7 Insights from Y Combinator's Paul Graham
Paul Graham of Y Combinator fame posted an article on his website earlier this month that give some insights about how the world of fundraising works.
I strongly recommend that anyone who is even thinking about launching a startup, joining a startup, or currently on the VC side read his entire (lengthy) article, but here are seven of the most revealing excerpts.
1) Don't raise money unless you want it and it wants you.
Most companies in a position to grow rapidly find that (a) taking outside money helps them grow faster, and (b) their growth potential makes it easy to attract such money. It's so common for both (a) and (b) to be true of a successful startup that practically all do raise outside money. 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.
The other time not to raise money is when you won't be able to. If you try to raise money before you can convince investors, you'll not only waste your time, but also burn your reputation with those investors.
2) Be in fundraising mode or not.
When you start fundraising, everything else grinds to a halt. The problem is not the time fundraising consumes but that it becomes the top idea in your mind... Because fundraising is so distracting, a startup should either be in fundraising mode or not. And when you do decide to raise money, you should focus your whole attention on it so you can get it done quickly and get back to work.
3) Don't waste your time with VC associates. (Sorry guys!)
If you get cold-emailed by an associate at a VC firm, you shouldn't meet even if you are in fundraising mode. Deals don't happen that way... If you want to approach a specific firm, get an intro to a partner from someone they respect.
It's ok to talk to an associate if you get an intro to a VC firm or they see you at a Demo Day and they begin by having an associate vet you. That's not a promising lead and should therefore get low priority, but it's not as completely worthless as a cold email.
4) Hear no until you hear yes.
[I]nvestors prefer to wait if they can. What's particularly dangerous for founders is the way they wait. 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. They hope that way to get a free option on investing. If they decide later that they want to invest-usually because they've heard you're a hot deal-they can pretend they just got distracted and then restart the conversation as if they'd been about to.
5) Get the first commitment.
The biggest factor in most investors' opinions of you is the opinion of other investors. Once you start getting investors to commit, it becomes increasingly easy to get more to. But the other side of this coin is that it's often hard to get the first commitment.
Getting the first substantial offer can be half the total difficulty of fundraising. What counts as a substantial offer depends on who it's from and how much it is. Money from friends and family doesn't usually count, no matter how much. But if you get $50k from a well known VC firm or angel investor, that will usually be enough to set things rolling.
6) Have multiple plans.
Many investors will ask how much you're planning to raise. This question makes founders feel they should be planning to raise a specific amount. But in fact you shouldn't. It's a mistake to have fixed plans in an undertaking as unpredictable as fundraising...
...[T]he right strategy, in fundraising, is to have multiple plans depending on how much you can raise. Ideally you should be able to tell investors something like: we can make it to profitability without raising any more money, but if we raise a few hundred thousand we can hire one or two smart friends, and if we raise a couple million, we can hire a whole engineering team, etc.
7) Don't optimize for valuation.
When you raise money, what should your valuation be? The most important thing to understand about valuation is that it's not that important... 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. But although it's a mistake for investors to care about price, a significant number do. A startup that investors seem to like but won't invest in at a cap of $x will have an easier time at $x/2.