A Fundraising Survival Guide(paulgraham.com)
paulgraham.com
A Fundraising Survival Guide
http://www.paulgraham.com/fundraising.html
45 comments
When you have confidence (in other words, if you are really good and you know it), the incentive to look good goes down. You have a track record. Smart people know who you are.
Your casual remarks impress those that haven't thought things through as much as you have.
You can be yourself, using the same vocabulary and tone of voice you would use at home. On the other hand, people that are insecure or down on the status ladder have a huge incentive to impress others. Some of them will work hard to improve their situation; others will work hard to improve their looks--eventually becoming phony and disbertesque (but only the really good will be able to tell them apart; average people may be blind to it).
The mere tone of voice and choice of words tells it all. If you cannot believe they use these words and tone of voice at home, that's a good sign they're striving for the stereotype.
The other day I was interviewing this guy. He looks straight to me and talks as if we're equals (even though he's climbing that darn status ladder). His tone of voice and choice of words are informal, smoothly flowing. Finally, he brings up a thing or two I haven't thought. That's impressive; a sign that the guy _is really_ good, not posing.
He's on the team now. And poor me, for I have to keep it up to keep him on.
Your casual remarks impress those that haven't thought things through as much as you have.
You can be yourself, using the same vocabulary and tone of voice you would use at home. On the other hand, people that are insecure or down on the status ladder have a huge incentive to impress others. Some of them will work hard to improve their situation; others will work hard to improve their looks--eventually becoming phony and disbertesque (but only the really good will be able to tell them apart; average people may be blind to it).
The mere tone of voice and choice of words tells it all. If you cannot believe they use these words and tone of voice at home, that's a good sign they're striving for the stereotype.
The other day I was interviewing this guy. He looks straight to me and talks as if we're equals (even though he's climbing that darn status ladder). His tone of voice and choice of words are informal, smoothly flowing. Finally, he brings up a thing or two I haven't thought. That's impressive; a sign that the guy _is really_ good, not posing.
He's on the team now. And poor me, for I have to keep it up to keep him on.
"people that are insecure or down on the status ladder have a huge incentive to impress others"
One part butt-kisser and the other part arsehole (for lack of better non-slang words).
One part butt-kisser and the other part arsehole (for lack of better non-slang words).
I've been thinking about that. It's not true of all fields. It's true of painters, but not mathematicians.
Maybe it depends on whether a field has a lot of fakers. Painting and VC both do. Math has few to none (I can't judge well enough to say for sure).
Maybe it depends on whether a field has a lot of fakers. Painting and VC both do. Math has few to none (I can't judge well enough to say for sure).
It's true of painters, but not mathematicians.
I'm not sure about that. The words "homeless drug addict" don't exactly bring "mathematician" to mind, but thats' exactly what Erdos was, and he certainly qualified as one of the best mathematicians of the 20th century.
EDIT: Oops, it wasn't methamphetamine; it was dl-amphetamine and methylphenidate. Somehow my brain squished those two together.
I'm not sure about that. The words "homeless drug addict" don't exactly bring "mathematician" to mind, but thats' exactly what Erdos was, and he certainly qualified as one of the best mathematicians of the 20th century.
EDIT: Oops, it wasn't methamphetamine; it was dl-amphetamine and methylphenidate. Somehow my brain squished those two together.
Erdos was a drug user, not a drug addict. He famously quit drugs for a month just to show that he was not an addict. And though he was technically homeless, he was not what most people imagine when they hear this word. He merely preferred to spend his life traveling, and had many friends everywhere (which comes with the territory if you're eminent).
His most salient characteristics--eccentricity and lack of concern for non-mathematical things--are common to most mathematicians.
His most salient characteristics--eccentricity and lack of concern for non-mathematical things--are common to most mathematicians.
"... Erdos was a drug user, not a drug addict. ..."
There is no distinction.
There is no distinction.
It's always true in any field where success is relative, and one's success is based on being "better" than others. For example in rowing, if you're on the same training program as everyone else then your chance of winning is basically flip-a-coin. Similarly, if you paint in the same style as others then your chances of being recognized as the best painter are basically flip-a-coin as well. Math, however, is different because you work at uncovering the properties of mathematical objects whatever they might be (so success is absolute), and you don't get credit for doing stuff that's already been done. Because of this everyone can do math the same way and still win, because how much stuff you discover is a function of you and what you're working on and not your methods.
If I had to come up with a general law on the spot, I'd say that the pressure to create new methodology is directly proportional to the similarity of recent winning outcomes in the past. I haven't fully tried to break this yet, but I'm guessing I'm pretty close to having found a natural law since it is consistent with evolution running in S-Curves.
If I had to come up with a general law on the spot, I'd say that the pressure to create new methodology is directly proportional to the similarity of recent winning outcomes in the past. I haven't fully tried to break this yet, but I'm guessing I'm pretty close to having found a natural law since it is consistent with evolution running in S-Curves.
The trouble with math is that the exceptional mathematicians (including theoretical physics/computer science) are the stereotype, and the regular mathematicians are actually quite different from that. So in fact it's the stereotype that's wrong, not the claim that exceptional mathematicians are not very mathematician-like.
As a fan and practitioner of bootstrapping I was interested in the part where pg says that the delay caused by bootstrapping can be fatal to many kinds of startups. Flipping that around, are there kinds of startups where the delay is not fatal?
Taking Basecamp as an example, it was released probably decades after the first project management software. Is bootstrapping best if you're going after a mature class of software?
I think that might be the case. When I'd started I was looking at a completely new class of software that didn't seem to have any entrants. Then Ning repositioned with heavy backing and there was no way I could see to compete. So we went into a vertical as a new approach to an existing and mature field. That's when all the bootstrapping pieces came into place. Six months of side jobs built a product that we could build services around which lead to twelve months of ramen-profitability. Now we're in post-ramen-profitability and growing. It's definitely slower and that's let competitors enter with similar approaches but none that could own an entire market the way Ning could.
