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How to Raise Money

538 points by oBeLx 13y ago

pg 13y ago
Incidentally, this is the actual advice we give startups about fundraising at YC. This batch I finally wrote it all down, and the s2013 startups used it when raising money.
- janson0 13y ago
  Thank you for posting this advice in a clear cut manner. As someone looking to raise money, but not currently residing in the valley, a thorough map to guide my thoughts and presentation development before venturing out into the West Coast VC waters is amazingly helpful.
- zmitri 13y ago
  The thanks to Moriarty is a nice touch pg.
  - pg 13y ago
    It's a real person. We actually had a Professor Moriarty in the last batch: http://techcrunch.com/2013/08/05/y-combinator-startup-7-cups-of-tea-connects-people-in-need-of-emotional-support-with-trained-listeners/ http://techcrunch.com/2013/08/05/y-combinator-startup-7-cups...
    - zmitri 13y ago
      That is amazing.
- ig1 13y ago
  "I don't know of a single VC investment that began with an associate cold-emailing a startup." I can vouch from personal knowledge that this has happened a number of times at a number of different European VCs, and at least once with a major US VC in the last year. I'm guessing it's far less common for YC startups because YC startups have demo day which essentially initiates the process. They also have a strong network because of YC so it's much easier for a VC to get a warm intro to any YC startup. It may just be a Europe vs US thing but I'd be surprised if it didn't happen frequently in the US as well especially at less well connected startups. Certainly referrals have significant value but most major VCs will be able to use their network to get references on pretty much any startup in any case.
  - diminish 13y ago
    we need to combine individual experiences and create a curated tabular list of investors classified by different dimensions in pg's great article. such a list combined with this article would be the ultimate cheatsheet for fundraising.
    - jacquesm 13y ago
      That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this. Deal details with investor names attached are not likely to materialize until long after the fact and even then someone is breaking a promise, which professionals with ties to VCs are not going to do. Founders could technically get away with this, especially if a deal fell through but this world operates largely on reputation and such a thing could easily pop up at a moment when you really don't need it later on. Crunchbase has quite a wealth of info in it, as does duedil.com , those you could use to get an idea of who is on the other side of the table as well as google. The best source of info for a company looking for funding from 'party x' is to go and find out who else 'party x' has invested in and then to see if there are connections that can be sounded out off the record as well as companies that 'party x' was going to invest in but where the deal fell through (this is a lot harder to come by though).
      - ig1 13y ago
        You should absolutely do this, always speak to founders of companies who've raised money from a given investor before taking money from them. You can also ask investors about other investors (as in "have you co-invested with X before, would you ?").
      - jacques_chester 13y ago
        > That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this. The former law student in me sees it as a magnet for defamation lawsuits.
    - adambenayoun 13y ago
- danmaz74 13y ago
  Considering that this essay will be read for years, maybe you might like to fix this little typo: "If you're in a wizard at fundraising". Edited: "equity round valuation might me". PS By the way, thank you so much for all this incredibly valuable free advice!
  - pg 13y ago
    Thanks, fixed.
    - danmaz74 13y ago
      You're more than welcome
    - natejenkins 13y ago
      Hey Paul, I found another small typo: "but if we raise a few hundred thousand we can hire a one or two smart friends" Should be: "but if we raise a few hundred thousand we can hire one or two smart friends" Thanks again for the article, very useful.
      - pg 13y ago
        Fixed, thanks.
        deleted 13y ago
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- nimble 13y ago
  > Since phase 2 prices vary at most 10x and the big successes generate returns of at least 100x, investors should pick startups entirely based on their estimate of the probability that the company will be a big success and hardly at all on price. Can someone explain the reasoning here? Investing at a lower valuation means that for the same money in, the investor gets a higher cut of any payout, right? If an investor judges your company to have a 1% chance of ending up worth $100m and a 99% chance of it ending up at $0m, then they should be willing to invest if the valuation is << $1m and not if the valuation is >> $1m. Or not?
  - pg 13y ago
    In practice few to zero investors make money that way. All the money in startup investing is in the big hits. Which means the way to make money as a investor is to try to invest in the companies you think will be big hits, and pay whatever the price happens to be.
    - nimble 13y ago
      What do you mean they don't make money that way? Do you just mean that $100m isn't a hit? If that's all you mean, change that number to $1b or $10b or one hundred... billion dollars (pinky to lip). But I think what you mean is that investors make money by finding companies that are grossly undervalued, to the point that an order of magnitude change in valuation shouldn't affect the decision. I'm still skeptical of this claim. How many companies valued at $10m do you think have a 10% chance of ending up at $1b+?
      - ecuzzillo 13y ago
        Almost all phase 2 startups will be worth zero, or nearly zero. Some will be worth $BIGNUM. If you invest in the latter, you will be rich irrespective of whether you invested at a valuation of $BIGNUM/100 or $BIGNUM/200. If you invest in the former, you will not be rich. Moreover, whatever money you make on any startups that do not make $BIGNUM is rounding error by comparison.
      - johnrob 13y ago
- melindajb 13y ago
  Thanks Paul for taking the time to share this wisdom outside the YC Collective. These words will have long lasting, positive effects on the ecosystem. Much appreciated.
- mathattack 13y ago
  I like "We'll succeed no matter what, but raising money will help us do it faster." I think this is a great universal negotiating technique. It's also useful for job hunting. Once you have time on your side (cash flow) you can afford to walk away from suboptimal deals.
larrys 13y ago
This is interesting and contradicts a bit of "disrupt" meme: "You can't trust your intuitions. I'm going to give you a set of rules here that will get you through this process if anything will. At certain moments you'll be tempted to ignore them. So rule number zero is: these rules exist for a reason. You wouldn't need a rule to keep you going in one direction if there weren't powerful forces pushing you in another." What this seems to be saying (to young people) is "it's ok to ignore what other older more experienced people say (or what established practices are) and try to disrupt in those situations because the guidelines and experience they have is bogus but I am telling you that my rules are right so just trust me".
- jasonshen 13y ago
  Your intuitions != what older more experience people say pg and YC has more qualified investing experience than probably any other "experienced person" you could talk to. When you are doing a startup, it's generally a good idea to focus on innovating in your core area of expertise - which would be some combination of product/market/technology - and take the best practices of all the other areas, like financing.
  - larrys 13y ago
    Re-read what I said. I'm not talking about what PG or YC recommends with regards to investing. I'm talking about the general idea that if anyone else said something like this and asked for blanket trust: "you can't trust your intuition....rule number zero is: these rules exist for a reason" Well those other people of course can't be trusted like PG and what they say doesn't matter as much. So if a person with 30 years in the taxi industry said to you "trust me these things are for a reason" and you saw he was as accomplished in what he did as PG would you just "trust him" or would you dig a little deeper? Interesting but expected that I would get downvoted for stating an opinion on something I said "what this seems to be saying". In a classroom would a teacher takes points off for stating a thought like that? Quite frankly I don't know why it's so necessary to walk on eggshells when stating a thought that seems to question what PG may say. Much of "disrupt" goes against a pattern of previously accepted behavior that others have questioned.
Felix21 13y ago
This couldn't have come at a better time. For the first time we have an investable business (revenue, growth, profits, big market, happy customers). Just as we were thinking: how do we go about this? Do we even have the time? Then such an informative article comes along. Thanks a lot PG.
- mikeg8 13y ago
  Feeling the exact same way. So much insight and time-saving advice, I can't believe it just falls into my lap.
austenallred 13y ago
