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A Guide to Seed Fundraising
- urs2102 11y agoThis is fantastic. I am more and more impressed with the wealth of knowledge being shared by YC, especially regarding clarifying common financial vocabulary (which is often used to make people believe that finance is difficult as the terminology used in discussing finance is designed to sound more complicated than it is). Similar to how clear and concise the SAFE documents are, this is really nice to read.
- soheil 11y agoThis seems to be a trend, it reminds of having a blog for your product. It's a way to attract leads, gives your free SEO traffic, makes people that much more likely to convert. I'd like to see some numbers on how much more likely to convert (to join YC/others) hackers/founders will be after reading such posts.
- estefan 11y agoI've been reading "Angels, Dragons & Vultures" recently to learn about this stuff. I highly recommend it.
- salmonet 11y agoSeed fundraising is so confusing, especially for first-time founders. Everyone seems to have a different opinion and you can never be sure about people's bias or motives. I appreciate YC leveling the playing field with straightforward founder-friendly information.
- josh_carterPDX 11y agoI agree with this so much. For me, I was getting so many people hitting me with different advice. Don't include this in your pitch deck. Ask for less money. Don't reach out without an intro. It's tough to know who to listen to. However, the best advice will come from yourself and just putting yourself out there. I met with some really cool VC folks who gave me great feedback. I think the best feedback I got (and would equally give) is to have a thick skin. This is your baby, but if you can't take honest criticism then you're in the wrong business. People may not like what you are doing, but as long as your open minded enough to listen to the feedback and take it to heart, you're doing the right thing.
- logicallee 11y agoThis Guide has a step baked in, which is move to Silicon Valley. I know this because it's the most important step, and geography plays such a defining role that I expected the guide to talk about it. I didn't see any mention of this. Then I searched the document for "geography" (0 hits) and then "silicon valley" which had 3 hits, in the two snippets below: >A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k518 = $1.35mm. and >Most seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes). 17 Some early rounds are still done with equity, but in Silicon Valley they are now the exception. As you can see, this means the entire guide is written from the point of view of Silicon Valley. It still calls raising a seed round "brutal" and "long, arduous, complex, and ego deflating." But it is, at least, possible. For the vast majority of the cases they are talking about, after the long, arduous, complex, and ego deflating process, outside silicon valley there is still no seed round that has been put together. So, if you are reading this guide outside of silicon valley, please realize is that your first step toward having a crack at this arduous process, is to move to SV. Airbnb, based in San Francisco, still had these 7 famous rejections for its modest seed round: https://medium.com/@bchesky/7-rejections-7d894cbaa084 https://medium.com/@bchesky/7-rejections-7d894cbaa084 There's not a chance in hell it would have been funded on that model at all basically anywhere else in the world. Do what it takes: if your business needs a seed round, you owe it to your business to move to silicon valley.
- deleted 11y ago[deleted]
- jedberg 11y agoThis was a great writeup with lots of great information. One thing that bugged me though was the "When to Raise Money" section. It says, in part: "However, for most it will require an idea, a product, and some amount of customer adoption, a.k.a. traction." There was a great comment on HN a while back (I wish I remembered who said it) that said, "If you're asking about traction or revenue, you aren't making a seed investment". Andy Bechtolsheim was a seed investor in Google -- he gave them a check based solely on their idea and who they were. Paul Graham/YC made a seed investment in reddit and Justin.tv and whole host of other companies -- none of them existed as more than idea when YC invested. But VCs are risk averse people (ironic given they are in the risk business), so it makes sense that they would rather invest after a company can show a little traction, especially now that it's so easy to get that initial traction. I just think we need a new term besides "seed" to differentiate it from the true seed investments.
- kapilkale 11y ago> especially now that it's so easy to get that initial traction It's gotten much cheaper to get traction. In some consumer markets, it is basically cost-free; all it takes is a motivated technical entrepreneur with a couple months of savings.
- cperciva 11y agoI agree that it's cheaper, but "a couple months of savings" != "cost-free".
- staunch 11y agoYou can't have very meaningful traction until you release an actual product. Most significant products (e.g. Dropbox) will take one person at least 6-12 months to develop, followed by 3+ months before there are charts showing traction. a) You raise money after having invested a year of work on your own dime. b) You raise money based on your connections/pedigree ("reputation").
- spuiszis 11y ago
- cperciva 11y agoHow rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. I wish this was a bit more specific -- how long exactly is "several weeks"? 3 weeks (total growth of 33%)? 7 weeks (total growth of 95%)? 13 weeks (total growth of x3.45)? 52 weeks (total growth of x142)?
- geoff 11y agoIt turns out that it is hard to be specific, other than the longer you have that sort of growth, the better. Also, it is, perhaps, obvious that large percentage growth beginning from very small numbers is not as impressive as sustained growth even as the numbers get larger. Impressive / interesting growth is very much in the eye of the beholder, and most investors will just say they know impressive when they see it. This being said, I take the point that more discussion around this point would be helpful (unfortunately, this is true about much of the guide and I was trying to keep it reasonably short).
