Why They Were Able To Raise Money | Hacker News Reader

Why They Were Able To Raise Money

jasonlbaptiste.com

I have GOT to stop reading these sorts of articles.

They make it big because they are networked with the sorts of people who have money to spend (either by being a former employee of an acquisition-happy company, or being pre-vetted by a group like YCombinator). Based on other articles of this type, they also make money because they are young, they are pretty, they went to Stanford or MIT, they live in Silicone Valley, they had a good idea, they were able to pivot in just the right way, they have no other commitments -- no spouse, no kids, no mortgage -- or ties, etc...

Sure, they "worked until they endangered their health".. but they were also the lucky 0.0001% that had everything else line up so that hard work was all they needed.

Reading this sort of thing is a drag for those of us who do not have any of those advantages. Who try year after year to support a family and also find a business that can actually work out. (got another idea last week... looking to feel out some potential customers ... wish me luck!)

So, uh, yeah.... I should stop reading these kinds of articles

At some point everyone was a nobody with none of the above. You can actually start to check some of these boxes off. It's also not some definitive list either. Don't just look at these points, but also look at all the same shit the successful ones went through. Don't give be discouraged.

Yup but I somehow missed noticing following point in your post:

_They got lucky_

Don't you think luck plays (or played) a great amount of role while raising funding?

PS: I define luck not as some sort of divine act but rater being "at the right place at the right time", something which can't be replicated per se.

heh, really funny. My original draft in textmate had that as the last point. I left it out because it's hard to nail down as something replicated/recognizable. It's also sometimes the cause of many of the other points.

When someone raises a mammoth Series A before launching, then no. It's almost entirely that they had previous successful startups under their belt, saw a hot market, and were really good at whipping VCs into a lather and creating a market. Luck doesn't do that, skilled fund raising and a hot team and market does. If you took two founders who had separate, large exits previously, and had raised a lot of money before, and were making a startup in location based services, or cloud computing, they'd have a 100% shot at a big round.

When someone raises a large round a year after they launched, which almost always means they got a lot of traction, then possibly.

He isn't wrong though. That is a pretty good list of reasons why a large funding round may have happened. They aren't requirements, but they do all help.

The good news is that none of those things ensure a large funding round, and also that large funding rounds aren't needed for a startup to succeed. I don't think anyone would suggest that you shouldn't start a company if you can't check three of those boxes. But you probably shouldn't start a company that needs a $20m Series A just to have a shot.

Also depends on what you consider 'startup success'.

Many of the startups we hear about being acquired doesn't really mean they succeeded. Only means the founders/investors were able to make a quick buck from someone willing to buy it.

It must be quite a 'hollow' success to cash out selling an unproven business model to some bigco.

Don't worry about them. Worry about you. Don't get caught up with where you are now, or what you haven't accomplished in the past. Focus on what you're going to do in the future. Build something you're passionate about, and let that project soak up all your attention.

Whenever I notice my mind getting caught in a similar trap, this always puts me back on track:

http://www.paulgraham.com/start.html

Agreed. And I think "worked until they endangered their health" is unwise and naive. There's no real need in the world to work like that, not in the US, not in the software field. In Africa, to fend off starvation, sure, but not in the US with software skills. Working insane hours may give a boost in the very short term but it's been pretty widely known now that for most people it becomes a big net loss over the longer term due to the negative effects on your health and family and social life. No matter how much money you make (and you may not make much or any at all) you can't really buy those things back past a certain point.

Work smarter and more efficiently. Not necessarily longer or "harder".

It's about the journey also. You may not hit it big but you can damn sure try. I bet all the lessons you learn will help you succeed in whatever you try next

Ya, but what I don't get is why an iPad app needs to raise $8 million or why Slide.com that just sold to Google for $180 million raised $87 million. I must be missing something? Does most of the funding go to marketing, engineering, what?

Will someone shed some light on this?

Well I can speak from my own experience but the spending on marketing and sales for some companies ends up being a lot more than engineering. The way my company works is that we developed what we think/hope is a scalable business model and we are scaling our marketing and sales operations to sell the product. We're trying to self fund that but some people don't want to bother or can't for any number of (mostly) good reasons.

There are a number of factors.

1. As PG points out, startups are sorta pass or fail. If you could raise $1m for 25% of your company, or $8m for 25% of your company (which, btw, is a realistic possibility when comparing angel vs VC investors) you would take the $8m because your business has much less chance of going broke. Clearly I'm simplifying here, as there are a lot of other relevant factors (who the investors are, terms, the needed valuation for an exit afterward, etc.) but you get the point.