On the flip side, if we were venture backed we still might not have been able to compete and this story might be about how we'd wasted several million dollars.
Taking Basecamp as an example, it was released probably decades after the first project management software. Is bootstrapping best if you're going after a mature class of software?
I think that might be the case. When I'd started I was looking at a completely new class of software that didn't seem to have any entrants. Then Ning repositioned with heavy backing and there was no way I could see to compete. So we went into a vertical as a new approach to an existing and mature field. That's when all the bootstrapping pieces came into place. Six months of side jobs built a product that we could build services around which lead to twelve months of ramen-profitability. Now we're in post-ramen-profitability and growing. It's definitely slower and that's let competitors enter with similar approaches but none that could own an entire market the way Ning could.
On the flip side, if we were venture backed we still might not have been able to compete and this story might be about how we'd wasted several million dollars.
Depends on the economics of what you're doing:
- Winner take all markets with strong positive network externalities have bit first mover advantages: eBay.
- Products requiring large investments probably require investments: if you trade time for money, you might be really late to market compared with a firm that got money.
- Products where it's easy to start competing and carve out a nice probably don't require much in terms of investments.
- Winner take all markets with strong positive network externalities have bit first mover advantages: eBay.
- Products requiring large investments probably require investments: if you trade time for money, you might be really late to market compared with a firm that got money.
- Products where it's easy to start competing and carve out a nice probably don't require much in terms of investments.
Kinda amusing that you picked eBay, because eBay was bootstrapped. It was one of very few startups where the founder was making more from his startup than his day job, before quitting his day job.
They did take venture capital though, at some point, according to the wikipedia page. It could be that that is what gave them the edge to ramp up over other sites.
eBay was far from the first on-line auction site. In particular OnSale was founded a year earlier was running on-line auctions in May of 1995 six months before eBay was founded.
First mover doesn't necessarily mean absolutely first. "Early mover" is probably a better term. Either way, it tends to apply to the first (or one of the first) to cross a certain hurdle.
eBay was not in the first 10. First/Early mover is a very mixed bag with most of the example of "first/early" turning out to be "one that we remember now." Some other counter-examples: Palm (something like 47th PDA, well after the Newton for example), iPhone, MP3 player (iPod), Google, Microsoft (e.g. Excel, IE, Word, Powerpoint,...). See also NSF study http://www.nsf.gov/statistics/nsf04305/pdf/tab11a.pdf (hat tip to http://particletree.com/notebook/first-mover-advantage/ )
First/Early mover, is (I think) a more useful concept from the market perceptive then the technology perspective.
eBay was the winner that emerged from the first tussle and as said above it was the first to hit a certain size. You might not want to call it a first mover but that is a semantic discussion. From the perspective of the market, it was.
The iphone certainly is a late entrant any way you slice the market. Late mover doesn't necessarily mean loser though.
Palm was a late entrant. I think what you get in that case is that the market had a few false starts. In that case, moving early would have been a mistake as the market didn't take off.
You could argue that the ipod was a first mover from a marketing perspective. The idea is that the product (in the minds of users) is so different that it is essentially a different market. grey area
But some areas definitely favour early movers. Interestingly, I don't think viaweb was one of them. You have a very large choice of online shop building software these days. There is not too much advantage in choosing the same software as everyone else. But I guess that wouldn't have been obvious at that point. Things could have rolled out differently though 'Web malls' could have happened. In that case, being in early would have been a big deal.
Cheers for the link. Is there analysis that goes with it?
eBay was the winner that emerged from the first tussle and as said above it was the first to hit a certain size. You might not want to call it a first mover but that is a semantic discussion. From the perspective of the market, it was.
The iphone certainly is a late entrant any way you slice the market. Late mover doesn't necessarily mean loser though.
Palm was a late entrant. I think what you get in that case is that the market had a few false starts. In that case, moving early would have been a mistake as the market didn't take off.
You could argue that the ipod was a first mover from a marketing perspective. The idea is that the product (in the minds of users) is so different that it is essentially a different market. grey area
But some areas definitely favour early movers. Interestingly, I don't think viaweb was one of them. You have a very large choice of online shop building software these days. There is not too much advantage in choosing the same software as everyone else. But I guess that wouldn't have been obvious at that point. Things could have rolled out differently though 'Web malls' could have happened. In that case, being in early would have been a big deal.
Cheers for the link. Is there analysis that goes with it?
The short analysis: first/early is a factor but not dominant. Each of the examples I cited would be "first/early" in the popular perspective. iPhone may end up re-defining the category the way that Palm and iPod did: from a marketing perspective "whole product" is a more useful target than "first/early mover."
Search, and thus Google, obviously has different economics than something like eBay: it's very easy to switch to a new search engine, and there aren't really demand-side economies of scale like there are with auctions.
eBay may not have been the first auction site, but it was the first to hit a critical size, beyond which the advantage was all theirs.
eBay may not have been the first auction site, but it was the first to hit a critical size, beyond which the advantage was all theirs.
Google makes money from selling ads. Advertisers want to place ads on the largest search engine sites (or one that can deliver a target audience at an effective price). It may be easy for a user to switch (although letting users know that you exist can be hard/expensive), it's less clear that advertisers will switch to a search engine with few users. Google's customers are the advertisers.
"Google's customers are the advertisers."
Technically. They do a great job of monetising search traffic but that's not the bottleneck.
Search engines win by attracting their customers' customers, users. Advertisers will follow the users.
Technically. They do a great job of monetising search traffic but that's not the bottleneck.
Search engines win by attracting their customers' customers, users. Advertisers will follow the users.
Advertisers pay for a well characterized audience (which Google infers from the search terms). Who is in the audience matters quite a bit, which is one point of attack on Google: when you only have 1% (or .01%) of their audience share starting out, you are better served if that 1% represents a significant fraction of a particular market or type of buyer instead of a representative cross section of Google's total audience. That's also a potential point of attack on eBay: you have to take a niche approach. This is often a more reliable way to gain traction than "first/early" or "get big fast." Even better if the niche is initially non-customers or customers whom existing players don't find attractive so that are less likely to mount a competitive response.
