Some early stage investors are claiming they love the idea of ‘seed strapping’, but frankly, I’m skeptical. It's a term that’s trending right now, and it basically means raise venture funding once and then never again. Think of it as a one-and-done round.
The problem with this approach is that it’s incompatible with the way venture funding actually works.
VCs show returns to their LPs in one of four main ways:
If you want to be profitable forever, then the only way a VC makes money is through the last two options: M&A or IPO.
And here’s the thing: statistically, it’s very unlikely a tech company will make it to a sizable M&A exit or IPO without tons of venture funding.
Sure, there's the rare circumstance when dividends can be paid out, but that is something VCs absolutely hate.
So, why are many VCs recently claiming they support the idea of seed strapping? I think what’s actually happening is that these VCs are tired of getting squeezed out of rounds.
They'll say whatever a Founder wants to hear just so they can get some allocation.
These investors are secretly betting the Founder is naive. They believe founders will inevitably need to raise a future round again.
And honestly, such investors will be a headache to deal with as they’ll be pushing you to raise the next round eventually.
Ultimately, while "seed strapping" sounds appealing, it often clashes with the fundamental mechanics of venture capital. VCs primarily seek returns through future funding rounds, secondary sales, M&A, or IPOs, with dividends being a last resort they dislike. The idea of a one-and-done round, particularly for a tech company aiming for a significant exit, often requires more capital than initially planned.
Don't be swayed by VCs who might just be looking for an allocation. Their incentives are clear: they need future rounds to show returns, and they'll likely push for them down the line. It's crucial to understand their playbook before committing to an approach that might not align with their actual goals.
Think critically about your funding strategy.
