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How to Convince Investors

489 points by johns 13y ago

ericabiz 13y ago
I wrote something similar today, only I called it "When the Sh-t Hits the Fan with Your Startup": http://www.erica.biz/2013/startup/ http://www.erica.biz/2013/startup/ In the post, I wrote: I firmly believe no outside problem (running out of money; struggling to pay bills) can’t be fixed by looking inside yourself and becoming a better, stronger person. That may sound sort of cheesy and "self-help-y", but for me it was transformative. I had to have internal confidence before I could project confidence externally. In order to have that internal confidence, for me, it involved rethinking absolutely everything about our startup, from our name to our customer demographic to our value proposition. (I go into detail on what happened and how we re-thought our startup in my blog post.) Once I rethought everything, I found a deep well of internal confidence, and we went from "teetering on the brink" to raising another $175,000 from outside seed investors quickly (some of whom had been sitting on the fence for months), and then applying to and getting into Techstars' first Austin class as well. External problems like lack of money or investors saying "no" are often reflections of your own internal doubts or lack of confidence. As PG said, it's not fixed by bravado, but by going deep inside yourself and rethinking your assumptions. Why are you doing this? Of all the things you could be doing, is this the #1 thing that drives you every single day of your life? Once you fix your internal issues, the external issues resolve themselves. However, this lesson may be something you have to experience to believe (as I did.)
- 3825 13y ago
  Please correct me if I am wrong but you're saying that I should try to identify low hanging fruits, right?
- vacri 13y ago
  Say 'shit' or don't say 'shit'. Don't mask it - it's the worst of both worlds.
billclerico 13y ago
One of the biggest changes in my style as an entrepreneur from when I started WePay (4 years ago) to now is that I used to focus so much on "the sell" - but now I focus on the substance. It makes the selling far easier, and it makes it easier for your team to sell it as well.
nostromo 13y ago
I <3 this essay. "Fake it 'til you make it" seems to be the m.o. in a lot of entrepreneurial circles. I've honestly never known if this is actually a good strategy or not. It seems the answer is no.
- billclerico 13y ago
  IMHO "fake it til you make it" is sometimes necessary and sometimes it produces quick wins - but if you let it distract you from building authentic value then it is a net negative in the long term.
  - relaxatorium 13y ago
    "Fake it 'till you make it" embeds the assumption that you are going to make it, which is a thing you need to constantly and actively work on doing. Otherwise, it's just faking it.
- kevingibbon 13y ago
  The real problem is that most people are not convincing during the "fake it" portion.
  - jdh 13y ago
    I agree, but I think there's a bigger problem. I think first time entrepreneurs are prone to thinking that raising money is a win. Second time entrepreneurs almost never think that, they view it as an obligation. A lot of young, first time entrepreneurs, if you told them: you can with certainty raise a $5M Series A, but with certainty the business will not work in the end, which you will figure out in 3 years -- they would still raise the money. They have a burning desire to to be a CEO, to build something, and they'll worry about the rest later. In my view, raising money when you either have no idea if it's a good opportunity, or believe on early data that it's actually not (but you'll figure it out or pivot later), -- this is what I see in "fake it til you make it", "hustler" thinking -- is that when you're successful, you've now signed up to use some of the most productive years of your life chasing an opportunity that is likely not to be any good, when you could have held out for something better. Happiness research indicates that people are consistently wrong about what's going to make them happy (or sad) -- the shiny new car will lift their spirits every time they get behind the wheel, but within a few weeks, it's just another car. I think this applies to fundraising as well: raising money for an idea you're not 100% convinced on has proven to tempt many founders, but in my experience, they later come to regret it.
6thSigma 13y ago
> There are a handful of angels who'd be interested in a company with a high probability of being moderately successful. Is YC in this camp or do you guys and gals try to stay in the huge success side of speculation?
- SurfScore 13y ago
  From the "Philosophy" section of ycombinator.com/about (the whole section is relevant really): One concrete consequence is that Y Combinator funding lets you sell early, if you want to. It can sometimes make sense to sell yourself when you're small for a few million, rather than take more funding and roll the dice again. Google likes to do early-stage acquisitions, and we expect them to become increasingly common as other companies learn what Google has. If you take a large amount of money from an investor, you usually give up this option. But we realize (having been there) that an early offer from an acquirer can be very tempting for a group of young hackers. So if you want to sell early, that's ok. We'd make more if you went for an IPO, but we're not going to force anyone to do anything they don't want to. I think YC prefers big successes but doesn't try to pressure everyone to be the next Dropbox or AirBnB
lifeisstillgood 13y ago
I loved the wings metaphor but i found it still frustrating - pg is clearly an intelligent, observant person, at the heart of some of the best and brightest entrpreneurs globally. And yet we still cannot tell what makes a child grow into a twenty something whose wings can unfurl and a twenty something with raggedy stumps. I hope that no one comes out of the "tube" of school and college without wings - but if that's true why do so few seem to fly? What is it about those who fly that they learnt that others did not? Formidable-ness seems to simply be a tell for a good investor - not an explanation. Please keep pushing them off cliffs - maybe we can work it out soon.
flipside 13y ago
"The time to raise money is not when you need it, or when you reach some artificial deadline like a Demo Day. It's when you can convince investors, and not before." Been waiting for someone to articulate this for a while now. Pitch people an idea a few thousand times and you get pretty good at reading if people buy it. Getting close to the "convince" threshold for investors and when we do reach it, watch out!
beat 13y ago
So a question... how do you balance confidence from a well-understood solution to a well-understood problem in a well-understood market, with the kind of blue-sky dreaming that seems to excite investors? Crossing into that blue-sky world starts smelling like BS to me, but when I say "We could realistically get a $100M chunk of an existing multi-billion market", it doesn't seem ambitious enough?
- emmett 13y ago
  It smells like BS to you because you don't really, honestly believe that you're addressing a multi-billion dollar market. That's not necessarily bad, but the whole point of the essay is that you should first come up with a strategy for a market that you really think has a shot of being that big.
deleted 13y ago
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gruseom 13y ago
Make the truth good, then just tell it. That closing line is the equivalent of a gymnast sticking a landing.
jusben1369 13y ago
"The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup, and misleading them about how far along you are with other investors seems the complementary countermove. It's arguably an instance of scamming a scammer. But I don't recommend this approach to most founders, because most founders wouldn't be able to carry it off." - Trying to reconcile this with the earlier citation that truth telling is critical. This flies in the face of it and rationalizes this behavior by claiming it's dickish to ask? I don't think that's true and when did two dicks make a right? By the way the much better tactic to solve this problem is pick one or two investors and work with them to get them to commit and then have an honest answer for the others who'll fill out your round. I enjoy these essays overall but don't enjoy this common thread I see that confuses hustle and sleight of hand as being interchangeable.
- pmarca 13y ago
  Paul's stance on this form of bluffing being "arguably permissible" is dangerous -- if you try that with a VC and they find out you're bluffing, you're screwed, not just on that deal but with that VC for the rest of your career. VCs talk to one another about this more often than entrepreneurs think.
- lnanek2 13y ago
  Some of it is word play. E.g. investor y invites person x to an event and they chat, person x then says he is meeting with investor y, which can imply it was a face to face meeting with just them, which then implies more interest than exists. If they compliment the idea at all then person x goes around saying investor y likes it. There seem to be a lot of defenses against this already, though. If you say something vague involving another investor you often get asked to clarify or expound on that immediately. That then breaks it down flat out to lie or tell the truth.
