Why I Skipped Raising a Seed Round

And, how it worked out.

Hello 👋

Martin here. Welcome to another edition of Founders’ Hustle!

I produce content about entrepreneurship and building startups.

Today, I’m sharing insight into a pivotal moment I experienced at my second startup. Do we raise a seed round, or not?

Here’s the thought process that went into that decision. And, how it worked out.

Raising a seed round is part of the established narrative for early-stage startups.

It feels like the beaten path. That you are an outlier or “unendorsed” in your mission by not going down that route.

This is partly because fundraising announcements make juicy headlines.

The opposite is not so true. Well, until a “bootstrapped” business grows to the size of MailChimp with $700m+ in revenue.

Then, it becomes a story.

At my second startup, which was a B2B AdTech business, we quickly reached a “crossroads” moment.

It came to a point where we had to make a quick decision about whether to raise a seed round or push on under “our own steam”.

So, I sat down with my fellow cofounders to weigh up the pros and cons.

Here’s how that went down.

As a little background, over the course of the previous year we had found product-market fit and grown revenue from $73.20 to $17,448.11 per day.

Cash was building up on our balance sheet quickly and operating costs were minimal — four salaries, servers, a small office.

It was clear we didn’t “need to” raise.

All of the immediate cash requirements needed to grow were funded by customers, as opposed to investors.

Plus, we had fantastic momentum. All pistons were firing in perfect synchronization for growth — sales, tech, product, support, operations, etc.

I had concerns going into “fundraising mode” for months would disrupt this.

Despite our traction level in terms of customers and revenue, which was certainly conducive with investor expectations at the seed level, questions surfaced as to how “investable” our company was.

We had discovered a way to monetize a relatively unsexy niche in the market that no one was paying attention too, or really understood.

The sustainability of our product was not clear from a technical perspective, and, the longterm viability of the business model was largely reliant upon two third-party browser extensions.

Also, there was no “grand vision” at this point. So, the conversation started leaning towards skipping a seed round.

This was cemented by other circumstantial factors.

de facto absence of competition gave us a false sense of comfort about near term outlook— the next year or so.

Up until that point we were approaching customers and signing deals quickly. They had no real competing options to review and the proposal was attractive in that our offering generated “found revenue”.

We knew competitors would start to emerge if we continued on our current trajectory. But, given the fact we were flying “under the radar” in a little-spoken of niche, we figured time and momentum were on our side.

My team was not romantically attached to the idea of “bootstrapping”. We just wanted to grow as fast as possible.

That incepted a question. If we don’t raise, will we grow slower?

If the answer was no, we could avoid dilution. In theory, we could “skip” raising a seed round and go straight to Series A.

At that point, we figured, the robustness of our technology and the sustainability of our business model would be convincing, a credible “grand vision” would have started to emerge, and we’d have “proven” ourselves as operators.

So, I started to answer the question by mapping out the coming year. What does our pathway to a Series A round look like and what do we need to support this next phase of growth?

We used traction up until that moment, which was increasing exponentially, to model customer and revenue growth going forward.

This provided a template to calculate the inputs we’d need to support it — hires, marketing, commercial space, servers, licensing, consultancy, travel, professional fees, etc.

One thing became immediately clear.

There was plenty of capital available to finance this plan internally. This was based off a combination of the balance sheet and ongoing cashflows.

It gave us the final conviction we needed to “skip” our seed.

But, was it the right decision?

A few months after making the call to “bootstrap” to Series A, our plans were turned upside down unexpectedly.

The “little-known” niche market we had been operating in became a hot topic in the industry.

It simply “blew up overnight” and transcended into a pressing subject of industry media, conferences, and meetings.

The problem we were working on went from “never heard of it” to a top concern of most target customers we were speaking with.

It was a shockingly fast transition.

On the surface, this was a good thing. For a while, we got meetings even more easily and continued to grow our client base.

But, as the year unrolled, the macro environment and industry “conversation” around our niche quickly started to change.

Whereas we had a one-dimensional product helping to solve a specific issue, target customers started to think more holistically about what caused the issue in the first place. And, they wanted a more sophisticated “grand vision” strategy to tackle it.

Competitors emerged numerously and expediently. One was launched by veteran founders — who picked up $10m in funding “straight off the bat” for their “grand vision” and no material product to speak of.

We immediately found ourselves massively outgunned on product and technical staff, PR/marketing, and network. They had an eight-figure war chest and my fledgling startup was competing back with EBITDA—which was roughly around $2.5m in investment over the same time period.

To fund our own “grand vision” solution, we had to continue pushing our one-dimensional product onto the marketplace.

This gradually pushed us out to the fringes as a “less sophisticated” supplier. Clients and revenue veered downwards.

This put us in a difficult position. With declining revenue and no “grand vision” traction, the opportunity to fundraise dried up (we tried).

After a year, work on the “grand vision” was suspended due to financial inviability. We couldn’t afford it.

To survive we doubled down on our core, original product, and carved out a sustainable but niche customer base—even regaining some ground.

Then, the business was acquired.

This experience taught me that small and otherwise “unheard of” niches can blow up overnight.

Don’t get comfortable.

It’s clear that if we had raised a seed round at the moment we had chosen not to, we could have acted more strategically in terms of the “big picture” sooner. Plus, leveled up our game and built more defensibility into our mission when it came to the inevitable competition that would emerge.

Takeaway: If raising capital is on your roadmap, lock it down when you can, because the opportunity may pass.

Concerns over how “investable” our startup was were relevant to consider, but, we probably overweighted investor expectations on this.

It was seed stage, where important questions are often unanswered and mostly theoretical. We were incorrectly treating it more like a Series A from the standpoint of what progress investors like to see.

Raising would have provided a ton more runway to pursue the “grand vision” and pivot once or twice if it didn’t work out. That breathing space can make all the difference.

Speculating whether or not we would have been “net” better off raising a seed round is not possible. There are just too many variables.

As it turns out, there weren't really any “big winners” that emerged from pursuing their original strategies. We would’ve had to pivot into something quite different in order to have built a huge company.

But, raising a seed round would’ve given more opportunity to “swing for the fences”, for sure.

Until next time,

Martin 👋

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