💰 The One-And-Done Round of Funding

Toby Egbuna
June 19th, 2024

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Last week, I hosted an hour-long office hours session for founders of a mental health accelerator.

Three of the four founders who joined the office hours had already raised venture capital. They had teams of 5-10 (an entirely different topic but one I’ll get into in a future post), and they ranged from being pre-product to doing around $100k ARR.

What was most interesting is that all three of them spoke about their plans for their next round of funding.

I couldn’t help but ask myself: why?

Why were these founders, who are building some excellent companies to increase access to mental health services, already thinking about raising another round of capital?

It’s because startup funding doesn’t work for 99% of founders, and we need a new route.

I call that new route a one-and-done round of funding.

Bootstrapping vs. raising VC

Until now, there are two accepted routes to fund your startup:

1. Bootstrapping

2. Raising venture capital

Sure, there are other paths—loans, grants, friends, and family— but the vast majority of startups (at least the ones that you hear about) decide to either never raise a dime of outside capital or jump on the VC hamster wheel and make plans for multiple rounds of funding.

Here’s why neither path works:

Bootstrapping

Bootstrapping sounds GREAT on paper. You keep 100% control of your company. You build the type of company you want, whether that’s a lifestyle business or a company that can one day go public. You get to laugh at the founders who needed VC money to turn their ideas into a reality while you could do it alone.

But there’s a dark side to bootstrapping that most underrepresented founders cannot afford to take on. Emphasis on afford.

Bootstrapping means paying for all initial startup costs with your own money.

When we started Chezie, we were bootstrapped for the first year (excluding some grant money we won). My sister and I discussed it and agreed that I would first go full-time on the company in exchange for a more significant equity ownership. For six months, I lived off of savings and relied on our grant money to keep the business afloat.

At first, it was cute. I was the young, hungry founder living off savings and trying to make a dream a reality. But as those savings dwindled, I got worried. I spent more and more time worrying about how long I could keep it up. That worrying bled into the company. I started to miss customer calls and need to be faster to respond to emails.

Luckily for me, we won some more grant funding and grew the business to ~$120k ARR, which was enough to pay myself a living wage and to bring my sister, Dumebi, on full-time as well.

But the point is, those six months were tough. We can downplay it and call it the plight of a founder, but it’s an entirely different thing when you’re living it, and not all founders can afford to go that long (or longer) living on their savings.

Venture capital

As I write this, I sound very anti-VC despite starting this newsletter to help founders secure venture capital money. Anywho.

On the other hand, venture capital does not come with the financial stresses that bootstrapping does. You get to pay yourself a living wage immediately, you have money to hire a team and invest in different strategies to grow your business, and you immediately get access to a group of people who are invested in your winning: your investors.

But there’s, of course, a downside.

There’s the downside of losing equity and potentially controlling your business. This isn’t to say that taking VC immediately means you give up control of your company, but taking even a round of Seed funding usually comes with an implicit understanding that you are jumping on the hamster wheel and plan to raise a Series A, B, C, D, etc.

Additionally, raising venture capital usually means that founders get lazy and inefficient. Let’s return to the three founders from the above-mentioned accelerator program. Please explain why some have as many as 10 employees with less than $100k ARR.

Venture capital removes constraints from a business, and every business needs constraints. Otherwise, all you know is limitless resources. When things get hard, rather than figuring out how to make it work, you assume you’ll be able to raise more money and keep the train moving.

As I’ve said before, venture capital is right for a very select group of businesses. For the large majority of us, it’s not the right move.

So, what’s left?

The One-and-Done round of funding

The one-and-done round of funding is exactly what it sounds like. Founders raise a single round of capital that’s enough to cover the basics:

• A living salary - This is up to the founder to decide, but somewhere between $50-80k is safe.

• Essential tools - Notion, Slack, Zapier, ActiveCampaign, etc.

• Hiring - Don’t go overboard, but use the money to hire a small team of part-time contractors and/or 1-2 full-time people to spread the work around.

The idea is this: You take this initial round of funding and use it as an 18-24-month runway. Keep expenses as low as possible and pour all your energy into finding product-market fit (PMF) and growing sales. Eventually, you’ll hit profitability, your business will be self-sustaining, and you won’t need any more funding. As the founder, you own 80-90% of the business.

Worst case? The founder grows the business to $1-5M in revenue and receives a yearly salary and bonus. Investors get bought out for 2-3x their investment, or they get dividends.

The best case is that the founders quickly grow the company and find PMF. The company grows quickly, revenue increases and the founder can take on additional funding or continue to grow without it.

I don’t know about you, but that sounds like a pretty good deal to me 🤝🏾.

We have a long way to go before this becomes the norm

The biggest hurdle is mindset. Many founders and investors are entrenched in one of the above-mentioned funding models.

To me, it starts with the founders. Venture capitalists have made it their job to invest in companies with unicorn potential, and there’s nothing wrong with targeting those types of businesses. The problem is that too many founders fall into the trap of thinking that their business needs to raise venture capital to succeed.

The one-and-done model isn’t sexy, but it’s the best path forward for most startup founders. Not every company can be a unicorn, and that’s okay. The sooner a founder understands his company’s ceiling, the sooner he can understand how to fund it.

I bet that it’ll only take one round.