From my experience, one of the most important realizations of fundraising is that it's an enormous mind game. The hardest part of fundraising was getting the startup to a point where I actually believed in it. When I looked at our projections and where the company could go, I was no longer thinking, "Yeah, if a miracle happens," but rather, "It'll be hard, but I really, really think we can do that. We just need some help to get there." Fundraising was a relative cakewalk when I was no longer selling investors on our company; I was explaining to investors that we were taking off, and asking them if they'd like to jump on board.
- unclebucknasty 13y ago
  I believe that making that mental transition (to believing in your company) impacts the way you approach other areas of your business as well (not just fundraising). For instance, when courting a large potential client or partner, your confidence goes up and you are not selling, so much as explaining. People pick up on this, and your results will show it. Plus, it just plain feels better when you really believe in your company's potential vs. merely hoping.
bryanh 13y ago
> Being proud of how well you did at fundraising is like being proud of your college grades. What a great line.
jacquesm 13y ago
For years I've been toying with making a start-up board game. This essay could easily serve as the basis for that. Slight disagree with the line: "For example, if a reputable investor is willing to invest on a convertible note, using standard paperwork, that is either uncapped or capped at a good valuation, you can take that without having to think." A good valuation means you're going to have to think anyway and if you don't need it you don't need it so then you're just going to have an obligation + temptation to use the funds. There is no such thing as 'free money' and a convertible note is simply deferring a part of the process and you'll need to take care of it sooner or later by going for funding (or paying back the loan). So if you are not sure if you are going to do a follow up round just yet I'd advise against getting a convertible loan, you now have a good chunk of the hassle of having an investor without having properly gone through the process required. Of course you could simply bank the money and pay back the loan if you are still of the same opinion later on but this rarely happens. It's the start-up equivalent of easy credit card debt, and if the valuation turns out to be low you could end up regretting taking the money (for instance, you could lose control like this). Better to negotiate it when you're strong or if you feel very secure about your future valuation. Having seen a lot of this from the other side of the table quite a few of the passages strike me as extremely negative about investors, I'm sure Paul has a ton more experience than I do so this carries a lot of weight with me but I don't recognize the behaviours he sketches with the investors that I normally work for. Maybe they are the exception (I'm sure they'd like to think that :) ), but I can't imagine it is this black. Investors look at the process of investing mostly as risk elimination, and as a second best as risk reduction by enumerating the risks. If an investors bails at the last moment (for instance after you've already agreed on terms) that would either reflect very bad on the investor, or more commonly on the party invested in. It's not as clear-cut imo as it is sketched here that all start-ups are angelic and innocent and investors are all sharks to a man and employing dirty tactics to get you to sign on the dotted line. Again, it's clear on which side my bread is buttered but I simply wouldn't work for investors deploying such tactics, but have yet to see this sort of behaviour in any VC of some stature. Otoh I've seen plenty of trickery by companies about to be invested in (and lots of good companies too).
- mbesto 13y ago
  Just to add a common misunderstanding - a convertible note is debt and raising capital is equity. Debt means you owe something (in this cause equity at a later time), and equity means you own something. I know this is probably "Fundraising 101" but often its the basics that people get wrong.
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rwaliany 13y ago
Great article. "might me" => "might be"
tomasien 13y ago
You'll notice a common theme in this (excellent) piece: it's for startups that have some reason to believe they can actually raise a bunch of money. Startups who have either sufficient demonstrable talent behind them, are growing in some interesting way, or some other form of validation. If you can't find some confidence that you're in that group, find a way to delay fundraising: keep your job, do consulting, work on alternate revenue streams, whatever, because fundraising when you're no in the group the bulk of this article applies to - trying to fundraise is hell. Not just hell like "it's really, really hard and frustrating" but hell like you could actually lose yourself in it, like you could actually get destroyed by it.
- namenotrequired 13y ago
  pg also points this out in http://paulgraham.com/convince.html http://paulgraham.com/convince.html :)
  - tomasien 13y ago
    He's done a great job of explaining this in the past - just making sure to clear it up. The worst thing in raising money is realizing you're not there yet - because NOBODY will tell you that, especially not investors.
kori 13y ago
Paul Graham on dating: s/investors/women/ && s/investor/woman/ (works the other way too) When you talk to women your m.o. should be breadth-first search, weighted by expected value. You should always talk to women in parallel rather than serially. You can't afford the time it takes to talk to women serially, plus if you only talk to one woman at a time, they don't have the pressure of other women to make them act. But you shouldn't pay the same attention to every woman, because some are more promising prospects than others. The optimal solution is to talk to all potential women in parallel, but give higher priority to the more promising ones.
- Tyrant505 13y ago
  I posted this on my fb.. Let hell break loose, thx. :P
- tlb 13y ago
  The analogy to dating is problematic. Such a strategy is indeed effective for dating, but feels mercenary or even sociopathic to most people. Making the analogy raises moral issues that aren't relevant to fundraising.
  - wellboy 13y ago
    Every human interaction is just analogous to dating, because human interactions are based on interest and the whole thing is called social dynamics. Be high value and wanted and everybody wants you, be desperate and low value and nobody wants you. In dating, it is sexual interest, in business, it is monetary interest , the underlying principles are the exact same.
- deleted 13y ago
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- drpancake 13y ago
  Essentially, they lead you on. They seem like they're about to invest right up till the moment they say no. If they even say no. Some of the worse ones never actually do say no; they just stop replying to your emails.
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YuriNiyazov 13y ago
Do investors read these essays? You've had some strong words for some of the types, e.g. "contemptible subspecies of investor". Would any of them email you and say, hey man, f u?
- j_baker 13y ago
  I would imagine not. Not only is PG very influential at many of the companies these investors would want to invest in, but most of these investors are also going to be hesitant to out themselves as being a "contemptible subspecies of investor".
- ekanes 13y ago
  Everyone in the community reads these essays. I would hazard that pg's goal in them is to coach both startups AND investors in how to behave toward each other. In this case, such bold language is him saying, "don't be this guy".
lpolovets 13y ago
There's a lot of great advice in this post, and much of it rings true. Specifically, the following tidbits are true ~100% of the time in my limited experience: - "Investors will try to lure you into fundraising when you're not. It's great for them if they can, because they can thereby get a shot at you before everyone else." - "What investors would like to do, if they could, is wait. When a startup is only a few months old, every week that passes gives you significantly more information about them." - "Though you can focus on different plans when talking to different types of investors, you should on the whole err on the side of underestimating the amount you hope to raise." - "You will be in a much stronger position if your collection of plans includes one for raising zero dollars—i.e. if you can make it to profitability without raising any additional money." - "If you have multiple founders, pick one to handle fundraising so the other(s) can keep working on the company." - "It's a mistake to behave arrogantly to investors." (I also think it's a mistake for investors to behave arrogantly to founders) That said, I wanted to comment on a few of the other points in this (awesome) essay: "To founders, the behavior of investors is often opaque—partly because their motivations are obscure, but partly because they deliberately mislead you." That's a strong statement. First, not all investors mislead -- many are honest people. Second, startups are also often guilty of misdirection, which doesn't mean you shouldn't call out shitty investors, but I do think you should call out both sides instead of making one side sound like the bad guy. "Do you have to be introduced? In phase 2, yes." I think this is true 95% of the