True.
From the perspective of most advertisers, they only care about their niche. If you your search engine or auction site is the place to go for tradesmen (plumbers, electricians etc.) or some other big money niche, you'd be able to make a lot more then you would with a much larger all purpose engine.
Ah, OnSale! I emailed Jerry Kaplan (of OnSale, previous CEO of Go) after reading his book Startup and he replied saying he's doing fine, something most authors don't do.
You are probably in the lucky minority.
I don't buy that at all.
I can see that lucky things have happened to us and that the degree of success (especially the part about being able to afford more people than just myself) has been greatly influenced by luck. But I also think you're guaranteed to have some good fortune along the way.
If we weren't doing what we're doing we would be doing something else. In our case we're doing conferences but we could be doing intranets or adding integrations with other websites or building custom social networks.
I got an interesting take from one of the founders of Apperceptive, a just acquired Movable Type services company. He said that they intended to build a product company but that once they got started with services they found that the "world has an insatiable appetite for services."
That was my experience, once we'd built something that could be valuable we had a number of excellent service options.
I'll agree with anyone who says that bootstrapping to this stage is hard but I'd argue that it's quite repeatable. I'd like to take the company one stage further, to a point where we have stable non-services revenue and I won't make any claims about the repeatability or luck factor involved in doing that.
I can see that lucky things have happened to us and that the degree of success (especially the part about being able to afford more people than just myself) has been greatly influenced by luck. But I also think you're guaranteed to have some good fortune along the way.
If we weren't doing what we're doing we would be doing something else. In our case we're doing conferences but we could be doing intranets or adding integrations with other websites or building custom social networks.
I got an interesting take from one of the founders of Apperceptive, a just acquired Movable Type services company. He said that they intended to build a product company but that once they got started with services they found that the "world has an insatiable appetite for services."
That was my experience, once we'd built something that could be valuable we had a number of excellent service options.
I'll agree with anyone who says that bootstrapping to this stage is hard but I'd argue that it's quite repeatable. I'd like to take the company one stage further, to a point where we have stable non-services revenue and I won't make any claims about the repeatability or luck factor involved in doing that.
I have a problem that I've seen mentioned on HN before, but I've never seen anyone with a good, "Here's what I did..." solution. I'm pretty certain that I'm not the only HN reader with this particular issue.
Imagine (I'm not saying that I actually HAVE any of these things, but imagine!) that I have a product, a beta with a community of active users, and a good team of co-founders who are developing the product on nights and weekends. Say I've even got some guesses about a marketing strategy and a revenue stream. Overall, a good collection of stuff to present to a potential investor of "seed" capital.
The only problem is, I have a day job. And (for now) I need a day job to eat.
If dealing with investors is really a full-time job as this article suggests, and should only be done in a startup city, as other PG articles suggest, how do I POSSIBLY afford to hunt down and meet with potential investors without starving to death? I suspect that "Can we meet after I get off work?" isn't a great confidence boost for a potential investor.
Imagine (I'm not saying that I actually HAVE any of these things, but imagine!) that I have a product, a beta with a community of active users, and a good team of co-founders who are developing the product on nights and weekends. Say I've even got some guesses about a marketing strategy and a revenue stream. Overall, a good collection of stuff to present to a potential investor of "seed" capital.
The only problem is, I have a day job. And (for now) I need a day job to eat.
If dealing with investors is really a full-time job as this article suggests, and should only be done in a startup city, as other PG articles suggest, how do I POSSIBLY afford to hunt down and meet with potential investors without starving to death? I suspect that "Can we meet after I get off work?" isn't a great confidence boost for a potential investor.
Here's what i did. I was a consultant before I started raising money, so I could carve out a chunk of my time for fundraising before any money came in. When the money came in, I jumped over full-time. If you're not independent yet, maybe you could shift towards contract work for the next 2+ months?
Also consider raising from friends and family first. This money can has the potential to come quickly if it's going to come at all. BUT don't do this unless your relationships won't be affected by the worst-case scenario (100% loss due to your obvious incompetence).
And I know your second paragraph is hypothetical, but if you have a product, active users, and co-founders, then you probably have time to talk to investors. Answer emails at night, and schedule meetings around lunch or personal days. Saying that fundraising is a full-time job is a bit exaggerated, at least for angel investment; I've been raising for 6 months now with some success, and it's maybe been a 20% of my time.
Also consider raising from friends and family first. This money can has the potential to come quickly if it's going to come at all. BUT don't do this unless your relationships won't be affected by the worst-case scenario (100% loss due to your obvious incompetence).
And I know your second paragraph is hypothetical, but if you have a product, active users, and co-founders, then you probably have time to talk to investors. Answer emails at night, and schedule meetings around lunch or personal days. Saying that fundraising is a full-time job is a bit exaggerated, at least for angel investment; I've been raising for 6 months now with some success, and it's maybe been a 20% of my time.
That's easy. You do what most people do. Let yourself become unmotivated and distracted by working on your side project and your day job simultaneously. Then slowly begin neglecting your promising side project and let it fade into obsolescence and then finally into death.
If there was a reasonably pain-free solution to this problem there'd be far too many successful startups. Large corporations would have even more trouble hiring good hackers and the whole world would fall apart.
If there was a reasonably pain-free solution to this problem there'd be far too many successful startups. Large corporations would have even more trouble hiring good hackers and the whole world would fall apart.
There's a similar problem with making sales calls, or with any other activity that requires synchronous communication/interaction (i.e. not email).
I have the same problem.
I have the same problem.
Excellent article about working with investors, but I'm not sure bootstrapping got a fair shake. 2 other ways to Bootstrap:
1) Getting a customer to pay up for a product up front. This is different from consulting, and this is not investment because you are not selling equity.