- larrys 13y ago
  PG seems to be saying that the other side "drew first blood". Of course that is an assumption that because they ask a question they care. While I'm sure they probably do care (because it's a well known fact and human nature) asking doesn't prove that the answer matters to them. That said in business bluffing and telling lies in certain circumstances about certain things (especially negotiation with an adversary) is a given. There is a line that is walked and it is walked differently by different people according to what they feel comfortable with. After all if you were at a car dealer and asked them "are you selling me this car cheaper than to any other customer" how do you think they would answer? And if they asked you "tell me the price the other dealer quoted you" how would you answer? One thing I do know is that if you don't know how to be devious in business you will have problems. This is not to say you should be a thief lying all the time and ripping people off. But you need to have some common sense about what is done in a business transactions and what is generally considered acceptable. And how in some cases you could even be viewed negatively for being "to honest".
wellboy 13y ago
The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction. If you are a startup that has low scalability, but you have traction, you will get funding If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curtains anymore. Why is this? Because investors have no clue, but you can't blame them, they are mostly 40-50 year olds whose minds are just not built anymore to foresee the future and most of them haven't even build a startup from ground to IPO. How are they supposed to even remotely know what will be the next startup that turns the whole silicon valley upside down. This applies to 99% of investors, but there is a tiny folk of 1% who are so in the mindset, almost all of them previous founders. They can foresee the future and they are only waiting for the startups to have built the product they have been thinking of for years, but haven't built it due to simply not having the time. Source: Pitched my no-traction/very scalable startup to hundreds of investors over 4 months until I stopped 2 months ago to get traction, never got a second meeting except for one time. Always thought, do the investors not see how super scalable this all is? Said no-traction startup now has strong traction.
- jonnathanson 13y ago
  "If you are a startup that has low scalability, but if you have traction, you will get funding" To be fair, I think most people tend to underestimate the scalability (as well as the Total Addressable Market) of successful startups at the early stage. As PG puts it, the big winners often look like bad ideas in their earliest stages. Take Rap Genius, for example. I'll freely admit that, when I first heard about the site and all the funding it received, I had no freaking clue why it was getting so much attention. I thought that this time, finally, unquestionably, the VC community had gone truly bonkers. Later on, when someone explained the potential to me -- that the underlying technology and platform could become X, Y, Z -- I was floored by the possibilities. And I felt like an idiot for not seeing it earlier. I know a lot of people who had very similar reactions to airbnb, and to this day, a lot of people still have that reaction to Uber ("An app just for calling cabs??? Seems pretty narrow!"). Same thing with Tesla ("It'll never work at scale; you need to whole infrastructure of power stations on the street corners!"). Scalability is very hard for the average observer to gauge. It's even hard for the average tech enthusiast to gauge, and probably hard for the average VC to gauge.
wissler 13y ago
This is a really fantastic essay, but I was disappointed by this: The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. By engaging in this tactic, you are working to make foolish behavior on the part of the investor successful, which then leads to the very climate that makes the dishonesty so tempting in the first place. It's a vicious cycle. Why not stick to the "always be 100% honest" approach? This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay. I recognize you didn't recommend this approach. But I think you should go one step further and not claim it is arguably acceptable.
- larrys 13y ago
  "This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay." Seems that the target of PG's advice is a particular individual and what benefits them. Not what benefits all startups. If he were writing to investors he might write differently.
- jdh 13y ago
  Fundraising climates cycle from optimistic to pessimistic. If you take a ten year view, this would be an average to above average time to raise money in my view. In the difficult environments, everyone has their wallets stashed in their pockets and it's hard for even good startups to raise money. In that environment I think engaging in "permissible levels of salesmanship" is probably rational. But in an average to strong market, I agree, why compromise even at the margin? If it's a good idea you'll get funded.
soneca 13y ago
A pitch is required to present your startup's idea to some people. Like friends - if they understand, they will engage and support you, give advices; if not, they will change the subject, think you're a little lost and tell you to "get a job". Or to your parents - if they understand, they will be happy and optimistic about your future; if not, they will worry and tell you to, guess, "get a job". To other entrepreneurs and developers - if they understand, they will try to give advices, make contacts, keep you in their mental list of people they would like to work; if not, they will you consider one wantrepreneur. This pitch is very important, it needs to come out without any thinking, on automatic. You need only one answer on this pitch, two or three sentences and a complement if the interlocutor is interested and give you space to talk about your startup. More than that is a conversation, and for conversations you do not need pitches. Do you know for whom you do not need a pitch? Investors. I am not talking about potential investors, who may one day remember you and consider the investment as the entrepreneurs I said earlier. I am speaking of that meeting with the investor, face to face, where you're to present your startup and they will decide whether to invest in you or not. A meeting is a conversation, not a pitch. It is the time that you will present what you know, not what you memorized. We must listen to the investor, to understand his doubts, it takes a lot of empathy. When going to a meeting for such a conversation you should prepare your knowledge, not your speech. You must have a deep understanding of the strengths and weaknesses of your startup, you have to create a presentation only to show some specific numbers that you have no reason to decorate. Those data that are calculated in a serious, rigorous method and not "estimated" or "expected". In summary, I think two things are essential: i) to have a carefully prepared pitch, ready to go out without thinking, the standard answer about your startup - something that is clear and visionary at the same time, to show the idea and attract person's interest and ii) not to have anything memorized if this short answer turn into a conversation, but you have to be completely updated to all relevante knowledge about your business - and this will tell not only the investors, but yourself, if you are prepared to run this business.
gesman 13y ago
"You need three things: formidable founders, a promising market, and (usually) some evidence of success so far." Evidence of success often makes the first two way less relevant. Up to the point where tables are turned and investors will be trying to convince founders to take their money.
- mindcrime 13y ago
  Where this whole thing breaks down, though, is where you need more money than you can self-fund, to get to that point of having some evidence of success so far. In theory, the whole point of "seed stage" capital is to take a company who aren't at that point yet, and get them there, where they can leverage that success to either grow organically, get acquired, or attract additional investment. But these days, would-be "seed stage" investors are acting more like VCs looking at an A round. Everybody seems to have become incredibly risk averse, and acts like they've forgotten the "high risk" part of the expression "high risk, high reward". Now to be fair, I'm speaking from an East Coast perspective, and I understand the investors here tend to be more risk averse than their West Coast counterparts. But from the sounds of this, this mindset may be spreading. Oh well, at least, in our case, we aren't trying to raise money (yet) anyway. Our goal is to self-fund as far as possible and only raise outside money if we absolutely have to.
michael_nielsen 13y ago
