Treat seed stage investments as a luxury good

As late as August and September of last year, the advice I got as an early-stage enterpreneur (<$1mm ARR) was that investors were chasing yield and pulling the trigger earlier and earlier. There had never been a better time to be a pre-seed company! Investors needed higher returns and getting in early was their only option! They needed me more than I needed them!

The doom and gloom was all about the Series A Crunch, and I would cross that bridge when I got to it.

Today, the data tell a different story.

The first quarter in 2016 has been the hardest quarter to raise a seed round in the past five years.

Meanwhile, Series A raises ($3mm — $10 mm) stabilized. Those raising at that level were no worse off in Q1 2016 than they were the quarter before.The message seems to be that if you can prove out a concept and begin to generate revenue, you stand a decent chance of getting ~$3–10mm to scale your business. Easier said than done, but that’s a topic for another post.

Before product-market fit, the landscape has shifted. Bootstrappers are now heroes — a fact that VCs are even starting to recognize. Fred Wilson smartly points out that many of the best companies were originally “side projects” (the classical form of bootstrapping).

Granted, some of these data are cyclical, but I still think that these numbers should cause us to ask questions like:

Why do seed stage investors exist? Should they?
Who are seed stage investors? Who should they be?

I don’t think that seed stage investors (often angels) should go away, but I do think that the funding they provide should be utilized only when the timing and terms are just right. And I think that entrepreneurs should be more selective about who they let in on very early rounds.

I recently spoke to an entrepreneur who is a bootstrapping poster boy. To this point, he has not raised outside capital. He has the luxury of saying things like, “I never pitch and I never make a deck. I like to keep myself in a position of power.” He deserves to be able to say and do these things because he’s awesome and super smart and has a great concept and a track record, but his statement still says something about fundraising. The only reason he is raising money at all is that he’s getting everything he wants in order to do so. For him, it’s a luxury that he can afford. In his words, “It’s cheap and it gives me options.”

He is playing this game like it should be played. For him, a seed stage investment (he needs less than $1mm) is a luxury good. He can pick and choose the investors who are best positioned to help him and turn away all the others.

Too many entrepreneurs (myself included!) began to rely on seed stage funding. We raised money from the wrong people at the wrong terms and at the wrong time (before we should have). We lacked patience and, given the opportunity due to right market conditions, we commoditized seed funding. Regardless of where we are in the funding cycle, we should learn from this. Seed stage investments should be treated like a luxury good. Before raising money, we need more testing and more time — even if it means keeping our day jobs for a little while longer.