The pre-seed diligence framework

By now it’s clear that seed is the new Series A. Seed rounds have tripled in size and companies have been around for 2.4 years before they raise a seed round. A new stage called pre-seed has emerged to fill the gap.

But many in the ecosystem equate investing at pre-seed to buying a lottery ticket. We disagree.

We believe that with the right amount and type of diligence, an investor can build the same amount of conviction pre-traction that you need to make a Series A investment.

Below are three core ways in which conducting diligence is entirely different at this stage (and how founders raising pre-seed should position their company).

Focus on short term versus long term

Conventional wisdom in venture is to invest in companies that are going after large markets and can be worth billions of dollars one day. While we agree that venture returns are based on the power law, we think it’s pretty much impossible for founders and investors to truly predict at the pre-seed stage how large a potential outcome the company is capable of.

In its first pitch deck, Airbnb (called AirBed&Breakfast back then) projected that their entire addressable market was 10.6 million trips/year, a meager 0.6 percent of the larger hotel market. No wonder they struggled to raise their first million dollars! Even the founders couldn’t have imagined that within a few years they’d pose an existential threat to the entire hotel industry. Airbnb now hosts more than 2 million people each night!

Uber’s “pre-seed” pitch deck stated that the entire market for Uber was $4.2 billion. Amazingly, the company is on track to do over $10 billion in net revenue 10 years later (and more than $40 billion in bookings).

So, instead of overly analyzing the market size and how this company can gain large market share, we focus on what the team can achieve in the short term: the next 6-12 months. Typically, the initial market tends to look pretty small, but there is a path to a larger adjacent market. If the company successfully captures the initial market, they can raise more money to go after the larger opportunity.

The question we ask ourselves is simple — can this team get to “first base” and, if so, is this the kind of team that can then figure out how to get to the next base? Once they wedge themselves in the door, do they have what it takes to pry the door open? In our experience, the best investments were in companies that went after seemingly small markets that upon years of incredible execution, eventually ended up owning markets no one could have predicted when they got started.

Product is more important than distribution

While most founders and investors will agree that distribution is just as important as product, we believe that at the pre-traction stage, a thoughtful product strategy trumps an elaborate distribution plan. In fact, we’d go as far as saying that the best pre-seed companies treat distribution as another feature of the product.

For B2B companies, it’s important that the “sales cycle” be on the order of days and weeks, not months. Precious time spent getting the product in the hands of the end consumer is time wasted; you are not learning how to make the product better and how to beat your competition.

The best founders scale and mature as the company takes off.

For B2C companies, it’s OK if you acquire your first cohort of users in an unscalable/unrepeatable fashion. Again, the key is how you leverage the initial version of the product to get feedback and have users share it with their friends.

It’s important to demonstrate that even though the product is very raw, the need in the market is so huge that end users are willing to jump through hoops to use the product.

It’s not clear whether these founders can run a large company one day

Most founders we back are “non-celebrity,” i.e. first-time founders or folks that have been acqui-hired before. They can’t raise millions of dollars on their resume.

Here are a few traits across most of our founding teams:

  • They have never managed a large team

  • They have never owned P&L

  • This is their first time starting a company

  • They don’t necessarily have the “larger than life” personality we associate with big company CEOs

You can see why founders that raise “pre-seed” are not an obvious bet for most investors.

Instead of trying to figure out if this team can run a large company, we analyze whether this company can build a super successful “small company” in the short term. And then it’s our job to help put executives and advisors around the founders to help scale it to the next phase.

Here’s what we look for in our potential founders:

  • They understand the market opportunity and use case better than people that have spent years in it

  • But at the same time, they have a strong point of view that is contrarian to what incumbents believe

  • They have a bias toward small, lean and fast moving teams

  • They have already identified the first five hires from their own networks

  • They have an insatiable hunger to deliver a product that wows the customer and have a “hacker” mentality to get to early signs of product-market fit

  • Growth keeps them up at night, not scale. They know scaling the business only matters if they achieve product-market fit

In our experience, the best founders scale and mature as the company takes off. They are self-aware of the skill gaps on the founding/management team and actively seek talent to backfill. Watching the “Social Network” again reminded me how raw Mark Zuckerberg was when he got started. It’d be hard to imagine just 10 years ago him running a company worth almost $500 billion. But he understood his target audience really well and what it would take to grow the user base as fast as possible.

