The differences between a first-time founder and a repeat founder are most noticeable during the seed stage. First-time founders want to take their newly acquired funding and put it to use right away. Hiring a team, buying new services, buying more ads, etc. Repeat-founders understand that cash is king, and preserving that funding to extend runway is how you avoid getting rinsed during your next round. Repeat-founders are also acutely aware of what product market fit looks like. This means they understand that dumping gas on a fire that isn’t yet ready for it is a great way to burn through several million dollars in a very short amount of time.
Why it matters
Typically, a B2B SaaS company is looking to hit specific revenue targets ($1-$3m ARR) with predictable growth (triple, triple, double, double, double) by the time they raise their Series A. That entails staying alive long enough to get there. It’s going to take dozens of iterations — not just product iterations, but sales iterations, marketing, etc. to hit these numbers. You’ll go through periods where doubling your revenue every week isn’t unheard of, but then you’ll hit a wall and go months without even 0.5x’ing. Sometimes this process can take years before you find what works.
Founders get into trouble when they have enough revenue to justify a Series A, but don’t quite have PMF yet, and are also hemorrhaging money on the other side. This means they’ll need to take that next round of funding on less than desirable terms. Seasoned founders can avoid this trap by keeping their burn low, and even hitting profitability during the seed stage. This doesn’t mean hitting scale, that’s what a Series A is for, but it does mean being able to run the business on fumes if needed. The best advice here is to hit a revenue target that can sustain a skeleton crew, and then operate 1-2 employees above that number.
How to do it
Resist most urges to hire. Strictly speaking [about B2B SaaS], there’s no reason why your team should be any more than 3-6 people during the Seed stage.
Find as many discounts, startup credits, free services, etc. as you can. These typically only last a year, but if you can get free infrastructure for a year, it’s worth it.
Be open and willing to rapidly test and iterate on every single part of the business. You might find that an entirely different product is needed, or that the product can stay the same, but you have to market and position it differently. Whatever the iterations are, be ready and willing to go through them on a near weekly basis.
Use services for every part of the business that isn’t a core competency. You don’t need an HR team. You need someone to handle HR. There are services that can help you do this at a fraction of the cost than hiring an FTE. This doesn’t mean ignore management. It means outsource the minutia of HR compliance. You don’t need a COO. You don’t need a CFO. You don’t need an executive team. You need founders with deep expertise and a small team of ICs.
Use contractors whenever you can. Contractor usage is more common on the engineering side, but you can push for it within other departments as well.
Keep a company dashboard and review/update it every week. Don’t let your runway ever leave the front of your mind. You should be tracking critical metrics on a weekly basis. You don’t need fancy software for this. Just use a spreadsheet.
Keep your board small, if you even have one. Ideally you should avoid forming a board during the Seed stage, but if you can’t, then keep it small. The founders + the Seed lead investor (1 person) is typically the best approach. The best investors and board members are going to understand the nature of a Seed round. They should leave you alone and let you figure it out. If your board is pushing you or your product in a certain direction, that’s a major red flag.
Avoid meetings. This shouldn’t be a hard sell to the rest of your team. Most meetings are a complete waste of time. Even a daily standup “meeting” can just be an app in Slack that asks everyone what they’re working on. Treat internal scheduled meetings as a failure of communication. Ad-hoc phone calls, zooms, etc. aren’t meetings. Sales calls, demos, etc. aren’t meetings. Meetings are internal time wasting mechanisms used in a corporate setting to provide the illusion of work. If you absolutely need a meeting, and there are justifications for them, relentlessly prepare beforehand. Time is your most valuable asset.
Be a remote team. For most [B2B SaaS] companies, working remotely is the only way you should work. This includes the executive team. When I say “be” a remote company I don’t mean provide employees the option. I literally mean engrain remote working culture into everything you do. This post isn’t about effective remote work, but it’s not something to be done on a whim, or haphazardly during a pandemic where it’s bound to fail. Take time during your seed round to understand how a remote company should function, and then execute on it. You not only save money this way, you also open up your hiring pool to an incredible amount of talent. Talent that otherwise wouldn’t want to waste 3 hours of their life everyday in traffic.
Why I think it works
Being cash conservative during your seed round provides you with the ability to:
- Find PMF without first running out of money
- Potentially build the business to a point where you don’t need a Series A (rare, but it can happen)
- Not over-hire. Over-hiring is extremely common. Being cash conservative never even presents this as an option
- Do things that don’t scale
Why it might not work
Of course, conserving money can have present challenges:
- You need a lot of money, and you need to spend it. These are capital intensive businesses, mostly non-SaaS and typically hardware focused
- You’ve already found PMF, and just need gasoline
- You (the founders) and a few engineers don’t possess the skills necessary to build a product sufficient in supporting PMF. Meaning you have to spend on a larger team to build the product
Thanks for reading. Feel like I missed something? Have suggestions? Contact me.