Key Takeaways

  • 37signals generated $370 million in profit since 2020 without institutional venture capital on its cap table.
  • Jason Lemkin reversed his stance on the "one-and-done" seed model, warning that taking even one early round traps founders who want to pull cash out.
  • Buying out an early investor who owns 30% at a modest 6x cash flow multiple eats two full years of total company profits.
  • Venture investors expect a $25 billion exit or failure, making it nearly impossible to distribute dividends cleanly from profitable software.

The False Comfort of One Seed Round

For years, founders treated Zapier as the holy grail. The playbook looked simple: raise a single seed round, skip the Series A hamster wheel, reach cash flow positive, and run a profitable business on your own terms.

Jason Lemkin spent years recommending that exact path. Now, he sees it as a dead end.

“I used to think this one and done was a Nirvana,” Lemkin said. “The three of us get together, we want to start a company. We're first-time founders. We don't have the money. We raise a couple million from 20VC seed or whatever. And we just keep growing our company. It's not a lot of pressure. We don't have to have board members.”

The trouble begins the moment the company starts printing cash. In a pure bootstrap setup, profit flows straight to the founders as distributions. Once outside capital sits on the cap table, pulling cash out becomes a legal and strategic headache. Preferred shareholders rarely sign off on dividend payouts when their fund models require compound growth.

“I think it's a trap because you can't dividend out the profits as easily,” Lemkin said. “You can't become a 37signals that easily. I almost wonder if no venture rounds is the way to go rather than one.”

The Brutal Math of Buying Out Investors

When founders realize they cannot dividend cash, their next thought is usually a secondary buyout: use company cash flow to buy the early investors out.

Rory O'Driscoll ran through the basic arithmetic of why that rarely works in practice.

“If you're trying to buy out an investor that owns 30% of the company and you want to buy it out for six times cash flow, by definition, you're tying up two whole years cash,” O'Driscoll said. “So it gets risky if you're doing it with debt. So you're right, these are hard deals to negotiate.”

Think about what that means for a company generating $5 million in net profit. If a seed firm owns 30%, their share of the company is valued at $9 million at a 6x multiple. To buy them out, the business must redirect almost two years of its entire post-tax earnings purely to remove one name from the cap table. If the business hits a speed bump or takes on debt to fund the purchase, the whole company faces bankruptcy.

Meanwhile, pure bootstrappers keep every dollar. Harry Stebbings pointed out that 37signals accumulated $370 million in profit since 2020 alone. They did it without debt, without liquidation preferences, and without asking an institutional partner for permission to distribute profits.

As O'Driscoll observed, venture capital enforces a binary worldview: “I want to make 25 billion or die trying.” If you build a software business that kicks off $10 million in steady cash every year, you have built an engine of personal wealth. But if a fund owns 25% of it, you have built an asset they consider a statistical write-off.

What to Do With This

Before you sign a seed term sheet this month, model the exit math in reverse. Take your projected year-five cash flow, calculate a 6x valuation multiple, and multiply it by the 20% to 30% equity you are giving away. If you cannot afford to buy that stake back in cash, and you do not intend to sell the business for billions, stop fundraising and build on customer revenue from day one.