We think there are great opportunities to invest at every stage — pre-traction or post-traction — but it’s important to figure out where you will specialize and then orient the fund around that stage.

Universal credit: Two-child benefit cap to be relaxed

Amber RuddImage copyright AFP/Getty Images
Image caption Amber Rudd will make her first major welfare speech on Friday

Around 15,000 families with three or more children will not have their universal credit capped, the work and pensions secretary will say on Friday.

A two-child limit on the benefit came into effect in April 2017 – but did not initially apply to claimants whose children were born before that date.

This exemption was due to end next month, but Amber Rudd will say that it will instead continue.

The Child Poverty Action Group said the decision was “fantastically good news”.

However, the group is still calling for the two-child cap to be scrapped for all other families.

The “child element” of universal credit varies, but is worth at least £231.67 a child per month.

Ms Rudd will say: “As it stands, from February 2019 the two child-limit will be applied to families applying for universal credit who had their children before the cap was even announced. That is not right.

“These parents made decisions about the size of the family when the previous system was the only system in place.

“So I can today announce that I am going to scrap the extension of the two-child limit on universal credit for children born before April 2017.

“All children born before that date will continue to be supported by universal credit.”

What is universal credit?

Universal credit is a benefit for working-age people, replacing six benefits and merging them into one payment:

  • income support
  • income-based jobseeker’s allowance
  • income-related employment and support allowance
  • housing benefit
  • child tax credit
  • working tax credit

It was designed to make claiming benefits simpler, and is being introduced in stages across the UK.

She will also defend the introduction of the benefit itself, saying: “Universal credit is working for the vast majority of people…

“As a nation, I believe we all want a decent safety net: if you’re facing a difficult moment in life, the state should be there to help you.

“But it is vital that people are supported by this safety net, not trapped beneath it.”

Media playback is unsupported on your device

Media captionStruggling with universal credit in Hartlepool

Additionally, Ms Rudd will announce a slowdown in the “managed migration” to universal credit of claimants whose circumstances have not changed.

But, she will add, there will be no “overall delay” to the universal credit migration, which “will be completed, as planned, by 2023”.

Labour MP Frank Field, who chairs the Work and Pensions Committee, said: “I strongly welcome the secretary of state’s decision not to press ahead with what could have been the cruellest benefit cut in history.

“At the eleventh hour, she has prevented thousands of children from being plunged into poverty by an unjustifiable retrospective policy.”

Media playback is unsupported on your device

Media captionWhat’s the problem with universal credit?

Jefferies Financial reports results for two-months to align with new reporting structure

(Reuters) – Jefferies Financial Group Inc (JEF.N) reported a net loss of $20.4 million for the two-month period ended Nov. 30, after changing its fiscal year end from Dec. 31.

The U.S. investment bank changed its fiscal year end to align its new reporting period with its main unit Jefferies Group LLC.

On a per share basis, the company reported a net loss attributable to shareholders of 6 cents.

For the three-months ended Dec. 31, 2017, Jefferies reported a loss of $271.6 million, or 74 cents a share.

Reporting by Mary Ann Alapatt in Bengaluru; Editing by Shailesh Kuber


Canada dusts off old message for new anti-tariff charm offensive

The prime minister’s inner circle is ramping up another lobbying push in Washington to terminate American tariffs on steel and aluminum.

Two senior government sources say that ministers with connections to American national security portfolios will be tasked with reaching out to specific U.S. officials to push Canada’s anti-tariff message.

The campaign is based on Canada’s long-standing position that the tariffs are both illegal and absurd.

Last June, the Trump administration invoked a rarely used national security provision — Section 232 of the Trade Expansion Act of 1962 — to impose 25 per cent tariffs on imported steel and 10 per cent tariffs on imported aluminum.

The tariffs are based on the argument that, in the event of a national emergency, the U.S. needs robust domestic steel and aluminum industries. Canada has openly attacked the tariffs, pointing out that Canada is not a threat to U.S. national security.

One source said the new lobbying campaign actually began when Foreign Affairs Minister Chrystia Freeland met with U.S. Secretary of State Mike Pompeo during a visit to Washington in December.

