Runway vs. Weight: Making the Case for Pre-Seed

By, Aaron Stachel, Partner

A common way to think about a startup’s level of funding is “runway,” typically measured as the number of months you have before you will run out of cash.  This analogy is useful but incomplete.

In a prior life, I flew helicopters in the Army.  During refueling, we did not measure fuel in gallons but in pounds. Fuel is critical and provides range and time on station to conduct your mission…a parallel analogy to runway and a good thing.  But fuel also adds weight, and weight brings challenges: it increases burn rate, makes you less nimble and leaves you less margin for error in tricky situations.
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The problem with the runway analogy is that, in theory, more is always better. While having more time and resources sounds obviously better, it ignores the “weight” of that capital. Some of the key downsides of “excess capital” are:

• It’s easy to spend money on the wrong things. Doing things that will set you up for success down the road sounds good, but it’s often a distraction from the things you must do to survive. Remaining laser focused on the critical milestones that will bring in the next round of capital is what will ensure you survive to do those other things.
• Inflated valuations are hard to grow into. Larger investment rounds (i.e. more runway) often come with larger valuations as investors try to balance their ownership with the team’s. Those large valuations create a very high bar to clear on the next round to get an increase in share price, and down rounds are demoralizing.  While it’s easy to say, “I just won’t increase my burn,” it’s much harder to do in principle as everyone strives to create the growth that will justify the last valuation.  
• It’s very hard to reduce spending that’s not productive. If you’ve hired a bunch of people to help you hit your ambitious growth targets, and the growth is not coming, you’ll need to reduce expenses to “extend your runway.” While that sounds easy, it’s incredibly painful to fire people you just convinced to come join your startup and potentially decrease salaries for those who stay.

At FirstMile, we aim to lead or be part of the first round of venture funding. We’re underwriting that team’s ability to use this funding to hit the milestones needed to attract the next round investors at a material step up in valuation. 

When we started our firm in 2014 and seed was relatively new, the round sizes in our market were often a million or less. The whole idea of seed was that you could leverage AWS, Stripe, etc to quickly and cheaply build a minimum viable product, close on some customers and prove to larger funds you were ready to start scaling.  Given the competition at the model layer, generative AI technology is likely to be affordable and widely available, adding another tool to drive capital efficiency.
As seed funds increased in size, the median round size has increased to over $3 million, and occasionally much larger.  Rounds have inflated much more than the costs to startup.  Now “pre-seed” has filled the funding gap that we used to call “seed.” We would argue raising a reasonable amount of capital that creates at least a rough outline of product-market fit is still the right place to start for most companies. If you are a capital efficient team building in a non-coastal tech hub on the verge of going to market, we would love to learn more.