A $113M seed round is a death sentence
This week, Mistral AI, a startup founded a few weeks ago that does not have a product, announced its $113M seed round. I really wish they succeed but I think this is a death sentence for this company and a heavyweight the founders will have to carry through their careers.
The problem is the size of the round and the stage of the company.
With a $113M seed round without any product or traction, the founders are going to have immense pressure to deliver. They have an immense pool of resources but absolutely no product. When you have unlimited resources, you can try many things but you then lose focus. Focus is everything you need at this stage. Scarcity puts pressure on you to execute your vision and go to the next milestone. $113M gives you enough money for years to try different strategies without obsessing about a particular one.
There is also the problem of ownership. This $113M round values the company at $240M, which means the company gave away almost 50% of the company. Each founder has between 10% and 20% of the company and some investors may have more power than some founders at this stage. If the company succeeds, the founders will not have the incentive to continue nor the power to push their vision. They will instead be instructed by the board on what to do.
There is the problem of hiring. When you announce you have $113M in the bank, employees will be demanding more benefits, salary, and stocks. People will join because they want to ride the wave, not because they have conviction in the product (there is no product!). And with $113M, the company will grow fast and this is going to be a nightmare to manage, especially with founders that have between 3 to 6 years of experience (see Dylan Field's experience when he started Figma - it’s challenging for a 20-something to manage older people with more experience).
There is one argument that AI companies need to raise so much money because of the cost of computing. This is a fallacy that has been proven wrong times and times again. Innovative companies never come after raising huge rounds. They come because they have a great product. Facebook seed round was $500,000 in 2004 and competitors had space in datacenters. Google started with $100,000 in 1998 when Yahoo! had already a ton of compute on its hands. Figma started with $100,000 when Adobe had resources. Great companies did not start with a huge seed round: they started with an idea first and then, some money to push an idea with great potential.
A $113M round is thinking backward in that you get some money first and then find a problem to solve. Considering that money brings creativity is a fallacy. The opposite is true: creativity can bring a great product that brings immense returns.
If you want to compare industries and round sizes, John Carmack’s AI company, Keen Technologies, raised a $20M round. Carmack is a living legend that built a gaming juggernaut and developed breakthrough technologies at Meta. He demonstrated his high execution abilities times and times again. Mistal’s round is 6 times the size of Carmack’s round with people that still have everything to prove.
I wish I am wrong and this company ultimately succeeds. I want nothing but for us to be amazing.