time, but it's not 100% true. My partners and I get pitch decks emailed to us by random people. Most of the time the pitch decks are subpar, but I think that's because not being able to get a real intro is a sign that your team/idea/traction/something else is subpar. However, this is just a signal, and there is no rule - written or unwritten - that says "if we don't know the sender then the deck goes in the trash." If you email us something that falls within our thesis and looks promising, we'd love to talk to you. "Never leave a meeting with an investor without asking what happens next. What more do they need in order to decide?" This is great advice. Most founders we talk to already ask "what's next" at the end of a meeting, but not all of them do. "And while most investors are influenced by how interested other investors are in you, there are some who have an explicit policy of only investing after other investors have. You can recognize this contemptible subspecies of investor because they often talk about "leads."" I guess I'm one of the members of that contemptible subspecies. My partners and I are in the middle of raising a fund, but we were investing with our own money for the better part of this year. Our checks were too small to lead, but there were lots of startups that didn't have terms. If you're raising 1m on a 5m pre, then we don't need a lead to invest. If you're raising 1m-2m on a ??? pre, then we would prefer to wait to find out what ??? is. We're not super valuation sensitive, so 7m vs 8m is fine, but there's a big difference between a 6m pre and an 10m pre. What makes this more difficult is that founders will not reveal terms for obvious reasons. They can't say, "we're going to be raising at a 6m-9m pre" because that immediately shows that they would be willing to go to 6m. They may as well not mention 9m. So instead, they say something like, "we'll know terms once we get a lead." Okay, fine.. then we'll wait for the lead. =) "Sometimes an investor will ask you to send them your deck and/or executive summary before they decide whether to meet with you. I wouldn't do that. It's a sign they're not really interested." I'm surprised by this advice. As an investor, it saves everyone a ton of time when I can look at a deck before a meeting. I will sit down for 15-45 minutes before a meeting, go through deck, do some internet research, and think of questions I want to ask. This saves time because I can find out answers to the basic questions that I would ask in the deck, and then we can focus on more interesting questions and concerns during the meeting.
zaguios 13y ago
I have a question. Since I'm nowhere near the valley and the start-up community in my community might as well be non-existent, I was wondering how I might go about meeting and getting introductions to investors. Not being well connected with a very poor local community makes it hard for me to know where to start.
- sillysaurus2 13y ago
  Since I'm nowhere near the valley and the start-up community in my community might as well be non-existent, I was wondering how I might go about meeting and getting introductions to investors. In that case, it's probably good to think of ways to move to the valley. It sounds like the only investors in your area are probably individuals who happen to be wealthy, i.e. potential angel investors. But outside of the valley, angels tend to be family or people you're already acquainted with. And even if you can get them to invest in you, they're going to be less experienced than valley angels, meaning they may be dangerous to you. E.g. they'll probably rely heavily on their lawyer to structure the deal, and since you're not in the valley, that lawyer probably isn't a startup specialist, so you'll need to be extra careful they're structuring the deal properly (and structuring your company properly, if they're incorporating you). Investment can be had in places other than the valley, of course. But the reason you want to be in the valley is because (a) that's where the top investors are, and (b) there are a lot of them. Raising investment anywhere else therefore increases the risk of having bad terms forced on you by clueless angels or predatory VCs. Choosing to seek investment in the valley is like choosing the high ground in a battle: it's naturally suited to protect you from dying. And since avoiding death is every startup's most important goal, the valley is therefore the most important place to be. http://paulgraham.com/hubs.html http://paulgraham.com/hubs.html http://paulgraham.com/startuphubs.html http://paulgraham.com/startuphubs.html http://paulgraham.com/siliconvalley.html http://paulgraham.com/siliconvalley.html http://paulgraham.com/cities.html http://paulgraham.com/cities.html
  - jacquesm 13y ago
    > But outside of the valley, angels tend to be family or people you're already acquainted with. Find out who the LPs are of any private equity fund, there are your angels (by the 10's if not the 100's), and none of them will be family or people you are already acquainted with. Additional upside for those locations where this matters: and all of them will already be vetted as qualified investors.
amattn 13y ago
Know your audience. I love that pg uses distributed algorithms as an analogy of how to treat VCs (failure is the default state).
agrona 13y ago
Forgive my ignorance, but what does it mean for a founder to be "formidable"? e.g. in this context: > The founder who handles fundraising should be the CEO, who should in turn be the most formidable of the founders.
- sillysaurus2 13y ago
  http://www.paulgraham.com/convince.html http://www.paulgraham.com/convince.html "But the foundation of convincing investors is to seem formidable, and since this isn't a word most people use in conversation much, I should explain what it means. A formidable person is one who seems like they'll get what they want, regardless of whatever obstacles are in the way. Formidable is close to confident, except that someone could be confident and mistaken. Formidable is roughly justifiably confident."
saturdayplace 13y ago
My favorite thing about these essays, is summarized by PG's remark in this one: "sorry, we think you're great, but PG said startups shouldn't ___, and since we're new to fundraising, we feel like we have to play it safe." The card it gives to inexperienced players. This whole thing feels like a way to even out the information asymmetry inherent in these transactions.
cdixon 13y ago
I'd strongly recommend having a presentation in the pitch meeting. It helps control the flow of the meeting and ensure you cover all the important points.
sfrjay 13y ago
Unsurprisingly, excellent advice phrased as succinctly as it could be for such an enormous topic. I'm glad Paul Graham think that decks are on the way out, because they're a ludicrous (or at least inefficient) way of understanding what a startup does. If you have a product, show me that. If you have financials, show me those. Otherwise it becomes a competition to see which companies can dedicate their design resources to make the prettiest deck, and which investors can do the math on your '30% growth' number to figure out that you're growing from 3 to 4 users. The advice about valuation is also great. I listened in on a conversation with very smart founders who are used to optimizing things, and they were super concerned about having a great pre-money valuation. It's tempting to focus on it because it's your only benchmark at a really stressful stage, but if things go badly it won't matter, and if things go really well it... won't matter either.
- tlb 13y ago
  Another problem with emailing decks is that investors read them and decide, without much feedback to the founders. When founders can talk through the deck interactively with investors, they can learn which parts work and which don't, and what questions are unanswered.
  - dpapathanasiou 13y ago
    Alas, like the YC application form.
- deleted 13y ago
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- wpietri 13y ago
  I think showing the product alone works well only if the investor is in the target audience. I just met with an entrepreneur who has what I believe is a great product, but the investors he has talked with so far are just not going to be users of it. In his case, I think having a couple of slides to help demonstrate the problem is very helpful. Otherwise there isn't a sufficient aha moment when he gets to the solution.
wpietri 13y ago
I'm sure I'm not the only one thinking back on some long-ago startup and thinking, "Oh! Those assholes! I knew it!" Not that what PG says here is exactly news to me at this point, but his wide experience and resulting confidence is fantastic confirmation of things that I now know to suspect, but at the time seemed so reasonable. Oh, you don't lead? Oh, you want to see just a little more progress? Well of course you do. And I, earnest nerd, took them at their word.
fieldforceapp 13y ago
Thank you, pg. I would amend the summary by including an encouraging word to the founders: "Avoid investors till you decide to raise money, and then when you do, talk to them all in parallel, prioritized by expected value, and accept offers greedily; build rejection into your plans by having a range of realistic, acceptable fundraising targets. Get back to work quickly."
mehuldesai 13y ago
