Raising a Seed Round with a high cap can come back to haunt you…

I recently spoke with a founder who was ecstatic, they were able to get a handful of investors to commit to their Seed round at a $15M cap. While they didn’t have any revenue yet, they told me they were confident they would be closing deals left and right and easily would be able hit growth targets.

While I’m an optimist so I’d like to say, “yes – you’re going to hit it out of the park!” I’ve also become a bit more grounded over time, especially when it comes to being able to predict revenue growth when you’re still a pre-revenue startup.

The challenge is, for founders who raise at a high cap, the bar gets set so high, so early on, that it really is almost impossible to hit the targets that VCs are going to expect going into your A Round. Ash Rust, Managing Partner at Sterling Road recently wrote a tweet that I thought highlighted this issue really well:

It seems I wasn’t alone in liking this one as Micah from Founder Collective and 212 other people seemed to agree.

In the past I’ve heard founders say things like, “well if you can raise at a high cap, why not? You’ll keep more of the company.” Sure, at this very moment in time you might feel like you’re on top of the world. Fast forward a year later and doing a down round to keep the company alive doesn’t quite feel as warm and fuzzy.

On the flip side, I met with a founder a few weeks ago who raised at at $10M cap pre-revenue. Things were going great, they had huge companies signing up for POCs, it felt like things were really going to tip. But, like most things in startupland (or life really) everything took a lot longer than they expected. 

So they went out to investors who now felt that $10M was too high. They were stuck, either do a down-round or try to hang on and make it work…when I spoke to them they had four months of runway.

While I totally understand that founders with multiple exits can raise at high caps and probably just keep on raising. First time founders, normal people like you and me, can’t really get away with that more than once. 

Keeping your cap grounded in reality and on-par with other companies at your stage gives you a fair shot at setting and hitting realistic goals. Sure, you can still shoot for the moon, we all should, but when you have $0 MRR you don’t quite know even where to build your rocket, what kind of fuel it takes, and a lot of other things that you’ll need to understand first.

I personally think that pre-revenue startups in the SaaS space should be happy with a valuation in the $3M – $6M range if they’ve gone through an accelerator like YCombinator or Techstars. No accelerator, then it might trend lower, maybe in the $2M range. 

At the end of the day, as a founder I’ve found that I can’t just think about how my decisions will impact me today, I have to think of how they will impact me a year from now if things don’t go exactly according to plan…because that’s often how it goes.

What do you think? Comment below and share your thoughts!

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