“Don’t worry about making money right now” is not the advice you’d expect a seed VC to give a CEO right after writing them a big check. Do I not desire the UpAndToTheRightCurve needed to raise a Series A and get me that sweet sweet write-up? Doesn’t Homebrew want steak more than sizzle in the companies we back? Hunter, what’s gotten into you???
I’m longterm greedy, which means ultimately my venture success is going to depend on quality of company exiting, not pump and dumps, or millions in fees. Phosphorous burns white hot but not very long. Unsustainable revenue curves willed into existence in order to prove growth ahead of raising more capital is the organizational version of phosphorous. I want furnaces – a sustainable heat source which goes as long as you feed it. Well, technically I want furnaces that eventually stop burning wood and start spitting out wood, but whatever, it’s a metaphor.
There’s an increased belief (maybe reality for some), that seed VCs want to see revenue before investing in verticals like SaaS, marketplaces, commerce. There are several contributing factors to this spreading notion:
- 2019 Startups Can Do More With Less – Because spinning up a startup atop 3rd party infrastructure (eg AWS, Shopify, etc) is lower cost than previous eras, companies can often get to market quicker and start charging for a product, even in pilot/beta form.
- Availability of Angel/Early Capital – There are more individuals/funds interested in being your first $250-$500k.
- Attempts to Stand Out Among Large Number of Startups – There are so many SaaS, Commerce, Marketplaces these days that founder believe (again, sometimes rightly) that a headline about early MRR/customer traction will get them in the door at a VC versus just a pre-market
The sum total of these is actually pretty positive for the ecosystem – a bunch of aggressive startups who get customer feedback and that $1 in revenue earlier in their lifecycle than the previous generation. But as a seed investor, what really matters to me is how they’re going to get the next 10x, 100x growth, and often it’s not through sheer force of will, but by understanding a segment of customers, and building a cost-effective, repeatable acquisition channel or two.
So when evaluating these companies for investment I’m less interested purely in milestones and more about tactics and learnings. Does your customer base now represent what the next 100 or next 1000 leads will look like? Are your current customers using the product the way you intend and engaged – the stacking revenue heading towards a retention cliff once their 6-12 month contracts are up is a trap for investors. Did you pay 10x LTV in CAC?
These aren’t reasons that I’d pass on an investment but they’re reasons I might suggest, post-seed raise, hey, you’ve got 24 mths of capital in the bank now, let’s take a quarter or two and get the foundation correct, because once we get back on the growth curve, we need to hit those numbers for the A. I’m never afraid of showing a future investor a chart which has four quarters of growth followed by three months of flat/down, followed by another four quarters of even faster growth. I’m deathly afraid of starting each month less certain you’re going to hit the revenue target when you’re three to six months from a Series A fundraise. [I’ll caveat this by saying there are a special class of startups which just happen to find product/market fit very early and it’s explosive from there. In those cases, yeah, you’re just going to be stressed by hiring and keeping the service live, but you still need to start investing in a bit of stability/scale alongside. That’s < 1% of startups, and so statistically it’s not you. BUT IF IT IS LET ME KNOW 😉 ]
In closing: we don’t require revenue before we invest; if you do have revenue, we’re going to ask about what it has taught you; and if there’s foundational work to be done that would make the revenue growth even faster, we should discuss what it means to prioritize that work before getting back on the growth curve.
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