"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting the perfect CV. For many of those people (not all) if they'd brought the same level of intensity to doing good work in the past, they'd be fighting off would-be employers, without any need to sprinkle pixie dust on their CV. Ditto people who try to find some magical method for networking. Do awesome work, and networking becomes mostly a matter of showing up and saying plainly and understandably what you've done.
- JTon 13y ago
  The people I've met who've obsessed over the perfect CV. were also, more often than not, the same people who gloated over how much success they've seen with minimal input work. Maybe they're related.
- keiferski 13y ago
  I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.
  - mathattack 13y ago
    The over-focus on resume is true across all industries. Missing a keyword on the resume can be symptomatic of a bigger problem. If you're impressing the right people (through work, networking, etc) your resume gets put to the top of the pile without going through HR or an on-line keyword search.
  - larrys 13y ago
    "omitting the right keyword from your CV " Agree. Even omitting the right word from you web page if you are a freelancer will cost you business. Outsourcer looks at qualifications and if, say, they are looking for php and the page doesn't list php the freelancer might not get a call for the particular project even if it seems reasonable that they do know php. Similarly if you are looking for a plumber and you need a water heater put in having "we install water heaters" is much better than "we do all sorts of plumbing". People key into specifics and hot buttons.
ecuzzillo 13y ago
s/both your time/both your time and theirs/
davemel37 13y ago
The underlying concept I took from this post was a fundamental rule of marketing and sales... Every decision made starts with an emotional trigger, and ends with a defensible position.
- pmarca 13y ago
  Yes -- this is what engineers who refuse about sales never come to understand. The decision is typically emotional; the facts are assembled and interpreted to justify the decision. The reason it isn't insane for VCs to invest money into ambiguous situations even knowing that we are doing this is because the enterpreneur who can't get the a VC to be emotionally positive isn't going to be able to get anyone to be emotionally positive about what they are doing (recruits, customers, press, etc.). Conversely, the best entrepreneurs often marry great product skills with great sales skills.
  - hammerzeit 13y ago
    Jonathan Haidt said it well -- we think our brain works like a scientist when it actually works more like a lawyer. Incidentally, your second point echoes one of the more persuasive arguments I've heard for cofounding teams -- if you can't convince a co-founder to join, will you really be able to build a team and acquire customers?
McKittrick 13y ago
No one likes risk. Even early stage investors. A good investor deck should convince the investor that whatever risks are associated with particular investment opportunity are seemingly mitigated. Team - not your first rodeo, know how to win, subject matter experts. Focus - clearly stated value proposition. Dream - big market, big value. Plan of Attack - clear path to capture market share. Validation/ Traction - customers! Tech - solid, non-obvious, not easily replicable. (i.e. if your successful, someone else can't just hop into the market and eat your lunch). Use of proceeds - not just pay my salary, but grow this business. Next big milestone: profitability? another fund raise? If you hit on these, then investors will want to put money in their favorite types of companies: the one's that don't look like they need it. ;)
kerryfalk 13y ago
I found this to be especially refreshing. I may just be placing my own spin on it but it seems to me like Paul was saying: have integrity and know what you're talking about. I'll have to give it another read to ensure I'm not just placing my own biases on the words. I have about a decade worth of sales experience. Sometimes not very successful, some very successful. I've also succeeded with convincing investors. The two were very similar for me. I've also worked with many other people in sales roles; of the ones that were successful only a small handful sold in the way Paul writes about. Moving forward I won't be working with, or hiring anyone who doesn't. It's better for everyone. Thanks for the essay, Paul.
acgourley 13y ago
PG led the charge on the idea you should start a company instead of going to grad school or taking a safe job. It's very important that he's now also saying, "your startup, despite needing money, might not be ready to raise money yet" because it adds an important constraint on your decision to take the plunge - either be sure you can reach the goal in a few months or have more personal runway.
deleted 13y ago
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michael_nielsen 13y ago
"But while Microsoft did really well and there is thus a temptation to think they would have seemed a great bet a few months in, they probably didn't. Good, but not great. No company, however successful, ever looks more than a pretty good bet a few months in." As an example, Bessemer Venture Partners passed on investing in Apple, Google, Intel, eBay, FedEx, and many other big companies. Their "anti-portfolio" makes amazing reading, and vividly demonstrates how hard it is to pick winners: http://www.bvp.com/portfolio/antiportfolio http://www.bvp.com/portfolio/antiportfolio
- emhart 13y ago
  What a phenomenal bit of copy from a VC company as well. This paragraph in particular: Our reasons for passing on these investments varied. In some cases, we were making a conscious act of generosity to another, younger venture firm, down on their luck, who we felt could really use a billion dollars in gains. In other cases, our partners had already run out of spaces on the year's Schedule D and feared that another entry would require them to attach a separate sheet. had me laughing aloud as it completely took me by surprise. Thanks for the link!
nakedrobot2 13y ago
Hi pg, I admire the clarity of your thoughts. This is a really fine and insightful article. Thank you for sharing this.
rmason 13y ago
There's one error: Microsoft did raise venture capital. They did it a matter of months before they went public. https://news.ycombinator.com/item?id=2339287 https://news.ycombinator.com/item?id=2339287
- pg 13y ago
  Yeah, I know. But that was not fundraising in the sense I'm talking about. That was just to support the IPO price.
salimmadjd 13y ago
That's the secret. Convince yourself that your startup is worth investing in, and then when you explain this to investors they'll believe you. This is one of the best advice for both fund-raising or anything else in life and it's basically the same strategy Arnold Schwarzenegger used to become the "number one star" in hollywood [1] as explained by Steve Chandler: * ...Then I asked just how he planned to become Hollywood's top star. Mind you, this was not the slim, aerobic Arnold we know today. This man was pumped up and huge. And so for my own physical sense of well-being, I tried to appear to find his goal reasonable. "Easy, It's the same process I used in bodybuilding," he explained. "What you do is create a vision of who you want to be, and then live into that picture as if it were already true." * edit: attribution added - 1: http://biznik.com/articles/being-like-arnold-schwarzenegger http://biznik.com/articles/being-like-arnold-schwarzenegger
- larrys 13y ago
  Similar also to "the method" in acting: http://en.wikipedia.org/wiki/Method_acting http://en.wikipedia.org/wiki/Method_acting I use this in negotiation as well. You convince yourself that you are playing a role and do what is consistent with the role you are playing. You are an actor. Takes quite a bit of practice.
  - jt2190 13y ago
    I'm having difficulty squaring what you do with what pg is recommending: > And by convince yourself, I don't mean play mind games > with yourself to boost your confidence. I mean truly > evaluate whether your startup is worth investing in. Isn't "playing a role" a form of mind games?
    - solistice 13y ago
      I think it's reconciliable over the fact that by setting out to become a certain kind of person/startup/something, you become it. After you're there, it'll be the truth, and not a mind game anymore. As a personal example, I started dancing, and after watching the movie Step Up 3, I decided that this guy (http://youtu.be/EKIgbR_V8fs?t=1m2s http://youtu.be/EKIgbR_V8fs?t=1m2s) danced really well. So I set out to dance just like him. At the beginning, it was me akwardly dancing in front of my bathroom mirror at 3 in the morning. Now I can do what he does, and more. So yeah, fake it till you make it, and then go get some investors.
larrys 13y ago
What's also interesting about all of this (when looking at qualitative factors) is that while we have plenty of data on certain people's success after the "nth" investor took a gamble (and it is a gamble since many had passed on the same person/opportunity [1]) on their idea and we have statistics on people that they gambled on and failed, what we don't have is any statistics on someone that everyone passed on and what would have happened if one person took a chance on them and gave them an opportunity. [1] (as with Drew Houston and the east coast))
