Seed-Strapping: A New Funding Model for Startups
In today’s venture capital climate, a new trend is emerging: “seed-strapping.” This approach, which involves raising a single round of funding and then scaling profitably, is gaining traction among startup founders. It’s seen as a way to navigate the challenges of a tightening venture capital market, where raising multiple rounds of funding can be difficult or come with significant sacrifices.
The Appeal of ‘Seed-Strapping’
The concept of seed-strapping has gained popularity in direct response to the recent downturn in the venture capital market, particularly in Silicon Valley. Josh Payne, general partner of OpenSky Ventures, describes it as the “Goldilocks version” of startup funding. The core idea revolves around securing one round of investment and then focusing on sustainable, profitable growth.
“I think what most founders are also realizing is what you need is not just money, but time. You need time to explore … You need space. You can’t have someone breathing down your neck for updates [while you’re] trying to figure out your product market fit at the start,” says Jx Lye, founder and CEO of Acme Technology.
The History and Advantages of Bootstrapping
The practice of bootstrapping, relying on one’s own resources to launch and grow a business, has a long history, with companies like Spanx, Craigslist, and GoPro starting this way. Seed-strapping builds upon this model, offering an alternative to the traditional venture capital route.
Wade Foster, co-founder and CEO of Zapier, experienced seed-strapping before the term even existed. He and his co-founders started their company in 2011. After securing approximately $1.3 million in seed equity funding in October 2012, they were able to sustain operations from revenue, reaching profitability by January 2014. By 2020, Zapier’s annual recurring revenue reached $100 million.
Foster explains that, at the time, founders were divided into two camps: those who bootstrapped entirely and those who took the venture capital route. The idea of seed-strapping — successful fundraising in one round — has only recently gained broader recognition.
Foster and his co-founders initially aimed to bootstrap, electing to raise a seed round to accelerate their growth.
“We started the company while in school, and it’s not like we had a lot of savings,” he said. “We were pure bootstrapping … [but] it’s just slower progress, so seed-strapping meant being able to be full-time on it and really give it our all.”
Competitive Advantages and Control
Not raising additional funds stemmed from profitability and an ability to maintain control, Foster stated.
“For us, not raising more had nothing to do with the environment, and had everything to do with the fact that we were able to get profitable,” said Foster. “We were tripling revenue year over year.”
“More capital would just have created more problems for us, and we didn’t want to take the dilution on, if it wasn’t necessary,” Foster said. “We didn’t want investors in our kitchen calling the shots … [we wanted to] allow ourselves to really be in the driver’s seat for where this thing could go.”
Similarly, Josh Payne raised $750,000 in an initial seed round for StackCommerce in 2011. He sold the commerce and content platform about a decade later to TPG’s Integrated Media Company, a transaction that proved highly successful for Payne and his investors.
“You get all the benefits of raising from venture without, you know, the hangover of it,” said Payne.
The Impact of Artificial Intelligence
Artificial intelligence is also contributing by helping startups become more efficient and reduce expenses, which minimizes the need to raise funds and makes it easier for a startup to become profitable.
“I definitely think seed-strapping is going to be a lot more prevalent for companies,” said Zapier’s Foster. “I think AI, in particular, is making it more possible, where these companies can use automation [and] tech to get a lot of leverage without having to go hire a bunch of people.”
Regional Variations: Southeast Asia vs. the US
While seed-strapping is on the rise in the United States, it’s especially noticeable in Southeast Asia. The region’s fragmented market landscape, encompassing 11 different countries, affects the applicability of the “power law” that is common in U.S. venture capital where a few companies generate the bulk of returns.
“Power law doesn’t work in Southeast Asia,” says Jeremy Tan, co-founder and partner of Tin Men Capital.
“It’s been popularized in the U.S., and has predominantly been a model used in Southeast Asia, though I think it’s a flop model for this region,” Tan said.
Furthermore, Southeast Asia has been facing a funding drought, adding to the appeal of bootstrapping and seed-strapping. Founders in Southeast Asia can also be more likely to have their company based on the model of bootstrapping due to the market being more fragmented than in the U.S.
A Shift in Founder Mindset
Beyond the financial factors, there’s a growing trend of founders rethinking their relationship with venture capital, as expressed by Jx Lye of Acme Technology.
“There’s a huge rethink by founders about whether they want to take [venture capital] money,” said Lye. “[VC funding] is like basically setting fire to gasoline … but then you have to live up to that valuation.”
Founders are becoming more aware that focusing solely on rapid growth fueled by external investment can lead to unsustainable models and pressure. This can lead to increased pressure on founders, potentially leading to burnout, as highlighted by Tan.
“There’s no point making all this money, and in the end, you realize that you’re alone,” he said.
