Fundraising Advice for YC Companies
blog.ycombinator.com
blog.ycombinator.com
>I'd close the first, say, $200k from the first reasonably good investors that offer it on reasonable terms--say a $5 million pre-money valuation or higher. This removes some uncertainty and pressure, gives you capital to execute with while raising the rest of your round, puts you in a stronger position, etc. It's worth a discount for all of this. (Emphasis added.)
Which means that a $5M seed-stage is a 'dicount'! (The true price would be at a higher valuation.) That is a shocking phrase to use, when selling a company for $5M outright is a pretty good outcome for 95% of people who create a company in the tech space.
Is it possible to ever answer this in a meaningful way, besides "we're going to be the best and get mindshare and beat everyone out of the market"? Anyone have examples, or care to imagine what the answer would have looked like for those few companies that DID go on to dominate a market?
I guess if your product has vendor lock-in or network/virual effects then you're in a better place to answer it well (?).
At that stage almost everything is story telling
I'd imagine a good answer might try to elucidate what it is they intend to do, and at least approximate how world domination could be achieved.
Explaining the market fit of the startup in detail, and how it meshes with present and future trends probably wouldn't hurt either.
But we're discussing the early pitch here. It's not enough to say We'll do the same as product X but BETTER. That's totally generic and not a plan.
So there has to be SOME insight at least on what might constitute "better," and then how to translate that into market dominance.
More seriously - network effects exist when there are reasons to choose your product other than what you, as the company running it, have personally built. People shop on EBay not because it's a great site (it isn't), but because if you want to find someone selling a rare item, you are far more likely to find it there than anywhere else. People stay on Facebook (despite oftentimes hating them) because their friends are on Facebook; it has nothing to do with what Facebook does, and everything to do with the behavior of their friends. People use Whatsapp/Line/WeChat/Hangouts/iMessage based on what their friends are using, irrespective of the relative technical merits. People stay at AirBnB not because it's a great site (though IMHO, it is), but because they're far more likely to find a nice place at an out-of-the-way location than any other hotel search.
The office messaging market - for whatever reason - has started to exhibit these dynamics. People setup Slack channels not because it's a good service, but because their employees encourage them to setup Slack channels. They write plugins for Slack not because they want to, but because that's where the audience is. They stay on Slack because that's where all the plugins are. Maybe these were intentional moves that Stewart Butterfield carefully planned out, or maybe they were just accidents of history. From an investor's POV, they don't care: the fact is that people do ask their employers to setup Slack channels, and they do get on Slack because other groups they're part of are using it, and that dynamic will lead to a monopoly that the investor wants to be a part of.
People don't use the alternatives to Slack because they're not as good as Slack, on various axes, is the short version. Slack has made themself hard to compete with.
Self-hosting, unlimited history, unlimited team size. They have great deployment docs for various methods and it was pretty easy for me to containerize it for docker.
It has a slack compatible webhook integration so many slack integrations will "just work" with mattermost, if the integration will allow you to specify your own url.
Yes, here are a few examples:
1. Some businesses require a massive amount of capital upfront and won't work in a iterative-lean-startup model. E.g. Tesla and SpaceX. I can't think of many people who can pull that off.
2. Most startups are started because the founders "live in the future", where the market isn't really a market yet but it's clear that there's going to be one. Basically, potential investors and competitors think you're wasting your time. I would say this is the most common thing at YC. When they "get it", you're already far ahead. Think of Paypal, Heroku, Reddit, optimizely or Stripe. (And hundred of others)
3. Owning the brand. I.e. You create some kind of horror app and you are Stephen King. Or, you're a big player in a space and expand in another one using your existing network. For instance, think about how fitbit keep adding new products, selling them to their existing customers, etc.
4. Expertise. You are one of the best in the world. I.e. Working on a new fusion reactor or some quantum computing.
If you're thinking "Most startup don't have those kind of competitive advantages", you're right. And most startups fail. Executing better than the competition or doing your best isn't a competitive advantage, it's just a coin flip.
To know if you have a real competitive advantage, you need to think that your competitors are going to raise more money, have a better team and execute better, but you should still beat them.
SpaceX -- great business model... get massive government contracts, hire ex-government employees, and pretend that you're not dependent on the government.
Paypal -- basically a luckbox.
Heroku -- commodity, getting eaten alive.
Reddit -- going strong.
Optimizely -- commodity, trouble hitting numbers, getting crushed.
Stripe -- commodity, failed to grow substantially beyond MMP, going to be eaten alive.
Or put another way - with all the issues documented (and probably over-blown) in the media regarding the current fund raising climate, is it truly good advice to just give a suggestion to "3) You should raise enough money to get to your next significant milestone.".
Surely developing the business case and reaching profitability should rate a mention somewhere when it comes to giving out fund raising advice, particularly when this is being released publicly for budding entrepreneurs not part of YC? And even more importantly because investors will be motivated to use this current climate as an excuse to negotiate harder than usual and get more stock for less money?
