Why Preseed and Seed Startups Shouldn't Use Bankers For Fundraising

Published 2024-06-28 21:14 EDT

Let's dive into why pre-seed and seed stage startup founders might want to avoid using a banker to raise capital.

  1. Early Stage Nature: Pre-seed and seed stages are critical for shaping a startup's direction. Founders need to be hands-on and deeply involved in fundraising decisions. Relying on a banker would distance them from this crucial process.
  2. Personal Relationships: At these early stages, funding often comes from friends, family, angel investors and soem ealry-stage VCs. These relationships are personal and built on trust. A banker's involvement would mean that the opportunity to build a relationship with current or future investors is very limited. See the last point.
  3. Costs and Fees: Bankers charge fees for their services, which can eat into the limited capital raised by a young startup. Startups need to conserve resources and paying hefty fees to a banker at this ealry-stage might not be the best use of the funds being raised.
  4. Understanding the Business: Founders know their business intimately. A banker, while skilled in finance, may not fully grasp the startup's unique value proposition, market fit, or growth potential. Hence, entrusting the future of your business to someone who isn't intimately involved in every nuance of the business, could potentially do more harm than good when raising from sophisticated investors.
  5. Speed and Agility: Startups need to move fast. Banker's typically have a process. Waiting for a banker's processes and (potentially) approvals can slow down fundraising efforts. Direct communication with investors allows for quicker decision-making and closing of investors. Also see points 1 and 2.
  6. Investor Relationships: Founders benefit from building direct relationships with investors. These connections go beyond just securing funding—they can lead to mentorship, strategic advice, and future rounds.

Remember, every startup is unique, and there's no one-size-fits-all approach. However, staying closely involved in the fundraising process during pre-seed and seed stages can be advantageous for founders.