Do investors ever invest in a pre-revenue and pre-product company?
All the time!
Historically (i.e. before ~2006) this was the explicit role of angel investors in the startup financing ecosystem. Rarely, in fact, would angel investors have an opportunity to invest after a product and revenue were in place.
For consumer internet and SaaS enterprise deals, a lot has changed in the last few years. Technology has moved on, and for a host of reasons a lot more can be accomplished with 1-2 engineers and little or no cash. Now angel investors expect to see product and customers before writing a check, and to an extent, founders expect to own more of the company after that first money comes in. Everybody wins.
As a general rule today, angel investors are expecting to see a product, and customers (or at least users) in place before they invest.
However, there is still a role for angel (and, in fact, VC) pre-product:
If superstar proven entrepreneurs want to raise money before building product, they can and will.
First-time entrepreneurs who literally have no money — can’t afford to go 6 months without salary or even pay for EC2 — will raise angel money as it was classically done, from FFF (friends, family & fools).
People who dream big and take on really hard, complex problems that require a lot of intellectual property to be built. (Ideally combined with category 1 above)
Outside SaaS/consumer internet, sectors such as hardware/communications equipment obviously require investment pre-product.
I personally find the third category super interesting. Today we are seeing a ton of new companies that want to build something pretty simple, where the venture risk is all about whether consumers will like it, and whether you can shout loud enough above the noise for anybody to even know that your new product exists. While there are some great businesses in that, it’s fun also to invest in some companies trying to do things that are technically difficult and solve a big customer pain point, and will surely get adopted if they are successful.
This question was asked to me directly on Quora, and I thought I would copy my answer here on the blog. You can view the thread on Quora as well here.