The Truth About Small Seed Rounds

One of the most critical (and often overlooked) pieces of advice for founders is this: Think very carefully before taking any round of funding. And no, the primary concern isn’t dilution. The real issue? Funding closes off exit opportunities.

Wait, what? Isn’t an investment supposed to help you build a more valuable company, making it more attractive for an exit? Yes—but it also drastically increases the price tag on your company, which shrinks the pool of potential buyers.

The Economics of Higher Valuations

Investors aren’t in the business of breaking even. They expect a return, and their expectations set a “floor” for acceptable exit outcomes. Most professional investors aim for a 5X to 10X return on their investment. More importantly, they often have legal stock preferences that allow them to block exits that don’t meet their expectations.

At the same time, they have an anchor for how much of your company they want to own—typically 20% to 30% per round. Let’s work through some quick math based on midpoint values of these expectations:

• Investors want to own 25% of your company.
• That means the post-money valuation of your round will be 1.33X your current value.
• Investors want a 7.5X return, so the required exit price becomes 10X your current value.

Every round of funding you take raises your required exit price by an order of magnitude.

The Exit Math in Action

Let’s put this into perspective:

• Seed Round: Suppose you raise a seed round at a $3M pre-money valuation. Now, to hit a 10X investor return, you need at least a $30M exit. Doable.
• Series A: You raise at a $10M pre-money valuation. Your new required exit price jumps to $100M. That’s a steep climb.
• Series B: Now you’re raising at $25M pre-money, pushing your required exit to $250M. How many companies exit at this level annually? Only about 50 to 100.

And yet, each year, there are roughly 1,000 early-stage VC investments competing for those exits. The odds? Not great.

The Series A Cliff (and Beyond)

There’s a well-documented drop-off in exit opportunities at Series A and beyond. Every round you take exponentially reduces the number of viable buyers, making an acquisition increasingly difficult. Founders should weigh this reality carefully: is the progress you’ll make with additional funding worth the dramatically narrower exit path?

Funding isn’t inherently bad, but it fundamentally changes your trajectory. Before you take that next round, ask yourself: Are you truly ready for the stakes to go up?

This blog post was originally published on 07/02/2013 and last updated on 12/14/25.

It used to take millions in funding to build a tech startup. Before cloud computing and open-source software, launching a product required expensive hardware, in-house servers, large engineering teams, and significant capital just to reach early milestones. Because of these high costs, venture capital firms primarily funded startups at the Series A stage, when companies needed large investments to scale.

Over the past two decades, however, the cost of building a startup has plummeted. Cloud infrastructure eliminated the need for expensive servers. Open-source software reduced development expenses. Low-cost distribution channels made it easier than ever for startups to access customers. As a result, early-stage investing has evolved, giving rise to new funding stages—first Seed, then Pre-Seed, and now Pre-VC—each emerging as the capital required to launch a company decreased.

For investors, this shift presents a compelling opportunity. While traditional VCs continue to focus on larger deals, many early-stage companies are raising smaller rounds well below the investment minimums of traditional institutional venture capital. The result is a funding gap—the Pre-VC stage—that remains largely overlooked by institutional investors, creating an open playing field for those who recognize its potential.

How Early-Stage Investing Evolved

From Series A to Seed: The First Shift (2000-2010)

Before the 2000s, Series A was the starting point for venture capital, with round sizes typically ranging from $3 million to $10 million. Startups at this stage were often pre-revenue, and investors focused on market size, the strength of the founding team, and long-term growth potential rather than financial performance. Funding rounds below $3 million were often limited to angel investors, friends & family, and bootstrapping.

As technology became more capital-efficient, startups needed less money to build and launch products. This shift led to the rise of Seed rounds. By the mid-2000s, dedicated Seed-stage VC firms formalized Seed investing, with round sizes typically between $1 million and $3 million, making Seed a critical bridge to Series A.

The Rise of Pre-Seed: The Next Gap (2010-2020)

As costs continued to decline, some startups needed even less capital before raising a Seed round, which led to an explosion of Micro-VC funds and the emergence of Pre-Seed funding, with rounds typically ranging from $750,000 to $3 million, a space that had formerly been the sole domain of angel investors, friends & family, and accelerators. However, as more founders sought early capital, Pre-Seed investing became more structured. Also, the introduction of the SAFE note by Y Combinator in 2013 played a major role in standardizing these early rounds, making it easier for startups to raise funds without the complexities of traditional equity financing.

Much like Seed rounds a decade earlier, Pre-Seed investing grew over time. Traditional VCs were initially hesitant to participate due to the small check sizes and the labor-intensive nature of early-stage investing. But as startup funding continued to evolve, Pre-Seed rounds became more popular, and many institutional investors now actively participate in this stage.

