TinySeed06 Feb 2019
When I first heard about TinySeed, I was excited. Venture Capital isn't for everyone, and bootstrapping can feel impossible. It seems like there isn't much in between. I'm excited to see new, innovative ways for founders to get startup capital.
But as I dug deeper into TinySeed, I came across this in their FAQ:
Traditionally, venture capital has consisted of unicorn-hunting. VCs are looking to fund the next Facebook or Oculus Rift. If a traditional VC funds your business and it gets to $50m in revenue, generating $20m in profit year over year, it’s considered a miss.
This seems naive, disingenuous, or both. Most (all?) angels and early stage VCs would be elated to fund a startup that grows to $50m ARR with $20m profit.
Dan Primack pointed this out succinctly on Twitter:
One thing that I think gets lost in the VC vs. non-VC discussion is that VCs don't need a company to become a "unicorn." At least not the early-stage VCs. They might want it, but unicorns weren't really a thing until a few years back, and VCs "settled" for much shorter home runs— Dan Primack (@danprimack) January 11, 2019
And the replies to his tweet are a masterclass in understanding VC. In short, VC expectations are related to fund size, check size, and ownership.
As a founder, you should understand this fund math before you a) raise money or b) write off all angel/VC money as bad.
Here's how TinySeed values your company:
TinySeed invests $120k for the first founder + $20k per additional founder, in exchange for 8-15% equity.
As a solo founder, they'll value your company between $680k and $1.4m pre-money. Compare this to median pre-money valuations from "traditional" angel and seed rounds, which is now around $7M. So you can raise 5-10x more money in exchange for the same equity.
If early stage investors consider 20x return a home run, they'll be very happy to see your $50m ARR "lifestyle business" exit for $140m or more.
If, like TinySeed, the same investors had invested at a 1/10th of the valuation? The resulting 200x return would be an off-the-charts grand slam.
TinySeed may be a great option for some founders. I personally admire much of what they're doing, and might have considered it for Formstack:
- They're targeting bootstrapped companies, and I bootstrapped for 3 years before raising a small angel round.
- It's remote, and I started shortly after our first son was born, so wouldn't move across the country to join an accelerator.
- They're not biased against solo founders, and I was one.
But their terms seem structured just like any angel or early stage VC investment — they give you cash for equity in your company. And at a valuation that might be way below market for your company. And you're required to pay investor dividends in perpetuity if you want to make more than their salary cap.
If the company sells, investors receive the initial investment back (minus any dividends paid to date), and then the proceeds are divided pro-rata based on ownership.
[UPDATE: This is fixed]
The core value prop for TinySeed seems to be the promise that they won't "force growth."
But I personally haven't seen an early stage investor do this. They're focused on making sure the company exists in the next 12 months. Even YC preaches getting to ramen profitable and default alive so you're not relying on investors for continued survival.
Investors don't want you to grow because they like to gamble with the health of your company. They want you to grow because lack of growth is why most companies die.
This is different than the pressure for huge exits, which comes after raising tens or hundreds of millions of dollars from later stage VCs. Especially when you've put yourself in a position where you have to keep raising money over and over again. At some point, the math just gets to a point where you have to become a unicorn to deliver a home run.
But if you're raising a few $100k, and do it with a standard SAFE, you're not giving investors any leverage. There's no board seat, majority ownership, or preferred stock to force you to do anything. And investors will be as happy as you when you build a $50m ARR company.
If you don't need to raise money to build the company you want to build, don't raise money.
Or look to firms like Indie.vc that are structuring funding in a very different way. They apply dividends toward a buy back of up to 90% of investor equity. And dividends are capped at 3x the original investment.
Or look to firms like Lighter Capital that offer debt financing without taking any equity.
But also know that there are "traditional" angels and early stage VCs that you might enjoy working with, and will be aligned with founders. Just raise at a sensible valuation, and build a great business.