- common sense (you should have a business plan)
and
- avoiding premature optimization
If you can build an unprofitable business that is growing like crazy and has a clear path to profitability (i.e. the fundamentals of the business are not based on unscalable factors), it shouldn't matter so much how close you are to profitability.
The YC way is "Make something people want." Fundraising is a distraction that is occasionally necessary.
Wow 5MM pre-money for seed is considered reasonable (and considered a discount) nowadays? Or have I misinterpreted?
I find it interesting, and disconcerting, that articulating a defensible competitive advantage is no longer sufficient advice. Now it's, "can you be a monopoly? no? go home". I realize this is a good way to maximize value for investors, but is this a healthy way to grow new companies and build a better society?
1. Many investors argue you should build your product in a narrow vertical that has the opportunity to turn into a much larger market. Given you start in a narrow vertical, you should aim to dominate that vertical ('Crossing The Chasm' makes a very coherent argument in favour of this). 2. Investors are aiming for 10-100x returns, and it's hard to do that if you are not going to become the clear market leader.
Whether this leads to a better society is an interesting question. One might argue that it makes your company more likely to be successful, and successful startups are job/value creators which is better for society.
(btw no political notion to this - it just is fact from my pov)
We're not in the startup world out of an ideological obsession with the perfectly spherical cows of economic fantasy. We're here to make money (among other things). We are trying to build high-growth sustainable business models. That means high profits, much higher than can be achieved in highly competitive industries.
Perhaps we shouldn't be saying "monopoly" so much as high demand, low competition, high barrier to entry.
A "defensible competitive advantage" is precisely a "monopoly" as that term is used in economics; that is, a defensible competitive advantage meansyou have something that assures that no other notionally "competing" product or combination of products is a perfect substitute for at least some subset of your products use cases; within that subset of use cases, you therefore have some range of pricing power, which defines a monopoly.
Assuming you're referring to service businesses like Uber, you're talking about competing with businesses that exploit these local legal monopolies in a corrupt manner to prevent competition and thus become local monopolies themselves. My first Uber ride was in Omaha, the week the service started there, and my driver was a (former) cabbie. She said there were four taxi companies in town, but all four were owned by the same person (faux competition). They regularly cheated drivers out of wages, overcharged customers, and used crappy vehicles. You'll find similar situations in cities all over the country - taxis as local monopoly, enforced by the police and depending on the taxi monopoly's cozy relationship with the local political machine.
Uber challenges the local regulations, but they win by offering a service that is less expensive and much higher quality than the monopolies they compete with.
Plenty of profitable businesses take a different path and don't try to be a Thielian monopoly. That's fine, it's not invalid as a business. But that's not what VCs are interested in investing in.
The extremely high startu failure rate means they need enormous returns on the very few investments in their portfolio that actually work. Such huge returns imply a Thielian monopoly business.
Obviously it's in every company's best interest to hold a monopoly position in a large market. It's that strong self interest and drive to do whatever it takes to be #1 that I think YC is generally looking for in its founders, rather than a truly brilliant or unique idea. Ideas are cheap, execution and grit is rare. This will be increasingly true for the new biotech/hardware startups that YC is looking at - grinding away in the lab for a shot at a patented monopoly position is the name of the game.
It's just interesting to see the goal of becoming a monopoly stated so bluntly as the end goal of every company that comes through YC. It clashes a bit with the hacker ethos of doing something because its intrinsically cool, interesting, and not expected to scale. Seems like YC is entering a new phase as a larger, more mature organization.
There is a small bit of overlap (as in a Venn diagram) between the spheres of "doing things that hackers find technologically cool" and "doing things that make a lot of money." That small area of overlap is where startups are. The vast majority of hacker-cool material isn't (and has never been) in that startup slice.
It's complicated, but for startups the answer is Yes.
If every auto company merged into one monopoly, society (other than the shareholders) would be worse for it. This is why anti-trust legislation exists.
If startups create things that never existed before and wind up owning the market for a few years, society benefits. This is why patent protection exists. (Yes - it's abused in software, but that's another story)
It's certainly not black and white. As a buyer, I may say "I'd rather have service X from many providers than one provider, but I'd rather have it from one provider than not at all."
Full stop there. This post is about attracting investors. From my experience in the fundraising world, there doesn't exist an investor who has the goal of "building a better society" over maximizing return. At best it's a nice to have feature of an investment that it's making something better.
Thus, the conclusion to be drawn from this is that most investors are bad at what they do. Even if that fault is only a short-sightedness.
No one really knows how things are going to eventually turn out.
History is utterly littered with the debris of feel-good movements and ideas that, once implemented, turned out to have negative outcomes unforeseen by the original instigators.
For example, while Facebook, Apple, Google, and present-day Microsoft all are not strictly speaking monopolies (they have viable competitors) -- they each have various features that make switching difficult (but not impossible).
Which is a poor way to communicate a point when the widely considered definition of one of your words doesn't match the one you're articulating. It assumes everyone has read Peter Thiel's book (ps - everyone has not).
