Jan 6, 2020 · 39m · 20vc
20VC: Why Now Is The Hardest Time To Raise an Institutional Pre-Seed in the Last Decade, What To Do When The Founder and VC Interests Do Not Align & The Rise of Pre-Emptive Rounds with Gaurav Jain, Founder & Managing Partner @ Afore Capital
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In this episode of 20VC, host Harry Stebbings interviews Gaurav Jain, co-founder and managing partner of Afor Capital, to discuss changing pre-seed market dynamics, stage specialization, and frameworks for evaluating early-stage founders.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 33.4% of the talking time here. How this is scored →
Harry as informed peer 3.6 Guest teaching 5.0 Guest disagreement 1.9 Harry pushing back 2.4
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 8:55 Rejecting the easy pre-seed premise
Gaurav directly refutes Harry's suggestion that pre-seed rounds are easier than ever, using hard PitchBook data to demonstrate that sub-million dollar deal volume has actually collapsed to a decade low.
Hardest push from Harry ▶ 18:31 Pushing back on specializationHarry explicitly challenges Gaurav's core thesis on specialist funds, arguing that modern product trends like consumerized SaaS make generalist sector cross-pollination far more valuable.
Biggest teaching moment ▶ 8:55 Data-driven market reframeGaurav corrects host assumptions about capital abundance at the early stage by outlining how multi-stage seed growth and LP capital consolidation have created a severe pre-seed institutional gap.
Harry holds his own ▶ 31:08 Calling out pre-seed unit economics nonsenseHarry showcases sharp early-stage venture expertise by forcefully rejecting claims that pre-seed startups should be evaluated on unit economics or customer acquisition metrics.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Gaurav Jain's Background and Path to Venture | 2 | 3 | 0 | 0 | Harry asks a standard career history question, allowing Gaurav to deliver a narrative monologue covering his engineering roots, Google Android experience, and transition from Founder Collective to launching Afore Capital. | |
| Key Takeaways from Founder Collective | 2 | 4 | 0 | 0 | Gaurav outlines core philosophies learned at Founder Collective, emphasizing founder-first values, disciplined fund sizing, and personal integrity. Harry agrees throughout without challenging the premises. | |
| The Reality of Raising an Institutional Pre-Seed Round | 3 | 7 | 4 | 2 | Gaurav directly counters Harry's premise that pre-seed funding is easier than ever, pulling in PitchBook metrics to prove sub-million dollar rounds are at a 10-year low while seed rounds have doubled in size. | |
| Pedigree Founders vs. Unproven Founders and Pre-Emptive Rounds | 5 | 5 | 3 | 4 | Harry brings a sharp industry observation about pedigree founders inflating pre-seed rounds to multi-millions. Gaurav adds nuance by noting media bias exaggerates these outlier cases while unproven founders still face strict discipline. | |
| Multi-Stage Funds Moving Early and Specialization | 3 | 6 | 1 | 1 | Gaurav explains why multi-stage funds moving early is a temporary reaction to cash abundance, citing Clay Christensen's modularity theory to argue that venture relies on unscalable services and specialization. | |
| Evaluating Signaling Risk in Multi-Stage Seed Bets | 6 | 5 | 3 | 6 | After agreeing on multi-stage signaling risks, Harry actively pushes back against Gaurav's specialization thesis by arguing sector cross-pollination benefits generalist investors. Gaurav reframes the problem around stage-level variance rather than sector-level variance. | |
| The Rise of Angel Funds and Scout Programs | 4 | 7 | 4 | 3 | Gaurav debunks the belief that pre-seed investing requires pure portfolio indexing due to lack of data, explaining how deep diligence into thought experiments and product insights yields an 86% graduation rate. | |
| Reserve Strategy and Follow-On Investment Process | 3 | 4 | 1 | 2 | Gaurav details Afore's reserve deployment process using blank-slate memos and offers an operational analogy comparing startup capital needs to airplane takeoff momentum. | |
| Decision-Making Speed and Investment Process at Afor | 3 | 6 | 2 | 2 | Gaurav describes Afore's swift decision-making matrix and rejects traditional TAM analysis at pre-seed, pointing out how defining early market sizes failed for category creators like Uber and Google. | |
| The Role of Unit Economics at Pre-Seed | 7 | 5 | 2 | 5 | Harry passionately critiques an angel investor's claim that unit economics matter at pre-seed, calling it absurd given early metric volatility. Gaurav agrees on principle while reframing acquisition cost trends as a proxy for organic market pull. | |
| Quickfire Round with Gaurav Jain | 2 | 3 | 1 | 1 | A rapid-fire series of lighthearted questions covering executive coaching literature, industry transparency, and portfolio company Modern Health, closing on an agreeable note. |
Statements from this episode (29)
Jain: Android Grew From Under 1M Total Users To 1M Daily New Users
“We had less than a million total users on Android at the time. It was a phenomenal journey for me to kind of see Android grow from less than a million total users to about a million new users a day.”
Jain: Success in venture capital requires staying small and resisting expansion
“Success and venture actually means you have to fight that inherent desire to expand and grow. Success and venture means you have to get really, really good at what you set out to do. You stay within your lane. And that's counterintuitive because it's staying s…”
Jain: Raising a first institutional round is the hardest in a decade
“In fact, this is probably the hardest time in the last decade to raise your first institutional round.”
Gaurav Jain: Angel and scout funds do not lead pre-seed rounds
“There's tons of angel and scout funds, but they're not leading these deals. You still need someone to catalyze. If you're trying to raise a proper round, if you're trying to raise enough money to get your next inflection point, you do need a lead investor.”