jasonkolb 13y ago
"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addresses a genuinely new market? For example our market is a subset of the analytics market targeted at a new set of data, similar to Mixpanel or KissMetrics. I honestly have no idea how to talk about the market because there is no analogue at this point. How can I apply this advice? "But every company that gets really big is "lucky" in the sense that their growth is due mostly to some external wave they're riding, so to make a convincing case for becoming huge, you have to identify some specific trend you'll benefit from." Is this the answer to my question? It doesn't give me an $xy, but it does give me the "wave" I'm riding. Is that a solid foundation for talking to investors? "It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup" You have a silver tongue, PG :)
- deleted 13y ago
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- tptacek 13y ago
  One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.
  - jasonkolb 13y ago
    This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?
    - wtvanhest 13y ago
dhruvtv 13y ago
"Why do founders persist in trying to convince investors of things they're not convinced of themselves?" This line hit home with me. Applies perfectly to job interviews.
- jacques_chester 13y ago
  It also applies to dating; indeed, any human activity where you are selling your own self.
arnoldwh 13y ago
It's a bit like a game. It's the investors job to eliminate false positives and vs. a first time founder, investors will typically have an advantage in that they've been through this many times before. Trying to "beat the system" is like trying to beat investors at what they would on average be the best at doing and potentially sending inadvertent false positive signals caused by the nervousness of being new to fundraising. If you focus on what PG recommends, you eliminate a lot of that friction since you eliminate the nervousness. My tl;dr: In the fundraising lottery, it's easier to sell investors a ticket than trying to convince them you have the winning combination.
theoh 13y ago
Whatever. When you consider the whole concept of the "pivot" it's clear that this is a business of betting on people rather than business plans, which makes this essay a bit redundant.
kategleason 13y ago
Shakespeare. amazing clarity of thought put to words.
lpolovets 13y ago
As someone who is starting a seed fund with a few friends, I want to address one of the footnotes: "The best investors rarely care who else is investing, but mediocre investors almost all do. So you can use this question as a test of investor quality." I think the part about mediocre investors is true, but I'm not sure if I agree with the part about the best investors. There is actual value in knowing who else is investing. First, knowing the caliber of other investors is a signal. It's not the only signal, and it's not the best signal, but it is a signal. Second, my partners and I have a network of trusted coinvestors. If we hear that one of them is investing in a company, we can share due diligence, which is great for founders because it avoids duplicated meetings, and great for us because it saves us some time/helps us focus on questions that haven't already been asked and answered. We have never made a decision to invest in something "because X is investing", but we've certainly used our relationships with various X's to inform our due diligence process.
mhartl 13y ago
PG's advice reminds me of a story from Surely You're Joking, Mr. Feynman!. Feynman relates how his first (!) scientific talk (as a graduate student at Princeton) was attended by such luminaries as Eugene Wigner, Wolfgang Pauli, Albert Einstein, and John von Neumann. We was terrifically nervous, but discovered that as soon as he started giving the talk his nervousness melted away—he was too focused on the physics to worry about who was in the audience.
- mhartl 13y ago
  I meant "He was", not "We was". Argh. I must have read and missed that ten times, and of course now it's too late to edit it.
Sealy 13y ago
Thanks for the advice Paul. It's very well timed as I have an investor meeting later today! My biggest takeaway from your essay: the truth prevails. As cliche as it sounds, its apt advice for those aspiring to be the biggest startups of our generation. Its easy to get carried away with our dreams and visions.
jacques_chester 13y ago
> When people hurt themselves lifting heavy things, it's usually because they try to lift with their back. It's got more to do with a weak back, actually. Folk with strong backs can lift very heavy weights safely. In terms of the analogy, I dunno what I'm saying. Just fulfilling my HN nitpick quota.
- dredmorbius 13y ago
  That and rounding the spine rather than maintaining an arch. Though the back musculature is sufficiently complex that a mis-firing can make for a bad week even if you're just picking up a bar of soap. Yeah, I cringe when I see obvious-but-sadly-erronious out-of-scope analogies being made. Particularly if I happen to have some idea of the subject area in which the analogy is being drawn. Sort of detracts from the whole message.
  - jacques_chester 13y ago
    These days I just let it slide. It's like being annoyed by inaccuracies in movies. Everyone's annoyed by something.
    - dredmorbius 13y ago
      It's a sign of sloppiness, lack of attention to detail, and a fundamental lack of interest in facts. If the issue is sufficiently allegorical, I'm reasonably OK with letting it slide, but increasingly this is a sign that there are much deeper flaws in a piece, and it's time to shift my limited attention elsewhere. E.g., "weight loss" stories in the popular press (in my case most often on NPR or The New York Times) which fail to distinguish adipose tissue from skeletal muscle, or address the role of strength training in both body recomposition and fitness. Both Gina Kolada and Gretchen Reynolds have particularly caught my attention in this regard. Or this stunning display of cavalier disregard for facts from The Economist: http://www.economist.com/news/leaders/21582516-worlds-thirst-oil-could-be-nearing-peak-bad-news-producers-excellent http://www.economist.com/news/leaders/21582516-worlds-thirst... Notice in particular: dismissal of the opposing argument is limited to unnamed "several theorists, who have since gone strangely quiet". ORLY? Not that The Economist hasn't (editorially at least) been notoriously and conspicuously cornucopian.
hclose 13y ago
Neophyte question: Why do investors have to ask founders who else is investing? Is it not possible for them to check this themselves, via public records? [There are some sites that even pre-package the SEC filings for consumption by journalists, etc.] It makes perfect sense to me why investors would want to know who else is investing, for a number of reasons. For one, standing on the sidelines knowing that most startups will fail is not a reasonable strategy. This is because some startups, no matter how unlikely, will succeed, and some VC will, despite our better judgment, have invested in them. If other VC deliver higher value for their clients than we do for ours because we cautiously and prudently stand on the sidelines, then we stand to lose the confidence of our clients. But I do not understand why anyone would rely on the statements of founders to determine who else may or may not be on board as investors.
- wtvanhest 13y ago
  The way VC and angel rounds work, is in rounds... Each round has investors commit and before they close, some investors may ask who else is investing. Most closed rounds on really early stage companies are hard/impossible to find, but all pre-closed rounds are impossible to find since there is no record of something that hasn't happened yet.
  - hclose 13y ago
    Here's one website I was thinking of: http://formds.com http://formds.com Is the information disclosed in Form D's severely limited or useless for determining who is being funded and who is funding them? If yes, then what is the purpose of this website?
gpsarakis 13y ago
Maybe a little out of context, but how easy is it to start talking about an idea without a working prototype? Of course it would make things easier, but maybe not always possible without a minimum funding.
vog 13y ago
As a side note, I think the website "paulgraham.com" demonstrates an anti-pattern: It is available with and without "www." prefix, thus splitting the HN comments into two parts: https://news.ycombinator.com/item?id=6175417 https://news.ycombinator.com/item?id=6175417 (paulgraham.com, i.e. this one) https://news.ycombinator.com/item?id=6178042 https://news.ycombinator.com/item?id=6178042 (www.paulgraham.com) The solution is simple: Establish an HTTP redirect from "www.paulgraham.com" to "paulgraham.com" or vice versa.
EGreg 13y ago
I have found the binary thing to be true with west coast investors (especially in San Fran). Here in NYC, many angel investors think in terms of "when will I start getting returns on my money", and not "will this be the next big hit"? Catering to both types is often impossible, you have to pick one to go after.
sinzone 13y ago
Sometimes is the other way too. They have to convince you, that they are the best fit for the company.