It's the same with the word "startup". For a majority of the world a startup is business that has just started, but for YC (well, pg specifically[0]), the definition is "A startup is a company designed to grow fast" and more specifically notes "Being newly founded does not in itself make a company a startup". The definitions are not only considered inconsistent but they're explicitly inconsistent.
Communication is important and this is one of those instances where I think many people might scoff at the notion that YC is building monopolies and that's "bad".
I'm just happy they're making this advice available.
EDIT: Here ya go https://www.youtube.com/watch?v=-oKjLVECMKA
The problem may be that that "tech startup" is too verbose and lame sounding.
All monopoly is contextual.
If you want to get pedantic about Thiel, he argues that the monopoly does not need to be the direct source of revenue - in fact, it's better if it isn't. Consider Google. What's their monopoly? Search engines, which they dominate with their superior product. How much do they charge to use that product? Nothing. Google makes all of its income indirectly, off of ads served via their monopoly (and other monopolies they hold, like email).
Facebook has a monopoly on Facebook, not posts, friends lists, and messaging.
Of course in a binary model, "monopoly" and "commodity" get stretched to cover a lot of grey flux between the poles. The important thing is which half of the spectrum a company is on, not if the company is on the absolute end of the side with all the potential.
This isn't to say that this is the perfect state of the world, only that there is some context around the way the terms of used...in this case, it's a sketch, or a diagram, or a schematic rather than a documentary photograph.
The failure rate in tech startups is so high that VCs are mostly only interested in investing in the potential to have an outsized Thielian-monopoly return, so that the very few winners in their portfolio can cover the many losses.
It doesn't mean that this is the only way to run a successful business or that other ways are invalid or unprofitable. It just means if you want Silicon Valley VC, this is what that particular group of investors is looking for.
I am a little removed from the Silicon Valley echo chamber and enjoy the ability to watch it from the sidelines, but I don't understand the obsession with the 'rapid growth, raise millions from investors, become a unicorn, own the world' mentality.
I just don't get it. As a founder, your life is going to be just as good (probably better) if you made a couple million dollars in actual money that you don't have to divide up in odd percentages to all sorts of already rich guys who gave you tons of money in the first place.
Why isn't everyone just trying to build products that work, that people like, that make money, and going from there?
Why the need to go to YC, or raise any capital AT ALL, for the very very low chance of becoming gajillionaires?
I understand the appeal of the #1 king on top thing, but not really, and not with the risks and pain associated with the journey and the reality.
Whatever I guess. People will not stop investing or raising money, at least for now.
I imagine the majority of Show HN posts are of that variety.
It's only recently that you could literally start accepting dollars from paying users without actually paying anything (servers, money integration, etc all free). That means founders have more leverage, which in turn means for the first time founders are getting more of a say in the trajectory of the company.
Basically, your feelings are following recent developments, but it's unusual that this is the case. In other words, you are the long tail that previously never got a seat at the table. But, there are still going to be founders already at the table chasing the big bets.
Of course, you are also discounting the value of having investors that prioritize growth. In most cases, all companies somewhat converge when it comes to what that start up needs to do to survive and succeed: grow.
This is pretty interesting to me. I wonder if the press is just blowing things out of proportion, or if there's some Big Money™ behind this so that investors can convince companies to agree to worse terms.
Whether that changes depends on a bunch of factors. The two biggest are the overall health of the economy and how economically incestuous high-tech has become. If write-downs and possibly failures among the unicorns trickles down a lot to smaller ventures and investors, it will get worse. Otherwise it will be mostly isolated to that segment of the market.
Edit: check the other response to the parent-- looks like we might indeed be seeing a pullback in angel/seed.
I don't think the sky is falling, but people are tightening up on the number of deals being done, there's no doubt about that.
For context: - It's less than ten percent of Google's market cap ($490 billion) [0] - The average Series D or later round is 40x higher ($100 million) [1] - It's less than a tenth of a percent of the US bond market ($40 trillion.) [2]
Net - seed funding is just not a lot of money compared to the market at large. If founders and VCs have money, they can spend it. It gets very different later on.
[0] http://www.google.com/finance?cid=304466804484872 [1] https://www.preqin.com/docs/press/Venture-Capital-Q1-15.pdf [2] http://money.cnn.com/2015/10/14/technology/cb-insights-ventu... [2] https://en.wikipedia.org/wiki/Bond_market
http://blogs.wsj.com/accelerators/2014/06/03/jessica-livings...
Hey, you may not be ready to take investor money and that's completely fine. Maybe you've realized you'd rather have a bootstrapped business instead of a unicorn. Cool, actually think about what taking investor money means. Figure out what's best for you and your team.
Bootstrapped businesses can be awesome; I've built a couple myself. But the time to be asking these sorts of existential questions would be before you take VC money, not after.
If you're at an early stage startup and you don't get a satisfactory answer, you need to leave.