The stages of early startup investment in Silicon Valley have gotten confusingly fragmented. From afar, there appears to be Angel, Pre-Seed, Seed, Post-Seed, Pre-Series A, and then finally the Series A. Contrast that with Japan, where there is essentially just Seed and Series A. If anything is raised in between, we usually just call it a “bridge.” But these days, the “Pre-Series A” is emerging.
In a lot of ways, the Pre-Series A is just a euphemism for a bridge round. Companies that couldn’t quite get to Series A level metrics will raise a smaller round as a buffer to hit their numbers before they go for the A. But in Japan, I think there is more to it than that. While Seed rounds in Japan are getting bigger, they are still typically just a few $100K. These small rounds may have been sufficient for younger teams with low burn rates building primarily consumer apps, but they aren’t enough for the recent teams we are seeing. These days, more experienced teams tackling traditional, highly regulated industries such as financial services, insurance, legal, or healthcare are emerging. These industries can be far more capital intensive to penetrate.
For many of these pursuits, they need to hire experienced talent that deeply understand their industry’s pain points, as well as have the credibility and the network to hire other team members and acquire customers. This kind of top talent rightfully costs more, therefore higher burn rates are expected. Getting their initial traction can also take longer, as it can take much more time to convince potential customers in conservative industries to take a risk on a startup. And in some cases, licenses are needed. Our insurance-tech portfolio company JustinCase, for example, spent 1.5 years to obtain their license before raising a Pre-Series A from Globis Capital.
These teams inevitably have higher burn rates and take longer to get traction. So while they may raise a Seed round of about $500K – $600K, these days they will also raise a Pre-Series A of $1m – $2m before raising a larger Series A. As the Japan startup ecosystem evolves, I expect to see more of these Pre-Series As, as well as more stage fragmentation before the Series A to buy time to overcome these hurdles.
This is not a bad thing. SmartHR and Kakehashi, two of our best companies, both raised Pre-Series As. While these hurdles may take time to overcome, because they can be so onerous there are few players attempting to conquer them. And once you break through, they create high entry barriers for others to follow. So for the right startup with patient founders and investors, they present big opportunities.