A primer on seedstrapping

What's up, everyone? This is Alex, the host of Founders Journal. As you may know, I built Morning Brew from my senior year of college until we sold the business in 2020. And now I'm building a variety of businesses in different spaces and different stages. I'm basically averaging 1 to 2 new businesses per year. And because of that, I have had the opportunity to test a ton of different products and services, ultimately landing on a core software stack that serves as my business operating system whenever I start a new company. I have my go-to banking service. I have my go-to formation service. I have my go-to domain hosting service. But probably the most important of them all is my HR service, Gusto. If you're a longtime Founders Journal listener, you know how much I think about people in the context of business. A business is nothing without its people, which means a platform that helps me manage and take care of my people is invaluable. And that means I've tried every HR platform under the sun, always with the same exact goals in mind. First, I want a product that's intuitive and delightful to use. As a non-HR person, I find the intricacies of payroll, benefits, taxes, compliance, and expenses to be painful. So I just want something that makes my life easier. Second, I want it to be affordable. I'm a bootstrapper at heart. I started Morning Brew with $0 and I started StoryArc with $0 as well, which means I don't have infinite dollars to drop on SaaS products. And third, I want a platform that acts as my one-stop shop for all things people. I want it to handle payroll, benefits, hiring, onboarding, and taxes, all while integrating with all of the other tools in my business stack, whether it be QuickBooks, Slack, or Google Workspace. Well, Gusto hit the trifecta, which is why I am a customer and use it for every single one of my businesses. Yes, this is a paid sponsorship by the amazing team at Gusto, but I would sing their praises even if I wasn't being paid to do so. So if you're looking for a platform that takes the pain out of payroll, benefits, and HR, I highly recommend you check out Gusto. And if you sign up at gusto.com/alex, you will get your first 3 months free. Now on to the episode. What's up everyone?

This is Alex Lieberman and this is Founders Journal. For those who are longtime Founders Journal listeners, welcome back. For those who are new to the show, here's the deal. Founders Journal is my audio diary made public for the world. My goal is to increase your odds of success as an entrepreneur by sharing the stories, lessons, and tactics that I experience as I build my businesses. You can expect the podcast Monday and Wednesday with episodes that are under 20 minutes in length. And if you want to get notified when a new episode comes out, make sure to subscribe wherever you listen. Today on the podcast, I am talking about seed strapping, what it is, what the internet thinks about it, what I think about it, and who it's right for. Before we get into it, I just want to share that I'm going to try something a little bit different for this episode.

Recently, Founders Journal has felt a little bit Too scripted for me.

Like I literally will research an entire topic. I'll write it out almost like an essay form, and then I will recite the essay. But one of the reasons that I started Founders Journal is I wanted it to be a journal. I wanted it to feel like I was having a conversation with you all. And so that is the direction I'm going to take Founders Journal in moving forward. At least I'm going to test it. Doesn't really mean any changes to topics or what I'm going to be talking about, but it just means that. Hopefully these podcasts will feel a little bit more raw for you. It will feel like you're in a room with me. We're having a conversation. It may feel like it's not perfect. Like there may be ums, there may be likes. I may trip over my words. I actually want that because I want this to feel as one-on-one of a conversation as humanly possible. So let me know what you think about that approach for it to feel less scripted and more off the cuff. Shoot me an email to alex@storyarb.com to let me know, but we're going to try it out now. See how it goes. Let's hop into it. So, for the longest time, I have always talked about Morning Brew as a bootstrapped company. But when I think about it, we aren't actually bootstrapped. We raised one round of funding from 28 individual investors right after I went full time on the business in 2016, and then we never raised again. I just called what we did bootstrapped because there wasn't a label for the way in which we approached fundraising. And psychologically, we ran our business way more like a bootstrap company than a venture-backed company. This year, a new term has taken off on the internet, on social, and it tries to capture how we and other companies approach fundraising in kind of this one-and-done way. It's called seed strapping, and it just refers to this idea of raising one seed round as a business. Let's call it raising anywhere from $250,000 to $2 million. If you're interested, we raised $750K at Morning Brew in the form of a convertible note with a $5 million cap. But the idea is you raise one seed round as a business, you get to profitability, and you don't have to raise again if you don't ever want to. And this approach to building a startup isn't new. You know, there are, there are many large companies that only raised one round. One great example is Zapier. I would encourage you, if you have a chance, listen to a few interviews with Wade Foster, who's the founder and CEO of Zapier. Zapier only ever raised, I want to say, $1.3 million from YC and one other venture fund. I can't remember which one. Never raised again, and it's a multi-billion dollar company. So this isn't a new approach, but it's in vogue right now. And so why is it that Seedstrap, the name, is sticking? And let's talk through why this is big at the moment. I think there is an older trend that's happening and there's a newer trend, and both of these have been playing out in a way that makes the idea of seedstrapping more attractive. And then I think a founder who I'm going to talk about in a minute put a name to something that didn't have one, which allowed people to more easily refer to this way of building a business. So