The article gives valuable insights into raising capital and the art of negotiation in this domain. Overall, negotiation and funding could almost be expressed as a rule table. Certain heuristics and rules. Rather than flip flopping strategies on how to negotiate and deal with investors, I think it may be good to have a set of rules/heuristics to follow and see if it leads to your goal. If it fails, alter it and see the result. Anyhow, thats what I intend to do for my company, GridCrowd. For negotiation PG mentions that its may be ok to just admit your a noob or not knowledgeable on certain aspects of funding. I respectfully wonder if there is another stratedgy from what I've learnt in negotiations in the non-funding world?: Negotiate from a perceived position of strength. You don't have to say your a noob, miss the detail and expose it if it becomes necessary. This way you may be able to attain more action on behalf of the investor moving through their process. The noob strategy allows them to indicate a process that could be tailored to their advantage. I don't know investors, so its hard for me to understand their objectives and how they behave. I'll re-read PGs advise again, he does have great credibility and wiseness so maybe I need more study on this strategy.
ffrryuu 13y ago
It's who you know, not what you know.
- adamzerner 13y ago
  No... it's both.
  - ffrryuu 13y ago
    Really? Recent news suggests otherwise...
wellboy 13y ago
An interesting point here is arrogance towards investors. The art of "arrogance" is to be arrogant in what you are saying while being very kind and nice in the way you say it. It's very hard as a first time founder to mimic the arrogance that is natural for experienced founders. If you can do it, it's great, if you can't, it will burn your bridges and blacklist you.^^ If you can pull it off though, you're the master. It's the pinnacle of hustling, having nothing to offer but being as confident as the next Mark Zuckerberg. So you'd need to be as confident as Mark Zuckerberg when he had $1M users when you only have 1000 users. However, that also only works if you intrinsically think of yourself as a very high-value individual and if you have worked for several on you to think that way. Otherwise, investors will quickly spot your fake.
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tomjohnson3 13y ago
this is perhaps the most honest and accurate description of what you will likely find in raising money - couple with fantastic advice. in fact, it accurately reflects my first experience and rookie mistakes raising money in a secondary market: wasting time by being led on by investors who don't lead; eventually closing a first investor, which started a rush; etc. if you're raising money for the first time, please read this multiple times...for your sanity's sake.
graycat 13y ago
The line in the essay I liked best was: > But there may be cases where a startup either wouldn't want to grow faster, or outside money wouldn't help them to, and if you're one of them, don't raise money. Having the essay earlier would have saved me a lot of time and effort. For my startup, I tried for a long time to raise money, and as in the essay it was a huge distraction from the real work. Eventually, at absurdly high cost in time and effort, I concluded the more common half of what is in the essay. Since I wanted to try hard to crack the nut of fund raising, I kept at the effort until I got some decent understanding. Also I had to conclude that VCs and I do projects and project planning and evaluation in very different ways. Since it was quite a while ago that I was 20 years old, and I've done a lot of projects and seen a lot of business, I prefer my approaches to project planning and evaluation. Also, for my project, my technical background, in applied mathematics, is far above that of all but maybe 10 VCs in the country. There is likely not a single VC in the country who could understand the crucial core of my project, some original applied math I derived, and only a few VCs who could even direct a competent review of that crucial core. So, I just can't be impressed by what VCs think of the crucial core of my project. When I was fund raising, I wondered how the VCs would evaluate my work; the answer is, they wouldn't! So, they don't have a clue about what they are missing. So, net, VCs will evaluate my project based on traction which should mean that, for me, a solo founder with meager burn rate, by the time a VC wants to write a check, as in the quote above from the essay, I will no longer be willing to accept one. After the fund raising effort, I settled on the line in the essay I quoted above: For me, and as often in the essay, the VCs are just too much trouble to work with to be worthwhile. Yes, the VCs are trouble in fund raising, but also the VCs will bring Board overhead, more time/money with lawyers and accountants, and, then, in case of the success they want, an IPO with all the Wall Street and SEC nonsense. Handling all that would be a full time job for me, the CEO of my company; that's not the kind of work I want to do; and my hands would be taken from actually building and running my company. I see another point: In the US, businesses are started and succeed coast to coast in big cities down to crossroads by solo founders by the millions each year. Such a business might be a pizza shop, auto repair shop, landscaping service, big truck/little truck business, etc. My startup, with me as solo founder, is in information technology (IT) which should be a huge advantage: E.g., my first server farm will cost less than the truck and lawn mower of the guys who cut grass in my neighborhood, and the Internet connection I need will cost less than $100 a month. Moreover if I half fill the Internet connection, then from simple arithmetic my revenue and earnings in one year will be quite comparable with funds from a Series A. So I just view my startup as a one person pizza shop but with some big advantages from IT; e.g., a pizza shop owner needs to be in the shop for each dollar made, and my server farm can be making money while I sleep. For PG's definition of a startup in terms of very rapid growth, so rapid that VC funds become important, that's not important to me. I need a nice business; I don't have to shoot for another Google and wouldn't want to manage anything that big anyway. A recent remark of Mark Andreessen is that there are only about 15 startups a year that deserve a Series A. So, the essay is talking about only about 15 startups a year and, thus, I am not disappointed the essay is not talking about my startup. The VCs and I will have to disagree on how to plan, evaluate, start, and build a company. If I am successful, then likely that disagreement will have been a big part of my success. The VCs remind me of the Mother Goose story The Little Red Hen when she could get help only when she had fragrant, hot loaves of bread coming out of the oven and customers lining up to buy and no longer needed any help. For me, one really serious turnoff of VCs is that, since they have really no chance of understanding the crucial core of my business or how I do projects, no way would I want to report to a Board with VCs. Vinod Khosla has some recent remarks on how helpful Board VCs are! Another big turnoff of VCs is that, as reported on Fred Wilson's blog, on average over the past 10 years, the VC ROI has been poor. Net, VCs do not have a lot of credibility in business. Another big turnoff is that too many VCs were not STEM majors and have written little to no code. Another big turnoff is that my startup, as is recommended for startups, is doing work that is new; well, there is some education for how to work effectively with things that are new, a Ph.D. degree; I have an appropriate one from a famous research university, and nearly no VCs do. I will have a tough time viewing a VC as a helpful colleague in the crucial core of my business.
mattmaroon 13y ago
"When everyone wants you, it's hard not to let it go to your head. Especially if till recently no one wanted you. But restrain yourself." Reminds me of a great quote from a family member. When my cousin's son started playing football, my cousin told him "the first time you get into the endzone, act like you've been there before".
photorized 13y ago
"How not to have to raise money" should have been more useful to startups. Unfortunately, many have been conditioned into thinking that success can't be achieved without fundraising.
adamzerner 13y ago
Ask HN/PG: This essay focuses on phase 2. What is the advice for phase 1?
- 2arrs2ells 13y ago
  http://ycombinator.com/howtoapply.html http://ycombinator.com/howtoapply.html
  - adamzerner 13y ago
    What about how a phase 1 startup could find investors in the first place? PG talks a lot about how it goes by introductions. What's the solution to the chicken/egg problem?
hynahmwxsbyb 13y ago
Great article PG. I'd like to see more case studies on a successful fundraise at the individual level. How much foreplY do you need before you ask them to bed? How many initial meetings will here likely be? How long does this take?
melbourne_mat 13y ago
A few points pg missed: - be white - be under 30. Preferably under 25 - don't sound too foreign - make sure you are well connected and/or went to harvard, mit or some such - look like Zuck if at all possible! Did I leave anything out?
known 13y ago
The Ultimate Cheat Sheet to Starting and Running Your Own Business http://www.jamesaltucher.com/2013/08/the-ultimate-cheat-sheet-to-starting-and-running-your-own-business/ http://www.jamesaltucher.com/2013/08/the-ultimate-cheat-shee...

