TinySeed raised $4.5m for Fund 1 in Jan 2019 which went into 23 companies across 2 cohorts
3 companies have raised traditional VC leading to a 55% IRR (paper markup only, no cash payouts/DPI), no companies have paid out dividends 1:13:40
Raising Fund 2 now targeting $35m. Pitching a 20-30% IRR driven 80% by portfolio exits, just 20% on dividends portfolio founders choose to pay out over time. (Invest here)
TinySeed is a new breed of fund investing in early stage Software companies. The firm gives founders optionality to stay small and make money off cashflow, or continue on the VC path and go for a billion dollar home run.
To get a better understanding of how TinySeed works I interviewed founder Einar Volsett on June 1st.
Einar says: “You can’t raise money from a seed investor with a pitch that sounds like this: My goal is to build a software business with 20m in revenue that throws off cash.” 1:06:19
Investors need larger and larger returns so capital flows to a smaller cohorts of founders who pitch the big exit.
Today, there is plenty of liquidity in the market chasing a smaller group of founders which drives the price up. This vicious cycle takes over.
More and more capital is being concentrated into a smaller set of companies. 1:08:28
TinySeed doesn’t believe this makes sense.
How does TinySeed work?
According to their website, the firm invests $120,000 for 10-12% of early stage SaaS companies. For each additional founder, TinySeed puts in another $60,000.
The idea came from Rob Walling who sold his company Drip to Leadpages and founded bootstrapped community MicroConf where he met Einar.
They both agreed that there was a different way to do startups that didn’t’ involve loads of VC, no profits, and “growth at all costs” 1:00:01
You can have a sustainable, small SaaS business thats throwing off cash and you don’t need VC’s to do that.
Einar shared, “a standard venture investor has to pay a $10m valuation to get into good companies. A 50x return means the company would have to sell for $500m.”
He continued, “At Tiny, we go in at a $1.5m valuation. A 50x return is a $75m exit. That kind of outcome is much more doable” with a larger pool of capable buyers.
This gives founders more optionality.
Where does TinySeed get money from?
In January of 2019, TinySeed raised $4.5m from 60 different limited partners (LPs). An average check size of $75,000. TinySeed pitched investors on the idea of a fund that would take 10 years to return at an IRR of 20-30%. 1:09:41
For comparison, most top tier VC firms earn 40-50% IRR’s for their LP’s.
“We’re just about to start fundraising fund 2,” said Volsett, “targeting $35-50m.”
They had planned to start calling family offices asking for cash in February. COVID changed this. They put the raise onhold and instead will go to market with Fund 2 in the next few weeks.
How Does TinySeed Make Money?
TinySeed makes money two ways:
- A portfolio company founder gets big enough where they decide to take cash out of the business. If TinySeed owns 10% of the company, every dollar the founder takes out, $0.10 goes to TinySeed.
- A portfolio company exits. If a TinySeed founder sells for $10m and TinySeed owns 10%, the firm makes $1m on the deal from their initial $120,000 investment.
Einar believes that the majority of the fund returns will come from portfolio companies exiting, not dividends paid out.
It’s important for founders to understand this as they think about working with TinySeed. While you certainly don’t have to exit, the fund model is to make the majority of its returns off exits.
Einar gave an example of an exit vs. dividends paid out where the lump sum made from an exit would take 10-15 years of dividend payments to make the same amount.
“We’ll make more off exits” over the next 10 years. Based off Tiny model, dividends will add about 20% to the fund returns over time.
Will TinySeed Fund 1 portfolio companies feel pressure to sell 7-10 years from now as Fund 1 matures?
How do VC’s Feel About TinySeed Owning Equity?
When most VC’s invest in a new company, they create a new class of controlled stock (Preferred A/B/C for example). In the TinySeed terms, they state that TinySeed shares will always be treated as equal.
Einar assumes that in most cases TinySeed will have to give up these rights and maybe dividend rights as well but will fight to preserve its Pro-Rata right.
This essentially gives TinySeed the ability to participate in the new equity round. Volsett anticipates raising money to invest their pro rata by creating a special purpose investment vehicle (SPV) and letting TinySeed LP’s fill out the round. 1:16:41
TinySeed 5 years from now
TinySeed wants to broadly index into the early stage SaaS market to avoid mistakes most individual angels make (not enough diversity to get returns).
