To me, one of the biggies is raising too early. To Sam's point, you want a competitive environment. To get that you want to obviously be a good investment to as many investors as possible.
If you don't have some combination of an amazing v1 product, a traction graph that's moving in the right direction, credible investors already on board, a big/timely market, or a top 5% team, you're almost certainly fundraising too early... And you should do whatever you can to get one or more of the above.
It's sort of silly though - founders already take risk with years of their life going nowhere, why should they also bear the entirety of the financial risk? Isn't the purpose of early stage investment to validate the idea? And by contrast late-stage investment is to grow the validated idea? It feels like these days everyone wants to invest only in validated ideas. It just feels suboptimal that hardly anyone ever wants to finance the actual validation... Am I missing something?
The barriers to entry for startups have gone down, and thus there's higher quality startups competing for the same funding. As development becomes cheaper, easier, quicker we are just going to see the bar go up for early stage investment because investors will have more and better options.
The "graph moving in the right direction" doesn't have to be impressive in absolute terms. If I can prove that I have 100 paying, engaged customers this week, 50 last week, 25 the week before, etc. I've proved that the idea resonates with a market, and its growing. Note that this is still early stage. You have to be able to prove some indication of longterm value though.
If you have paying customers with consistent growth then you are well past idea stage.
I think DenisM's point is that founders often need to be somewhat wealthy on their own in order to create a product in the first place. This doesn't seem like an optimal division of responsibilities.
Be that as it may, why is this true just for founders? Ie, we sometimes forget the echo chamber we live in around here - ie, no one owes anyone a "fundraising" opportunity. Early stage investment is absolutely about validation, but does that mean anyone who's interested should be able to raise money for it? If it was your own money, wouldn't you do everything you could to minimize the risk for a given upside profile?
Yeah, getting a working prototype and alpha users before even thinking about angel or VC.
Later, the right amount of validation will speak for itself and reduce friction. That is if investment would win a race-to-market. Otherwise, plan to get to market as quick as you can on with the team and money you have.
Founders have to have enough credibility to find customers and a business model to seek out profit, or it seems like a risky proposition no amount of selling can overcome.
I don't know Sam, but I really like this experiment he's doing with writing. Lot's of decent articles being written a a high speed.
It's almost like he's trying to replicate Paul Graham circa 2004- 2008.
I haven't seen an article yet that breaks any new ground, ie he's still looking for his "blub paradox" article, but all his articles generate discussion.
Just look at his article on AI from yesterday. It didn't really break any new ground in the AI conversation and it got 260+ comments.
Except unlike PG, he hasn't really established authority on what he is writing about (other than perhaps a confusing endorsement from PG). What are Sam's big hits?
Edit: That sounds meaner than intended, but it's actually an honest question. How does this guy share a top 5 list spot with Jobs, Larry, and Sergey? How do we know we should take him at his word when he didn't learn these things be being successful doing them? I feel like I'm missing something.
He's an advisor at YC and an advisor at tons of other successful startups. Tons of successful entrepreneurs have benefitted from his advice and take what he has to say very seriously.
But PG wasn't an established authority back when PG was writing fast. I remember reading PG in 2006, and you'd read lots of snarks on the tech forums of the time (Slashdot, Digg): who is this guy, and why should we listen to this bored washed up multi-millionaire who sold his startup to Yahoo? He hasn't done anything of note in the past 10 years! (They said the same thing about Philip Greenspun too, who was also writing at a faster clip back then).
Look, at the end of the day, "established authority" is only loosely correlated with worthwhile meaning. At some point you're going to have to move past the author and evaluate the words on the page on their own merit.
> At some point you're going to have to move past the author and evaluate the words on the page on their own merit.
For this type of writing, you can't. You don't have the experience or the data to judge anything. That's just how expert advice works. It's not falsifiable to anyone that would be learning from it, so that's why the credentials are important.
