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Early-stage investments are inherently more likely to fail, but these risks also come with greater rewards—getting in on the ground floor of the startup journey gives VCs more leverage. This is especially true in so true In the early pre-seed stage, companies may not have a product to shout about. And this is something London-based general VC firm Playfire Capital knows all too well, focusing on backing startups that have yet to succeed in their respective industries.
In its 10-year history, Playfair has invested in over 100 companies, including well-established unicorns such as Stripe and Mapillary, a startup that floated to Facebook in 2020. Those particular investments that were not focused on came from Playfair’s initial funding. Any particular company “level”. But Playfair has moved further into pre-seed with the announcement of its second fund in 2019, and is keeping that focus for its new £57 million ($70 million) third fund, which it is announcing today.
While many early-stage VC funds aim to make a few dozen investments a year, Playfair keeps things pretty neat, making no more than eight investments each year. Investments. The latest fund comes amid a spate of new early-stage European VC funds, including Embal, which announced a new $80 million seed fund last week, while France-based Ovini Capital stepped in last month with a $54 million seed fund.
‘High judgment, low rate’
Playfire, on the other hand, is looking for founders “outside the major tech hubs,” and founders who work on projects that might gravitate toward places where the core motivation and “buzzy-ness” is. This may be more useful if the stated goal is to invest in a few startups each year – they don’t have the luxury of spreading large amounts of money around to increase their chances of finding a winner. “High trust, low volume” is the Playfire ethos here, and spotting real differences is a key part of it.
“I’d say half of the funding in our portfolio is pre-production,” PlayFire managing partner Chris Smith told TechCrunch. “And the other half has very early traction, maybe an MVP (minimum viable product) or a couple of POCs (proof-of-concepts). But we invest where there’s very little traction.”
It wasn’t that long ago that autonomous automobile technology was all the rage, dominating every trade show and tech conference. And there was one particular event several years ago, the eMotion mobility event in Israel, that Smith says really helped highlight the nature of the investment.
“I walked into the exhibit to see about 120 companies, 116 of which were working on autonomous cars,” Smith said. “And as an investor, I look at this and if you’re writing a lot of checks a year, maybe invest in a lot of them and find a winner — but we don’t, we only do six. About eight.” [annual investments]. So my view was ‘I don’t want to play in that position’. The only real difference between them is whether you’re choosing LIDAR or computer vision. There wasn’t enough difference.”
But at the same conference, four companies were doing something completely different. One of them is Orca AI, which developed a collision avoidance system for ships, and Playfair invested in a company from the same sea of startups – both in the 2019 pre-seed funding round and its follow-up. Series A round two years later.
“That’s where we want to see,” Smith said. “We love these nascent markets – I call them the ‘missing and absurd sectors.’ That’s where we love to stick in and that’s where I see the opportunity.
Large early stage deals are broken down with a level of due diligence. But how exactly do VCs go about deciding who’s worth betting on when a company doesn’t yet have any market interest or a fully functional product? While one of the oldest investment clichés says something about the importance of ‘investing in people, not companies’, this is perhaps even more true in the early stages. And while previous exits and success in the business world can be a useful indicator, there are many factors that can ultimately determine whether a founder or founding team is internally investable.
“We’re looking for a few things, including specific examples of performance,” Smith said. I think the main thing is not necessarily in the business world or in the domain where you are building the company.
Playfair Capital staff portraits Image credits: Playfair Capital
For example, PlayFair recently reinvested in AeroCloud, a SaaS startup from northwest England, which builds airport management software, and also invested in its seed two years ago. AeroCloud founder and CEO George Richardson had been a fairly successful professional racing driver since the age of 15, but had no direct aviation industry experience before setting up AeroCloud.
“Before he started the company, he knew nothing about airports,” Smith said. But we thought if someone could stand on stage. For mans And living under such high pressure, that’s a wonderful way to develop character for a founder.
Obviously, there’s a lot more that goes into the due diligence process, including careful industry research to establish the scale of the problem the startup claims to be solving. But some kind of successful track record, with anything, is an important barometer in the early stages of investing.