2) Building a niche product, with a market that is cheap to reach, and using cashflow to evolve product.
Case 1, the pain is equal to the number of customers you have to talk to to find this one or more that will fund your development. Subtract pain if you have good or opportunistic connections; subtract pain if you are a superb salesman; also subtract pain if you have experience in this exact product field before.
Case 2, the pain is in attracting the initial set of customers. Subtract pain if you have a lot of friends who will buy the product; subtract pain if you are natural evangelist (like PT Barnum) or have PR experience; subtract pain if the market is already ready to accept a product that you can build cheaply.
Case 1, the pain is equal to the number of customers you have to talk to to find this one or more that will fund your development. Subtract pain if you have good or opportunistic connections; subtract pain if you are a superb salesman; also subtract pain if you have experience in this exact product field before.
Case 2, the pain is in attracting the initial set of customers. Subtract pain if you have a lot of friends who will buy the product; subtract pain if you are natural evangelist (like PT Barnum) or have PR experience; subtract pain if the market is already ready to accept a product that you can build cheaply.
The point that caught my eye is the "ramen profitable" one. We are at this point now, the amount is quite bigger, but we are 2 founders in their 30's with children so this is a lot of ramen. Also the wifes appreciate variety so "ramen profitable" for us is more like 10K/month. Our problem with financing now with this is that to built those revenue we had to sacrifice much of our vision and just concentrate on execution. Now we have a startup that needs about 4 days of work a month and generate some money. But it is not a sexy company. All the answer to basic VC questions for it are bad or not good enough. Like no barriers to entry, the competition is huge, etc...
So we could go back to the vision project and start that "great idea" we had, but instead we often find ourselves trying to make the current product generate more revenues.
I think that may be responsible with the problem PG sees with bootstrapping. "The mere fact that bootstrapped startups tend to be famous on that account should set off alarm bells." I think there are a lot of successful bootstrapped startup that are just not successful enough to be famous in any way. Ours is heading that way.
So we could go back to the vision project and start that "great idea" we had, but instead we often find ourselves trying to make the current product generate more revenues.
I think that may be responsible with the problem PG sees with bootstrapping. "The mere fact that bootstrapped startups tend to be famous on that account should set off alarm bells." I think there are a lot of successful bootstrapped startup that are just not successful enough to be famous in any way. Ours is heading that way.
So the inefficient market you get because there are so few players is exacerbated by the fact that they act less than independently. The result is a system like some kind of primitive, multi-celled sea creature, where you irritate one extremity and the whole thing contracts violently.
Eerily similar to the high school dating scene I remember.
Eerily similar to the high school dating scene I remember.
"If you factor out the "bootstrapped" companies that were actually funded by their founders through savings or a day job, the remainder either (a) got really lucky, which is hard to do on demand, or (b) began life as consulting companies and gradually transformed themselves into product companies."
I had to read the paragraph a few times, so I may be misunderstanding it, but why do we factor out bootstrapping through savings or a day job? Is that not 'real' bootstrapping?
I had to read the paragraph a few times, so I may be misunderstanding it, but why do we factor out bootstrapping through savings or a day job? Is that not 'real' bootstrapping?
why do we factor out bootstrapping through savings or a day job? Is that not 'real' bootstrapping?
I'd say that those have more in common with angel funding -- the money is coming from an external source which has lots of it. Bootstrapping, in contrast, suggests that the company is being funded out of the company's revenues.
But it's a rather blurry line: What do you call a company which operates for N months out of the founders' savings and is self-funding beyond that point? The answer has to depend on N -- at T=0 a "bootstrapped" company has nothing to sell, so there must always be some initial period when a company if funded by external sources.
I'd say that those have more in common with angel funding -- the money is coming from an external source which has lots of it. Bootstrapping, in contrast, suggests that the company is being funded out of the company's revenues.
But it's a rather blurry line: What do you call a company which operates for N months out of the founders' savings and is self-funding beyond that point? The answer has to depend on N -- at T=0 a "bootstrapped" company has nothing to sell, so there must always be some initial period when a company if funded by external sources.
Doesn't bootstrapping also imply operating on founders' credit?
I'm distinguishing between companies that took no investment (truly bootstrapped) and those that merely took no outside investment.
To cut that pain in half you can start to treat your startup/idea as if it were a well established business. Think of all the items one company will go through during diligence and make it a habit to implement the proper process accordingly.
If your investor walks in and see that you have well run back end they will be impressed and they will not fool around with you. That will also give them some relief.
So from the get-go make sure you incorporate properly, hire an accountant firm, or use software and make sure someone records and categorizes every single expense (yeah add 25c for that Koolaid too), develop a great business relationship with your customers (mostly for startups that charge), document your technology ( I do not know much about this one), write short bi-weekly or monthly report about your traffic, write short reports about your sales etc....
You do not have millions in revenue to treat your business like it is, and if you do treat it as if, it is very likely to end up making that much.
If your investor walks in and see that you have well run back end they will be impressed and they will not fool around with you. That will also give them some relief.
So from the get-go make sure you incorporate properly, hire an accountant firm, or use software and make sure someone records and categorizes every single expense (yeah add 25c for that Koolaid too), develop a great business relationship with your customers (mostly for startups that charge), document your technology ( I do not know much about this one), write short bi-weekly or monthly report about your traffic, write short reports about your sales etc....
You do not have millions in revenue to treat your business like it is, and if you do treat it as if, it is very likely to end up making that much.
there is probably a startup idea here. Everyone probably emails all VCs at the same time, so why not speed up the process?
Can have Entrepreneurs sign up, upload their business plan/youtube presentation. Then VCs will be able to login using a special verified VC account(that way Entrepreneurs will know that only VCs will see their presentations). And then be able to see the uploaded presentations and contact entrepreneurs for an in person interview.
Throw in a bunch of filter options for each party. A few web2.0 mashups for maps/scribd pdfs etc and bam instant millions.