Early in the new year, Defence Minister Harjit Sajjan delivered a similar anti-tariff message over the phone to the new U.S. acting Secretary of Defense Patrick Shanahan​.

And Finance Minister Bill Morneau also made Canada’s case during a face-to-face meeting with U.S. Treasury Secretary Steve Mnuchin in Washington yesterday.

Now, the lobbying push is seeking new targets. Officials at the Canadian embassy in Washington are drafting a list of influential Americans who may be open to Canada’s message.

Once that list is complete, individual ministers will be tasked with reaching out to those officials, by phone or in person, to press Canada’s case.

Both Freeland and Morneau will use the upcoming World Economic Forum in Davos, Switzerland as a forum to meet with their American counterparts and push them to nix the tariffs.

They won’t see U.S. President Donald Trump there. Trump announced on Twitter today that he would be skipping the forum to focus on the current federal government shutdown and a swelling dispute with House Democrats over his demand for a border wall.

Paul Moen, a principal at Earnscliffe Strategy Group and an international trade lawyer, said Canada’s strategy makes sense — but it should also reach out to business and labour leaders and the new faces in Congress who took office in the November midterm elections.

“With the new Congress in place, that’s a new opportunity to build some new relationships, build on some old ones, but also to broaden the engagement with the business community, with the labour community,” he told CBC News.

But Mark Rowlinson, a spokesman for United Steelworkers Canada, said the window for charm offensives has long since closed and it’s time for Canada to draw “a line in the sand” by refusing to ratify the revamped North American trade deal until the tariffs are dropped.

“I’m skeptical​,” he said. “It’s clearly the case that Canada has never posed a threat to U.S. national security, and I don’t think anyone on either side of the border has ever really taken that seriously. Canada has engaged in a number of charm offensives … and so far, those efforts have yielded next to nothing.

“What they should be doing is saying, ‘We will not sign, we will not ratify the new Canada-U.S.-Mexico trade agreement, unless and until these tariffs are dropped.”

In fact, neither of the two senior government sources who spoke to CBC News is optimistic that Trump will abandon his enthusiasm for tariffs any time soon.

On Tuesday, Trump tweeted a defence of his tariff policy by quoting an interview on Fox News with Mark Glyptis, a local president of the United Steelworkers union from West Virginia.

One of the sources said that Canada will be stepping away from any arguments that connect the tariffs to the updated North American free trade agreement.

Some American lawmakers and business leaders who oppose the tariffs have said publicly they should be dropped, since they were meant only to serve as leverage in the trade negotiations.

One of the sources told CBC that Canada doesn’t want to touch that argument because it’s too similar to the line Mexican officials are taking in their own push to end the American tariffs.

Canada does not want to be lumped in with Mexico, the source said, because Mexico might end up agreeing with American demands for export quotas on steel.

CBC News has reported that American trade officials want both Canada and Mexico to accept caps on how much steel they can import into the United States, based on a portion of what was imported in 2017.

“That’s crazy,” said the source, adding Canada will not entertain the idea of accepting quotas.


Alphabet board faces lawsuit on allegations of sexual misconduct cover-up

Google signage is seen at the Google headquarters in the Manhattan borough of New York City, New York, U.S., December 19, 2018. REUTERS/Shannon Stapleton

SAN FRANCISCO (Reuters) – A shareholder’s lawsuit filed on Thursday said the board of Google parent Alphabet Inc played a direct role in covering up sexual misconduct claims against two top executives in 2014 and 2016.

The company did not immediately respond to a request for comment.

The lawsuit in San Mateo County Superior Court in California by shareholder James Martin cites minutes from Alphabet board and board committee meetings. The lawsuit seeks to force Google to upgrade its governance and oversight to stop future sexual harassment and discrimination.

Reporting by Paresh Dave and Jonathan Stempel; editing by Grant McCool


In Flint, a future built on schools as well as safe water

When her two-year-old son DeQuincey was diagnosed with elevated lead levels and developmental delays, Crystal Garcia-Pitts worried he might face a lifetime of health and behavioral challenges.

The infamous Flint crisis over lead-tainted water, while not definitively to blame, was a possible cause of her son’s lead exposure, as for many others in this economically depressed Michigan city.

Yet after a year at an innovative school opened in the wake of the water crisis, DeQuincey has caught up so much he’s no longer considered delayed at all.