“If you can play a musical instrument at an amazing level or [if you’re] Whether it’s a professional racing driver, or a golfer, or whatever — I think that’s a very useful predictor of future performance,” Smith said. But it is. [investing due diligence] A combination of spending more time with the founders and understanding what makes them tick. Then go deeper into supporting the article.
Protected
In the year A lot has happened in the world between 2019 and 2023, with global pandemics and major economic downturns cutting Playfair’s second and third funds. In big tech, startups and venture capital, we’ve seen major funding, slashing valuations and delayed IPOs, but in the early-stage world when Playfair was there, it was a slightly different experience.
“When we’re doing early seed investing, we’ve been exposed to what’s going on in the IPO markets or what’s happening with growth funds,” Smith said.
This is not to say. nothing However, it has changed. The third fund is more than double that of the second fund, reflecting the size of checks now being written to companies, which may have risen from an average of around £500,000 in the past, to around £750,000 today. Topping the £1million mark. So what brought about the change? As you’d expect, a combination of factors, including the simple fact that there’s a lot of capital around and the economic climate everyone’s facing right now.
“In 2021, that was a crazy high, it’s just been confirmed again – but rounds are still a lot higher than they were in 2018-2019,” Smith said. “We’re really lucky in the UK to have SEIS and EIS schemes[tax-saving schemes for investors]because they bring in a lot of angel capital, then they bring in capital from funds that take advantage of the tax relief – there’s basically just more money around. I think inflation played a role as well. Therefore, in some cases the cost of building a startup has fallen, for example, access to certain equipment, while at the same time wages have increased significantly. So, in 2018-2019 startup founders may have paid themselves £30-40,000. [annually]Now founders are probably looking at being paid £60-70,000. So founders need more to live comfortably while building their company.
This, of course, follows the recruitment and building of groups that expect more money to cope with the rising cost of living in society. Enter into the mix, maybe a start-up company needs a little more runway to stand a chance of success, and all of this to explain the growing search volumes in the early seed stages.
I think Europe has probably learned a few lessons from the US, that it’s no use putting really little money into companies, giving them really short runways, putting unnecessary pressure on them and watching them fail. Smith said. “You want to give companies enough money to have 18 to 24 months, time to pivot, time to figure things out. This increases the chances of success.
Benefits
While not unique in the early-stage investment fray, Playfair has founder Federico Pirzio-Biroli providing all the capital and a sole partner (LP) who initially ran it as managing partner and LP. Smith stepped in for Federico for the second fund, and Federico has since moved to Kenya, where he has a more active role in terms of day-to-day involvement. And having one entity providing the capital greatly simplifies things from an investment and management perspective.
“It gives us a lot of benefits – it means I don’t spend 40-50% of my time raising money and I can spend my time working with our founders,” says Smith. “And I think it’s just a big vote of confidence.”
This “vote of confidence,” according to Smith, came from Playfair returning its initial funding entirely in cash, aided in part by multiple exits. That number is likely to get a big boost as Stripe prepares for a strong IPO — Playfair invested in the fintech giant in a Series C round in 2014 before narrowing its focus to pre-seed. And for the second fund, Smith said they hit somewhere in the 95th percentile range for TVPI (Total Value Paid in Capital).
According to Dealroom data, 19% of companies in the seed stage raise a Series A within 36 months. In contrast, according to Playfair, 75 percent of its Fund 2 investments have now raised Series A investment, and by 2022 alone, its portfolio companies have received $570 million in follow-on funding from various VCs.
“Success for our founders is fundamentally synonymous with success for us, bringing them from early seed to a successful Series A round,” Smith said.
And while Playfair typically passes the lead investor baton to another VC firm for subsequent rounds, it often leads again in the seed round, as well as participating in Series A rounds and, more rarely, later. In part, this is as much about showing confidence as providing capital, which is crucial when a startup is preparing to hit the market.
“I think that’s really important, because if you don’t have a pre-seed investor leading your seed, it can be a very difficult time to go to market, you may not have as many validation points to try and find. Another foreign investor,” Smith added.
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