538 points by oBeLx 13y ago

pg 13y ago

Incidentally, this is the actual advice we give startups about fundraising at YC. This batch I finally wrote it all down, and the s2013 startups used it when raising money.

janson0 13y ago
Thank you for posting this advice in a clear cut manner. As someone looking to raise money, but not currently residing in the valley, a thorough map to guide my thoughts and presentation development before venturing out into the West Coast VC waters is amazingly helpful.
zmitri 13y ago
The thanks to Moriarty is a nice touch pg.
- pg 13y ago
  It's a real person. We actually had a Professor Moriarty in the last batch: http://techcrunch.com/2013/08/05/y-combinator-startup-7-cups-of-tea-connects-people-in-need-of-emotional-support-with-trained-listeners/ http://techcrunch.com/2013/08/05/y-combinator-startup-7-cups...
  - zmitri 13y ago
    That is amazing.
ig1 13y ago
"I don't know of a single VC investment that began with an associate cold-emailing a startup." I can vouch from personal knowledge that this has happened a number of times at a number of different European VCs, and at least once with a major US VC in the last year. I'm guessing it's far less common for YC startups because YC startups have demo day which essentially initiates the process. They also have a strong network because of YC so it's much easier for a VC to get a warm intro to any YC startup. It may just be a Europe vs US thing but I'd be surprised if it didn't happen frequently in the US as well especially at less well connected startups. Certainly referrals have significant value but most major VCs will be able to use their network to get references on pretty much any startup in any case.
- diminish 13y ago
  we need to combine individual experiences and create a curated tabular list of investors classified by different dimensions in pg's great article. such a list combined with this article would be the ultimate cheatsheet for fundraising.
  - jacquesm 13y ago
    That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this. Deal details with investor names attached are not likely to materialize until long after the fact and even then someone is breaking a promise, which professionals with ties to VCs are not going to do. Founders could technically get away with this, especially if a deal fell through but this world operates largely on reputation and such a thing could easily pop up at a moment when you really don't need it later on. Crunchbase has quite a wealth of info in it, as does duedil.com , those you could use to get an idea of who is on the other side of the table as well as google. The best source of info for a company looking for funding from 'party x' is to go and find out who else 'party x' has invested in and then to see if there are connections that can be sounded out off the record as well as companies that 'party x' was going to invest in but where the deal fell through (this is a lot harder to come by though).
    - ig1 13y ago
      You should absolutely do this, always speak to founders of companies who've raised money from a given investor before taking money from them. You can also ask investors about other investors (as in "have you co-invested with X before, would you ?").
    - jacques_chester 13y ago
      > That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this. The former law student in me sees it as a magnet for defamation lawsuits.
  - adambenayoun 13y ago
danmaz74 13y ago
Considering that this essay will be read for years, maybe you might like to fix this little typo: "If you're in a wizard at fundraising". Edited: "equity round valuation might me". PS By the way, thank you so much for all this incredibly valuable free advice!
- pg 13y ago
  Thanks, fixed.
  - danmaz74 13y ago
    You're more than welcome
  - natejenkins 13y ago
    Hey Paul, I found another small typo: "but if we raise a few hundred thousand we can hire a one or two smart friends" Should be: "but if we raise a few hundred thousand we can hire one or two smart friends" Thanks again for the article, very useful.
    - pg 13y ago
      Fixed, thanks.
      - deleted 13y ago
        [deleted]
nimble 13y ago
> Since phase 2 prices vary at most 10x and the big successes generate returns of at least 100x, investors should pick startups entirely based on their estimate of the probability that the company will be a big success and hardly at all on price. Can someone explain the reasoning here? Investing at a lower valuation means that for the same money in, the investor gets a higher cut of any payout, right? If an investor judges your company to have a 1% chance of ending up worth $100m and a 99% chance of it ending up at $0m, then they should be willing to invest if the valuation is << $1m and not if the valuation is >> $1m. Or not?
- pg 13y ago
  In practice few to zero investors make money that way. All the money in startup investing is in the big hits. Which means the way to make money as a investor is to try to invest in the companies you think will be big hits, and pay whatever the price happens to be.
  - nimble 13y ago
    What do you mean they don't make money that way? Do you just mean that $100m isn't a hit? If that's all you mean, change that number to $1b or $10b or one hundred... billion dollars (pinky to lip). But I think what you mean is that investors make money by finding companies that are grossly undervalued, to the point that an order of magnitude change in valuation shouldn't affect the decision. I'm still skeptical of this claim. How many companies valued at $10m do you think have a 10% chance of ending up at $1b+?
    - ecuzzillo 13y ago
      Almost all phase 2 startups will be worth zero, or nearly zero. Some will be worth $BIGNUM. If you invest in the latter, you will be rich irrespective of whether you invested at a valuation of $BIGNUM/100 or $BIGNUM/200. If you invest in the former, you will not be rich. Moreover, whatever money you make on any startups that do not make $BIGNUM is rounding error by comparison.
    - johnrob 13y ago
melindajb 13y ago
Thanks Paul for taking the time to share this wisdom outside the YC Collective. These words will have long lasting, positive effects on the ecosystem. Much appreciated.
mathattack 13y ago
I like "We'll succeed no matter what, but raising money will help us do it faster." I think this is a great universal negotiating technique. It's also useful for job hunting. Once you have time on your side (cash flow) you can afford to walk away from suboptimal deals.

larrys 13y ago

This is interesting and contradicts a bit of "disrupt" meme: "You can't trust your intuitions. I'm going to give you a set of rules here that will get you through this process if anything will. At certain moments you'll be tempted to ignore them. So rule number zero is: these rules exist for a reason. You wouldn't need a rule to keep you going in one direction if there weren't powerful forces pushing you in another." What this seems to be saying (to young people) is "it's ok to ignore what other older more experienced people say (or what established practices are) and try to disrupt in those situations because the guidelines and experience they have is bogus but I am telling you that my rules are right so just trust me".

jasonshen 13y ago
Your intuitions != what older more experience people say pg and YC has more qualified investing experience than probably any other "experienced person" you could talk to. When you are doing a startup, it's generally a good idea to focus on innovating in your core area of expertise - which would be some combination of product/market/technology - and take the best practices of all the other areas, like financing.
- larrys 13y ago
  Re-read what I said. I'm not talking about what PG or YC recommends with regards to investing. I'm talking about the general idea that if anyone else said something like this and asked for blanket trust: "you can't trust your intuition....rule number zero is: these rules exist for a reason" Well those other people of course can't be trusted like PG and what they say doesn't matter as much. So if a person with 30 years in the taxi industry said to you "trust me these things are for a reason" and you saw he was as accomplished in what he did as PG would you just "trust him" or would you dig a little deeper? Interesting but expected that I would get downvoted for stating an opinion on something I said "what this seems to be saying". In a classroom would a teacher takes points off for stating a thought like that? Quite frankly I don't know why it's so necessary to walk on eggshells when stating a thought that seems to question what PG may say. Much of "disrupt" goes against a pattern of previously accepted behavior that others have questioned.