489 points by johns 13y ago

I wrote something similar today, only I called it "When the Sh-t Hits the Fan with Your Startup": http://www.erica.biz/2013/startup/ http://www.erica.biz/2013/startup/ In the post, I wrote: I firmly believe no outside problem (running out of money; struggling to pay bills) can’t be fixed by looking inside yourself and becoming a better, stronger person. That may sound sort of cheesy and "self-help-y", but for me it was transformative. I had to have internal confidence before I could project confidence externally. In order to have that internal confidence, for me, it involved rethinking absolutely everything about our startup, from our name to our customer demographic to our value proposition. (I go into detail on what happened and how we re-thought our startup in my blog post.) Once I rethought everything, I found a deep well of internal confidence, and we went from "teetering on the brink" to raising another $175,000 from outside seed investors quickly (some of whom had been sitting on the fence for months), and then applying to and getting into Techstars' first Austin class as well. External problems like lack of money or investors saying "no" are often reflections of your own internal doubts or lack of confidence. As PG said, it's not fixed by bravado, but by going deep inside yourself and rethinking your assumptions. Why are you doing this? Of all the things you could be doing, is this the #1 thing that drives you every single day of your life? Once you fix your internal issues, the external issues resolve themselves. However, this lesson may be something you have to experience to believe (as I did.)

3825 13y ago
Please correct me if I am wrong but you're saying that I should try to identify low hanging fruits, right?
vacri 13y ago
Say 'shit' or don't say 'shit'. Don't mask it - it's the worst of both worlds.

billclerico 13y ago

One of the biggest changes in my style as an entrepreneur from when I started WePay (4 years ago) to now is that I used to focus so much on "the sell" - but now I focus on the substance. It makes the selling far easier, and it makes it easier for your team to sell it as well.

nostromo 13y ago

I <3 this essay. "Fake it 'til you make it" seems to be the m.o. in a lot of entrepreneurial circles. I've honestly never known if this is actually a good strategy or not. It seems the answer is no.

billclerico 13y ago
IMHO "fake it til you make it" is sometimes necessary and sometimes it produces quick wins - but if you let it distract you from building authentic value then it is a net negative in the long term.
- relaxatorium 13y ago
  "Fake it 'till you make it" embeds the assumption that you are going to make it, which is a thing you need to constantly and actively work on doing. Otherwise, it's just faking it.
kevingibbon 13y ago
The real problem is that most people are not convincing during the "fake it" portion.
- jdh 13y ago
  I agree, but I think there's a bigger problem. I think first time entrepreneurs are prone to thinking that raising money is a win. Second time entrepreneurs almost never think that, they view it as an obligation. A lot of young, first time entrepreneurs, if you told them: you can with certainty raise a $5M Series A, but with certainty the business will not work in the end, which you will figure out in 3 years -- they would still raise the money. They have a burning desire to to be a CEO, to build something, and they'll worry about the rest later. In my view, raising money when you either have no idea if it's a good opportunity, or believe on early data that it's actually not (but you'll figure it out or pivot later), -- this is what I see in "fake it til you make it", "hustler" thinking -- is that when you're successful, you've now signed up to use some of the most productive years of your life chasing an opportunity that is likely not to be any good, when you could have held out for something better. Happiness research indicates that people are consistently wrong about what's going to make them happy (or sad) -- the shiny new car will lift their spirits every time they get behind the wheel, but within a few weeks, it's just another car. I think this applies to fundraising as well: raising money for an idea you're not 100% convinced on has proven to tempt many founders, but in my experience, they later come to regret it.

6thSigma 13y ago

> There are a handful of angels who'd be interested in a company with a high probability of being moderately successful. Is YC in this camp or do you guys and gals try to stay in the huge success side of speculation?

SurfScore 13y ago
From the "Philosophy" section of ycombinator.com/about (the whole section is relevant really): One concrete consequence is that Y Combinator funding lets you sell early, if you want to. It can sometimes make sense to sell yourself when you're small for a few million, rather than take more funding and roll the dice again. Google likes to do early-stage acquisitions, and we expect them to become increasingly common as other companies learn what Google has. If you take a large amount of money from an investor, you usually give up this option. But we realize (having been there) that an early offer from an acquirer can be very tempting for a group of young hackers. So if you want to sell early, that's ok. We'd make more if you went for an IPO, but we're not going to force anyone to do anything they don't want to. I think YC prefers big successes but doesn't try to pressure everyone to be the next Dropbox or AirBnB

lifeisstillgood 13y ago

I loved the wings metaphor but i found it still frustrating - pg is clearly an intelligent, observant person, at the heart of some of the best and brightest entrpreneurs globally. And yet we still cannot tell what makes a child grow into a twenty something whose wings can unfurl and a twenty something with raggedy stumps. I hope that no one comes out of the "tube" of school and college without wings - but if that's true why do so few seem to fly? What is it about those who fly that they learnt that others did not? Formidable-ness seems to simply be a tell for a good investor - not an explanation. Please keep pushing them off cliffs - maybe we can work it out soon.

flipside 13y ago

"The time to raise money is not when you need it, or when you reach some artificial deadline like a Demo Day. It's when you can convince investors, and not before." Been waiting for someone to articulate this for a while now. Pitch people an idea a few thousand times and you get pretty good at reading if people buy it. Getting close to the "convince" threshold for investors and when we do reach it, watch out!

beat 13y ago

So a question... how do you balance confidence from a well-understood solution to a well-understood problem in a well-understood market, with the kind of blue-sky dreaming that seems to excite investors? Crossing into that blue-sky world starts smelling like BS to me, but when I say "We could realistically get a $100M chunk of an existing multi-billion market", it doesn't seem ambitious enough?

emmett 13y ago
It smells like BS to you because you don't really, honestly believe that you're addressing a multi-billion dollar market. That's not necessarily bad, but the whole point of the essay is that you should first come up with a strategy for a market that you really think has a shot of being that big.

deleted 13y ago

[deleted]

gruseom 13y ago

Make the truth good, then just tell it. That closing line is the equivalent of a gymnast sticking a landing.

jusben1369 13y ago

"The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup, and misleading them about how far along you are with other investors seems the complementary countermove. It's arguably an instance of scamming a scammer. But I don't recommend this approach to most founders, because most founders wouldn't be able to carry it off." - Trying to reconcile this with the earlier citation that truth telling is critical. This flies in the face of it and rationalizes this behavior by claiming it's dickish to ask? I don't think that's true and when did two dicks make a right? By the way the much better tactic to solve this problem is pick one or two investors and work with them to get them to commit and then have an honest answer for the others who'll fill out your round. I enjoy these essays overall but don't enjoy this common thread I see that confuses hustle and sleight of hand as being interchangeable.