- cperciva 11y agoThank you! Your point about "starting from small numbers" is something else I was considering -- obviously increasing from $1/week to $10/week of revenue over the course of three months is not that impressive, despite being a 20%/week growth rate! I wonder if a good way to explain this would be via examples of (starting point, growth rate, duration) tuples and an "interesting" / "not interesting" assessment for each. (Can YC publish anonymized data on its portfolio companies?) This would allow readers to look for an example which roughly matches their performance -- which may sound silly to people in the valley who are surrounded by startups all day long, but there are a lot of us outside of the valley who rarely meet anyone working for a startup and never see any sort of concrete numbers like these. I absolutely agree about keeping the guide short though -- this is more a matter of something I'd like to see you (or someone else at YC) write more about in the future.
- amorphid 11y agoShow accelerating growth. Focus on that.
- gist 11y ago> The difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists. That's a pretty broad statement I would take issue with calling angels as a group, amateurs and hobbyists. Especially since some well know VC's also do angle investing.
- aagha 11y agoIf you hear an angel/VC saying they're interested in investing in you but they haven't done so within a couple of meetings, politely walk away. When you're in the seed stage, angels are investing in you and the idea. Some will want to know about traction MRR (walk away)and others will want to do deep-dives of your concept (again, walk away).
- josh_carterPDX 11y agoIt's funny. I read this and thought about a meeting with a VC a friend of mine had where the VC Partner was on his phone the whole time. My friend suddenly stopped talking and sat there for a good minute before the VC realized he had stopped. When he asked why he stopped, my friend said that he took the meeting to get his full attention. After a while the VC did it again. My friend closed his laptop and walked out of the building without saying a word. Weeks later they closed their seed round without that firm and now they're growing like crazy. I'm sure that VC Partner is kicking himself for being so inconsiderate.
- jacquesm 11y agoThat's super rude and your friend is incredibly patient for even giving the guy another chance. I'd have walked out on the first time.
- AndrewKemendo 11y agoI've seen this so many times and did the same thing. Actually turned out about the same for us, so I'm glad other people aren't taking any guff.
- jacquesm 11y agoYou are 100% spot on. I've been part of 3 seed rounds, and one of those had a bunch of savvy investors jerking the founders around waiting to see how desperate they would become before investing (better terms I guess). I didn't want any part of it, called a meeting with all the wanna-be investors and the two founders and committed on the spot. Then those that would have eventually invested all followed afraid to miss out on the deal as it was set at that moment (which was a pretty sweet one for the founders). So if you are in a situation like this force their hand, the ones that are in will still be in and the ones that were just dicking you around will bow out right away. The company is still around, they're doing fine. They will never be a 'homerun' but I don't care, they're good people and they work hard, it's just that their pivot turned out to be less of a money maker than the project they envisioned starting out (it was either pivot or die, I give them great respect for staying alive and generating a ton of work during the last 8 years), and I'll always have their back, no matter what.
- josh_carterPDX 11y agoSo much incredible information in this document. I think the misstep some Founders make is trying to raise too early. I hear stories all the time about people trying to raise on an idea. And while that can be useful, it is usually the wrong time to go after Investors. We made this mistake and failed miserably. It was only after we had a beta, some customers, and some press that people started to pay attention. Now we're close to closing our seed round and it's because we had better focus around what we were doing, how we were going to do it, and why it was important. At the end of the day, a VC is interested in answering one question, "What's the 10x return?" How will you make them lots of money. Unless the pieces are all there to answer that question, Founders will get a lot of no's. The goal should be to go through your pitch deck and find ways to eliminate the ability for VCs/Angels/Investors to say "no."
- javajosh 11y agoThese rules are nowhere near as complex as combat rules in AD&D and yet I find my eyes glaze over when reading even clearly well-written summaries. I think the problem is actually that these are actually "combat rules", but they are never explained as such. The combat is between the investor and the investee, in that the investor wants as much as possible for his money under every circumstance, and the investee wants to give as little as possible in every circumstance. Certain important moments and thresholds have become "standard circumstances" over time, and these are basically used to divvy up the battle into bite-sized pieces. Imagine a variant of D&D where every encounter begins with you and your party naked, and after assessing your enemy you have to negotiate with Elves for your armor and weapons - to be paid for after either winning the battle. (If you lose, you might have to give back your battered armor, and try a different group of Elves). In the best case, if you beat the final Boss (which is always the same, the Grand Vizier of Product Market Fit) then you get to keep like 10% of the treasure and the Elves get 90%. (You could grind lower level monsters to buy your own armor, but that can take a very long time and it might wear you down until you're no longer fit to be a warrior anymore. The Elves are smart because they risk money (which is replaceable) but not life (which is not).)
- deleted 11y ago[deleted]
- kevindeasis 11y agoThis is exciting. I've always tried to imagine and wonder what the process would be like. I've never seen a detailed document like this. Great job~
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