Felix21 13y ago

This couldn't have come at a better time. For the first time we have an investable business (revenue, growth, profits, big market, happy customers). Just as we were thinking: how do we go about this? Do we even have the time? Then such an informative article comes along. Thanks a lot PG.

mikeg8 13y ago
Feeling the exact same way. So much insight and time-saving advice, I can't believe it just falls into my lap.

austenallred 13y ago

From my experience, one of the most important realizations of fundraising is that it's an enormous mind game. The hardest part of fundraising was getting the startup to a point where I actually believed in it. When I looked at our projections and where the company could go, I was no longer thinking, "Yeah, if a miracle happens," but rather, "It'll be hard, but I really, really think we can do that. We just need some help to get there." Fundraising was a relative cakewalk when I was no longer selling investors on our company; I was explaining to investors that we were taking off, and asking them if they'd like to jump on board.

unclebucknasty 13y ago
I believe that making that mental transition (to believing in your company) impacts the way you approach other areas of your business as well (not just fundraising). For instance, when courting a large potential client or partner, your confidence goes up and you are not selling, so much as explaining. People pick up on this, and your results will show it. Plus, it just plain feels better when you really believe in your company's potential vs. merely hoping.

bryanh 13y ago

> Being proud of how well you did at fundraising is like being proud of your college grades. What a great line.

jacquesm 13y ago

For years I've been toying with making a start-up board game. This essay could easily serve as the basis for that. Slight disagree with the line: "For example, if a reputable investor is willing to invest on a convertible note, using standard paperwork, that is either uncapped or capped at a good valuation, you can take that without having to think." A good valuation means you're going to have to think anyway and if you don't need it you don't need it so then you're just going to have an obligation + temptation to use the funds. There is no such thing as 'free money' and a convertible note is simply deferring a part of the process and you'll need to take care of it sooner or later by going for funding (or paying back the loan). So if you are not sure if you are going to do a follow up round just yet I'd advise against getting a convertible loan, you now have a good chunk of the hassle of having an investor without having properly gone through the process required. Of course you could simply bank the money and pay back the loan if you are still of the same opinion later on but this rarely happens. It's the start-up equivalent of easy credit card debt, and if the valuation turns out to be low you could end up regretting taking the money (for instance, you could lose control like this). Better to negotiate it when you're strong or if you feel very secure about your future valuation. Having seen a lot of this from the other side of the table quite a few of the passages strike me as extremely negative about investors, I'm sure Paul has a ton more experience than I do so this carries a lot of weight with me but I don't recognize the behaviours he sketches with the investors that I normally work for. Maybe they are the exception (I'm sure they'd like to think that :) ), but I can't imagine it is this black. Investors look at the process of investing mostly as risk elimination, and as a second best as risk reduction by enumerating the risks. If an investors bails at the last moment (for instance after you've already agreed on terms) that would either reflect very bad on the investor, or more commonly on the party invested in. It's not as clear-cut imo as it is sketched here that all start-ups are angelic and innocent and investors are all sharks to a man and employing dirty tactics to get you to sign on the dotted line. Again, it's clear on which side my bread is buttered but I simply wouldn't work for investors deploying such tactics, but have yet to see this sort of behaviour in any VC of some stature. Otoh I've seen plenty of trickery by companies about to be invested in (and lots of good companies too).

mbesto 13y ago
Just to add a common misunderstanding - a convertible note is debt and raising capital is equity. Debt means you owe something (in this cause equity at a later time), and equity means you own something. I know this is probably "Fundraising 101" but often its the basics that people get wrong.

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rwaliany 13y ago

Great article. "might me" => "might be"

tomasien 13y ago

You'll notice a common theme in this (excellent) piece: it's for startups that have some reason to believe they can actually raise a bunch of money. Startups who have either sufficient demonstrable talent behind them, are growing in some interesting way, or some other form of validation. If you can't find some confidence that you're in that group, find a way to delay fundraising: keep your job, do consulting, work on alternate revenue streams, whatever, because fundraising when you're no in the group the bulk of this article applies to - trying to fundraise is hell. Not just hell like "it's really, really hard and frustrating" but hell like you could actually lose yourself in it, like you could actually get destroyed by it.

namenotrequired 13y ago
pg also points this out in http://paulgraham.com/convince.html http://paulgraham.com/convince.html :)
- tomasien 13y ago
  He's done a great job of explaining this in the past - just making sure to clear it up. The worst thing in raising money is realizing you're not there yet - because NOBODY will tell you that, especially not investors.

kori 13y ago

Paul Graham on dating: s/investors/women/ && s/investor/woman/ (works the other way too) When you talk to women your m.o. should be breadth-first search, weighted by expected value. You should always talk to women in parallel rather than serially. You can't afford the time it takes to talk to women serially, plus if you only talk to one woman at a time, they don't have the pressure of other women to make them act. But you shouldn't pay the same attention to every woman, because some are more promising prospects than others. The optimal solution is to talk to all potential women in parallel, but give higher priority to the more promising ones.

Tyrant505 13y ago
I posted this on my fb.. Let hell break loose, thx. :P
tlb 13y ago
The analogy to dating is problematic. Such a strategy is indeed effective for dating, but feels mercenary or even sociopathic to most people. Making the analogy raises moral issues that aren't relevant to fundraising.
- wellboy 13y ago
  Every human interaction is just analogous to dating, because human interactions are based on interest and the whole thing is called social dynamics. Be high value and wanted and everybody wants you, be desperate and low value and nobody wants you. In dating, it is sexual interest, in business, it is monetary interest , the underlying principles are the exact same.
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drpancake 13y ago
Essentially, they lead you on. They seem like they're about to invest right up till the moment they say no. If they even say no. Some of the worse ones never actually do say no; they just stop replying to your emails.

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YuriNiyazov 13y ago

Do investors read these essays? You've had some strong words for some of the types, e.g. "contemptible subspecies of investor". Would any of them email you and say, hey man, f u?

j_baker 13y ago
I would imagine not. Not only is PG very influential at many of the companies these investors would want to invest in, but most of these investors are also going to be hesitant to out themselves as being a "contemptible subspecies of investor".
ekanes 13y ago
Everyone in the community reads these essays. I would hazard that pg's goal in them is to coach both startups AND investors in how to behave toward each other. In this case, such bold language is him saying, "don't be this guy".