Volsette feels a cohort of 50 companies should be an ample index to prove out the funds model of 20-30% IRR’s.
TinySeed Portfolio Companies
2020 Cohort (12 companies)
- Userlist.com is a customer messaging tool for SaaS companies
- Seekwell.io helps you send SQL to google sheets, excel, or other applications
- Scrapingbee.com lets you scrape websites without getting blocked
- Scoutdns.com is a content filtering tool and malware protection at the DNS layer
- Scatterspoke.com helps teams improve better with smarter retrospectives
- Reftab.com is asset management tool for fixed assets
- Dealforma.com provides datapoints on 1000’s of biopharma companies
- Codesubmit.io helps you give take home coding assignments for your developer job candidates
- Builderprime.com is CRM and project management software for contractors
- Bluerithm.com is a cloud based platform designed to streamline your mission-critical and commercial commissioning projects.
- Segmetrics.io is an analytics platform for Infusionsoft
- Squadcast.com helps podcasters record remotely
2019 Cohort (10 companies)
- Loadster.app is a Load testing platform for web apps, APIs, and static websites.
- Getpopsicle.com helps manage after school activity registrations for summer camps and aftercare.
- Reimbi.com is a tool that helps HR teams manage reimbursement for job candidate expenses.
- Usesummit.com is a forecasting tool for software founders.
- Statickit.com is a drag and drop editor that helps create contact forms and payment flows.
- Branchci.com helps wordpress developers automate their releases.
- Castos.com helps podcasters with hosting and analytics.
- Clientrock.com is an automated client portal for fixed fee and subscription law firms.
- Gatherit.co is a powerful platform that helps design teams build shared digital resource libraries and manage project specifications from any location.
- Lessaccounting.com is accounting software.
More on TinySeed Co-Founder Einar Volsett
Einar Volsett grew up in an old mining town in northeast England that was economically depressed in the early 80’s.
He got into hacking by phone freaking in 1991 when he was 13 (hes 42 today). This was his first venture into coding.
In undergrad, one of the founders of SAGE came and spoke which got Einar thinking about Entrepreneurship.
During Volsett’s PhD he started reading Paul Grahams work on startups. This further opened his mind to entrepreneurship.
Even with this influence, Volsett stuck with the academic route, saying: “I guess I needed to prove how smart I was.”
After his PhD, Volsett taught at Cornell for a few years but was not interested in being a tenured professor. Awful lot of academics who are pretty unhappy. If you’re in CS academia and you decide to go to industry, people almost treat you like “oh you didn’t quite make it, go do your thing, good for you”. The real pinnacle of achievement is pure academic research.
After quitting academia, Volsett and his wife moved to California following a great job offer his wife pursued. In California, Volsett met the team at Remail and joined the team as they entered the YC program.
2009: Volsett Joins Email Startup ReMail
Gabor Cselle was an intern who worked on Gmail before leaving to launch Remail in 2008. The company iterated through many products as they went through Y Combinator:
“We built 3 products, but the one that took off was an iPhone app for travelers that would download all your email to your phone for instant local search,” said Cselle.
In 2010 Remail was acquired by Google in an acqu-hire deal structure (little cash). Volsett says he didn’t see meaningful cash returns from this exit.
Not wanting to join Google, Volsett ventured out on his own.
2010: Volsett Launches Left Coast R&D
This firm helped companies build their MVP’s faster. The company worked on apps that had been downloaded more than 1,000,000 times.
2018: Volsett Launches Discretion Capital to Help Founders Exit
Discretion capital took fees to help founders sell their companies. Conversio had raised $500k and sold to Campaign Monitor in 2018. This was a deal Discretion helped on.
During this period, Volsett attended Rob Walling’s Microconf, a conference for bootstrapped founders. They both agreed there had to be a better way for early stage founders to access capital, without committing to a one track VC route.
2018: TinySeed Launched to Give Founders Optionality
The duo went out and raised $4.5m from 60 investors. To date, this money has been invested into 23 founders across two TinySeed Cohorts.
As the virus calms down, and the world normalizes, Volsett plans to hit the road again in the summer months to raise Fund 2 targeting $35m.
TinySeed intends to make most of its money when portfolio companies sell. In the meantime, TinySeed will help them build and get to profitability. 1:16:41