People respond more to anecdotes than hard data. PG did, as the Quora comment mentions, give the world an anecdote of a good guy winning. After 2001, there was a huge morale crisis (because of the same ills as what we see now-- unqualified idiots raising huge sums of money, carpetbaggers from finance swooping in and calling all the shots) in the Valley, and it took Paul Graham to raise the banner and reconvince people that what was happening out there was right.
A "good guy winning" story, in a society on the cusp of awareness of its own corruption-- that is, facing a morale crisis-- can be really powerful in bringing back hope. However, for each PG, there are lots of good guys who lose at that game, but I'm one of the few who spoke out and called it for what it was. Most people value their own success more. I value truth. I don't want anyone else to fall into the career-damaging trap of the VC-funded startup game. It's just not for our generation.
With PG's account and my account, the impression that all this makes is that, yes, 15 years ago (PG's time) the Valley may have been a meritocracy, but now (for my generation) it's just another corporate ladder-- and an inferior one to that of finance.
In order to prop up faith in the Valley's claims of meritocracy, PG needs a "good guy winning" from our generation, and someone who can write well and see the big picture. He needs that person badly, and I think Sam Altman is really good in the role.
This is great but I will offer a simplistic view how to raise money.
First, you need to get "social proof". Getting accepted into Y-combinator is a very good one. Or if you already sold a company then you are golden. But if you are super smart working in large tech company such as Yahoo! for 15+ years - good luck. Especially if you are over 40. When you are 40 it is easier to convince Discovery Loan to give you 100K loan than seed round from any VC.
Second, you should not have any revenue or god forbid any profit. You might think that is needed but actually revenue and profit are bad for raising money: investors will look your numbers and make projection based on these numbers. It much easier to sell "blue sky" than business with actual revenue and profit.
So to raise money:
1 build "social proof",
2 make powerpoint presentation,
2 go raise money
If you worked at large tech company for that long and didn't make enough connections, learn enough, and/or save enough money to start a startup on your own...
This is a great compilation of wisdom passed on while participating in YC, plus lessons learned I can appreciate 1.5 years later. Well written Sam.
My personal favorite on this list is to focus on what you're most passionate about during your pitch. This should drive the entire conversation. Investors do not expect you to know everything from day one. Don't go into a pitch trying to have the perfect answer for every question, focus on what you do know and can speak passionately about.
This basic point is something I keep thinking, too… either you have your shit together, or you don't. If your fundamentals are strong, you should be able to get funding easily. If your fundamentals are weak, no amount of would-be cleverness will make funding viable.
If you want to impress investors, impress your customers.
Interestingly, this just falls out of something I've learned from years of developing big systems, which is that the line between success and failure is narrow, but the grounds on either side of that line are broad. So back of the envelope calculations that strongly suggest one conclusion or the other are almost always right, assuming there's nothing wrong with your analysis. Because of this, I've learned to not be pedantic about precision. Quick decisions are usually more effective than cautious ones.
Maybe that's why I've set out on a path away from the enterprise and toward entrepreneurship.
Just saying, but nobody successful I know spends or spent any time raising funds for their company that wasn't just saving their wages.
The one case I know of where they tried (after already being successful I would add) they were already doomed before going down that path ... it just took a while for it to come to fruition. Given that the only people I know who thought this was a good idea lost their business from right under their nose anyway I'm not inclined to think that in general it is a good idea.
The small number of spectacular successes that came from VC capital make it seem more reasonable as a choice than it is... they also make it easier for VCs to invest and see a return because some of those spectacular success are worth a lot and more than make up for the fact that without them its just a game of losing money constantly...
> So don’t do obviously dumb things like talk about potential acquirers in a seed round pitch - that will suggest you’re not trying to build a really big company.
Question, should one talk about potential acquirers - specifically, those you have offers from - at any point during fundraising?
Acquisition offers are a great external validation of both your product and the market you're in. So my take is that it's a very positive thing to talk about any potential acquisition offers, as long as you stress that that's not your end game.