Recommended: Mexico tells early learners: You need to play more.

“He’s talking more, he knows how to count to 10 already,” Ms. Garcia-Pitts said recently after a support group for mothers wrapped up at the school, which serves 220 children from months-old babies to 5-year-olds. “He’s outgrown a lot of the stuff…. If he hadn’t been here, that wouldn’t have been the case.”

Late last year, Garcia-Pitts also enrolled her 4-month-old son Leo at the state-of-the-art school, the first in Michigan to follow an innovative model called Educare, for early childhood education. The former waitress even landed a job at the school as a liaison with families.

Her encouraging experience reflects the tangible successes of broad-based recovery efforts that have gathered momentum since the crisis – all centered around the idea that success involves a definition of community health that broadens well beyond safe water in city pipes.

It’s too soon to say how effective the blend of public and private initiatives will ultimately prove to be given Flint’s myriad woes. High poverty, crime, and distrust of institutions persist in this city, which once prospered as a factory hub for General Motors.

But what’s under way here is notable for its breadth and scope – ranging from parenting classes to promoting children’s mental health, and from economic development to prescription vegetables. It could also hold lessons for other communities struggling with economic decline. 

“We all work together, so we all work hand in hand,” says Mona Hanna-Attisha, a crusading, Flint-based professor and pediatrician who helped expose the water crisis. Her research on child development has informed efforts here. “The hope is all of this holistically serves as a best practice for children everywhere who are suffering from similar toxicities and traumas.” 


Civic groups, foundations, and universities have joined hands alongside local government and public-health officials.

“We want [Flint] to be a model in terms of what to do in a recovery process,” says Ridgway White, president and chief executive of the Flint-based Charles Stewart Mott Foundation, which provided $4 million in grant funding to reconnect Flint back to a safe water source in 2015.

“The nonprofit sector was here to respond and lessen the struggles,” he says. “All of these pieces came together at a time when the government was not able to respond.”

The water contamination started in 2014 from a botched cost-cutting effort. A change in the water source, approved by a state-appointed emergency manager for the financially struggling city, resulted in badly corroded pipes. The city’s water quality has tested safe for two years, according to federal guidelines, though many in Flint still don’t trust it.

After the water crisis captured international headlines, Mott was one of 10 foundations, including W.K. Kellogg, Kresge, Ford, Robert Wood Johnson, Skillman, and others, that pledged $125 million dollars over five years to help Flint bounce back. Of that amount, the Mott Foundation alone pledged roughly $100 million, with half going toward educational endeavors specifically, including $11-million to build Educare Flint.

Impressive as such sums are, Mr. White is cautious about how much the nongovernment players can achieve without more publicly funded support.

“We can’t claim success until a person who grows up in Flint has an equal opportunity to someone who grows up in a more affluent area,” he says. “Foundations can’t do it alone. Maybe the old model of test, scale, and have the government take over isn’t exactly what it used to be, but there is still a major role for government…. We shouldn’t be the ongoing funding source.”

With the help of state and federal funding, the city of Flint is still replacing pipes that could contaminate the water supply. It hopes that work will be complete by the end of next year.

Wider recovery for the community is a longer-term task – and much of it hinges around education.


With help from various nonprofits, the Flint-based Crim Fitness Foundation has implemented a “full-service” school model, so schools are one-stop shops for parents in need of multiple types of help. A full-time community health worker and a full-time community school director have been added to every school to help parents with everything from finding housing to getting to school. This community-education model, informed by resident input, began before the water crisis, but 

was expanded rapidly in response to it.

“Resilience in Flint is probably the biggest characteristic to stand out,” says Gerry Myers, chief executive of the Crim Fitness Foundation. He says that, although distrust toward outside institutions runs high in Flint due to years of corporate disinvestment, state cost-cutting, and the poisoned water, the community-education effort has escaped “this frame of distrust.”

“There are big voids that are being filled,” says Danielle Green, a member of the school board.

“Before I can even get in the door at schools, parents have a lot of thank yous – a lot of questions, and still concerns – but a lot of thank yous.” she says.

One of those voids involved play areas, with the Community Foundation of Greater Flint stepping up to fund 8 new Flint playgrounds in the past two years.

