The product doesn’t exist and the projections are mostly hope. What investors are underwriting is the founder’s ability to build the numbers, especially in climate-tech, where that road runs ten years long.
At pre-seed, what exactly is an investor investing in?
The company may have:
→ An unfinished product
→ Little or no revenue
→ A pilot that is not yet a business
→ Financial projections containing more optimism than history
So, is the investor betting on the founder, the market or the technology?
I looked at a few investor perspectives.
A discussion with All In Capital and Rainmatter by Zerodha says founder-market fit is probably the first thing investors try to understand.
Another discussion featuring investors from Elevation Capital, Peak XV Partners & Accel
covers team versus traction, founder credibility, knowledge of numbers and customer validation.
Ankur Capital evaluates three things:
→ The market: Is the problem large enough to build a big business?
→ The founders: Do they have industry knowledge, drive, resilience and the honesty to admit what they do not know?
→ The path: Is there a believable plan to build and sell the product?
The global view is similar.
After more than 400 deep-tech investments, SOSV‘s investment model also places considerable weight on founding teams while helping deep-tech companies navigate product development, manufacturing and subsequent fundraising.
My takeaway:
→ The market decides how large the opportunity can become.
→ The technology decides whether the solution can stand apart.
→ The founder decides the likelihood of getting there.
This matters even more in climate-tech.
A founder may have to deal with technical risk, certifications, manufacturing, regulation, corporate sales, project finance and several funding rounds. The business model may change repeatedly during a journey that could last over ten years.
Passion for climate change is not enough. Founders must be able to learn, adapt, hire, sell and raise different kinds of capital.
But ‘betting on the founder,’ however criminally oversimplified it may sound on investor panels, is neither blind faith nor a personality contest.
Climate urgency does not give founders a free pass to skip unit economics or financials and then blame Big Oil’s lobbying for an unfavourable market.
‘But my startup solves for climate,’ doesn’t mean the investor MUST back it no matter how poor the product-market fit is.
At pre-seed, investors may back founders before the numbers exist.
They are backing the founders’ ability to create those numbers, not their ability to explain why the numbers can wait.
Credits
This article is written by Deepa Sai for EcoHQ