In the SmartUp methodology, successful early stage funding is not measured by how much money is raised, but by how effectively it is used. Yonatan Stern critiques the modern trend where Pre-Seed rounds can reach as high as 5 million, contrasting this with his experience building three successful companies for less than 5 million combined. The objective of early funding is to reach positive cash flow quickly. A company that relies continuously on new funding is described as a “baby,” while a profitable company is independent.
Early funding primarily buys time to experiment. The time a startup has to live is calculated as Money in the Bank divided by Monthly Expenses. Raising large sums is ineffective if burn rate immediately increases to match the new capital.
The sources describe several key sources of early capital. Many first-time entrepreneurs begin with personal savings or funds from friends and family, often in the range of $20,000 to $50,000. Another major source is Angel Investors, whom SmartUp describes as the ideal “first co-founder.” Cash from an angel investor is extremely versatile compared to a human co-founder, and raising a few hundred thousand dollars typically results in 20–25% dilution, rather than the 50% dilution that comes with adding a co-founder. Customer revenue is described as the most sustainable source of funding, with SmartUp advocating for “Branding First,” selling the concept or service before investing heavily in product development.
To better align founder and investor incentives, SmartUp suggests alternative funding structures such as a loan or revenue share model. In this structure, the investment is treated as a loan, and once the company becomes profitable, a percentage of profits is used to repay the investor, who may still retain equity.
Common pitfalls in early funding include over-hiring after raising capital, which creates rigid salary expenses and shortens the company’s lifespan. Another pitfall is the “pre-revenue” trap, where startups delay monetization to show usage growth. SmartUp argues that this leads to a vicious fundraising cycle and recommends inverting the process by selling first and building later.