Another was a gap in books. A citywide program named Flint Kids Read, with help from Dolly Parton’s Imagination Library, will mark two years in operation in January and has delivered nearly 75,000 books to more than 5,000 kids and 200 classrooms or daycare-type sites. And Born To Read, a local program that provides a bundle of books and developmental materials for newborns, recently enrolled its 1,000th child.

“It’s fantastic, I just can’t believe the volume of books…. There’s no way our community could mail 5,000 books a month to our kids and for just 2 dollars and 10 cents per book” without all of these partners involved, says Kathryn (Kay) Schwartz, director of library services at the Flint Public Library, which is operating with 40-percent less revenue than in 2009. “It makes this program affordable for our community.”


Other efforts seek to broaden the mental toolkit of residents. Community members including Ms. Green are teaching a form of meditation known as “mindfulness” to residents. The initiative now reaches 6,000 children and 2,000 people beyond the schools, helping them build social and emotional skills. Proponents cite research suggesting the instruction can help with things like handling stress, collaborating, and staying focused.

Marlo Thomas, a Flint resident who works as a nursing assistant, says her 14-year-old twin sons are being helped by the coaching in mindfulness at Flint Southwestern Academy, the city’s only remaining public high school. The pair of 9th graders “compromise, make better decisions, have better thoughts. It helps them with their daily routine,” says Ms. Thomas.

Some improvements in Flint began before the water crisis. Michigan State University’s Division of Public Health began its move to Flint’s downtown earlier, but then accelerated the process and served as an anchor for development and the expansion of services for Flint residents.

Most others were launched after the crisis made national headlines. Early in 2018, the city of Flint added an economic development team, with the help of a nearly $3-million, four-year grant from the W.K. Kellogg Foundation. The city has also created three new roles, including a chief recovery officer, all of which are funded by outside grants. And the United Way funds a new role created in 2016 – the president of Flint Neighborhoods United – to serve as a go-between among residents and those in power.

Many in Flint credit Dr. Hanna-Attisha, the pediatrician-professor, with a vision and drive that has fueled the collective efforts and influx of financial support in Flint.

“Mona’s research is at the core of many of the interventions that we fund. She’s been instrumental,” says Isaiah Oliver, chief executive of the Community Foundation of Greater Flint, which among other things owns the Educare Flint building.


Another feature of the holistic approach to public health involves meals. About a year ago, the Hurley Medical Center where Hanna-Attisha works started screening patients for food insecurity. It refers those in need to get fully subsidized food from a Food FARMacy, which has reached more than 3,400 residents so far with lead-mitigating and other foods. And a program called Flint Kids Cook, in a partnership with Michigan State University (MSU), sits alongside parenting classes and the Born To Read program at Hurley. 

Some outside Flint are taking notice. One provision in the recently enacted federal farm bill was inspired by a Hurley/MSU nutrition prescription program.

But in a city where 60 percent of children live in poverty, numerous challenges remain.

Despite the Educare site, for example, more than 2,000 children in Flint below age 5 – nearly a quarter in that age group – are not in a licensed daycare or preschool program at all.  

Derrick Lopez, the new superintendent of Flint schools, points out that sometimes the most vulnerable parents are living so hand to mouth that they’re not aware of vital services.

“We can do more and I think that is the challenge,” says Dr. Lopez, who became the superintendent of Flint Community Schools in August. “There are more kids in crisis that we can identify…. It’s incumbent on us to make sure more parents are able to access” the expanded services available, he says.

Thanks to funding from the state and the federal Centers for Disease Control, Michigan State’s Division of Public Health launched in January. The registry is modeled partly after a similar effort supporting families affected by the World Trade Center attacks in 2001. It aims to connect current and even former Flint residents who were affected by the water crisis to more than 30 services and resources, including those for early education.

Similarly, at both Educare Flint and a sister school that serves 144 children, Cummings Great Expectations, parents can connect with a range of services. The schools serve neighborhoods with some of the highest likelihoods of exposure to lead. The Educare school is one of 23 nationwide featuring full-day, year-round programming, and classroom observation rooms manned by specialized staff. Operating on a mix of public and private funding, both schools enable parents to sign up on site for programs including Medicaid and food stamps.

Lopez says such outreach efforts make “a huge difference because you lower the barrier. Time is the commodity, and often parents don’t think they have the time to do that, so a one-stop service stop … is huge.”