The Emergence of Pre-VC Investing

Just as Seed investing institutionalized in the 2000s and Pre-Seed evolved in the 2010s, a new funding gap has emerged between angel rounds and institutional VC: Pre-VC investing.

Today’s institutional venture capital firms typically avoid participating in rounds below $1 million, leaving many early-stage startups reliant on friends & family, angel investors, or their own resources. If this story sounds familiar, it’s because it is. In the 2000s, Seed investing was considered too early for institutional venture capital—until it wasn’t. In the 2010s, Pre-Seed investing was dismissed as too small—until it wasn’t. Now, Pre-VC faces the same skepticism from traditional investors, even as it quietly grows.

While large VC firms hesitate, this emerging stage presents an opportunity for investors willing to adapt. Just as institutional investors once overlooked Seed and Pre-Seed, they are now bypassing Pre-VC. This stage represents a market inefficiency, one that investors can leverage by building diversified portfolios of high-potential early-stage startups.

Why Pre-VC Hasn’t Caught On with Most Institutional Investors

Traditional venture capital firms aren’t ignoring Pre-VC because it lacks potential. Instead, structural challenges within their investment models make it difficult for them to participate effectively.

One challenge is that early-stage investing is labor-intensive. Most traditional VC firms pride themselves on using their subjective expertise to pick winners. They evaluate thousands of pitches annually and conduct extensive due diligence before making an investment. The hands-on nature of their involvement makes it difficult to justify small investments.

Another challenge is portfolio construction math. A traditional $100 million venture fund might invest in 25 companies, with an average of $4 million per company. Smaller investments don’t make economic sense for most VCs because they require just as much time and effort as larger deals while contributing little to overall fund returns. A $250,000 Pre-VC check, for example, is too small to justify the labor involved and too insignificant to meaningfully impact the fund’s performance.

For large institutional VC firms, Pre-VC investing simply doesn’t fit their model.

Why Pre-VC Is a Significant Opportunity for Investors

The Pre-VC stage is attractive to investors for two key reasons: capital efficiency and competitive valuations.

Startups at this stage tend to be exceptionally capital-efficient, benefitting both founders and investors. Highly capital-efficient startups have less reliance on external funding which means greater resilience during bad funding markets, like what we’ve seen over the last couple of years. This can mean less dilution risk and higher potential return on investment. Capital-efficient companies can also pivot faster and adapt to market changes.

Many companies at this stage reach profitability early, which means Pre-VC isn’t just their first funding round—it could be their only funding round. Investors at this stage have the rare opportunity to buy meaningful ownership in startups that may never need to raise additional capital.

In addition to capital efficiency, valuations at the Pre-VC stage remain highly attractive. While valuations at all VC stages have soared in recent years, Pre-VC valuations have remained relatively flat. As an example, between 2014 and 2024, Seed valuations rose by 183% according to Pitchbook. In contrast, valuations for Pre-VC investments at Right Side Capital Management (RSCM) increased by only 10% during that same period. This is all a function of supply and demand of capital. During the past decade, especially before 2022, thousands of new VC firms were created, and the VC industry raised tremendous amounts of capital, leading to ever-increasing valuations.  But at the Pre-VC stage, demand has risen every year from founders but very few institutions address this demand, keeping valuations depressed.

Since 2012, RSCM has invested in over 2,000 startups, specifically targeting this funding gap. By streamlining the investment process and challenging traditional VC norms, RSCM has been able to exploit the inefficiencies at this stage and invest in promising early-stage companies at significantly discounted valuations.

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Pre-VC Funding: Investing in the Future Before the Herd Arrives

Early-stage venture funding has always evolved. Seed rounds were once an informal and overlooked segment of investing until they became institutionalized. Pre-Seed rounds followed a similar trajectory, initially dismissed as too small before maturing into a widely accepted funding stage. Now, Pre-VC is emerging as the next logical step in the evolution of early-stage investing.

This funding gap exists not because startups don’t need capital, but because traditional investors aren’t structured to provide it. For those who recognize this shift, Pre-VC represents a rare and valuable market inefficiency.

• The cost of building a startup has never been lower.
• Institutional VCs are ignoring this stage.
• Valuations remain competitive.

As the venture capital landscape continues to evolve, investors who recognize this shift now will find themselves ahead of the herd—investing in the future before the rest of the industry catches up.

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Have you ever finished a challenging task and thought, I went about that all wrong—why didn’t anyone warn me? If you’re gearing up to raise a seed round, consider this your warning.