Take for example Drew Houston turning down the acquisition offer from Jobs/Apple back in the day; probably did wonders for Dropbox's valuation in the following round (and very rightly, if so).
I've never heard an investor actually say "no". They will hem, haw, delay, excuse, etc. and do everything except give a definitive "no". You just have to learn to treat "maybe" as "no" until you decide it's worth talking to them again.
I'd love to have an actual "no" from an investor.
It's like dating: "no" is no. "maybe" is no. "yes" is maybe until you've closed the deal.
> It’s actually quite simple; if you have a good company, you will probably be able to raise money.
IMO, investors tend to be very formulaic. Traction + social proof + impressive team etc. The formula might be a good heuristic, but I think that it misses out on some genuinely good companies.
As someone who has found a startup, one point I would add is - Make sure you are within 50 miles of where the VC activity is. That for practical purposes means this; be based out of SFO (+Bay Area), NYC (+Boston).
VCs want to fund businesses that reach all over the world, but they themselves must be reachable within an hour or two commute.
> Some founders try things like carefully timing news articles, casually mentioning to one investor that they'll be having dinner with another investor, claiming their schedule is really packed except for one specific hour, and other tricks - but if you just build a good company, you generally won’t need to.
(Non-italics mine) This is such wonderfully simple advice. Investors, by definition, want to make money. Build something that can, show them it will, and they will give you an investment. If you can't raise money, you're doing something wrong with the first two -- so that should show you where to focus on instead of using poorly thought out social engineering tricks.
I would second webright's comment about raising too early. One other mistake we made was underestimating the number of investors we needed to speak with in order to create momentum and a competitive environment. You definitely do want to raise in parallel, and in order to truly do so you should overshoot the number of people you plan to talk to so that you don't find yourself done with all of your leads and not with the full amount raised. Chase more leads than you think you'll need to.
Normally, I find Sam's articles maybe interesting, but not that insightful.
However, this one is really awesome, it pins down the dynamics happening in fundraising exactly. It actually feels a bit Paul Graham like, very good article.
Especially liked the part about not being arrogant. I'm always trying to be very assertive while actually sounding really nice and likeable, it's a very important art to master.
With actual rockstar startups not burning through cash like it's their own personal vacation from profitably and reality, the dilemma is often centered between reasonable frugality and trying too hard to seem frugal ending up penny wise-pound foolish.
FWIW I'm impressed more by how little actual (non-bullshit numbers) cash and time went into something.
Business people that don't add value tend to focus on appearances than substance because it's an easier business theather to bikeshed than to show progress and interest. The upside is that anyone that's built a business before is unlikely to be fooled by clever packaging or a well-defended presentation.
Beware, though, that saying things like “our round is closing really fast” when you have no offers usually backfires. Investors talk and will call your bluff.
True, but this sort of investor collusion is unethical and only (possibly) legal because private stock isn't regulated in the way that publicly traded stock is. In fact, the whole and only purpose of the VC-funded economy is to take stock strategies that were made illegal 30-100+ years ago and apply them to fast-growing, private, volatile tech stocks.
Shit like this is why most of us who are paying attention hate VC, and why the U.S. has gone from admiring Silicon Valley to vilifying it (and justly so; the ethics in Wall Street are way better than those in the VC-funded world.)
That this kind of scumbag collusion is tolerated is just unconscionable. Investors are supposed to be competitors, but they compare notes so much as to function as a cartel.
Collusion is a pretty big charge. If investors are upfront about the fact that they talk to each other (and, hey, it's right there in the blog post) then investor A calling up investor B to verify he has made an offer to a startup isn't collusion. It's just due diligence. I'm also unclear about the analogous situation in the public markets that you alluded to.
On the public markets, using social sway or inside connections to intentionally up- or downregulate the reputation or market price of another company for personal profit (say, a pump-and-dump scheme) will put you in prison. No question about it; it's unambiguously illegal to do that. You don't get to, for example, spread negative rumors about a company and ruin its reputation because you think you should be able to buy it at a discount.