pmarca 13y ago
Paul's stance on this form of bluffing being "arguably permissible" is dangerous -- if you try that with a VC and they find out you're bluffing, you're screwed, not just on that deal but with that VC for the rest of your career. VCs talk to one another about this more often than entrepreneurs think.
lnanek2 13y ago
Some of it is word play. E.g. investor y invites person x to an event and they chat, person x then says he is meeting with investor y, which can imply it was a face to face meeting with just them, which then implies more interest than exists. If they compliment the idea at all then person x goes around saying investor y likes it. There seem to be a lot of defenses against this already, though. If you say something vague involving another investor you often get asked to clarify or expound on that immediately. That then breaks it down flat out to lie or tell the truth.
larrys 13y ago
PG seems to be saying that the other side "drew first blood". Of course that is an assumption that because they ask a question they care. While I'm sure they probably do care (because it's a well known fact and human nature) asking doesn't prove that the answer matters to them. That said in business bluffing and telling lies in certain circumstances about certain things (especially negotiation with an adversary) is a given. There is a line that is walked and it is walked differently by different people according to what they feel comfortable with. After all if you were at a car dealer and asked them "are you selling me this car cheaper than to any other customer" how do you think they would answer? And if they asked you "tell me the price the other dealer quoted you" how would you answer? One thing I do know is that if you don't know how to be devious in business you will have problems. This is not to say you should be a thief lying all the time and ripping people off. But you need to have some common sense about what is done in a business transactions and what is generally considered acceptable. And how in some cases you could even be viewed negatively for being "to honest".

wellboy 13y ago

The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction. If you are a startup that has low scalability, but you have traction, you will get funding If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curtains anymore. Why is this? Because investors have no clue, but you can't blame them, they are mostly 40-50 year olds whose minds are just not built anymore to foresee the future and most of them haven't even build a startup from ground to IPO. How are they supposed to even remotely know what will be the next startup that turns the whole silicon valley upside down. This applies to 99% of investors, but there is a tiny folk of 1% who are so in the mindset, almost all of them previous founders. They can foresee the future and they are only waiting for the startups to have built the product they have been thinking of for years, but haven't built it due to simply not having the time. Source: Pitched my no-traction/very scalable startup to hundreds of investors over 4 months until I stopped 2 months ago to get traction, never got a second meeting except for one time. Always thought, do the investors not see how super scalable this all is? Said no-traction startup now has strong traction.

jonnathanson 13y ago
"If you are a startup that has low scalability, but if you have traction, you will get funding" To be fair, I think most people tend to underestimate the scalability (as well as the Total Addressable Market) of successful startups at the early stage. As PG puts it, the big winners often look like bad ideas in their earliest stages. Take Rap Genius, for example. I'll freely admit that, when I first heard about the site and all the funding it received, I had no freaking clue why it was getting so much attention. I thought that this time, finally, unquestionably, the VC community had gone truly bonkers. Later on, when someone explained the potential to me -- that the underlying technology and platform could become X, Y, Z -- I was floored by the possibilities. And I felt like an idiot for not seeing it earlier. I know a lot of people who had very similar reactions to airbnb, and to this day, a lot of people still have that reaction to Uber ("An app just for calling cabs??? Seems pretty narrow!"). Same thing with Tesla ("It'll never work at scale; you need to whole infrastructure of power stations on the street corners!"). Scalability is very hard for the average observer to gauge. It's even hard for the average tech enthusiast to gauge, and probably hard for the average VC to gauge.

wissler 13y ago

This is a really fantastic essay, but I was disappointed by this: The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. By engaging in this tactic, you are working to make foolish behavior on the part of the investor successful, which then leads to the very climate that makes the dishonesty so tempting in the first place. It's a vicious cycle. Why not stick to the "always be 100% honest" approach? This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay. I recognize you didn't recommend this approach. But I think you should go one step further and not claim it is arguably acceptable.

larrys 13y ago
"This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay." Seems that the target of PG's advice is a particular individual and what benefits them. Not what benefits all startups. If he were writing to investors he might write differently.
jdh 13y ago
Fundraising climates cycle from optimistic to pessimistic. If you take a ten year view, this would be an average to above average time to raise money in my view. In the difficult environments, everyone has their wallets stashed in their pockets and it's hard for even good startups to raise money. In that environment I think engaging in "permissible levels of salesmanship" is probably rational. But in an average to strong market, I agree, why compromise even at the margin? If it's a good idea you'll get funded.

soneca 13y ago

A pitch is required to present your startup's idea to some people. Like friends - if they understand, they will engage and support you, give advices; if not, they will change the subject, think you're a little lost and tell you to "get a job". Or to your parents - if they understand, they will be happy and optimistic about your future; if not, they will worry and tell you to, guess, "get a job". To other entrepreneurs and developers - if they understand, they will try to give advices, make contacts, keep you in their mental list of people they would like to work; if not, they will you consider one wantrepreneur. This pitch is very important, it needs to come out without any thinking, on automatic. You need only one answer on this pitch, two or three sentences and a complement if the interlocutor is interested and give you space to talk about your startup. More than that is a conversation, and for conversations you do not need pitches. Do you know for whom you do not need a pitch? Investors. I am not talking about potential investors, who may one day remember you and consider the investment as the entrepreneurs I said earlier. I am speaking of that meeting with the investor, face to face, where you're to present your startup and they will decide whether to invest in you or not. A meeting is a conversation, not a pitch. It is the time that you will present what you know, not what you memorized. We must listen to the investor, to understand his doubts, it takes a lot of empathy. When going to a meeting for such a conversation you should prepare your knowledge, not your speech. You must have a deep understanding of the strengths and weaknesses of your startup, you have to create a presentation only to show some specific numbers that you have no reason to decorate. Those data that are calculated in a serious, rigorous method and not "estimated" or "expected". In summary, I think two things are essential: i) to have a carefully prepared pitch, ready to go out without thinking, the standard answer about your startup - something that is clear and visionary at the same time, to show the idea and attract person's interest and ii) not to have anything memorized if this short answer turn into a conversation, but you have to be completely updated to all relevante knowledge about your business - and this will tell not only the investors, but yourself, if you are prepared to run this business.

gesman 13y ago

"You need three things: formidable founders, a promising market, and (usually) some evidence of success so far." Evidence of success often makes the first two way less relevant. Up to the point where tables are turned and investors will be trying to convince founders to take their money.

mindcrime 13y ago
Where this whole thing breaks down, though, is where you need more money than you can self-fund, to get to that point of having some evidence of success so far. In theory, the whole point of "seed stage" capital is to take a company who aren't at that point yet, and get them there, where they can leverage that success to either grow organically, get acquired, or attract additional investment. But these days, would-be "seed stage" investors are acting more like VCs looking at an A round. Everybody seems to have become incredibly risk averse, and acts like they've forgotten the "high risk" part of the expression "high risk, high reward". Now to be fair, I'm speaking from an East Coast perspective, and I understand the investors here tend to be more risk averse than their West Coast counterparts. But from the sounds of this, this mindset may be spreading. Oh well, at least, in our case, we aren't trying to raise money (yet) anyway. Our goal is to self-fund as far as possible and only raise outside money if we absolutely have to.

michael_nielsen 13y ago

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting the perfect CV. For many of those people (not all) if they'd brought the same level of intensity to doing good work in the past, they'd be fighting off would-be employers, without any need to sprinkle pixie dust on their CV. Ditto people who try to find some magical method for networking. Do awesome work, and networking becomes mostly a matter of showing up and saying plainly and understandably what you've done.