Jain: LP flight to quality will lead to fewer new micro-VC fund creations
“So, so you're going to see, we think of fewer new fund creations. And when we say fund, we're not talking about a few million dollar funds. We're talking about sizable funds that can lead, you know, institutional size rounds.”
Jain: Afore Capital represents 40% of capital in pre-seed focused funds
“In fact, you know, a four accounts were about 40% of capital that has gone into funds exclusively focused on pre-seed.”
Jain: Cloud cost savings are offset by rising startup labor costs
“So the cost saving that's come from the shift to, you know, AWS, Twilio, et cetera, it's offset by the increase in labor costs, which is why that number has stayed fairly stable, and we expect that to stay stable in the future.”
Jain: More specialist institutional investors will enter the pre-seed stage
“And we also expect, given the incredible amount of demand for institutional grade lead investors at the pre-seed stage, That we expect more specialists to enter the category. Whether they're coming in from a stage focus, like we are, or a sector focus, we expe…”
Jain: Media overstates frequency of massive initial seed rounds for new founders
“I think it happens much less frequently than the media may make it up to seem. Mostly because when that happens, it becomes news. Hence, we all hear about it, and it makes it feel like that is what is happening day to day. But the reality on the ground is, for…”
Jain: Series A funds preempt rounds sooner and at inflated valuations
“In a prepared mind for a Series A fund, we certainly see those rounds getting preempted, and maybe those rounds are getting done sooner than they would have five, 10 years ago, and they're getting done at a price higher than those companies probably deserve.”
Jain: Venture capital is a human service business that cannot scale like software
“But I think people forget that venture is a services business. This is not a software company. You know, two core parts of being a venture capitalist are exercising judgment and advising founders. And both of those things cannot be productized. Well, at least …”
Jain: Multi-stage funds entering seed rounds is a temporary phase
“So we think this is a more of a phase, and I think over time, as the economic cycles shift, you know, the Series A funds will retreat to focus on what they do best, which is investing at Series A, which is, you know, around the time when the company is getting…”
Stebbings: VC Signaling Risk Poses Real Dangers for Startups
“Others, like me, believe in the real dangers and impact of signaling.”
Jain: Series A Funds Rely Heavily on Insider Follow-On Signals
“And look, as I mentioned earlier, series of rounds are getting done earlier and earlier, which means there is less and less data for the story. So, so series of funds are looking for other signals. And I think whether your insiders are doubling down or not is …”
Jain: Startups face more variation across growth stages than sectors
“We think there's more variance on the problems that companies face across stages and phases of the business than there are across sectors.”
Jain: Angel Funds and Scout Programs Are Funded Mainly by Series A VCs
“If you look at where the capital is coming from for these funds, it's predominantly from Series A funds or GPs individually investing.”
Jain: Afore Capital achieves an 86%+ pre-seed portfolio graduation rate
“And our graduation rate's been upwards of 86%, and it's because we're able to do this diligence to really figure out, can the company get to the next stage?”
Jain: Afore Capital's average initial check is ~1% of fund size
“Our average primary check is just over one percent of the fund, and we think that's a good number because it allows us to get meaningful ownership, it's meaningful to the fund, but it also allows us Take a lot of risk.”
Stebbings: Early-stage venture funding labels are meaningless
“The early stages of funding, it's just a continuum, and all the labels are pretty bullshit.”
Gaurav Jain: Afore Capital treats follow-on checks as new investments
“We consider each check we write, even in existing portfolio companies, as a new investment. So we run a very similar process where we will put together a memo and really try to understand, is this, if we were to have a blank slate, would we invest in this comp…”
Jain: Early startups should raise $500k-$1M for 12-15 months runway
“And this is where we recommend to founders, like, look, you should raise somewhere between half a million to million dollars, which we think is the right balance between having enough to really be heads down and execute for, let's say, 12 to 15 months. But at …”
Jain: Early-stage diligence should focus on reaching the next inflection point
“And the way we operate is we make a list of key questions we have to answer in the diligence process. And these are basically things that need to go right for this company to get to the next inflection point. Not necessarily for this to be a massive business.”
Jain: Best pre-seed startups reshape markets in ways founders cannot anticipate
“In my opinion, best companies will either expand or shrink the market in ways even the founders cannot anticipate at the pre-seed stage.”
Jain: Uber estimated a $4.2B TAM initially, now handles nearly $60B
“Uber, of course, you've seen the first deck, right, talks about the TAM being 4.2 billion dollars. And they now do almost sixty billion dollars in bookings.”
Jain: Multi-stage VCs fail at pre-seed by applying Series A frameworks
“And this is, I think, also where it's tough for multi-stage investing firms, frankly, to invest at this pre-traction stage, because what the company looks like is very different than when you look at it as Series A. And I think it's easy to fall in the trap of…”
Stebbings: Pre-seed startups do not have reliable unit economics
“You don't have unit economics. The CAC is going to explode, or you don't know where it's going to go. The LTV is going to shrink. We just don't know.”
Jain: Pre-seed unit economics are leading indicators of market pull
“I think it's, you cannot take it literally on what the unit economics are, but I think you start to see some leading indicators on, you know, the idea of market pull that I talked about.”
Jain: VCs should ask founders questions rather than dictate actions
“Don't tell founders what to do, even though you have that urge all the time, because you've seen that before, but instead to focus on first principles to ask the right questions of the founder. So they can make, they can come to that conclusion themselves and …”