When faced with a challenge, most entrepreneurs seek out as much data as possible, then dive in. For fundraising, that often means scouring TechCrunch, listening to founder stories, and analyzing top VC blogs. But these sources are inherently biased—only the most unusual cases make the headlines. If you optimize for the outlier, you’ll struggle with the typical case.

At RSCM, we've observed or participated in hundreds of rounds over the last decade. We know what the typical seed raise looks like—and how to navigate it successfully.

The Two Most Common Mistakes: Too Much Money & Fixating on a Lead Investor

The biggest fundraising mistakes we see are:

1. Setting a target raise that’s too high.
2. Getting anchored on the idea of securing a "lead" investor.

Raising a seed round is rarely easy. But the difficulty increases dramatically when moving from a $500K target to $1M+. At that stage, you usually need significant revenue, a well-known founding team, or truly breakthrough technology. While it’s possible to find investors who fall in love with your idea, the odds are low, and the effort required is high.

Even if you meet these extreme criteria, raising $1M+ often requires a lead investor. You might think, That’s fine, I want a lead! But consider this analogy: If you’re an engineer, would you design an architecture with a single point of failure? In marketing, would you create a campaign targeting the lowest-converting users? In sales, would you prioritize prospects with the longest sales cycles? Probably not—yet that's effectively what founders do when structuring a round around a lead from the outset.

If you don’t secure a lead, you could end up with nothing. The universe of lead investors is smaller, they take longer to engage, and closing them is a lengthy process. This delays fundraising and distracts from building your business. Unless your company has at least $20K in monthly revenue, a dozen professional investors already interested, or an absolute need for a large capital infusion, this approach is suboptimal.

A More Effective Strategy: Modest Raise, Brick-by-Brick, Graduated Pricing

If you have little revenue and a limited investor network, start with a modest raise—$250K to $500K. Ensure your plan demonstrates clear progress with this amount and that your cash burn aligns with reasonable milestones.

Step 1: Secure Initial Commitments

Begin with your strongest supporters—friends, advisors, early customers. Many founders hesitate to ask for small checks, thinking it won’t move the needle. But at the start of a raise, momentum is more important than amount.

Offer attractive terms to incentivize quick commitments. A convertible note with a 20% discount, 5% interest, and a compelling cap is a good starting point. A lower cap at the beginning rewards early investors for moving quickly.

Step 2: Raise the Cap Gradually

Once you’ve secured $100K–$200K, bump the cap up. The “great deal” becomes a “good deal.” The increase should reflect investor demand—if early commitments came quickly, raise the cap two notches; if it took longer, only one.

Continue creating urgency. Tie limited-time offers to natural deadlines, such as an accelerator Demo Day, a major product release, or a customer launch. Investors respond to scarcity—use it.

Step 3: Build Toward an Optional Upgrade

Once you’ve closed 50% of your target, you gain leverage. You now have money in the bank, customer traction, and reduced risk. At this stage, you can:

1. Tap into bigger geographies. If you’re outside SF or NYC, start pitching investors in those markets.
2. Leverage platforms like AngelList. A strong lead can attract syndicate funding.
3. Approach small funds that lead rounds. With momentum, you can explore a larger raise.

Sidebar: Process Matters

Fundraising requires structure. Track your prospects in a CRM or spreadsheet. Categorize investors into:

• First check: Early believers who can move quickly.
• Second check: Investors who follow others’ lead.
• Later check: Those who need more traction before committing.
• Lead investors: Professional funds who might anchor the round.

Initially, focus on first and second-check investors. Ask them for referrals to expand your pipeline. Engage with later-check and lead investors early but don’t prioritize closing them until you’ve built momentum.

Oversubscribing, Securing a Lead, and Converting if Necessary

If demand is strong, you may be in a position to upgrade your raise. There are two paths:

1. Oversubscribe: If interest exceeds your target, tell investors you’re at capacity and need firm commitments. Use scarcity to drive action.
2. Entertain a Lead Investor: If a fund expresses interest in leading, push for a term sheet within 7–10 days. Avoid holding out so long that you lose other investors.

Most institutional investors are comfortable leading a seed round with a convertible note. If you’ve already raised via notes and a fund insists on a priced round, don’t worry—you can always convert the notes into equity.

Final Thoughts

It’s easy to adjust when things go better than expected. Plan for the typical case, not the outlier.

Depending on market conditions, only 10-20% of seed rounds have a true lead, and another 10-20% are oversubscribed. That means 60-80% of rounds follow the standard path: a gradual raise without a formal lead. And that’s completely fine.

Fundraising is difficult. Raising $250K to $500K gives you roughly a year of runway. And we’ve seen firsthand how much founders can achieve in a year. Focus on building, execute strategically, and the capital will follow.

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This blog post was originally published on 07/18/2016 and was last updated on March 12, 2025.