3 ms·

> ...most seed companies aren’t actually burning that much money. A lot can be done today with a small team and $50,000 a month. > In many of these cases, the

> ...most seed companies aren’t actually burning that much money. A lot can be done today with a small team and $50,000 a month. > In many of these cases, the founder simply didn’t raise enough to hit the milestones they promised. Product development often takes twice what was anticipated, and many early stage companies simply didn’t have the capital to achieve what they hoped in advance of an A round. This is contradictory. On one hand, the author claims "a lot can be done today with a small team and $50,000 a month" but on the other he's admitting that many of these companies aren't able to do what the founders "promised" they'd be able to do. > Valuations tend to be flat or flat-ish. > In the end, however, the entrepreneur benefits because they usually see a step up in valuation from the first to second seed. Which one is it? > These differ from your classic seed. They tend to have new participants, unlike the more classic extension, which is merely the insiders injecting additional capital into the company. This is the perfect demonstration of what happens when there's too much money chasing too few opportunities. New investors are willing to put more money into a company that underestimated its funding needs, missed its targets and can't raise a Series A, and do so at the same or slightly higher valuation as previous investors. Insanity. The "seed extension" phenomenon also demonstrates why early-stage startup employees should be skeptical about equity. These "seed extensions," which look like dumb money bridge rounds, can be really destructive. Just do the math on what happens when a company raises $1 million at a $10 million valuation, and then raises a $2 million "extension" at a "flat-ish" valuation.

danieltillett 11y ago
On the maths isn't it the same as having raised $3 million on a $10 million valuation? Of course if you start doing this you are going to find that you don't own much by the time you get to series A and you have managed to totally destroy any incentive for your team to build the business.
wpietri 11y ago
I agree with your concerns about the article, but I'm not so worried about the phenomenon. The new money in a seed extension could be dumb money. But it also could be real validation of a pivot, where the first idea didn't work but the second, better informed one could. I'd certainly prefer people taking multiple seed rounds to them taking a ton of money up front. Too much money is startup poison.
- danieltillett 11y ago
  >I'd certainly prefer people taking multiple seed rounds to them taking a ton of money up front. Too much money is startup poison. Is there any reason that a large seed round could not be drip fed to the company? As an investor I would rather the company get on with building and stop worry about fund raising, but I would not just want to give then a huge amount of money that they blow on a hiring craze trying to hit some ludicrous growth number. Something like "here is $3 million, but we aren’t going to give it to you at more than $100K a month - now get on with building and stop worrying about fund raising. If you hit all your targets early come back and we will talk more."
  - rhizome 11y ago
    Like a tranche?
    - danieltillett 11y ago
      I guess, but are tranches handed out in monthly chunks normally?
  - wpietri 11y ago
    I've heard of people who have tranched funding and it seems like the worst of both worlds. Pricing is locked in up front, so founder upside is limited. Plus, getting tranches is conditional on continued investor approval, so the risk hasn't really gone away. Honestly, I've never heard of investors saying, "Hey, slow down on the spending." I'm sure it must happen, but the stories I hear are all the other way, encouraging investors to spend faster and get bigger to establish market dominance. Founders are in some ways naturally more conservative, in that they have exactly one company to gamble with, while investors are just hoping for a couple big hits in their portfolios.
    - danieltillett 11y ago
      >I've heard of people who have tranched funding and it seems like the worst of both worlds. Pricing is locked in up front, so founder upside is limited. Plus, getting tranches is conditional on continued investor approval, so the risk hasn't really gone away. Couldn't the valuation issue be solved with SAFE? Also if the funding was locked in and handed to some third party to administer then the founders could stop worrying about investor approval changing? Maybe I think too much like an founder, but the last thing I would want to do as an investor is give some 22 year olds a couple of million dollars and let them go crazy. Having personally been through a similar situation it is all to easy as a founder to convince yourself that getting more money in the future is going to be easy.

danieltillett 11y ago

On the maths isn't it the same as having raised $3 million on a $10 million valuation? Of course if you start doing this you are going to find that you don't own much by the time you get to series A and you have managed to totally destroy any incentive for your team to build the business.

wpietri 11y ago

I agree with your concerns about the article, but I'm not so worried about the phenomenon. The new money in a seed extension could be dumb money. But it also could be real validation of a pivot, where the first idea didn't work but the second, better informed one could. I'd certainly prefer people taking multiple seed rounds to them taking a ton of money up front. Too much money is startup poison.

danieltillett 11y ago
>I'd certainly prefer people taking multiple seed rounds to them taking a ton of money up front. Too much money is startup poison. Is there any reason that a large seed round could not be drip fed to the company? As an investor I would rather the company get on with building and stop worry about fund raising, but I would not just want to give then a huge amount of money that they blow on a hiring craze trying to hit some ludicrous growth number. Something like "here is $3 million, but we aren’t going to give it to you at more than $100K a month - now get on with building and stop worrying about fund raising. If you hit all your targets early come back and we will talk more."
- rhizome 11y ago
  Like a tranche?
  - danieltillett 11y ago
    I guess, but are tranches handed out in monthly chunks normally?
- wpietri 11y ago
  I've heard of people who have tranched funding and it seems like the worst of both worlds. Pricing is locked in up front, so founder upside is limited. Plus, getting tranches is conditional on continued investor approval, so the risk hasn't really gone away. Honestly, I've never heard of investors saying, "Hey, slow down on the spending." I'm sure it must happen, but the stories I hear are all the other way, encouraging investors to spend faster and get bigger to establish market dominance. Founders are in some ways naturally more conservative, in that they have exactly one company to gamble with, while investors are just hoping for a couple big hits in their portfolios.
  - danieltillett 11y ago
    >I've heard of people who have tranched funding and it seems like the worst of both worlds. Pricing is locked in up front, so founder upside is limited. Plus, getting tranches is conditional on continued investor approval, so the risk hasn't really gone away. Couldn't the valuation issue be solved with SAFE? Also if the funding was locked in and handed to some third party to administer then the founders could stop worrying about investor approval changing? Maybe I think too much like an founder, but the last thing I would want to do as an investor is give some 22 year olds a couple of million dollars and let them go crazy. Having personally been through a similar situation it is all to easy as a founder to convince yourself that getting more money in the future is going to be easy.