Don’t do it like they did it.
I have read ALL the classic books-for-founders and loved every single minute of them. They are written by the rare group of founders who make it all the way, which makes for uplifting and optimistic reading.
That glory is also a caution: these stories are of only the group that succeeded. They are a subset of startups that is therefore riddled with survival bias. We tend to associate that survival with all right steps of the survivor’s story: they pivoted early, they raised a big seed round, they located in Palo Alto, they began in a garage. And yet, the causality links are not proven.
We all have theories; mine is that there is a perfect and mystical balance between self-belief and openness. If you are so dominated by self-belief then you’re initially very attractive but you’re also blind to learning, and blind to real threats.
If you’re too open; you do things by the book, you flip flop and you undermine your own ability to make clean and focused choices. Worse, you follow the pattern laid down in those classic books well after those patterns’ sell-by dates.
We have a mystery 4th board advisor whose identity we have to keep secret for various reasons.
In the last month, I have gone against their advice twice. Many founders would say ‘I guess they are the billionaire and I’m the wannabe, so I should defer to the wisdom that put that cash into their account.’ but we didn’t.
Nor have we blindly ignored their advice. Instead we treated it as a sudden climbing wall: something that should absolutely stop us in our stride. Something we should have to think about and a barrier we should be prepared to pause at the top of, scan the scene and only then decide if we should climb down the other side.
That is the magic combination of self-belief and openness. The ability to take in advice but build that advice into our own focused decision-making.
One thing founders are desperate to follow a successful formula in, is raising money. We got a lot of advice and support in our early days and we followed most of it. The best was from Eammon Carey who forcefully told us over a flow of Guinness that no matter what, never let any funding round be larger than 20% of the business. He said it exactly like when Indiana Jones implores Marion Ravenwood not to look at the Arc of the Covenant; so we believed him.
But in one huge aspect we wilfully ignored all of the advice and accepted norms; we ran our seed round with an unlimited rolling close. Not a couple of months, or six but as it now finally closes, the seed round will have been open for a good 20mths.
Everyone told us: you leave a rolling close open too long and people will start to question your viability ‘They will think you can’t raise the money’.
That seemed ridiculous to us. We knew over time we’d need roughly half a million to get us to the edge of scale-up. We also knew that we didn’t need very much of that in the initial period. We’d seen too many startups win big seed rounds and immediately piss the money away on toys and fluff.
Why grab all the cash before you need it? It’s mostly because if you say you’re raising £100k and selling 4% of your business, almost nobody takes that seriously. £500k for 20% sounds worth backing because it shows ambition.
We are full of ambition so right from the start, we sold it as a seed round of that scale but explained to everyone that we would close the round in phases but that the round itself would stay constant across all phases: same valuation, same terms, everything, would stay consistent and we would only call off a new phase within the round as we found useful things to do with that money. That same value, same shares element was also unusual but it fit the kind of investors we wanted to work with: fair minded people, in it for the long term.
The result of a convention-defying fixed-value rolling close of 20mths is that we have grown steadily, not wasted a penny investment, and built a scalable startup. Surely that’s what seed is for?
Demonstrably, what I’m calling a phased close has worked; we’ve raised exactly what we wanted to raise, sold equity for exactly the valuation we wanted and been able to pace ourselves with maximum fiscal responsibility, and only access cash when actually needed. Nobody could have predicted Covid-19 but the use of a phased close has helped here too; we still had reserves within the phased round and have been able to call off the final chunk as things have eased. It’s been kind of perfect.
The drawback of a phased close is that you’re essentially always somewhere within the round, so there is some mental strain but that’s small compared to the benefit of certainty and sensible pace. I would highly recommend this approach to anyone.
Those warnings we had, that rolling our close for so long would damage our credibility; that hasn’t happened and the magic behind that is that we only ever asked for chunks of our total round value, never the whole thing; so we raised £100k when we needed it; did a network crowd round; £200k when we needed that, until 20 months after starting we asked for the final bit and our network has provided.
This is the right way to do a seed round, I’m sure of it. We’re better off, both in progress and cash terms, for having phased a rolling close over what before us would have looked a damagingly long period.
Self-belief and openness; balance. Don’t copy the template if you think there’s a better way. Don’t stick to the rules because conventional wisdom tells you to. If you find a better way, test it, commit to it and then make that the new wisdom. Phased Seed Rounds — you watch, we did it first but this time next year hundreds will copy the method.