To make money can charge either Entrepreneurs by telling them you are charging them in order to filter out the weak startups: "If you don't believe in your idea to pay $___ in promoting it to investors, what makes you think its good enough for investors to put in real money?" Or you can charge the VCs($____ to see each business plan or a monthly payment) or make it a non-profit organization and have a bunch of VCs donate to it.
Can have Entrepreneurs sign up, upload their business plan/youtube presentation. Then VCs will be able to login using a special verified VC account(that way Entrepreneurs will know that only VCs will see their presentations). And then be able to see the uploaded presentations and contact entrepreneurs for an in person interview.
Throw in a bunch of filter options for each party. A few web2.0 mashups for maps/scribd pdfs etc and bam instant millions.
To make money can charge either Entrepreneurs by telling them you are charging them in order to filter out the weak startups: "If you don't believe in your idea to pay $___ in promoting it to investors, what makes you think its good enough for investors to put in real money?" Or you can charge the VCs($____ to see each business plan or a monthly payment) or make it a non-profit organization and have a bunch of VCs donate to it.
There are a ton of those out there, http://www.gobignetwork.com/ is one another is http://www.fundingpost.com/.
There are too many people out there trying to do the "start up" thing trying to get attention from too few people.
To put the number of "start ups" out there in perspective, 900 signed up for the Techcrunch 50 conference (http://www.techcrunch50.com/2008/blog/) and in order to sign up you cannot be launched yet and you must be able to launch on the conference date. So that means that 900 start ups signed up, each ready to start on a single day.
There are too many people out there trying to do the "start up" thing trying to get attention from too few people.
To put the number of "start ups" out there in perspective, 900 signed up for the Techcrunch 50 conference (http://www.techcrunch50.com/2008/blog/) and in order to sign up you cannot be launched yet and you must be able to launch on the conference date. So that means that 900 start ups signed up, each ready to start on a single day.
"Not everyone has Sam's deal-making ability. I myself don't. But if you don't, you can let the numbers speak for you."
PG you have hundreds of people applying to make a deal with you (through YC) and once you agree to make a deal--a decision that takes you 20 minutes--you are rarely rejected. Plus, when you are rejected the people who reject you usually fail. I appreciate the modesty but by no means do you seem like a poor deal maker.
I feel that no matter one's starting point they should work on there deal making ability so they can have more then just the numbers. You need the steak and the sizzle.
Just as startup founders in order to make a good product need to be persistent, intelligent and understand the technology; in order to make good deals the founders still need to be persistent and intelligent but also need to understand the components of what it takes to find and close deals.
So how can startup founders learn to be good deal makers?
PG you have hundreds of people applying to make a deal with you (through YC) and once you agree to make a deal--a decision that takes you 20 minutes--you are rarely rejected. Plus, when you are rejected the people who reject you usually fail. I appreciate the modesty but by no means do you seem like a poor deal maker.
I feel that no matter one's starting point they should work on there deal making ability so they can have more then just the numbers. You need the steak and the sizzle.
Just as startup founders in order to make a good product need to be persistent, intelligent and understand the technology; in order to make good deals the founders still need to be persistent and intelligent but also need to understand the components of what it takes to find and close deals.
So how can startup founders learn to be good deal makers?
Picking who to give money to is not "deal making," or at least bears little resemblance to the deal making that founders need to become proficient at to gain customers and partners. In particular the exploding offer structure ("make your decision before you leave the room") is only possible when one side in the negotiation is in a highly advantaged position.
"So how can startup founders learn to be good deal makers." Practice, negotiation training, cultivating a creative frame of mind, preparation, spending two-thirds of your preparation trying to look at the situation from the other party's perspective.
"So how can startup founders learn to be good deal makers." Practice, negotiation training, cultivating a creative frame of mind, preparation, spending two-thirds of your preparation trying to look at the situation from the other party's perspective.
I meant ability to convince people to do what one wants.
I appreciate the distinction (& the modesty) but I think that YC is exceptionally sold. It seems to be a pretty good machine for getting people to do what you want them too.
Does YC convince people to start companies? ..move cities? ..change game plan in a way that is as significant or more significant (to them) then signing a deal is to a VC?
But I get what you mean. That knack for projecting momentum is rare.
But I get what you mean. That knack for projecting momentum is rare.
If investors always need a little more information and none of them understand the product, then doesn't it make sens to have funds?
Funds where investors would pool their money and where very smart people with very deep knowledge about he market make the investment decisions. Isn't that what VC funds are?
So if VC funds are supposed to be led by people who know what to invest in, but it seems none actually do, not even Y combinator, then isn't there something else that pg did not mention?
Could it be that simple, pure, dumb luck plays such a large role in each and every startup that educated guessing what to invest in is impossible?
And doesn't that mean that the most rational investment strategy is the one of the index fund? Invest in everything, most will fail, a few will succeed.
So does that make all investors just market inefficiencies?
Funds where investors would pool their money and where very smart people with very deep knowledge about he market make the investment decisions. Isn't that what VC funds are?
So if VC funds are supposed to be led by people who know what to invest in, but it seems none actually do, not even Y combinator, then isn't there something else that pg did not mention?
Could it be that simple, pure, dumb luck plays such a large role in each and every startup that educated guessing what to invest in is impossible?
And doesn't that mean that the most rational investment strategy is the one of the index fund? Invest in everything, most will fail, a few will succeed.
So does that make all investors just market inefficiencies?
I think pg nails it when he says that talking to tons of investors takes up lots of time, and given the extremely low probability of a deal going through it comes out as extremely hard.
One of the reasons that exacerbate this problem is the presence of 'wannabe' angels in the investing community. These will typically be folks who worked long and hard in a big company or possibly got rich as an early employee and now fantasize about doing angel investments. Obviously the ambiguity of the whole process is too much for them to ever go through an investment.
IMHO the fund raising process is all about waisting as less time on the folks who will not invest and figuring out the potential investors.
