Venture Capital

Why Startups Should Consider Raising A Series Zero

By Keith Smith, co-Founder, and CEO of Payability

It could have been just another Monday morning at Payability. Our virtual all-hands meeting was about to begin. Patiently sitting at the bottom of the agenda -- after conversations about weekly metrics, tweaks in our algorithm and our latest marketing strategy -- was a bullet point “Fundraising update” that would accelerate the growth of our company. I let our team know that we would be raising our first round of outside capital since founding our company over six years ago.

Payability is the largest independent e-Commerce and funding payments platform in the U.S., but we have been deliberately slow to raise. Two years after we launched we had an opportunity to take outside investment. We declined, deciding it would be overly dilutive and we weren’t yet ready to prioritize scaling. We have a goal to be the clear leader in our market, but our view was that the best way to do so was to focus first on our foundation and only after that is secure would we shift our focus to hyper growth.

Early on, we stuck to our strategy of prioritizing product market fit, unit economics and our risk model, and to wait to prioritize scaling until after we met our internal goals in those three areas. We believe that if you’re going to start a for-profit business, you should have a plan for how to make a profit. Given the business we are in, that means scale should come after - not before - we’ve figured out our unit economics.

Raising capital is, of course, tempting, especially right now. The Q1 U.S. venture market was on fire, nearly doubling from the same time last year. And the trend is still going full throttle. With supply overflowing, it’s easy to get caught up in taking capital even when it may not make sense.

We embrace being equity stingy. In addition to this being the right order for our particular business, the other thing that kept us from raising early was our entrepreneurial optimism about the value of this company. We felt so strongly about its potential to be a billion dollar business, that selling 30% to someone we don't know for a mere $10M early on seemed to me a travesty. We had a vision to build a business with great fundamentals that would be a solid profit machine down the road, but we had to prove ourselves by accomplishing significant milestones before investors would begin to see the same value we did. Then, and only then, did we want to raise outside equity capital.

Our capital efficient philosophy has allowed us to avoid rushing many of the decisions that come with hyper growth and have instead been able to choose value over valuation and direction over speed. This allowed us to aim our rocket before we truly launched it, and has created a structural foundation that can hold up the industry’s skyscrapers, if need be. Even in the world of fast paced startups, patience can in fact still be a virtue.

In shifting to a slow-to-raise mentality, I suggest thinking along the lines of a 10-year horizon and what makes the most sense. For many businesses, especially in the early days, choosing to scale and grow before getting a strong handle on the fundamentals of your business means you are building a large, fragile venture that will not be able to adapt when any significant changes or competition head in your direction. Understand your own risk profile before you devise your strategy and before you take a dollar of permanent capital.

Let me caveat that there are some businesses where massive scale upfront makes sense and you can later figure out how to leverage your growth and size and become profitable. Facebook, Amazon and Uber are fantastic examples of this kind of model - and it obviously works wonderfully for some venture backed companies. But we shouldn’t fool ourselves into thinking that is the only model for building a dominant tech business. Know what’s right for you and your business. Don't let the tail wag the dog from an investor standpoint. VCs can be terrific pattern matchers. That doesn’t mean you have to fit their pattern.

While I urge thoughtfulness in raising capital, I am nonetheless encouraged by the new forms of business funding that have emerged. There’s been a theme for years that venture capital is being disrupted or that Silicon Valley is being disrupted. That’s perhaps not quite on the mark. Financing options for the startup engine in America have simply expanded and gotten better and more robust through SPACs, crypto or even crowdsourcing fundraising efforts that have cropped up. Still, none of them have displaced venture capital. It’s as important as it ever was. Silicon Valley is as important as it ever was. But Austin is also important as is Seattle, as is New York, and as of lately, so is Kansas City and dozens of other cities throughout the country.

Even when we close our first Series A, we will forever celebrate our most important round: raising a ‘Series Zero’ by raising nothing at all.

About the author: Keith Smith, co-Founder, and CEO of Payability, originally hails from the Pacific Northwest and now calls New York City home. Keith spent the initial few years of his career working as an analyst at a few financial institutions before founding CyberMortgage and then Zango. Keith was most recently co-Founder and CEO of BigDoor, which provides loyalty programs to large consumer brands, including; NFL, MLB, CBS, Viacom, and Starbucks. A successful entrepreneur, Keith regularly lends his time to early-stage startups via TechStars and also serves as an advisor, investor and board member for multiple tech startups.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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