks of LPs you have access to, deal flow access, network of investors to follow you afterwards - and everything else. Much like with startups, where we look for uniquely positioned founders buliding a certain product and market, funds choose their strategies, based on a unique advantages and collective managers' experiences and networks at a certain investment entry level. In essence, it's not a choice.

At Rahim Invest, we cater to the ESG investment needs of family offices in select Gulf countries. To empower our clients in navigating the ever-evolving landscape of DeepTech while adhering to robust ESG principles, we strategically concentrate on A and B rounds within industries such as ESG construction, biotech, medtech, edtech, and IT—specifically AI, quantum, and machine learning. We allocate checks ranging from $5 million to $80 million. Notably, our clients exclusively engage in equity investments that come with voting rights on the Board. Crucially, it is imperative to bear in mind that our clients assess not only the startup itself but also take into account other investors participating in the round.

I’m going to start with some base assumptions, that if they don’t hold for you, ignore the rest of what follows… IF: 1) Your #1 goal is to maximize IRR (expected value) 2) Your #2 goal is to minimize variance (actualized blended return multiple) 3) You are NOT a strategic investor with value to add to your portfolio beyond your investment of capital. THEN: The game-theory optimal (i.e. mathematically proven best investment strategy) is to: A) Invest ONLY in seed or pre-seed companies (no follow-on investment) B) Do NOT try to pick winners (other than founding team quality) C) Portfolio size of 300 or more (to minimize variance) You will net the seed market returns of 28% IRR historically with high certainty. c.f. Right Side Capital

Always decide with a 50X decision-making model. We make decisions with a piece of decisive information to improve clarity, insights, alignment, conscious vs unconscious, and scoring of the trade-offs.

One element that is not talked about a lot and which in my experience one of the major factor in the success or failure of a venture-stage company is the board of directors. As a partner in a VC firm, we did a post post-mortem of 18 companies we had invested in, and identified that the #1 cause of failure was related to the board. Either the size was wrong, the skill set was not optimal, the relationship with management was poor etc. It's not talked about much and it should be top of the list for both the founders and the investors.

Have faith in yourself and your vision. With patience and perseverance, the right backers will see your potential and want to join your exciting journey ahead

This one is for early stage startups: Do due diligence to your investors as well as your investors do due diligence for you. Ask your investors to send you introductions to at least 3 founders they invested in. Ask your investors to send you introductions to other investors they co-invested with. A good investors would not shy away from doing these introductions, if they do, walk away. Investors should be transparent & self-confident, money is easy to find, a long lasting mutually beneficial relation is not. Accepting to get money from an investor should not feel like having a one-off fun one-night relation but closer to a long term relation leading to an engagement.

As an investor it’s important to form, understand and articulate your investment thesis down to basics like: - asset classes - sectors - outcomes your strategy is well positioned for - optimal portfolio size - concentration in the portfolio and dry powder for follow ons - macro environment that is conducive to your strategy - likely timing of capital calls Investors who understand their thesis well can appreciate that seed vs later stage is like what time to show up to a party vs when you were invited. The price tags get higher further along the spectrum of reducing uncertainty and execution risk a business is at, in most but not all cases that would coincide with seed vs growth vs later stage raises.

Is your startup in the seed phase? Are you an early-stage entrepreneur looking for investment? DM me, where dozens of business angels will listen to your project.