π§ @ycombinator's @startupschool week 6: YC Group Partner @bradflora gave a talk on fundraising. π sharing my notes:
YC has given talks on startup fundraising in the past, but theyβre getting dated, so Brad wrote a completely new talk that explains how things actually work today.
This is a practical guide by a top investor. Before joining YC, Brad was one of the top angel investors in Silicon Valley, and heβs going to give you the inside scoop.
Brad's job at YC is to read applications, interview founders and work with them once they join. He often gets questions about fundraising
It's the second hardest part of starting a startup - after building something that people want
First, some must-read content from @paulg - from his blog
Geoff Rolston also has posted very detailed content about raising a seed round. There's a video on youtube
YC has also posted a lot of great tactical content on specific deep topics
Brad doesn't want to rehash that content. Instead he'll top about myths and misconceptions that he sees with founders. The media propagates myths that are not true. Today we'll cover 7 myths and counter examples of YC companies.
Brad was a founder from 2008 to 2014. Perfect Audience, a small business ad retargeting company (YC S11) grew to $3m revenue before getting acquired.
Then he got into angel investing with 5 to 10k cheques. He got hooked and suddenly he was raising a fund to invest in more companies. He invested in 150 YC companies and got into companies like deel, retool, opensea and razorpay
Eventually he joined YC as a group partner. He gets to be a founder peer and a seed investor
Myth 1 - raising money is glamorous
You might imagine something like Shark Tank, where people dress up and give a pitch. You might think fundraising is like this kind of high pressure sales pitch.
Or you might imagine something like the pitch competition at TechCrunch Disrupt.
The reality is that it looks like this. A picture of the Creamery in San Francisco. It's where everyone went before COVID to raise money. It's just a bunch of coffee chats.
And post COVID, it looks like this: a laptop on top of a stack of boxes. This from the founder of Linen's home. Cam used this stack of boxes to raise $1.6m for his startup.
Shark Tank and Disrupt are just for show. They are entertainment. It's not what fundraising looks like
It's just zoom calls over and over again. It's a grind. Freshpaint showed what their actual fundraise looked like - each circle is an investor that they met with and gave intros.
Freshpaint (YC S20) talked to 160 investors and converted 39 (a high rate). It took more than 4 months! You can check out their blog post for details
another myth - "I need to raise money before building". Many people have this misconception. It's not how the best founders things about fundraising. The best ones build something first, even if it's toy-like. Only after they users and show value do they raise money
The reason is that it's cheaper than ever to host a website and build something. It's also easier than ever to find users. You can get users via hacker news, product hunt, social media. You can use those channels to find people to use your early product.
That gives you leverage. Investors want to jump on trains in motion. Example - Solugen makes chemicals at scale. Some founders might try to raise $10m for investment before building.
Instead, Solugen founders started with a very small prototype and started producing hydrogen peroxide. They discovered the perfect customer in hot tub supply stores.
As an investor, you would definitely prefer to invest in the company with a product that is generating revenue. They were able to raise more than $4 in their seed round!
Myth 3 - my startup needs to be impressive. But you don't need to impress investors. You need to convince them.
the best ideas seemed terrible at first. Like airbnb or doordash.
OpenSea was a bad idea at the start - but not in hindsight
Investors know that and get it. They get bored when founders try to impress them. They prefer you to just talk about what you're building
Founder think there are magic words to get a "yes" from investors but the reality is that it's all about making something people want
then repeat it.
retool is a great example of this. They make software for building internal tools. David, CEO and co founder, met many investors in SF. He just opened the software without a pitch deck
Brad was one of those investors and was convinced. He wrote a cheque and now it's worth $4bn.
Myth 4 - raising money is complicated, slow and expensive. The media will lead you to believe that it's this way
Techcrunch always reports massive raises. You might think you need to aim for this directly.
Those are all series A+ rounds. Not the seed rounds because they are boring. No glamour, no press.
These growth stage rounds are expensive
But seed rounds are much smaller. With no legal fees.
Why? YC created the SAFE - simple agreement for equity. It was first intended for YC but now every startup uses it
They are easy to understand, fast discussion on terms and no lawyers needed!