the old trend is that post-COVID and post-zero interest rate environment, we no longer lived in a world of inflated valuations, unlimited capital, and zero consequences with being unprofitable for a long time. And so as the market reset, I would say in 2022, around there, startups were faced with the painful reality that they likely wouldn't be able to raise a follow-on round. They would have to cut, burn, likely through layoffs, and they would have to do so pretty significantly. And then they would have to get to profitability because they couldn't expect that more free money would just show up. That's the older trend. Now, the newer trend is generative AI, which a lot of people believe will give entrepreneurs and businesses a step function change in efficiency and leverage such that fewer people will be needed to build just as big of a business. That belief of kind of the leverage created by GenAI was probably kicked off by a few big names in the space talking about this idea of one-person billion-dollar companies. So even just using the example of Sam Altman in January of last year, Sam Altman, who's the CEO of OpenAI, he was being interviewed by Alexis Ohanian, who, you know, writes now, runs 776, the venture firm. He was the founder of Reddit. He was interviewing Sam Altman, and Sam Altman basically said very soon there will be 10-person billion-dollar companies and that this tech CEO group chat that Sam is in has a running bet on when the first 1-person billion-dollar company will be created. And then following that interview, basically you've had a bunch of people on the internet keeping track of big companies with small teams, which I think has made this idea of needing fewer Fewer resources to do more as a startup feel even more real for people. So as an example, Ben Lang, he posted on X in March, quote, "We've entered the era of tiny teams. The list keeps growing. First time coming across most of these." And then basically, if you look at the tweet, he has a screenshot of a list of seven companies, seven startups that are doing at least five million dollars in ARR, and these teams have. Minimum 4 people on the team and maximum 16 people on the team. So all this to say that the psychology of the internet was ready to fully embrace this idea of raising less, raising once, and getting to profitability within the confines of your first raise. Then Josh Payne, who is the founder of Stack Commerce, he, I believe, was the first person to use the label of seed strapping and explain why it was an attractive way to approach fundraising now. And just for context, if you haven't heard of Stack Commerce. Stack Commerce is a product discovery platform. It was acquired by TPG Integrated Media in 2021 for an undisclosed amount. But in the year that TPG acquired Stack Commerce, the business did $80 million in revenue. So you can assume it was a 9-figure exit for Josh and the founding team. Here is what Josh said about seed strapping. Founders in 2024 are faced with a tough choice. There's bootstrapping and then there's raising a shitload of money from VC. I never understood why these were the only two options. But what if there was a middle ground that made more sense for founders and investors? There is. I call it seed strapping. It's the Goldilocks approach to investing. Here's how I define it and how I use the approach to scale and sell my previous company. Seed strapping is just one step away from bootstrapping. You raise a single round of funding at the pre-seed or seed stage and scale profitably from there. You get all the validation from being connected to incredible investors. You get all of their network, all of their mentorship, all of their help with very little dilution. I did this with Stack Commerce. I think it's safe to say it paid off. Here's why I think seed strapping is the best of both worlds. And now I'll keep the post going. He goes, you know, line by line on the reason that seed strapping can be valuable. One, you get the early validation and ecosystem support from investors. One of the benefits of raising VC is the network you get to tap into. Bootstrapping can put you on an island. When you seed strap, you can connect with amazing investors who bring their networks, mentorship, and support structures to the table. 2, probably the most important, you get all the benefits of a VC without loss of control. Avoid giving up board seats and keep your equity dilution to a minimum, ideally less than 15 to 20% all in. Instead of a board of directors who could fire me, I formed a real board of advisors that functioned in the same way, but they had no real control over the company. It doesn't happen often, but some investors will keep you from selling when you want to or encourage you to raise more money so that they can shoot for the 100x when all you need personally is a 5x to make life-changing money. 3, you get the social proof and credibility that comes with fundraising. Whether you want to admit it or not, raising money from respected VCs helps you attract top talent and gives your company a stamp of approval. It's a powerful form of social proof that can open doors and help you hire the best people and grow faster. 4, you don't get over-diluted in later rounds. As a founder, the rationale here is obvious, but seed strapping also works for the earliest pre-seed or seed investors. As an early-stage investor at Open Sky Ventures, I'd rather see a portfolio company raise less money overall and sell for a smaller amount than raise a huge sum and sell for a higher price. Why? Because if you keep raising round after round, my initial investment gets diluted and I might end up with a smaller return than if you had sold earlier for a lower price. So that's Josh's thoughts on seed strapping. Now, before I share my thoughts on this idea, this way of building a business and who it's right for, let me just share the mix of views from around the internet that I've seen. Some VCs are really excited about it. You have Eric Bonn and Elizabeth Yin from Hustle Fund who are bullish on seed strapping. Eric said founders raise a little at the beginning, they get started and then bootstrap the rest of the way to get big results. That was followed by Elizabeth saying seed strap is the way to go in many cases in software. But then other VCs think the idea is stupid. Nikunj