Picture the typical venture capital journey: Pre-Seed, Seed, Series A, B, C, and then a glitzy IPO. It's a classic VC bedtime story that many of us have both authored and championed. But after indulging in the VC funding bonanza of 2020 and 2021, some founders, when faced with a funding need for capital when the same investors that encouraged growth at all costs in 2021 are now asking for profitability in 2023, are wondering, "Isn't there another way?"
A growing subset of the founders I’ve spoken with are opting for a mix of venture fuel from VC funds and the grassroots energy of bootstrapping: a balance between VC support and self-reliance. The catalysts for this shift in thinking can be attributed to the hangover felt by founders after startups were provided a decade-long venture capital buffet, and now the uncertainty of later-stage capital being available in the coming years.
Over the past decade, VCs have been showering startups with capital. For perspective, startups today are operating with 5x the capital their 2013 counterparts had. Bloated VC funds (where focus on performance incentives fade in place of a salary from fees), led to bloated capital injections into companies without true product market fit, which then led to bloated burn rates and companies unable to reach profitability or secure financing before cash ran out. That’s left several founders dismayed to pursue venture capital. Especially for the later stages of financing as the market has come to a near standstill.
Yet, there’s an exception: Pre-Seed and Seed venture investing isn't going anywhere. In fact, Pre-Seed and Seed activity, by both deal count and dollar amount, are recovering faster than all other stages of financing with valuations dropping. The reason? It's the early stages, the formative years of a startup. Groundbreaking ideas, untested markets, and ambitious entrepreneurs thrive in this space and are open to investor capital. Founders are much more receptive to capital injection while searching for product market fit and semblance of profitability without scale. Investors and founders alike point to Zapier as the quintessential bootstrapped unicorn story. Yet, many forget that they raised a Seed round. While the later stages might get saturated with capital without any true understanding of the probability of profitability at scale, the Pre-Seed and Seed stage is where investors can identify and nurture fund-returning founders who are financially disciplined and dilution-sensitive.
Many founders are opting for a "hybrid" approach—raising just the essentials, gunning for early profitability, and charting their growth. This approach encourages discipline, innovation, and autonomy. A breath of fresh air after ‘21. However, this may require a new playbook from investors for both sourcing and investment management. In our previous funds, we were able to allocate to several companies that were only interested in bootstrapping, most notably PayScore (f.k.a The Closing Docs). In the first introductory call, they told me they would never take investor capital and were only interested in bootstrapping. We invested in them 9 months later. The key? Show your value as a fund early. In conclusion, the perceived value of venture capital in the eyes of some founders has changed. Yet, founders can’t walk away from the value of venture capital investors at Pre-Seed and Seed which provides ample investment opportunities.