lpolovets 13y ago

There's a lot of great advice in this post, and much of it rings true. Specifically, the following tidbits are true ~100% of the time in my limited experience: - "Investors will try to lure you into fundraising when you're not. It's great for them if they can, because they can thereby get a shot at you before everyone else." - "What investors would like to do, if they could, is wait. When a startup is only a few months old, every week that passes gives you significantly more information about them." - "Though you can focus on different plans when talking to different types of investors, you should on the whole err on the side of underestimating the amount you hope to raise." - "You will be in a much stronger position if your collection of plans includes one for raising zero dollars—i.e. if you can make it to profitability without raising any additional money." - "If you have multiple founders, pick one to handle fundraising so the other(s) can keep working on the company." - "It's a mistake to behave arrogantly to investors." (I also think it's a mistake for investors to behave arrogantly to founders) That said, I wanted to comment on a few of the other points in this (awesome) essay: "To founders, the behavior of investors is often opaque—partly because their motivations are obscure, but partly because they deliberately mislead you." That's a strong statement. First, not all investors mislead -- many are honest people. Second, startups are also often guilty of misdirection, which doesn't mean you shouldn't call out shitty investors, but I do think you should call out both sides instead of making one side sound like the bad guy. "Do you have to be introduced? In phase 2, yes." I think this is true 95% of the time, but it's not 100% true. My partners and I get pitch decks emailed to us by random people. Most of the time the pitch decks are subpar, but I think that's because not being able to get a real intro is a sign that your team/idea/traction/something else is subpar. However, this is just a signal, and there is no rule - written or unwritten - that says "if we don't know the sender then the deck goes in the trash." If you email us something that falls within our thesis and looks promising, we'd love to talk to you. "Never leave a meeting with an investor without asking what happens next. What more do they need in order to decide?" This is great advice. Most founders we talk to already ask "what's next" at the end of a meeting, but not all of them do. "And while most investors are influenced by how interested other investors are in you, there are some who have an explicit policy of only investing after other investors have. You can recognize this contemptible subspecies of investor because they often talk about "leads."" I guess I'm one of the members of that contemptible subspecies. My partners and I are in the middle of raising a fund, but we were investing with our own money for the better part of this year. Our checks were too small to lead, but there were lots of startups that didn't have terms. If you're raising 1m on a 5m pre, then we don't need a lead to invest. If you're raising 1m-2m on a ??? pre, then we would prefer to wait to find out what ??? is. We're not super valuation sensitive, so 7m vs 8m is fine, but there's a big difference between a 6m pre and an 10m pre. What makes this more difficult is that founders will not reveal terms for obvious reasons. They can't say, "we're going to be raising at a 6m-9m pre" because that immediately shows that they would be willing to go to 6m. They may as well not mention 9m. So instead, they say something like, "we'll know terms once we get a lead." Okay, fine.. then we'll wait for the lead. =) "Sometimes an investor will ask you to send them your deck and/or executive summary before they decide whether to meet with you. I wouldn't do that. It's a sign they're not really interested." I'm surprised by this advice. As an investor, it saves everyone a ton of time when I can look at a deck before a meeting. I will sit down for 15-45 minutes before a meeting, go through deck, do some internet research, and think of questions I want to ask. This saves time because I can find out answers to the basic questions that I would ask in the deck, and then we can focus on more interesting questions and concerns during the meeting.

zaguios 13y ago

I have a question. Since I'm nowhere near the valley and the start-up community in my community might as well be non-existent, I was wondering how I might go about meeting and getting introductions to investors. Not being well connected with a very poor local community makes it hard for me to know where to start.

sillysaurus2 13y ago
Since I'm nowhere near the valley and the start-up community in my community might as well be non-existent, I was wondering how I might go about meeting and getting introductions to investors. In that case, it's probably good to think of ways to move to the valley. It sounds like the only investors in your area are probably individuals who happen to be wealthy, i.e. potential angel investors. But outside of the valley, angels tend to be family or people you're already acquainted with. And even if you can get them to invest in you, they're going to be less experienced than valley angels, meaning they may be dangerous to you. E.g. they'll probably rely heavily on their lawyer to structure the deal, and since you're not in the valley, that lawyer probably isn't a startup specialist, so you'll need to be extra careful they're structuring the deal properly (and structuring your company properly, if they're incorporating you). Investment can be had in places other than the valley, of course. But the reason you want to be in the valley is because (a) that's where the top investors are, and (b) there are a lot of them. Raising investment anywhere else therefore increases the risk of having bad terms forced on you by clueless angels or predatory VCs. Choosing to seek investment in the valley is like choosing the high ground in a battle: it's naturally suited to protect you from dying. And since avoiding death is every startup's most important goal, the valley is therefore the most important place to be. http://paulgraham.com/hubs.html http://paulgraham.com/hubs.html http://paulgraham.com/startuphubs.html http://paulgraham.com/startuphubs.html http://paulgraham.com/siliconvalley.html http://paulgraham.com/siliconvalley.html http://paulgraham.com/cities.html http://paulgraham.com/cities.html
- jacquesm 13y ago
  > But outside of the valley, angels tend to be family or people you're already acquainted with. Find out who the LPs are of any private equity fund, there are your angels (by the 10's if not the 100's), and none of them will be family or people you are already acquainted with. Additional upside for those locations where this matters: and all of them will already be vetted as qualified investors.

amattn 13y ago

Know your audience. I love that pg uses distributed algorithms as an analogy of how to treat VCs (failure is the default state).

agrona 13y ago

Forgive my ignorance, but what does it mean for a founder to be "formidable"? e.g. in this context: > The founder who handles fundraising should be the CEO, who should in turn be the most formidable of the founders.

sillysaurus2 13y ago
http://www.paulgraham.com/convince.html http://www.paulgraham.com/convince.html "But the foundation of convincing investors is to seem formidable, and since this isn't a word most people use in conversation much, I should explain what it means. A formidable person is one who seems like they'll get what they want, regardless of whatever obstacles are in the way. Formidable is close to confident, except that someone could be confident and mistaken. Formidable is roughly justifiably confident."

saturdayplace 13y ago

My favorite thing about these essays, is summarized by PG's remark in this one: "sorry, we think you're great, but PG said startups shouldn't ___, and since we're new to fundraising, we feel like we have to play it safe." The card it gives to inexperienced players. This whole thing feels like a way to even out the information asymmetry inherent in these transactions.

cdixon 13y ago

I'd strongly recommend having a presentation in the pitch meeting. It helps control the flow of the meeting and ensure you cover all the important points.

sfrjay 13y ago

Unsurprisingly, excellent advice phrased as succinctly as it could be for such an enormous topic. I'm glad Paul Graham think that decks are on the way out, because they're a ludicrous (or at least inefficient) way of understanding what a startup does. If you have a product, show me that. If you have financials, show me those. Otherwise it becomes a competition to see which companies can dedicate their design resources to make the prettiest deck, and which investors can do the math on your '30% growth' number to figure out that you're growing from 3 to 4 users. The advice about valuation is also great. I listened in on a conversation with very smart founders who are used to optimizing things, and they were super concerned about having a great pre-money valuation. It's tempting to focus on it because it's your only benchmark at a really stressful stage, but if things go badly it won't matter, and if things go really well it... won't matter either.

tlb 13y ago
Another problem with emailing decks is that investors read them and decide, without much feedback to the founders. When founders can talk through the deck interactively with investors, they can learn which parts work and which don't, and what questions are unanswered.
- dpapathanasiou 13y ago
  Alas, like the YC application form.
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wpietri 13y ago
I think showing the product alone works well only if the investor is in the target audience. I just met with an entrepreneur who has what I believe is a great product, but the investors he has talked with so far are just not going to be users of it. In his case, I think having a couple of slides to help demonstrate the problem is very helpful. Otherwise there isn't a sufficient aha moment when he gets to the solution.

wpietri 13y ago

I'm sure I'm not the only one thinking back on some long-ago startup and thinking, "Oh! Those assholes! I knew it!" Not that what PG says here is exactly news to me at this point, but his wide experience and resulting confidence is fantastic confirmation of things that I now know to suspect, but at the time seemed so reasonable. Oh, you don't lead? Oh, you want to see just a little more progress? Well of course you do. And I, earnest nerd, took them at their word.

fieldforceapp 13y ago

Thank you, pg. I would amend the summary by including an encouraging word to the founders: "Avoid investors till you decide to raise money, and then when you do, talk to them all in parallel, prioritized by expected value, and accept offers greedily; build rejection into your plans by having a range of realistic, acceptable fundraising targets. Get back to work quickly."

