$250k Seed Rounds

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Earlier today I had a debate with an investor in the startup community. He was arguing we need more angel investors that can help pre-revenue entrepreneurs put together $1 million investment rounds. I was arguing that the $700k – $1M seed rounds aren’t a good idea because the entrepreneur almost always spends all the money without making enough progress to raise the next round at a higher valuation leading to even more dilution. Raising a $1M seed round can work, but when entrepreneurs have money in the bank and believe they can raise more, the money gets spent quickly.

Instead of $1M seed rounds pre-revenue, my recommendation is for angel investors to put together small rounds in the $250k range. $250k is enough money for a small team of three people to work on finding product/market fit and building the start of a repeatable customer acquisition process over the course of 18-24 months. If product/market fit hasn’t been found at the end of that time period, it’s a good time to evaluate continuing forward with the startup or shutting it down.

Entrepreneurs would do well to think about smaller seed rounds and the benefits of a leaner team, less dilution, and more time to figure how to stay in the game long enough to win.

What else? What are your thoughts on $250k seed rounds?

Comments

7 responses to “$250k Seed Rounds”

June 12, 2014

Del Ross (@delross)

Makes sense. If failure is going to be the outcome, you want a FAST failure. Even so, the key would seem to be identification of milestones which, if met, would be rewarded with the next round.

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June 13, 2014

Mike Eckert

I agree w David. Depends on the product/service, but 250-500K to validate against key milestones is a wise target.. If this happens then a larger amount can be raised at a higher valuation.Much better for the entrepreneur/founders and for the investors.

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June 13, 2014

Vernon Niven (@vniven)

While I agree with your premise – keep things lean – what are your assumptions re. how that $250k would be spent?

If you budget $250k to carry 3 full time people over 18-24 months, each team member would receive about $30k/yr in income, including benefits. I’m assuming you’ll also need to pay for rent, SaaS services, hosting, furniture, laptops, etc.

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June 13, 2014

Tony Gaines (@tonygaines)

David…how much equity would your “team of 3” be expected to give up for the $250K?

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June 13, 2014

bcbeaird

It feels like you need double in SF what you need in Atlanta, heh. One thing I do miss about ATL is the pro-development environment. San Francisco just passed this absurd Proposition B that requires any new development on the waterfront to be put to vote – basically nothing over 40ft will be built on SF’s waterfront for the foreseeable future. While I do love the SF Bay Area in many ways, they are strangling the lower, middle, and arguably upper middle class with development restriction.

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June 13, 2014

jason

The 250K raise is the perfect entry point for a “ticket to the game”. This amount will give the entrepreneur the ability to prove the value of the business model. Here is the problem. The structured pool of angels, high net worth individuals, is virtually non-existent in Atlanta. It is a very difficult raise. I think it is one of the reason that Atl. is secondary to other cities being considered an entrepreneurial tech hub. This is the riskiest amount, stage to invest in a company. But it is also the point where a lot of entrepreneurs need the money, guidance to get over the hump.

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June 13, 2014

Adam

I agree. For B2B startups outside the Valley, anything over $300k is not needed and unnecessarily dilutive in the first round.

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