Why Now Is the Best Time Ever to Raise Money

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We are in a special time in startups.

If you’re like me, you see everyone talking about how it applies to launching and building a company, but it’s also trickling down into fundraising.

Over the past few months, I've been thinking a lot about "seed-strapping" and how it’s becoming acceptable to do the one-and-done round of funding.

The traditional model of raising a seed round, then Series A, then Series B (and so on) has dominated startup culture, but what if you could raise just once and build a profitable, growing business on your terms? What if you could maintain control while still getting the benefits of outside capital?

You can! Let’s dive in.

What is seed-strapping?

Seed-strapping is raising just one round of funding and building a sustainable, profitable business that never needs to raise again.

Here’s how a typical VC-backed company would approach fundraising:

Seed round

• $3M raise

• $12M valuation

• $250K ARR

• 48x revenue multiple

From that seed round, the company would focus on reaching $1-1.5M ARR so they can raise a series A 👇🏾

Series A

• $10M raise

• $50M valuation

• $1M ARR

• 50x revenue multiple

After the Series A, the goal would be $5M in ARR so that the company can raise a Series B, and so on. Everything is based on hyper-growth. In the past, to reach each of these valuations, you had to scale by hiring more people and investing more into marketing. But with the outbreak of AI, it’s possible to do much more with much less.

Examples

Zapier

According to reports, the automation tool Zapier raised between $12M and $15M in its initial seed round, and now it's valued at over $5B. They are leveraging AI within their product and growing rapidly, despite only having raised what they did.

Descript

Descript is an AI-powered video editing app. The company took on a $500K seed investment and grew to $5M in ARR, before opting to raise additional funding.

The key here is that they decided to do so at $5 million in ARR. I can only imagine that they were very profitable and decided to take the venture capital money to grow faster than their competitors, who were likely encroaching on their space.

VC has lowkey been ripe for seed-strapping this whole time

Venture capital runs on patterns, and some of those patterns—the use of SAFEs and a tendency to not give up board seats—have laid the foundation for seed-strapping without folks even realizing it

SAFEs don’t auto-convert

99% of seed-stage deals are done on SAFEs. A SAFE (Simple Agreement for Future Equity) is an investment contract that gives investors the right to get shares in your company in the future. Simply put, people invest now for the right to equity when you raise another round.

In the past, the idea that the equity that didn't auto-convert was fine because most venture-backed companies haven’t thought about becoming profitable with their first raise. The goal was to grow as quickly as possible; there was a mutual understanding that the founder would raise additional funding after the seed round. Therefore, anyone who invested early would almost always have their investment turned into equity.

But now that seed-strapping is on the rise, that conversion is less certain.

Theoretically, a founder could raise $1M in a seed round at a $5M valuation. On paper, he would be diluted 20%. However, if he doesn't raise again, that equity never converts. In this case, he basically got free money to build his company.

I'll caveat this by saying it's 100% shady and not something I recommend to any founder. Anyone who believes in you enough to invest in your company deserves ownership if you're willing to take it. But it does highlight an important fact: seed-strapping gives almost 100% of the power to the founders.

No board seats

If you don't give up board seats in your first round (which you probably won't and shouldn't), and the equity doesn't convert, you call the shots. You don't have to answer to board members who push for unsustainable growth targets or suggest strategies that don't align with your vision for building the business.

Early-stage investors expect bets to go to Zero

Most early-stage investors expect their investments to go to zero.

A VC who has a $10M fund would anticipate the following returns:

• 8 investments go to zero

• 1 investment gives him his money back

• 1 investment returns the fund

Focus on the eight investments that go to zero. She’s investing KNOWING that most of the companies will not exist in the next 3-5 years.

That's valuable for founders because if you build a profitable business and are growing, but not at a venture scale, many investors will write you off.

While being written off might not sound like a good thing, it means that the often-discussed pressure from VCs isn't there because they’ve given up on you. You're not getting their support, but you're also not getting them breathing down your neck.

How Founders Can Take Advantage

When you seed-strap well, there are two scenarios:

Worst case: you build a profitable business

I would describe that as a "worst-case" because I think that's very specifically where Chezie is at right now. We're profitable, and although we're not growing as quickly as I would like, we can continue to exist. My sister and I have the option to sell the business, continue running it, try to grow it a little more, take dividends for ourselves, and/or distribute dividends to our investors.

We have a lot of options.

Note: I'm choosing to call this the worst-case scenario because I refuse to acknowledge the possibility of someone building a company and then shutting it down entirely. We took money from friends and family, and I hate the idea of losing their money.

Best case: you build a venture-backable business with optionality

The best-case scenario is that we continue to grow, reaching $1-2 million in ARR. We're super profitable on lean and still have growth potential. At this point, like Descript mentioned above, we would have optionality.

We can raise more money. We can continue growing at our current rate. The decision is ours because we’ve seed-strapped our way into complete control of the company.

The Bottom Line

Raising venture capital today offers you a safety net without requiring you to give up control of your destiny. It's money to pay yourself from the jump, hire developers, bring on a contract marketer or designer, experiment with different GTM channels, and build a real business. You still have to be cautious and treat that money as the only money you'll ever raise (because it might be), but building a company is much easier with $1M in the bank.

Take advantage of this moment. If you have traction and see a path to profitability, strongly consider raising capital right now. Just remember to build as if this is the only money you'll ever raise – because with the right approach, it can be.

If you’re a first-time founder and you’re thinking about raising, reply to this email. Let’s talk!