Investors do the same thing, and it wrecks peoples' careers and makes it hard as hell for people to get started amid that feudalistic reputation economy. The excuse is "well, investors talk".
I say: fuck that and fuck them. If Silicon Valley entrepreneurs are really going to tolerate that shit-- which only hurts them-- instead of agitating for proper laws to be written, then they're a pack of self-hating losers for not knowing how to fight for themselves.
It is illegal to give false or misleading statements in order to defraud other investors, but it isn't illegal to "talk your book" if you aren't outright lying about what you are saying. You can flip on CNBC and expect to see lots of hedge fund managers hyping up their positions. That's not fraud.
If you are saying there is some fraudulent behavior involved in one investor calling another investor to fact check a founder's claim, I'm still not seeing it.
The main difference is that, in this case, the investor is playing to screw the founder, not other investors.
If you want to argue that it's only unethical but not strictly illegal, then fine. I still think we should aim to do better, and it's sad that Silicon Valley doesn't care about better than "not clearly illegal" when it comes to ethics.
Whoah there - that's a huge leap from investors finding out that the entrepreneur is lying to them to the investors colluding on price. One is fine, the other is not.
No. They are the same crime. You are wrong, both morally and factually. As a founder you have the right to represent investor interest however you see fit. It is up to them to judge you independently and, if they cannot do that, then any gain you make in dealing with them is rightfully yours.
Michael, I respect and like a lot of what you write, but you've lost me here. An investor fact-checking a statement like "VC A said they would send us a term sheet" is morally wrong and should/is illegal?
And a founder saying "VC B has given us a term sheet", when no such term sheet exists and in fact they said "Normally we don't say no, but for you, we're going to make an exception. Don't call us again!" is okay and the right of the founder.
Could you explain why those two (separate) things should be like that? As a practical first thought, it seemed to me if investors couldn't fact check, and founders could lie freely, gathering social proof would be harder, not easier, which might make it harder to get investment.
In general, I believe in being as honest as one can, but some people can't be trusted with the truth. That's just a fact. It may be unfortunate, but we're not going to change it just by talking about it. There are many people who are better off not knowing all of the world's state variables (i.e. the truth) because they aren't equipped to handle the complexity and context.
Investors who rely on social proof, if you don't have it yet, fall into that "can't be trusted with the truth" category and it's OK to apply reality tweaks that are ultimately in their interests (giving them the courage to do the right thing) as much as yours.
I don't advocate fraud (lying to people in a way that acts against their interests) but some people don't have the courage to do the right thing unless you pull out some reality tweaks and make them comfortable. That's just life.
Investors who scheme against people who are trying to do that are acting in bad faith, because the ultimate goal of this activity on their part is to bring the devolution of our society into a feudal state. They don't care, at this point, about building or investing in great businesses. They just want to keep others-- people who weren't born into their parasitic social network-- out. I can't respect that in the least and I have no issue with those who choose to mislead them. If the club's purpose is vapid and its selection criteria both meaningless and unfair, then is it wrong to fake membership if it is convenient? Absolutely not.
Only B-players of second string shops investors and founders behave in such a manner. The valley is too small for such to be sustainable. The top people aren't stupid and are hemmed in by social and reputation considerations. The B-string shops will only fuck with you if they assume you don't have powerful enough friends.
Hmm. The founder lies to investors while trying to raise money, and the investors check his story to see if it's true. This makes the investors scumbags?
If you don't have some combination of an amazing v1 product, a traction graph that's moving in the right direction, credible investors already on board, a big/timely market, or a top 5% team, you're almost certainly fundraising too early... And you should do whatever you can to get one or more of the above.
See: http://andrewchen.co/2011/06/21/video-the-anatomy-of-a-funda...
(note: salesmanship can trump all of the above)