PROPTECH
2 Min Read
Bread's Grain
We started Bread on the promise of bringing better businesses into the world. We're hands-on operators and have spent the past two years supporting our unique pipeline of founders through our Agency.
We only invest in industries with potential for foundational change through technology investment and founders who find magic in the mundane.
The Landscape
After the 2021-2023 correction, valuations have rationalized. Emergent cross-sector technologies in AI and computing are re-crafting enterprise, consumer, and climate markets simultaneously. Industry specific funds will swing and miss because impacts of emergent technology are variant and unexpected. Over this period, the Bread team has been consulting with founders, helping them bring their businesses to market, mostly in an effort to help raise their A rounds. Our experience as operators and feedback we've received from founders over the past two years is the basis for our decision to become capital providers. Here's what we've learned:
Seed stage remains a proven asset class.
The reset is yielding a less busy and confusing pre-seed landscape. Investing at pre-seed is an asset class that works regardless of cyclical trends and enables positive returns on reasonable outcomes.
The bar for raising later rounds is higher.
Most investors hibernated over the past few years to endure the low-growth economic environment and shake out of under-performing funds[1]. As a result, series-A conversions have decreased drastically for non "AI first" companies—we're seeing numbers ranging from 5-10%. We think this will increase in the next year but not without a revision to the definition of a fund-able series-A business.
Why pre-seed founders fail to get to market
Through our work with founders, we've seen great ones struggle and they are typically:
Hyper technical people over building their product
Hyper technical people that don't really understand their customers
Non-technical people who struggle to make technology investments
Non-technical people who are struggling to scale their operation
Technical / Non-technical people with no knack for building a reproducible sales motion
Opportunistic people that just want to do something cool
It's often not a deficiency in ability, but a tendency to operate on default settings. And this is ok. But it results in overcorrection.
The mistakes we see are:
Hiring too senior a team at an early stage — these are costly and the work is often too tactical for their liking
Avoiding or delegating speaking to customers — this is a founder's job
Lack of ROI definition for technology investments — tech investment needs explicit tie to revenue or cost reduction
Averting significant changes to pricing / rev model — pricing can unlock scale and clarify an ICP!
Chasing newer, cooler, opportunities rather than core business — you will always be a hype machine
Under investing in brand identity and market positioning
Overspending on frivolous, low-impact projects
An inability to hire in disciplines they lack familiarity in
The lack in diligence
Most seed-stage firms can't afford to go deep enough to truly de-risk an investment. It's a function of time, not ability. And so a market study, a handful of founder meetings, and thin pipeline reviews are what, for the most part, create their picture for investment.
Based on what we've seen, most investors focus on two things:
Belief in this market
Belief in the founders
... where's the assessment on execution? Seed investments are always going to be investments in people. But personality, while a valid assessment for one's ability to sell, isn't necessarily emblematic of one's ability to execute. Good personalities attract opportunity. Good operators turn opportunities into enduring businesses.
An AI spread
We've been on ground floor not only witnessing how LLMs are reshaping every industry, but actually helping founders build these products. Less technical GPs are forced to swing for the fences with all-in AI strategies. But the "AI first" market is saturated, filled with chat-bots and crappy content generators with no moats, flimsy ARR, and no clarity for LPs on exit potential. This is gambling. Not investment.
Opportunity
01 — Invest in boring magic
We see opportunity in products built for industries that have been under invested in, or historically resistant to technological change. These are products that have large impacts on customers experiences, but low visibility as fixable problems.
We call these types of products boring magic.
With the advent of LLMs and increased commodification of software development. Innovations in software are going to be innovations in process best developed by more experienced individuals with strong opinions on how to reshape their industry.
Examples of industries we have been exploring lately include:
Death
Lawn care
Specialty insurance
Non-profit finance
These are extraordinarily large industries with virtually non-existent technology stacks. Many of the processes and tools in these spaces have not benefited from the singular progress of technology over the past 5 years. They’re historically resistant to change. because the leaders in these spaces rely on locality, relationships, or engrained industry processes. And while that makes them challenging markets, founders who win in these spaces, typically win big.
We also keep a close eye on industries we’ve operated in before:
Dev tools
Private Equity
Healthcare
Proptech
02 — De-risk founders through operational diligence
Determining which founders have what it takes should be a robust evaluation process, focused on theory and execution.
Early evaluations are evaluations in character and in execution. It requires a team of diverse operators to properly evaluate a team's strengths and weaknesses.
To optimize for efficiency, deeper diligence should be segmented in phases and involve functional interaction with founders. These interactions reveal how founders actually work, where most VCs are only exposed to how they present.
Strategic Diligence:
Pitch meetings Evaluating the founders ability to communicate their vision, their values, and how they perceive their market.
Market research Does the market fit our thesis? Is their room for fundamental change?
Founder research Are they humble? Are focused on the right things?
Product research Does is work? Is the approach validated by our market understanding?
Operational Diligence:
Tech assessment 5 day sprint with development team to tackle underlying architectural challenges (Ben)
Growth assessment 5 day go-to-market session to revamp product marketing and analytics tooling (Brian)
Brand assessment 5 day brand workshop to understand the customer, define a brand message and design a more robust brand identity (Rob)
Special Diligence:
10 day special project sprint (Ben, Brian, Rob) Work directly with their team to design or build a tool for their market or internal operations
03 — Meet founders' demand for operational support
Most founders haven't run a business before. They know they don't know things. The best ones are eager to learn and shamelessly ask for support—this holds especially true for technical founders.
We’ve spent the past two years successfully providing the kind of support founders need:
Getting to profitability early, reduce pressures to raise subsequent rounds of capital
Hiring team members in areas they’re not experts in
Avoiding critical stack choices they slow pace of development
Achieving higher brand value through considered brand design
What’s more is that, we've been asked on multiple occasions, before becoming a venture firm to join boards, or invest directly.
04 — Profit driven investment
We’re obsessive about profitability in an effort to reduce the amount of rounds a founder needs to raise. We want to minimize dilution to the greatest extent possible.
05 — Increase series-A conversion rates
Over the past two years, founders without a .ai domain have had to readjust their expectations for follow-on investment. Their peers have struggled.
Through our work with them, we've been able to help 80% of the founders get follow-on capital.
We don't expect 80% to be a benchmark, it's a high bar. But there's no doubt that direct operational support drives this number up from the steep decline we've seen otherwise.
06 — Founder to founder support — outside of board meetings
Tactical support leads to more deals won, and voluntary board seats.
Being a founder is a lonely journey. Investors capable of providing thought partnership turns strategic participation from a requirement, to a default setting.
In speaking with our network about past investment experience, almost all of them shared their unease around asking investors for help. They're concerned about exposing uncertainty or poor performance. Information provided at board meetings ends up sugar coated and it creates an environment laden with disillusionment, rather than support.
Investors who can provide direct operational support make oversharing the default.
We've seen this dynamic be most impactful when a founder feels compelled to pivot.
Momentum can force founders down a path of mediocrity, simply because they're too nervous about losing investor confidence through a drastic shift in direction.
Investors should be part of those decisions, rather than benevolent check writers. They should be helping founders define their metrics for performance with ultimate goal of adding value to the world, not just higher valuations.
07 — Redefine venture as a service at the seed-stage
At its core, a venture fund is a services business.
We exist to help founders avoid common pitfalls at the early stages of their business.
Good service providers:
Put their clients before everything
Build tooling to automate repetitive functions
Build products to better service their clients
Are sticklers about good cashflows
Recognize their value is in their brand
Know their brand is a function of their people
Funds that fail, are funds that don't understand this at a fundamental level.
