Three weeks ago, we received an influx of incredibly helpful founder feedback after Paul Bassat reached out to the community at this LinkedIn post.

A recurring theme in the feedback that appealed to me was, telling founders to invest early isn’t really that helpful. Founders Asked: What Does “Early” Mean? What does ‘seed stage’ mean? Is it the intention that you have a grip in the ‘early’ phase of a startup?

That is a huge challenge for founders each fund has different answers to these questions.

I wanted to make the answers to those questions less opaque by sharing our data. I went over the 10+ year history of Square Peg’s investments and reviewed all of the investment papers the team had written to understand what we knew about the companies at the time we invested. This is what I found.

1. Our investment behavior has changed over time

Over the past 5 years, the share of investment in seed rounds has increased year on year and now constitutes the majority – in 2022 seed will represent 80% of our new investments.

2. When we invest in seed or Series A, we usually write larger checks (US$1 million+)

Our historical data from 2012 to 2022 showed that about 40% of our initial investment in a startup was in the start-up phase.

But labels like “seed,” “Series A,” or “Series B” can be useless because check sizes and valuations associated with stages change over time depending on market cycles. That’s why I also show the breakdown by check size below.

When we invest in the startup phase, we usually write checks for more than $1 million. Dan Krasnosteinour partner in Melbourne, wrote a great post recently here explain why that is. In short: we are investors with a high level of persuasion and a high degree of involvement. We do not do small checks to “test the water”. We only invest when we are so excited that we put our hands on the table to work with you.

That means that as a founder you can expect us to drop everything to serve you. We are empathic partners who are with you through the long journey – both the ups and the downs.

The other factor to keep in mind for the current round size is what the next round looks like (i.e. what milestones does the founder need to meet to make the next round a success, and how much money will he need to get there). A larger round can often give founders more buffer to experiment and make room for high-quality angels or seed-focused funds. That said, a small round is better than no round. Above all, pragmatism wins: founders have to make the best decision with the possibilities they have.

3. We don’t need to see revenue growth in the early stages

Traction can be an ambiguous term for founders, as many funds want to see different levels of ‘traction’ for the same phase.

A general requirement for founders may be to come back when there is income. Looking back on the past 10 years, yes not is a requirement we make of the founders. We invested pre-income in 92% of our seed investments.

We also look at other signals, for example:

1. The depth of a founder’s understanding of the problem;
2. Whether the hypothesis about the solution is convincing and differentiated; and
3. The level of ambition and the plans surrounding it.

Founders don’t have to have all the answers. We are often impressed by founders who are aware and candid about the risks, as well as what they know and what they don’t know.

Here are some examples of seed company investments and the reasons behind them (founder archetypes vary quite a bit!):

• Saasguru (pre-revenue) – new tech founders with a background in cloud consulting. They had a deep understanding of the cloud skills gap and an approach that went beyond the “digital textbook” model of first generation ed techs.
• Vow (pre-sales and pre-product) – the founders came from outside the industry they were tackling, which gave them a new perspective and strategy for solving the future of food with cell-based meat.
• Zeller (pre-sales and pre-product) – a seasoned team that came from Square looking for a payment solution where they had strong domain expertise.

What is common with these investments is not that “we are looking for a founder who has done X, Y, Z or has an A, B, or C background”, but that they all showed unique insight in the problem and a compelling, differentiated hypothesis about how they would solve it.

What should founders take away from this?

I hope by sharing this data we’ve at least made Square Peg’s definition of “early” clearer for founders.

However, the broader message I want to give to the founders is that when we say we’re “high conviction” investors, it doesn’t mean we need to see a post-product-market-fit company where revenues are flying. It just means that we often have to say “no” when we can’t reach that level of strong conviction. However, if we say yes, we are fully behind you for the first and subsequent rounds.