mehuldesai 13y ago

The article gives valuable insights into raising capital and the art of negotiation in this domain. Overall, negotiation and funding could almost be expressed as a rule table. Certain heuristics and rules. Rather than flip flopping strategies on how to negotiate and deal with investors, I think it may be good to have a set of rules/heuristics to follow and see if it leads to your goal. If it fails, alter it and see the result. Anyhow, thats what I intend to do for my company, GridCrowd. For negotiation PG mentions that its may be ok to just admit your a noob or not knowledgeable on certain aspects of funding. I respectfully wonder if there is another stratedgy from what I've learnt in negotiations in the non-funding world?: Negotiate from a perceived position of strength. You don't have to say your a noob, miss the detail and expose it if it becomes necessary. This way you may be able to attain more action on behalf of the investor moving through their process. The noob strategy allows them to indicate a process that could be tailored to their advantage. I don't know investors, so its hard for me to understand their objectives and how they behave. I'll re-read PGs advise again, he does have great credibility and wiseness so maybe I need more study on this strategy.

ffrryuu 13y ago

It's who you know, not what you know.

adamzerner 13y ago
No... it's both.
- ffrryuu 13y ago
  Really? Recent news suggests otherwise...

wellboy 13y ago

An interesting point here is arrogance towards investors. The art of "arrogance" is to be arrogant in what you are saying while being very kind and nice in the way you say it. It's very hard as a first time founder to mimic the arrogance that is natural for experienced founders. If you can do it, it's great, if you can't, it will burn your bridges and blacklist you.^^ If you can pull it off though, you're the master. It's the pinnacle of hustling, having nothing to offer but being as confident as the next Mark Zuckerberg. So you'd need to be as confident as Mark Zuckerberg when he had $1M users when you only have 1000 users. However, that also only works if you intrinsically think of yourself as a very high-value individual and if you have worked for several on you to think that way. Otherwise, investors will quickly spot your fake.

deleted 13y ago

[deleted]

tomjohnson3 13y ago

this is perhaps the most honest and accurate description of what you will likely find in raising money - couple with fantastic advice. in fact, it accurately reflects my first experience and rookie mistakes raising money in a secondary market: wasting time by being led on by investors who don't lead; eventually closing a first investor, which started a rush; etc. if you're raising money for the first time, please read this multiple times...for your sanity's sake.

graycat 13y ago

The line in the essay I liked best was: > But there may be cases where a startup either wouldn't want to grow faster, or outside money wouldn't help them to, and if you're one of them, don't raise money. Having the essay earlier would have saved me a lot of time and effort. For my startup, I tried for a long time to raise money, and as in the essay it was a huge distraction from the real work. Eventually, at absurdly high cost in time and effort, I concluded the more common half of what is in the essay. Since I wanted to try hard to crack the nut of fund raising, I kept at the effort until I got some decent understanding. Also I had to conclude that VCs and I do projects and project planning and evaluation in very different ways. Since it was quite a while ago that I was 20 years old, and I've done a lot of projects and seen a lot of business, I prefer my approaches to project planning and evaluation. Also, for my project, my technical background, in applied mathematics, is far above that of all but maybe 10 VCs in the country. There is likely not a single VC in the country who could understand the crucial core of my project, some original applied math I derived, and only a few VCs who could even direct a competent review of that crucial core. So, I just can't be impressed by what VCs think of the crucial core of my project. When I was fund raising, I wondered how the VCs would evaluate my work; the answer is, they wouldn't! So, they don't have a clue about what they are missing. So, net, VCs will evaluate my project based on traction which should mean that, for me, a solo founder with meager burn rate, by the time a VC wants to write a check, as in the quote above from the essay, I will no longer be willing to accept one. After the fund raising effort, I settled on the line in the essay I quoted above: For me, and as often in the essay, the VCs are just too much trouble to work with to be worthwhile. Yes, the VCs are trouble in fund raising, but also the VCs will bring Board overhead, more time/money with lawyers and accountants, and, then, in case of the success they want, an IPO with all the Wall Street and SEC nonsense. Handling all that would be a full time job for me, the CEO of my company; that's not the kind of work I want to do; and my hands would be taken from actually building and running my company. I see another point: In the US, businesses are started and succeed coast to coast in big cities down to crossroads by solo founders by the millions each year. Such a business might be a pizza shop, auto repair shop, landscaping service, big truck/little truck business, etc. My startup, with me as solo founder, is in information technology (IT) which should be a huge advantage: E.g., my first server farm will cost less than the truck and lawn mower of the guys who cut grass in my neighborhood, and the Internet connection I need will cost less than $100 a month. Moreover if I half fill the Internet connection, then from simple arithmetic my revenue and earnings in one year will be quite comparable with funds from a Series A. So I just view my startup as a one person pizza shop but with some big advantages from IT; e.g., a pizza shop owner needs to be in the shop for each dollar made, and my server farm can be making money while I sleep. For PG's definition of a startup in terms of very rapid growth, so rapid that VC funds become important, that's not important to me. I need a nice business; I don't have to shoot for another Google and wouldn't want to manage anything that big anyway. A recent remark of Mark Andreessen is that there are only about 15 startups a year that deserve a Series A. So, the essay is talking about only about 15 startups a year and, thus, I am not disappointed the essay is not talking about my startup. The VCs and I will have to disagree on how to plan, evaluate, start, and build a company. If I am successful, then likely that disagreement will have been a big part of my success. The VCs remind me of the Mother Goose story The Little Red Hen when she could get help only when she had fragrant, hot loaves of bread coming out of the oven and customers lining up to buy and no longer needed any help. For me, one really serious turnoff of VCs is that, since they have really no chance of understanding the crucial core of my business or how I do projects, no way would I want to report to a Board with VCs. Vinod Khosla has some recent remarks on how helpful Board VCs are! Another big turnoff of VCs is that, as reported on Fred Wilson's blog, on average over the past 10 years, the VC ROI has been poor. Net, VCs do not have a lot of credibility in business. Another big turnoff is that too many VCs were not STEM majors and have written little to no code. Another big turnoff is that my startup, as is recommended for startups, is doing work that is new; well, there is some education for how to work effectively with things that are new, a Ph.D. degree; I have an appropriate one from a famous research university, and nearly no VCs do. I will have a tough time viewing a VC as a helpful colleague in the crucial core of my business.

mattmaroon 13y ago

"When everyone wants you, it's hard not to let it go to your head. Especially if till recently no one wanted you. But restrain yourself." Reminds me of a great quote from a family member. When my cousin's son started playing football, my cousin told him "the first time you get into the endzone, act like you've been there before".

photorized 13y ago

"How not to have to raise money" should have been more useful to startups. Unfortunately, many have been conditioned into thinking that success can't be achieved without fundraising.

adamzerner 13y ago

Ask HN/PG: This essay focuses on phase 2. What is the advice for phase 1?

2arrs2ells 13y ago
http://ycombinator.com/howtoapply.html http://ycombinator.com/howtoapply.html
- adamzerner 13y ago
  What about how a phase 1 startup could find investors in the first place? PG talks a lot about how it goes by introductions. What's the solution to the chicken/egg problem?

hynahmwxsbyb 13y ago

Great article PG. I'd like to see more case studies on a successful fundraise at the individual level. How much foreplY do you need before you ask them to bed? How many initial meetings will here likely be? How long does this take?

melbourne_mat 13y ago

A few points pg missed: - be white - be under 30. Preferably under 25 - don't sound too foreign - make sure you are well connected and/or went to harvard, mit or some such - look like Zuck if at all possible! Did I leave anything out?

known 13y ago

The Ultimate Cheat Sheet to Starting and Running Your Own Business http://www.jamesaltucher.com/2013/08/the-ultimate-cheat-sheet-to-starting-and-running-your-own-business/ http://www.jamesaltucher.com/2013/08/the-ultimate-cheat-shee...