Possibly pg should elaborate more about how founders can predict the 'successful' investors and skip the bad ones.
One of the reasons that exacerbate this problem is the presence of 'wannabe' angels in the investing community. These will typically be folks who worked long and hard in a big company or possibly got rich as an early employee and now fantasize about doing angel investments. Obviously the ambiguity of the whole process is too much for them to ever go through an investment.
IMHO the fund raising process is all about waisting as less time on the folks who will not invest and figuring out the potential investors.
Possibly pg should elaborate more about how founders can predict the 'successful' investors and skip the bad ones.
In footnote [2]: No VC will admit they're influenced buzz. Some genuinely aren't. But there are few who can say they're not influenced by confidence.
I think this wants s/influenced buzz/influenced by buzz/.
I think this wants s/influenced buzz/influenced by buzz/.
"Deals fall through."
At Justin.tv, Emmett has a framed picture of pg with this caption.
At Justin.tv, Emmett has a framed picture of pg with this caption.
Consulting is the only option you can count on.
I'm curious - what's wrong with the old-fashioned "having a job and living way beneath your means"? The average grad student lives on about $15-20k/year, and often does so in a startup hub with its inflated cost of living. The average entry-level programmer can make $60-80k/year. Why not work for a year, live like a grad student, and then use the accumulated savings to fund 2-3 years of full-time development?
I'm curious - what's wrong with the old-fashioned "having a job and living way beneath your means"? The average grad student lives on about $15-20k/year, and often does so in a startup hub with its inflated cost of living. The average entry-level programmer can make $60-80k/year. Why not work for a year, live like a grad student, and then use the accumulated savings to fund 2-3 years of full-time development?
This is what I'm doing. I don't mind living cheaply. I do like the feeling of watching my runway lengthen with every paycheck.
I read this essay. Then I re-read it. This is a superb effort to analyze the funding experience for startups!
For the last 4-years we lived this, down to moving into a consulting role to survive. If funding ever arrives, we will thrive.
We are lucky to have 2 founders - I focus on fund-raising, business development, IP, and operations. The other focuses on the technology and product development. My keeping him out of morale-threatening situations, we have a kick-ass product. I learned not to take the multitude of rejections personally. The ignorance of the product and market conspires to keep most investors away.
The one addition I would add is this: Those investors who do "get it" and are supportive in both dollars and participation should be treated the highest-level of respect. We are extremely lucky to have a stable of such investors!
There is a great forum at http://thefunded.com/ where entrepreneurs can share their funding experience, terms sheets, and good leads. Also, those VCs who like to rope-a-dope entrepreneurs are highlighted there so we can avoid them.
I highly recommend this essay be linked there!
For the last 4-years we lived this, down to moving into a consulting role to survive. If funding ever arrives, we will thrive.
We are lucky to have 2 founders - I focus on fund-raising, business development, IP, and operations. The other focuses on the technology and product development. My keeping him out of morale-threatening situations, we have a kick-ass product. I learned not to take the multitude of rejections personally. The ignorance of the product and market conspires to keep most investors away.
The one addition I would add is this: Those investors who do "get it" and are supportive in both dollars and participation should be treated the highest-level of respect. We are extremely lucky to have a stable of such investors!
There is a great forum at http://thefunded.com/ where entrepreneurs can share their funding experience, terms sheets, and good leads. Also, those VCs who like to rope-a-dope entrepreneurs are highlighted there so we can avoid them.
I highly recommend this essay be linked there!
I disagree with one point:
"They do seem to expect an answer to the [question of how much money you are trying to raise]. But I don't think you should just tell them a number."
It's very useful to have a number in mind, and it's very helpful for an investor to know what that number is. If I only have $50k to invest and you're trying to raise $10M then talking to you is probably wasting both of our time. (The reverse is true too. If I'm running a $100M fund and you only need $25k to get to your next milestone it's not a good match no matter how promising your company is.)
It's helpful to think of the question as, "How much money can you make effective use of at the moment" or "How much do you want to raise before you stop putting immediate effort into raising money" or "How much do you need to get you to your next significant milestone (and what is that milestone)?"
"They do seem to expect an answer to the [question of how much money you are trying to raise]. But I don't think you should just tell them a number."
It's very useful to have a number in mind, and it's very helpful for an investor to know what that number is. If I only have $50k to invest and you're trying to raise $10M then talking to you is probably wasting both of our time. (The reverse is true too. If I'm running a $100M fund and you only need $25k to get to your next milestone it's not a good match no matter how promising your company is.)
It's helpful to think of the question as, "How much money can you make effective use of at the moment" or "How much do you want to raise before you stop putting immediate effort into raising money" or "How much do you need to get you to your next significant milestone (and what is that milestone)?"
Interesting strategy on how much money to ask for. He says:
“We advise startups to tell investors there are several different routes they could take depending on how much they raised. As little as $50k could pay for food and rent for the founders for a year. A couple hundred thousand would let them get office space and hire some smart people they know from school. A couple million would let them really blow this thing out. The message (and not just the message, but the fact) should be: we’re going to succeed no matter what. Raising more money just lets us do it faster.”
The challenge here is having several funding plans up your sleeve that show different growth rates and also stack up together. To be credible, the plans should show that if an investor puts less money in, the business will not grow as fast and will also have a lower chance of success. The key is putting the lower growth scenario together without putting the investor off and at the same time not making the larger investment easy to pass on because the lower growth scenario looks like a good investment. Why put more money in at the highest risk point when the start up can show good progress with a lower investment?
For me, the difficulty here is that I know if we have less money the chances of our success are greatly reduced. The reason for this is you don’t know what you don’t know and more money allows you to find out, flex your plans and find a successful strategy. Credibly telling an investor that if they give you less money, you are still equally confident of success albeit on a smaller scale, is a challenging balancing act.