You can find the template on the YC website and use it today. There is even a company called Clerky that automates them.
it saves you a ton of time
being quick is leverage
See Asher Bio (YC S19) developing cancer therapies, another capital intensive business. The founders came into YC with just an idea then raised quickly with SAFEs from angels. Used $1m to make progress in the lab.
Since then they raised over $150m. It all started with $1m in SAFEs. It was a game changer
Myth 5 - raising money means losing control. The reality is that founders have more control now than ever
SAFEs don't give up board seats. Just you and the co founders. No shareholders. No info rights for updating investors.
That means you only have to answer to your customers, not your investors.
Example of Zapier (YC S12). They raised on SAFEs and kept control. 10 years ago that meant they could go fully remote. It was weird at the time but they could do it and focus on customers. Never raised again!
what about bootstrapping? everyone does it at first. but doing it forever sucks
it's scary. you're always about to run out of money. you have to go into consulting. and the odds are not good.
bootstrapping takes the pain of fundraising and stretches it out over the entire life of your company
Brad recommends front loading the pain
do you want to be worried about running out of money or have enough?
Myth 6 - I need a fancy network. You don't.
Investors only care about making money. Look at Podium - building software for tire shops. 2 guys from utah with no SV network. But they were great at sales. $10k+ MRR during the YC batch. Investors noticed and funded them with more than $200m
tangent - don't hire someone else to raise money for you!! bad idea.
if someone offers, get an intro and take the meeting yourself
Myth 7 - a rejection means my idea is bad. No matter what you will get rejections. Lots of them. But that's OK!
See nVision - medical devices company by a YC group partner. She had a hard time raising money. Rejected more than 50 times! She convinced them that she would bet on herself and take no salary for 2 years.
Another example - WhatNot (YC W20). Marketplace for collectibles that is now worth $3.7bn. Investors hated the idea and they faced a lot of rejections. They only raised a fraction of that seed round target.
you only need a few believers. not everyone.
and the good news is that there are more investors than ever
The common theme to all these myths: "This isn't for you" "I don't know how to do this"
The reality is that YOU CAN DO THIS!!
Just start working on it. No intricate pitch. Use SAFEs. Run the company how you want. No need for a huge network. Be OK with No. It's the best time to raise.
So start building! Thank you @bradflora !!!
time for Q&A with @snowmaker! Q - what is the difference between seed, pre seed etc?
Stages are a bit like neighborhoods in real estate - all made up. For year, the first money was called a seed round, which took you to product market fit. Then when you scaled up, you would go to VCs and raise the Series A, which was a priced round.
But now, because of many reasons, seed rounds started getting bigger. Founders started thinking that maybe I don't need so much money - and that started being called pre Seed. Main reason was that investors were raising large funds and that capital had to be deployed.
It's all very academic. You're raising some money. Call it what you want.
Q - do I need to sell all my equity?
The first round could cost anywhere from 3-8% up to 15%. Founders are NOT selling 50% on day one. When Brad first started, he was worried about investors kicking him out. That happens but it is way later in the game. Early on it's only modest pieces that you give up.
Q - does the market downturn impact how I raise money?
We don't know exactly what will happen. But we have data from Winter 2020 batch. Demo Day during COVID. People were really worried about the economy. We saw that many investors would wait. But the best companies, with stuff people wanted, raised money that they needed
Don't let the media scare you into thinking it's not possible! Good ideas will still get funded.
Q - How does valuation work for the first cheques? How to value the company?
It's totally made up and imaginary. For your first cheque, it depends on who you are raising from. From family, it's about how much you love those people - if you love them a lot maybe a $4-5m cap. If you love them less, invest at a $10m cap.
Joking aside - it's all about the cap that you use for your SAFE. It might feel crazy that you are raising at a valuation at a $10m valuation. But it's actually referring to the next priced round, how that equity will convert.
Brad recommends starting with a cap around $4-5m, then going up from there.
Q - I don't know investors. How do i get those coffee chats?
There is content on the YC website about how to meet investors. You might be surprised by who in your network can invest.
It can be small cheques - as little as $1,000. The best way to meet investors is to have them come to you. And the best way to get that is to take money from an investor
Be flexible in your definition of an investor - it can be random people around you. High school swim coach, etc. And that's it! The end of week 6.