JTon 13y ago
The people I've met who've obsessed over the perfect CV. were also, more often than not, the same people who gloated over how much success they've seen with minimal input work. Maybe they're related.
keiferski 13y ago
I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.
- mathattack 13y ago
  The over-focus on resume is true across all industries. Missing a keyword on the resume can be symptomatic of a bigger problem. If you're impressing the right people (through work, networking, etc) your resume gets put to the top of the pile without going through HR or an on-line keyword search.
- larrys 13y ago
  "omitting the right keyword from your CV " Agree. Even omitting the right word from you web page if you are a freelancer will cost you business. Outsourcer looks at qualifications and if, say, they are looking for php and the page doesn't list php the freelancer might not get a call for the particular project even if it seems reasonable that they do know php. Similarly if you are looking for a plumber and you need a water heater put in having "we install water heaters" is much better than "we do all sorts of plumbing". People key into specifics and hot buttons.

ecuzzillo 13y ago

s/both your time/both your time and theirs/

davemel37 13y ago

The underlying concept I took from this post was a fundamental rule of marketing and sales... Every decision made starts with an emotional trigger, and ends with a defensible position.

pmarca 13y ago
Yes -- this is what engineers who refuse about sales never come to understand. The decision is typically emotional; the facts are assembled and interpreted to justify the decision. The reason it isn't insane for VCs to invest money into ambiguous situations even knowing that we are doing this is because the enterpreneur who can't get the a VC to be emotionally positive isn't going to be able to get anyone to be emotionally positive about what they are doing (recruits, customers, press, etc.). Conversely, the best entrepreneurs often marry great product skills with great sales skills.
- hammerzeit 13y ago
  Jonathan Haidt said it well -- we think our brain works like a scientist when it actually works more like a lawyer. Incidentally, your second point echoes one of the more persuasive arguments I've heard for cofounding teams -- if you can't convince a co-founder to join, will you really be able to build a team and acquire customers?

McKittrick 13y ago

No one likes risk. Even early stage investors. A good investor deck should convince the investor that whatever risks are associated with particular investment opportunity are seemingly mitigated. Team - not your first rodeo, know how to win, subject matter experts. Focus - clearly stated value proposition. Dream - big market, big value. Plan of Attack - clear path to capture market share. Validation/ Traction - customers! Tech - solid, non-obvious, not easily replicable. (i.e. if your successful, someone else can't just hop into the market and eat your lunch). Use of proceeds - not just pay my salary, but grow this business. Next big milestone: profitability? another fund raise? If you hit on these, then investors will want to put money in their favorite types of companies: the one's that don't look like they need it. ;)

kerryfalk 13y ago

I found this to be especially refreshing. I may just be placing my own spin on it but it seems to me like Paul was saying: have integrity and know what you're talking about. I'll have to give it another read to ensure I'm not just placing my own biases on the words. I have about a decade worth of sales experience. Sometimes not very successful, some very successful. I've also succeeded with convincing investors. The two were very similar for me. I've also worked with many other people in sales roles; of the ones that were successful only a small handful sold in the way Paul writes about. Moving forward I won't be working with, or hiring anyone who doesn't. It's better for everyone. Thanks for the essay, Paul.

acgourley 13y ago

PG led the charge on the idea you should start a company instead of going to grad school or taking a safe job. It's very important that he's now also saying, "your startup, despite needing money, might not be ready to raise money yet" because it adds an important constraint on your decision to take the plunge - either be sure you can reach the goal in a few months or have more personal runway.

deleted 13y ago

[deleted]

michael_nielsen 13y ago

"But while Microsoft did really well and there is thus a temptation to think they would have seemed a great bet a few months in, they probably didn't. Good, but not great. No company, however successful, ever looks more than a pretty good bet a few months in." As an example, Bessemer Venture Partners passed on investing in Apple, Google, Intel, eBay, FedEx, and many other big companies. Their "anti-portfolio" makes amazing reading, and vividly demonstrates how hard it is to pick winners: http://www.bvp.com/portfolio/antiportfolio http://www.bvp.com/portfolio/antiportfolio

emhart 13y ago
What a phenomenal bit of copy from a VC company as well. This paragraph in particular: Our reasons for passing on these investments varied. In some cases, we were making a conscious act of generosity to another, younger venture firm, down on their luck, who we felt could really use a billion dollars in gains. In other cases, our partners had already run out of spaces on the year's Schedule D and feared that another entry would require them to attach a separate sheet. had me laughing aloud as it completely took me by surprise. Thanks for the link!

nakedrobot2 13y ago

Hi pg, I admire the clarity of your thoughts. This is a really fine and insightful article. Thank you for sharing this.

rmason 13y ago

There's one error: Microsoft did raise venture capital. They did it a matter of months before they went public. https://news.ycombinator.com/item?id=2339287 https://news.ycombinator.com/item?id=2339287

pg 13y ago
Yeah, I know. But that was not fundraising in the sense I'm talking about. That was just to support the IPO price.

salimmadjd 13y ago

That's the secret. Convince yourself that your startup is worth investing in, and then when you explain this to investors they'll believe you. This is one of the best advice for both fund-raising or anything else in life and it's basically the same strategy Arnold Schwarzenegger used to become the "number one star" in hollywood [1] as explained by Steve Chandler: * ...Then I asked just how he planned to become Hollywood's top star. Mind you, this was not the slim, aerobic Arnold we know today. This man was pumped up and huge. And so for my own physical sense of well-being, I tried to appear to find his goal reasonable. "Easy, It's the same process I used in bodybuilding," he explained. "What you do is create a vision of who you want to be, and then live into that picture as if it were already true." * edit: attribution added - 1: http://biznik.com/articles/being-like-arnold-schwarzenegger http://biznik.com/articles/being-like-arnold-schwarzenegger

larrys 13y ago
Similar also to "the method" in acting: http://en.wikipedia.org/wiki/Method_acting http://en.wikipedia.org/wiki/Method_acting I use this in negotiation as well. You convince yourself that you are playing a role and do what is consistent with the role you are playing. You are an actor. Takes quite a bit of practice.
- jt2190 13y ago
  I'm having difficulty squaring what you do with what pg is recommending: > And by convince yourself, I don't mean play mind games > with yourself to boost your confidence. I mean truly > evaluate whether your startup is worth investing in. Isn't "playing a role" a form of mind games?
  - solistice 13y ago
    I think it's reconciliable over the fact that by setting out to become a certain kind of person/startup/something, you become it. After you're there, it'll be the truth, and not a mind game anymore. As a personal example, I started dancing, and after watching the movie Step Up 3, I decided that this guy (http://youtu.be/EKIgbR_V8fs?t=1m2s http://youtu.be/EKIgbR_V8fs?t=1m2s) danced really well. So I set out to dance just like him. At the beginning, it was me akwardly dancing in front of my bathroom mirror at 3 in the morning. Now I can do what he does, and more. So yeah, fake it till you make it, and then go get some investors.

larrys 13y ago

What's also interesting about all of this (when looking at qualitative factors) is that while we have plenty of data on certain people's success after the "nth" investor took a gamble (and it is a gamble since many had passed on the same person/opportunity [1]) on their idea and we have statistics on people that they gambled on and failed, what we don't have is any statistics on someone that everyone passed on and what would have happened if one person took a chance on them and gave them an opportunity. [1] (as with Drew Houston and the east coast))

jasonkolb 13y ago

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addresses a genuinely new market? For example our market is a subset of the analytics market targeted at a new set of data, similar to Mixpanel or KissMetrics. I honestly have no idea how to talk about the market because there is no analogue at this point. How can I apply this advice? "But every company that gets really big is "lucky" in the sense that their growth is due mostly to some external wave they're riding, so to make a convincing case for becoming huge, you have to identify some specific trend you'll benefit from." Is this the answer to my question? It doesn't give me an $xy, but it does give me the "wave" I'm riding. Is that a solid foundation for talking to investors? "It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup" You have a silver tongue, PG :)

