Death to the $700k Seed Round

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The $700k seed round, as it’s currently known today, needs to die. Here’s a common scenario: entrepreneurs scrape together $50k from friends and family, build a prototype, sign three customers or LOIs that are from warm intros, use the modest progress to raise a $700k seed round, spend all the money in 12 months, still don’t have product/market fit or a repeatable customer acquisition process, and now can’t raise more money resulting in a zombie startup. This happens again and again.

Here’s a modest proposal for how to change it:

Raise $50k to build the prototype and get the first three customers or LOIs
Raise $250k and make it last 24 months
– Forced to make the money last longer with a smaller team acknowledging that throwing more people at it doesn’t accelerate the time it takes to figure things out (much like The Mythical Man-Month for startups)
– More time to find product/market fit and a repeatable customer acquisition process
– Lower burn rate when/if it’s time to raise more money resulting in more flexibility
– Decreased dilution since less money is raised at the same pre-money valuation
Raise more money or continue to grow organically from a position of strength

The two main differences from the current model are that it’s planned to take twice as long and it’ll cost less than half as much each year to figure out how to make things work. This leaner, longer timeline approach increases the likelihood of startup success.

What else? What are your thoughts on death to the $700k seed round and this alternative proposal for a smaller seed round designed to last longer?

Comments

6 responses to “Death to the $700k Seed Round”

August 23, 2012

Benjamin

It really is a matter of who can get things done in a small time window in an efficient manner, meanwhile acquiring a solid customer base. Provided that your product is interesting…

And that’s difficult.

Lasting longer is good. It gives you more constraints, forcing you to take decisions and act differently then if you had loads of money.

But if your product isn’t just the thing, will you be able to take the right decisions ? TIme is just as valuable as money, spending it the right way is just as important.

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August 23, 2012

Andy Powell (@apowellgt)

Who leads the change?

If investors aren’t interested in seed deals that result in owning 10-15% of the startup (knowing that a Series A could dilute them into single digits), then founders won’t pitch those deals. They’ll go for a big seed round (and potentially flame out) or continue bootstrapping.

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August 23, 2012

Sanford

No way I’d invest in a $700,000 round ever again, unless the series A investors owned 51% of the company. I learned this lesson the hard way. by the way, $700,000 is dead on. I raised $625,000 in a series A back in 2004.

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August 23, 2012

CommunitySEO (@CommSEO)

24 months is a very long time. A lot can change.

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August 23, 2012

waitforthewolf

Raised $500k for our seed round (founders, friends, and family).. made lots of mistakes but it also lasted us 18 months or so… its hard to say what is right and what is wrong when it comes to raising $$ from investors… look at what many of the current accelerator participants are doing for their initial seed rounds (excluding accelerator investments).. raising $700k-1M with basically 0 market acceptance.. my personal thought is that you are going to make mistakes regardless of how much $$ you raise BUT, if you only raise a little you will have to thoroughly think about each decision before you make a move..

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August 24, 2012

Adam

A more apt title might be “Keep monthly burn below $20k/month before product-market fit.”

$20k/month in revenue + $40k/month in expenses is about right for an aggressive, early-stage company. Resources to get stuff done. Constrained enough to not follow dead ends.

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