The challenge here is having several funding plans up your sleeve that show different growth rates and also stack up together. To be credible, the plans should show that if an investor puts less money in, the business will not grow as fast and will also have a lower chance of success. The key is putting the lower growth scenario together without putting the investor off and at the same time not making the larger investment easy to pass on because the lower growth scenario looks like a good investment. Why put more money in at the highest risk point when the start up can show good progress with a lower investment?
For me, the difficulty here is that I know if we have less money the chances of our success are greatly reduced. The reason for this is you don’t know what you don’t know and more money allows you to find out, flex your plans and find a successful strategy. Credibly telling an investor that if they give you less money, you are still equally confident of success albeit on a smaller scale, is a challenging balancing act.
Look,one model can take care of different growth/funding scenarios, no need for laborious replications. I spent a pretty amount of hours building both my solutions and product financial model (really, my forte). Just frustrating attracting angel investors to such a business model that has proven (competitively) to generate lots of revenue. Being on the finance side, I tend to have a disdain for middle tier VCs. Sorry for some of the angels who don't understand, that's more acceptable. But VCs, many don't know what they want: liquidity or high market valuation.
I hope my first points answer your thesis: "The challenge here is having several funding plans up your sleeve that show different growth rates and also stack up together."
I like bootstrapping. I think it teaches you to run a business that will bring in revenue and profit, because it's your money. I think it allows you the option of scaling up, or down, as you feel is appropriate. There's much less of a "burn rate". There are fewer surprises when things take longer than you thought they would - that can give you a second chance when V1 sucks too badly.
But yeah, I'd take money if I needed to - when the only thing between me and success is ability to grow.
But yeah, I'd take money if I needed to - when the only thing between me and success is ability to grow.
This is the Best Article I have read on the subject.
I've bootrapped (Consulting) a start-up for 9 years... We were early...otherwise it would not have worked.
Now we are shifting gears and productizing. Our new product is less than 12 months old and is already 20% of revenue.
We were a young management team (25) so consulting allowed us to cut our teeth and learn all the topics mentioned...poor advisors, account every expense, learn what net income really means, and how to manage cash flows...
There is nothing magical to starting a business it's just really hard. As one of our Angel's says "Nothing to it, just alot of hard work!"
I have comprimsed alot, haven't started a family, don't own a house, still sub-market income.
My advice: Scope the your vision relative to your ability to take risk. If your wife will only let you run for 24 months don't try to create google.
I've bootrapped (Consulting) a start-up for 9 years... We were early...otherwise it would not have worked.
Now we are shifting gears and productizing. Our new product is less than 12 months old and is already 20% of revenue.
We were a young management team (25) so consulting allowed us to cut our teeth and learn all the topics mentioned...poor advisors, account every expense, learn what net income really means, and how to manage cash flows...
There is nothing magical to starting a business it's just really hard. As one of our Angel's says "Nothing to it, just alot of hard work!"
I have comprimsed alot, haven't started a family, don't own a house, still sub-market income.
My advice: Scope the your vision relative to your ability to take risk. If your wife will only let you run for 24 months don't try to create google.
As a lawyer, I laughed and laughed about the lawyer not being able to admit "he'd screwed up". It's such a common problem and start-up founders are well advised to carefully vet not only their own advisors but also the VC's or Angel's ones. The truth is that many, many advisors are inexperienced (no one knows all of the answers in a world where human knowledge doubles every few years) but it is the advisor's failure to admit a lack of experience or knowledge which is potentially fatal to YOU.
Congratulations on the great article, Graham. I've read tones of this sort of stuff over the years and I believe that your article is the closest to an honest, sensible guide to fundraising I've ever seen. It should be mandatory reading for all would-be startup founders.
Please, please keep up the good work!
Congratulations on the great article, Graham. I've read tones of this sort of stuff over the years and I believe that your article is the closest to an honest, sensible guide to fundraising I've ever seen. It should be mandatory reading for all would-be startup founders.
Please, please keep up the good work!
on an average how long do YC companies take to raise the next round (could be series A, or another larger angel round) of funding after the YC funding?
I don't think anyone has done this math... PG said to be prepared for 6-9 months for Series A. Angel seems to be 1-3 months and Series A seems to be closer to 4-6 for YC companies. I talk to plenty of non-YC founders who raise money for 6-12 months. Blech.
I think only 20ish of the 80 "graduating" companies have gotten Series A, and most of the rest (who are alive) got angel.
I think only 20ish of the 80 "graduating" companies have gotten Series A, and most of the rest (who are alive) got angel.
Average, maybe 2-3 months from Demo Day. But the range is wide, from a few days for a small angel deal to many months for a series A.
As someone who worked for investors (and VC wana be's), I really like this quote:
\" Though a rejection doesn't necessarily tell you anything about your startup, it does suggest your pitch could be improved. Figure out what's not working and change it. Don't just think "investors are stupid." Often they are, but figure out precisely where you lose them. \"
Regarding novice investors, sophisticated invesotors sometimes bring a lot more to the table than just money. Or at least they are not going to make life difficult later on. The caveate is they are not easy to get to. All the best E
Regarding novice investors, sophisticated invesotors sometimes bring a lot more to the table than just money. Or at least they are not going to make life difficult later on. The caveate is they are not easy to get to. All the best E
So what I'd like to know is, what does Paul Graham think about the current financial / credit markets crisis. Does the current crisis change any of his views as expressed on this and previous essays? For example the "Mind the Gap" essay comes to mind about generating wealth. With academics such as Nouriel Roubini (Dr. Gloom) predicting a systemic financial meltdown worldwide but mostly in the U.S., how can anyone remain optimistic about the future particularly with regard to fund raising for startups and wealth generation?
Eddie
Eddie
> [Investors] think they need a little more information to make up their minds. They don't get that there are 10 other investors who also want a little more information, and that the process of talking to them all can bring a startup to a standstill for months.
I wish there was a way to know the 90% of information that an investor might ask you ahead of time, and be ready by having those questions answered.