Hanna-Attisha describes Flint as a “small big city,” voicing hope that it can become a model for other cities recovering from post-industrial decline.

“Our story is way beyond Flint,” she says. “It’s about kids everywhere.”

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Calvin Klein owner PVH raises profit forecast

FILE PHOTO: Boards with Calvin Klein store logo are seen on a shopping center at the outlet village Belaya Dacha outside Moscow, Russia, April 23, 2016. REUTERS/Grigory Dukor

(Reuters) – Apparel maker PVH Corp (PVH.N) on Thursday raised it fourth-quarter and full-year adjusted profit outlook, citing better performance across its businesses.

The company now expects its full-year adjusted profit to be at least $9.50 per share, compared with its previous forecast of $9.33 to $9.35.

The Calvin-Klein owner said it expects adjusted profit to be at least $1.75 per share in the fourth quarter, 15 cents above the high end of its prior guidance range.

PVH also said it was relaunching its CALVIN KLEIN 205W39NYC under a new name.

Reporting by Soundarya J in Bengaluru; Editing by Maju Samuel


Brazil government approves Boeing-Embraer tie-up

The Boeing logo is pictured at the Latin American Business Aviation Conference & Exhibition fair (LABACE) at Congonhas Airport in Sao Paulo, Brazil August 14, 2018. REUTERS/Paulo Whitaker/File Photo

SAO PAULO (Reuters) – The Brazilian government on Thursday said it would allow a proposed tie-up between planemakers Embraer SA (EMBR3.SA) and Boeing Co (BA.N) to go forward, capping weeks of uncertainty in which President Jair Bolsonaro expressed his hesitation.

The deal still must be approved by shareholders and regulators, but winning the backing of Brazil’s government was its biggest hurdle.

Under the proposed deal, Embraer will sell 80 percent of its commercial plane division, its most profitable, for $4.2 billion. The deal is seen as part of a reshaping of the global aviation market for mid-sized planes. It follows a similar deal by Boeing’s rival Airbus (AIR.PA) which bought Bombardier Inc’s (BBDb.TO) commercial plane division that competed with Embraer.

Embraer’s private shareholders now must vote to approve or reject the deal within 30 days.

Shortly after assuming the presidency on Jan. 1, Bolsonaro, a former army captain, had expressed concern that Boeing might end up owning all of Embraer if the deal was approved under the terms proposed.

But on Thursday, a statement from his office said his government had analyzed the proposal and found that it “preserves (Brazil’s) sovereignty and the national interests.”

Reporting by Marcelo Rochabrun; Editing by Brad Brooks and Lisa Shumaker


U.S.-based stock funds attract $8.74 bln in week ended Wednesday -Lipper

NEW YORK, Jan 10 (Reuters) – Investors put money to work in both U.S. stock and bond markets for the week ended Wednesday, in the wake of soothing remarks by Federal Reserve Chair Jerome Powell that low inflation would allow the central bank to be “patient” in deciding whether to continue raising rates this year.

U.S.-based stock funds attracted about $8.74 billion in the week ended Jan. 9, following the previous week’s cash withdrawal of $18.7 billion, according to data released Thursday by Lipper. U.S.-based taxable bond funds attracted $8.4 billion in the week ended Wednesday, following the previous week’s cash outflows of over $12.7 billion, according to the research service. (Reporting by Jennifer Ablan; Editing by Lisa Shumaker)


Moody’s downgrades PG&E’s credit rating

Jan 10 (Reuters) – Moody’s on Thursday cut PG&E Corp’s credit rating to B2 from Baa3, citing a challenging environment for the California power provider as potential liabilities grow, liquidity reserves decline and access to capital becomes more uncertain.

Moody’s said its ratings remain on review for a downgrade and comes on the heels of a downgrade by S&P.

S&P cut the rating on PG&E and its Pacific Power & Gas Co unit on Monday to “B” from “BBB-,” the lowest tier of so-called investment-grade ratings.

Reuters reported on Friday, citing sources, that the utility company was exploring filing for bankruptcy protection. The company was considering the move, for some or all of its businesses, as it faces billions of dollars in liabilities related to wildfires. (Reporting by Arundhati Sarkar in Bengaluru; Editing by Maju Samuel)