Iranian immigrant Pejman Nozad famously learned about investing in startups while selling Persian rugs to Silicon Valley’s top VCs such as Sequoia‘s Doug Leone.
In 2013, Nozad founded a fund with Mar Hershenson, a previous founder who holds a Ph.D. in electrical engineering from Stanford. Their firm, Pear VC, went on to be an early backer of DoorDash, Guardant Health, Gusto and Viz.ai.
Operating out of a former burger joint next to Stanford University, Pear VC still focuses on identifying strong founders and helping them launch startups.
Last month, Pear announced that it raised its fourth $432 million fund, a 270% step-up from its $160 million previous vehicle closed in 2019. “Ten years later, we reached our own product-market fit,” Nozad said about his firm, which now employs 26 professionals and runs several pre-seed programs, including PearX for AI, a recently announced AI boot camp.
PitchBook spoke with Nozad about Pear’s latest fundraise, seed valuations, helping portfolio companies survive the downturn and investing in AI. The following interview has been edited for length and clarity.
PitchBook: How were you able to almost triple the size of the fund at a time when many other VC firms are reducing it or keeping it steady?
Nozad: Our strategy hasn’t changed since day one. We want to build the best-performing seed fund that ever existed by partnering with entrepreneurs at the earliest stages—sometimes at the idea stage and even pre-idea—and then helping them to get to product-market fit.
I think LPs are interested in us because we have built a very differentiated firm with a strong track record, and after 10 years, we reached our own product-market fit.
We increased the fund size for two reasons: We are going to invest in more companies because we are seeing exceptional deal flow, and we are writing bigger checks at the seed rounds.
Did you add new LPs?
We’ve had amazing institutional investors from fund one, and they came back. But we also added new LPs. I learned during this fundraise that some of the world’s largest LPs are now interested in having a dedicated pre-seed and seed fund. They are realizing that the seed exposure they get through multistage firms is just not enough.
You said you’re writing bigger checks at seed. Are the sizes of seed rounds getting larger, or do you just want to own a bigger percentage of the company?
Many seed rounds are between $3 million to $5 million—some more and some less. Before, we were not able to consistently write two, three and even $4 million checks. Now we can. We can also invest in more companies—most particularly through PearX, our boot camp for pre-seed companies.
What about valuations—are they still increasing?
Let’s take AI out [of this question] because some of those companies get crazy valuations. Otherwise, I think valuations across the board have come down, but less so at the seed stage. The main difference is that we now have more time to get to know the founders.
How are you helping your existing portfolio companies that raised capital during the boom years of the pandemic? Valuations have reset significantly since then.
The challenge for companies that raised money in the last few years is: How do they survive?
It’s a lot harder to raise a Series A now. And if a company has negative unit economics, it’s almost impossible to raise it. One of the misconceptions is that if you have money for 18 to 24 months, you’re okay.
That’s wrong—you need to have positive unit economics no matter what category you’re in. We help our portfolio companies design a financial plan and a product roadmap that gets them to a place where they can raise additional capital.
Despite the massive valuations in AI, you are investing in it. How can you cut through the noise and hype in this sector?
We mapped out the whole world of AI: where it’s going and where we think there are opportunities.
We think it helps to get involved early in a company’s life. For example, we just gave a term sheet to a Stanford Ph.D. in AI. We don’t know what he wants to build; we’re exploring that together. We also just gave a term sheet to another AI team [of] three-time founders [who] have worked in Big Tech companies. For us, investing early could mean there’s a prototype and somebody is using it, or it is something that’s still in the ideation stage.
What areas besides AI are you still excited to back?
If you follow the trends, you don’t end up funding outliers. The AI revolution is real, but that doesn’t mean there are no innovations in other areas: fintech, climate tech, consumer and healthcare.
One of the areas we’re very excited about is biotech. I think given the advancement in biotech and AI, you’ll see the creation of some of the most iconic biotech companies in the next five to 10 years.
Featured image by Jenna O’Malley/PitchBook News