I wish there was a way to know the 90% of information that an investor might ask you ahead of time, and be ready by having those questions answered.
This article is the most honest and accurate I've read and describes the mindset and habits of fundraisers and investors perfectly. As a serial entrepreneur and founder of several small startups in China, I have had some experience with fundraising too... and your insights are true even here in the Middle Kingdom.
Great content. Long, but very helpful. Anyway, just thought I'd let you know I've referenced your article in a post on my blog -
9 Fundraising Survival Tips For Startups
( http://urbansurvivalproject.blogspot.com/2008/09/9-fundraisi... )
As a person in their second start-up company I know that funding is the biggest problem. Your paper helped me understand my effort I have ahead of me. And made me more determined that ever for my idea and company plus it gave me some more ideas. Thanks
Jerrel Crider Graphic Arts Teacher [email protected]
Jerrel Crider Graphic Arts Teacher [email protected]
If you have been in sales, some portion of the fundraising process wouldn't sound as intimidating.
Interesting, the article makes me want to write something entitled: "How fundraising is similar to selling a house, and why." (at least in the UK)
The timescales, rejection rates, legal layers and lack of trust between the participants seems very similar.
The timescales, rejection rates, legal layers and lack of trust between the participants seems very similar.
I think PG has said this before. There is incompatability between:
A. VCs are 'funds' (IE they need to invest a big amounts)
B. Partners only invest 1-2 times per year
C. Startups are (or can be) cheap
One of them has to give. Seems like its C.
One of them has to give. Seems like its C.
I have to suspect that B is less fact than it is VC posturing. To my knowledge, a partner who only invested once or twice per year would soon lose his position. His job is to make money for the firm, and if he's not investing very much, he's not going to make money.
While I have no reason to doubt the indubitable PG, I have a feeling that Mr. Hornik is fibbing or is in a unique position to under-deliver for August Capital.
Let's put it this way: if very very few startups ever get funding, how do you explain Podshow and Meebo getting so much money with such unproven/unreliable revenue models? Don't tell me it was "pure chance". I think it is/was because VC is more readily available than Mr. Hornik's self-important attitude would imply.
While I have no reason to doubt the indubitable PG, I have a feeling that Mr. Hornik is fibbing or is in a unique position to under-deliver for August Capital.
Let's put it this way: if very very few startups ever get funding, how do you explain Podshow and Meebo getting so much money with such unproven/unreliable revenue models? Don't tell me it was "pure chance". I think it is/was because VC is more readily available than Mr. Hornik's self-important attitude would imply.
I don't know much about VC structures. How much they need to invest per year. How many partners, etc.
But I assume that even if the numbers are off, the principle stands: They invest in few companies per year, so they need to invest large amounts.
Maybe VCs (or the ones currently around) don't need to be investing in software startups any more. The classic model is that VCs fund risky industries that need a lot of startup cash (like sailing to India to buy spices). If that's not software anymore, maybe they need to get out. At least out of some software areas.
Actually, I was surprised at the numbers he was talking about: 50k, 200k..
But I assume that even if the numbers are off, the principle stands: They invest in few companies per year, so they need to invest large amounts.
Maybe VCs (or the ones currently around) don't need to be investing in software startups any more. The classic model is that VCs fund risky industries that need a lot of startup cash (like sailing to India to buy spices). If that's not software anymore, maybe they need to get out. At least out of some software areas.
Actually, I was surprised at the numbers he was talking about: 50k, 200k..
A fabulous article! As someone who has raised $11.5 million from 148 angel investors (including this week's raise where $2.5M came together in a single night), I can attest to the truth of every word here.
Wow!!! All from angels. Can you post the link to your company here? I would love to know more. Thanks.
Gosh, send me your links on [email protected]!
[3] One VC who read this essay wrote:
"We try to avoid companies that got bootstrapped with consulting. It creates very bad behaviors/instincts that are hard to erase from a company’s culture."
What are those?
"We try to avoid companies that got bootstrapped with consulting. It creates very bad behaviors/instincts that are hard to erase from a company’s culture."
What are those?
I found this comment pretty odd. We HAVE to bootstrap/do consulting just to GET STARTED already! Doing consulting gigs requires us to stay current and in the loop and helps us learn to deal with customers. Staying in the corporate world didn't grant the flexibility we needed. But, yes, client work can be very distracting and takes up a lot of time. But hey, we have to SURVIVE.
Absolutely mind blowing! You've made my day. Your quotes are plastered over our white boards. Keep sharing your wisdom. We need to read more articles like this.
Question for anyone who has dealt with angels:
Is it normal for angels to take 600 hours to complete a deal -- from first meeting to signing on?
Is it normal for angels to take 600 hours to complete a deal -- from first meeting to signing on?
Paul:
In a word this is exceptional work. You are swiftly becoming a hero to me and at some point you will see how much you've inspired me.
In a word this is exceptional work. You are swiftly becoming a hero to me and at some point you will see how much you've inspired me.
[deleted]
I have read it.
I also watched Sam Altman.
I would never think it will come to this!
This iPhone "thing" is the greatest invigilation system ever created.
I saw communism first hand, I saw people prosecuted.
This is much worse.
... and guess what, we all LOVE IT !!!
... unbelievable !
... unbelievable !
really enjoyed reading this essay, Paul, thanks for bringing it to the world. Couldn't be more true... Will mention it on my blog.
Man, I wanna vote this up for the 2nd time.
Thanks your paper gave me new ideas.
Oddly enough, the best VCs tend to be the least VC-like.
I suspect that rather than being odd this is nearly tautological for any profession -- "the best X tend to be the least X-like". Professional stereotypes are set by the multitudes in the middle, not the highest-performing outliers.
Further, atypical behavior can be both a cause and effect of excellence. Being 'different' helps them be 'better', but also by being 'better' they gain freedom and confidence to deviate from norms.
(Of course, "the worst X tend to be not very X-like" is also true. But they're more likely to at least try to emulate the average X.)