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tptacek 13y ago
One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.
- jasonkolb 13y ago
  This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?
  - wtvanhest 13y ago

dhruvtv 13y ago

"Why do founders persist in trying to convince investors of things they're not convinced of themselves?" This line hit home with me. Applies perfectly to job interviews.

jacques_chester 13y ago
It also applies to dating; indeed, any human activity where you are selling your own self.

arnoldwh 13y ago

It's a bit like a game. It's the investors job to eliminate false positives and vs. a first time founder, investors will typically have an advantage in that they've been through this many times before. Trying to "beat the system" is like trying to beat investors at what they would on average be the best at doing and potentially sending inadvertent false positive signals caused by the nervousness of being new to fundraising. If you focus on what PG recommends, you eliminate a lot of that friction since you eliminate the nervousness. My tl;dr: In the fundraising lottery, it's easier to sell investors a ticket than trying to convince them you have the winning combination.

theoh 13y ago

Whatever. When you consider the whole concept of the "pivot" it's clear that this is a business of betting on people rather than business plans, which makes this essay a bit redundant.

kategleason 13y ago

Shakespeare. amazing clarity of thought put to words.

lpolovets 13y ago

As someone who is starting a seed fund with a few friends, I want to address one of the footnotes: "The best investors rarely care who else is investing, but mediocre investors almost all do. So you can use this question as a test of investor quality." I think the part about mediocre investors is true, but I'm not sure if I agree with the part about the best investors. There is actual value in knowing who else is investing. First, knowing the caliber of other investors is a signal. It's not the only signal, and it's not the best signal, but it is a signal. Second, my partners and I have a network of trusted coinvestors. If we hear that one of them is investing in a company, we can share due diligence, which is great for founders because it avoids duplicated meetings, and great for us because it saves us some time/helps us focus on questions that haven't already been asked and answered. We have never made a decision to invest in something "because X is investing", but we've certainly used our relationships with various X's to inform our due diligence process.

mhartl 13y ago

PG's advice reminds me of a story from Surely You're Joking, Mr. Feynman!. Feynman relates how his first (!) scientific talk (as a graduate student at Princeton) was attended by such luminaries as Eugene Wigner, Wolfgang Pauli, Albert Einstein, and John von Neumann. We was terrifically nervous, but discovered that as soon as he started giving the talk his nervousness melted away—he was too focused on the physics to worry about who was in the audience.

mhartl 13y ago
I meant "He was", not "We was". Argh. I must have read and missed that ten times, and of course now it's too late to edit it.

Sealy 13y ago

Thanks for the advice Paul. It's very well timed as I have an investor meeting later today! My biggest takeaway from your essay: the truth prevails. As cliche as it sounds, its apt advice for those aspiring to be the biggest startups of our generation. Its easy to get carried away with our dreams and visions.

jacques_chester 13y ago

> When people hurt themselves lifting heavy things, it's usually because they try to lift with their back. It's got more to do with a weak back, actually. Folk with strong backs can lift very heavy weights safely. In terms of the analogy, I dunno what I'm saying. Just fulfilling my HN nitpick quota.

dredmorbius 13y ago
That and rounding the spine rather than maintaining an arch. Though the back musculature is sufficiently complex that a mis-firing can make for a bad week even if you're just picking up a bar of soap. Yeah, I cringe when I see obvious-but-sadly-erronious out-of-scope analogies being made. Particularly if I happen to have some idea of the subject area in which the analogy is being drawn. Sort of detracts from the whole message.
- jacques_chester 13y ago
  These days I just let it slide. It's like being annoyed by inaccuracies in movies. Everyone's annoyed by something.
  - dredmorbius 13y ago
    It's a sign of sloppiness, lack of attention to detail, and a fundamental lack of interest in facts. If the issue is sufficiently allegorical, I'm reasonably OK with letting it slide, but increasingly this is a sign that there are much deeper flaws in a piece, and it's time to shift my limited attention elsewhere. E.g., "weight loss" stories in the popular press (in my case most often on NPR or The New York Times) which fail to distinguish adipose tissue from skeletal muscle, or address the role of strength training in both body recomposition and fitness. Both Gina Kolada and Gretchen Reynolds have particularly caught my attention in this regard. Or this stunning display of cavalier disregard for facts from The Economist: http://www.economist.com/news/leaders/21582516-worlds-thirst-oil-could-be-nearing-peak-bad-news-producers-excellent http://www.economist.com/news/leaders/21582516-worlds-thirst... Notice in particular: dismissal of the opposing argument is limited to unnamed "several theorists, who have since gone strangely quiet". ORLY? Not that The Economist hasn't (editorially at least) been notoriously and conspicuously cornucopian.

hclose 13y ago

Neophyte question: Why do investors have to ask founders who else is investing? Is it not possible for them to check this themselves, via public records? [There are some sites that even pre-package the SEC filings for consumption by journalists, etc.] It makes perfect sense to me why investors would want to know who else is investing, for a number of reasons. For one, standing on the sidelines knowing that most startups will fail is not a reasonable strategy. This is because some startups, no matter how unlikely, will succeed, and some VC will, despite our better judgment, have invested in them. If other VC deliver higher value for their clients than we do for ours because we cautiously and prudently stand on the sidelines, then we stand to lose the confidence of our clients. But I do not understand why anyone would rely on the statements of founders to determine who else may or may not be on board as investors.

wtvanhest 13y ago
The way VC and angel rounds work, is in rounds... Each round has investors commit and before they close, some investors may ask who else is investing. Most closed rounds on really early stage companies are hard/impossible to find, but all pre-closed rounds are impossible to find since there is no record of something that hasn't happened yet.
- hclose 13y ago
  Here's one website I was thinking of: http://formds.com http://formds.com Is the information disclosed in Form D's severely limited or useless for determining who is being funded and who is funding them? If yes, then what is the purpose of this website?

gpsarakis 13y ago

Maybe a little out of context, but how easy is it to start talking about an idea without a working prototype? Of course it would make things easier, but maybe not always possible without a minimum funding.

vog 13y ago

As a side note, I think the website "paulgraham.com" demonstrates an anti-pattern: It is available with and without "www." prefix, thus splitting the HN comments into two parts: https://news.ycombinator.com/item?id=6175417 https://news.ycombinator.com/item?id=6175417 (paulgraham.com, i.e. this one) https://news.ycombinator.com/item?id=6178042 https://news.ycombinator.com/item?id=6178042 (www.paulgraham.com) The solution is simple: Establish an HTTP redirect from "www.paulgraham.com" to "paulgraham.com" or vice versa.

EGreg 13y ago

I have found the binary thing to be true with west coast investors (especially in San Fran). Here in NYC, many angel investors think in terms of "when will I start getting returns on my money", and not "will this be the next big hit"? Catering to both types is often impossible, you have to pick one to go after.

sinzone 13y ago

Sometimes is the other way too. They have to convince you, that they are the best fit for the company.