Why, if You Can, You Should Raise a $5–8mm Seed Round in Deep Tech

Reflections on the Seed 1+2 vs. larger seed round strategy

I am sharing observations, reflecting on more than 600 seed and Series A rounds I saw come together and participated in while at StartX and the multitude of serial entrepreneurs we have worked with at Prime Movers Lab.

Too many entrepreneurs raise $2–3mm thinking that can get them to the milestone they need for Series A. I have rarely (put more bluntly “almost never”) seen that be enough money in any industry, let alone deep tech. And so the result is: in 18 months, the entrepreneur has to go back to the market and raise a Seed 2 type round. This takes time, effort, and is a distraction to business execution at a critical time. It also muddies the waters with VCs, you end up talking with a mix of early stage funds you met with during Seed 1, some new seed funds, and Series A investors.

The result; you may raise a Seed 2 and hopefully at a bit of an uptick to Seed 1 — but the combined result, you are typically no better off than if you had raised a larger amount in Seed 1 at what at that time had seemed too dilutive / too much capital. Seed 1 + Seed 2 strategy almost always ends up equivalent to a larger Seed round strategy in terms of dilution but the real differential is time.

Dilution

It might be attractive to raise $2–3mm for only 20% dilution thinking you can get all the way to Series A on that money. But experienced founders know things almost always take-longer and cost more. They build in this contingency and are willing to ‘pay’ for that with a modest amount of incremental dilution upfront.

I see it all the time, the most experienced founders are the least concerned with dilution in the first round and the most concerned with mapping precise amounts of capital needed to hit Series A milestones and de-risk the company. There will be a meaningful uptick in valuation at Series A if they have executed. And, well, if they haven’t or there isn’t Product Market Fit well, then it is all a lost cause and dilution upfront doesn’t really matter.

Cap Table

The Seed 1+2 strategy often ends up with more of a hodgepodge cap-table; a mix of small funds with co-invest style portfolios and spray-and-pray type strategies. With the larger seed round expect to have one or two larger names; funds who build concentrated portfolios and to whom upfront ownership is important. This is the Prime Movers Lab model, where we pursue only high-conviction investments as a lead investor, you should expect our entire firm will be laser focused on helping you. Once you have that credible lead in a larger seed round, your over subscription will be immediate with followers, allowing you to pick amongst your highest value-add folks.

Structure

If you raise a larger round ($5–8mm) you often will do it as a priced round (i.e. Series Seed equity). There are lots of posts out there on the SAFE/note vs Priced Round trade-off / conundrum. SAFEs and notes are great instruments, but once you start raising larger amounts of money there are very solid reasons for both founders and investors to want to do a priced round. I have seen it play out countless times where a company has raised large amounts of seed money all on SAFEs with different caps. When the Series A comes together and the lawyer sends out a pro-forma cap table there is a big surprise on what dilution actually adds up to from all those SAFEs.

Time

With a larger seed round, expect that your investors are going to want to see a more detailed plan, including things like a bottoms-up five year detailed financial model. The due diligence process for a larger round is going to be more in depth and take longer, but it will pay dividends in the future. You should secure 24+ months of runway and be extremely aligned with your lead VC on what milestones you need to reach for Series A. Expect a Seed 2 to take you 6 months of added time (time where you are not able to be heads down executing).

Series A

One of the most important things you can do when raising your seed round is understand what milestones Series A investors are expecting you to hit. Excellent entrepreneurs are always thinking about what capital is required to de-risk this next milestone; because it is that milestone that unlocks valuation inflection points.

So, let’s get real. Here is the practical…

So, it is very unlikely any VC is going to hand you over $6mm for an idea on paper. This is the part of the “Why, IF YOU CAN, you should raise a larger seed round”. Here is a partial checklist of what you need (this is specific to deep tech / hardtech):

• Non dilutive funding and friends & family. Investors writing big checks want to know that you have secured the maximum amount of non-dilutive funds available to you before this point. Non dilutive and friends & family early rounds are critical to get you early traction before someone will write a larger check.
• LOIs. LOIs come in many shapes and sizes and are varying “seriousness” levels. But expect that if you are raising a larger round that investors are going to want to see that you have gotten far enough with potential customers that they have been willing to sign LOIs and serve as reference checks.
• IP Protection. Expect that investors funding larger rounds are going to go deep in your patent stack. What is patentable (and in process?), what is trade secret. Get ready to answer these questions.
• Customer development. Further to the point on LOIs, investors are going to want to see a tremendous amount of customer development. Do you “eat, sleep and breathe” a real problem you are solving for customers? A problem that customers are willing to pay you money to solve. How many have you talked to, what has been surprising about those conversations? A “hammer looking for a nail” often reveals itself when entrepreneurs who love tech are asked about customer development. You must love the customer.
• Sweat equity. To be at the progress point where you can raise a larger round, expect your investors will be judging the amount of sweat equity the co-founders have already put in. Have the CEO & CTO already done 12 months unpaid to get to a prototype? This matters and will go a long way in allowing you to raise a large amount of seed funding. And, if you’ve been fortunate and had a past exit, expect VCs will want to see you invest a personally meaningful amount in your NewCo. Skin in the game is one of the key ingredients in alignment.
• Hiring. Show, don’t tell. Show you have the engineers lined up who you are bringing on board with this round of funding. You should know them, you should be in discussions with them, you should know exactly what it is going to take for them to sign on the dotted line (comp, % equity, responsibilities). When experienced entrepreneurs hand over that detailed financial model, the ‘people cost’ type page, it has actual people’s names tagged against many of the top positions they will fill in the next 6–12 months.

Now, I will caveat all of this and say there are always exceptions. But, if you take anything away from this, it is to think deeply about the fundraising strategy you are pursuing and the trade-off between short term dilution and long term success.

Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in seed-stage companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and agriculture.

Sign up here if you are not already subscribed to our blog.