My favorite model is “seed-strapped” (a play on bootstrapped).
1) Raise $1-2 million (ideally from multiple small investors rather than 1 big investor, many smaller investors increases your control since every investor alone is too small to make serious demands about how you should run your business)
2) use the $1-2 mill to find product market fit and (more importantly) achieve profitability (or be cash flow neutral) within 12-18 months. If you can’t reach profitability, close your doors and start another company with a new idea rather than raising a 2nd VC round (fail fast)
3) reinvest new sales into growth, and don’t raise another round of capital even if people are offering you lots of money
Some advantages:
- Fail fast. It’s better to be resource constrained in the early days so that you don’t spend many years chasing an idea “just because you can afford to” when it’s destined to fail
- It lowers the valuation where selling your company will be a profitable transaction for founders & employees. If you raise $2m you can sell for $8m and make a good return for founders/employees, whereas if you raise $20 million you’ll never be able to sell your company for less than $20m, and you now need to sell for $25m+ in order to see any meaningful as a founder
- Without huge investors, you have a lot of latitude to operate your business however you want. When you raise $20m+, you basically become an employee of your investors
- You typically retain full board control if only raising $1-2 million, this amount is low enough that the VCs probably won’t even need or want a board seat
Disadvantages:
- You’ll get less support from your investors because they invested less. The less money VCs invest, the less attention they give you. This can be a downside if you actively want VC help (which personally I find overrated, very few VCs actually add value beyond the money invested, most VCs have never actually run a company and have only watched from the sidelines)
—
TLDR: raising low single digit millions in seed money to get going in the beginning is rarely a bad idea. Raising too much money too soon (especially before reaching PMF/profitability) severely limits options for a future exit and potentially creates difficult dynamics with VCs to deal with, if you accept a lot of money from a VC most will want you to do whatever necessary for them to get their money back.
VC isn’t bad, there’s a time and place for VC. But it’s 100% a game.
You must know the rules of the game before playing.
Not all VCs operate on the "we just need 1 unicorn" model. Some VCs are a bit more conservative and would be happy with a 4-5x return on their money.
What's nice about the seed-strapped model is primarily optionality (which is good for you and also good for seed investors). Meaning you can start out with a seed-strapped mentality and flip to a "Big VC" mentality later on IF it makes sense. IMO during seed stage, most founders won't know upfront whether they would benefit from a huge capital injection or not, so IMO it's best to start with raising a small amount and then raising larger amounts later if/when you want to.
Again, VC is 100% a game. You need to know how the game is played in order to know whether you want to play it in the first place. So many founders don't understand VC/Founder dynamics, especially first time founders. Starting with a seed-strapped model gets your feet wet in the VC game without diving head first.
1) Raise $1-2 million (ideally from multiple small investors rather than 1 big investor, many smaller investors increases your control since every investor alone is too small to make serious demands about how you should run your business)
2) use the $1-2 mill to find product market fit and (more importantly) achieve profitability (or be cash flow neutral) within 12-18 months. If you can’t reach profitability, close your doors and start another company with a new idea rather than raising a 2nd VC round (fail fast)
3) reinvest new sales into growth, and don’t raise another round of capital even if people are offering you lots of money
Some advantages:
- Fail fast. It’s better to be resource constrained in the early days so that you don’t spend many years chasing an idea “just because you can afford to” when it’s destined to fail
- It lowers the valuation where selling your company will be a profitable transaction for founders & employees. If you raise $2m you can sell for $8m and make a good return for founders/employees, whereas if you raise $20 million you’ll never be able to sell your company for less than $20m, and you now need to sell for $25m+ in order to see any meaningful as a founder
- Without huge investors, you have a lot of latitude to operate your business however you want. When you raise $20m+, you basically become an employee of your investors
- You typically retain full board control if only raising $1-2 million, this amount is low enough that the VCs probably won’t even need or want a board seat
Disadvantages:
- You’ll get less support from your investors because they invested less. The less money VCs invest, the less attention they give you. This can be a downside if you actively want VC help (which personally I find overrated, very few VCs actually add value beyond the money invested, most VCs have never actually run a company and have only watched from the sidelines)
—
TLDR: raising low single digit millions in seed money to get going in the beginning is rarely a bad idea. Raising too much money too soon (especially before reaching PMF/profitability) severely limits options for a future exit and potentially creates difficult dynamics with VCs to deal with, if you accept a lot of money from a VC most will want you to do whatever necessary for them to get their money back.
VC isn’t bad, there’s a time and place for VC. But it’s 100% a game.
You must know the rules of the game before playing.