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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 r

by 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.

by 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.