Kothari, who was a partner at Khosla Ventures, he basically said businesses that should be venture-backed will always have an incentive to raise more and grow faster. He said, my hot take is that all of these amount raised and team size proclamations are extremely short-sighted. People are always obsessed with efficiency, and that's great. But if you're ambitious, you will always have a large roadmap. And for that, more people and more money should accelerate that plan to capture that ambition. If you're happy with a small product and making a few million a year, you should absolutely not grow your team or raise money out of proportion. Heck, you should Shouldn't raise venture at all, but the most ambitious founders I know will demand a lot from their team, but still not tie themselves up in knots about these arbitrary metrics. The only thing that matters to them is capturing the prize and dominating whatever they put their mind to. Okay, that was Nikunj's thoughts. So where does this leave me on the whole seed strapping thing? First, I don't know how I feel about the actual name seed strapping. It feels kind of lame. But I do like that there is a label to describe what we did with Morning Brew and what so many other businesses have done rather than going down the venture path. Second, I do think it's a really good approach to funding your business for the right businesses. Do I think that every company should try and seed strap? No. Do I think that some companies should raise venture? Yes. But I do think this is probably the best, most common way for the average internet business to fund themselves. I think about the internet economy similar to how I think about the US economy. Just broadly speaking, most companies are not and will not be massive companies. There are 34.8 million small businesses in the US, while there are only 30,000 businesses in the US that are doing at least $100 million in revenue. I think for the business that doesn't obviously know that it is swinging for the fences and building a category-defining business from day one, seed trapping is probably the way to go. I think that limiting yourself to one round and let's call it 12 to 18 months of cash to figure out your product and get to product-market fit and then be default alive is a very healthy constraint that most entrepreneurs would benefit from. And if you do end up realizing that you have a category-defining company on your hands later on, okay, that's great. You can always raise more, but then you're doing so from a place of strength. I also think there's a ton of value in learning quickly whether you've got a business on your hands or you don't have a business on your hands. And here's what an anonymous founder on Hacker News said about this idea. He said, a lot of companies are bootstrapped or seed-strapped. My company raised a $1.2 million seed after doing a startup accelerator in 2015, used it to get to profitability, and we've been growing 40% year over year for a very long time without any additional outside capital. It's also a huge selling point to prospective employees while interviewing candidates. Unlike many other startups, we haven't raised lots of money. We're profitable. We've never done layoffs. That's all possible because we have product market fit and we have a sustainable business model. Our customers, rather than VCs, fund our growth. Personally, I really like the seed strap model. Raise $1 to $2 million in order to find product market fit and begin an early sales and marketing function with the goal of reaching profitability before the $1 to $2 million is burned through. It also creates a short window to fail fast. This is the part I love. Lots of companies raised way too much money and will end up failing very slowly. Failing very slowly is what should be avoided. Raising huge amounts of VC is a signal that the company couldn't sustain their growth with their current revenue and operating model. It's also a signal that the company is likely using inorganic and unscalable tactics to grow, which might work now but won't work forever. That means the company will likely pivot their model at some point. From an employee perspective, that means higher risk of layoffs. And from a customer perspective, that means higher risk of price hikes in the future. So that's what this founder on Hacker News said. Basically, all of this to say he did seed strapping. It worked for him. But the new idea that he said that I think is so true is when you raise a bunch of venture and you're relying on venture and it delays the time that you should take to get to product-market fit and profitability, your odds of failing as a business are still very high. But now you're going to fail over, let's call it, a 3 to 5 year time horizon just because venture funding is going to continue to subsidize the business even if you can't pay for it yourself. Now, just to round things out and finish up the episode, I want to be clear that I don't think seed trapping is for everyone. And I do think raising venture is right for some founders, but I would argue it is for the vast minority of businesses when you should raise venture funding. And those businesses are the ones that have clarity on day one that they are building a category-creating or market-winning idea that either requires a ton of capital to be first in a winner-takes-all market, or it is a product that requires a ton of capital to get to market in the first place, meaning there would be no way to test or find out if you have product-market fit unless you raised a bunch of money to develop the product. And examples of those types of businesses are frontier tech, biotech, hardware companies, like businesses that require a ton of R&D. So basically my notion here is the only businesses that should go down the venture path are those that venture capital was created for in the first place, which basically said a different way just means way too many businesses that should have never been venture backable in the first place end up raising venture funding, and instead they should be looking to seed strapping. So that is it for seed strapping— what it is, how it came to be, what the internet thinks about it, and how you should think about it in the context of your own business. Thank you as always for listening to Founders Journal, and I'll catch you next episode.