2. They probably have a lot of ambition. In the case of Flipboard, my guess is they're not thinking "we're just making an iPad app." They're probably setting out to change the way people interact with social media, and the iPad app is just the first step along a very long road.

3. Peace of mind. As an entrepreneur I can tell you, there's something very nice about knowing you're not going to run out of funding for awhile. Everyone breathes easier, and it lets you take bigger gambles when not every product has to be a winner. If you're already wealthy from a previous startup, and you're shooting for a massive exit, your path will involve hiring a lot of people and possibly a large marketing budget. To not have to worry about money requires raising a lot. (This is one of the primary advantages, for first timers, to raising angel money. They don't need an IPO increase their net worth by a factor of 100.)

4. It's what worked for them before. The companies that merged to become PayPal presumably raised a lot along the way. I know TellMe had one $47m round. When people raise a lot of VC money, then have an enormous exit, they're probably going to tend to do the same again. It's what they know, and they have empirical evidence that it can work.

5. Because they can. That shouldn't be a reason, but it definitely is. A big VC round is the startup equivalent of a trophy wife.

Another reason could be this:

My understanding is that most PE/VC funds typically have a "2 and 20" compensation structure. 20% of profits, and 2% annual fee on committed capital.

That incentivizes, regardless of performance outcome, committing as much capital as possible.

That combined with taking board seats (which is why it's better for a VC to put $20m into one company than $10m into 2) is why VCs want to fund big rounds, but founders don't have any such incentive to take them.

The biggest trap of raising too much money is what I call "Maserati Limbo". You have raised $70,80,90,etc. million and have a huge staff to support current operations. You might be just about break even or even worse, not profitable. With that amount of money raised you're sort of in a limbo while maybe driving a Maserati:

1) You're limited to being acquired by a handful of select companies. If they don't want you, yikes. 2) You would need to go public, but you don't have the rev numbers to justify it.

So what often happens is the following: massive layoffs, fire sale occurs, and founders make diddly squat. The investors maybe make their money back and possibly .5-1x more due to liquidation prefs.

Why do you have to be acquired or go public? Can't you just run the company while drawing a high salary for several years?

Not when you've raised 90 million dollars. You're on borrowed time baby.

Its the wrong answer as to why digg was able to raise money. While Kevin's reputation may have led to growth (given that he was a cable tv host at a just purchased network that was going through multiple rounds of layoffs, I would find that suspect), the real reason was traction. Growth was crazy.

Agreed. It was meant to be one of many reasons Digg raised money with "Intense Growth" being the main one. I feel the reputation was exactly what you said: what lead to growth /started the fire.

Actually upon further thought, you're sort of right, but you got the wrong person. Jay Adelson had already produced a big exit, and his reputation was probably key in raising money.

To sum up Digg:

Jay brought: great track record with equinix and strong reputation amongst investor community.

Kevin brought: strong reputation in the tech community that lead to intense growth.

I somewhat disagree with the Kevin's "strong reputation" - he had an audience for sure, but I think his reputation wasn't wholly positive. He'd done startup type things before that went nowhere.

Actually this brings me to the one thing you left out - "luck." The Paris Hilton cell phone incident was an external event that made a huge difference.

It's interesting that none of these criteria directly mention 'they built something useful'. Shoot for building a useful thing. If you pull it off, you'll be namedropped in blog posts like these for all the wrong reasons.

I didn't really care for Flipboard very much. It's really nice looking, but it just makes the information I want much harder to get to.

I agree. It's fun to play with at first, but besides looking cool, it doesn't help with navigation at all. I would be interested to know if they are seeing a drop off in traffic yet. Besides, they'll likely get smacked down hard for scraping content. They did a great job getting press for launch (I wonder how much they paid Scoble?) but I can't see them returning that $10 million unless someone acquires them.

It's VERY hard for even a paid iPhone app to make enough money to justify a large enough sale for people who invested $8m into a company to give the go ahead. Maybe impossible. A free iPad app is orders of magnitude away from that.

It's interesting to show a picture of Kevin Rose in this article without mentioning him beyond one paragraph. I re-read the article trying to find which "checkboxes" allowed Digg to raise so much money.

I almost linked to that article. I always found that picture from 2006 was the poster child of: "holy crap this web stuff is so easy, and so is that fundraising stuff!"

Note to self: never let a press photographer put earphones on you, turn your hat backwards, and suggest you give double-thumbs-up. You'll never live it down.

They say there is no such thing as bad press.

I was in that article as well. There was a lot of lying all around.

Do you think that cultural or socioeconomic issues play a role at all?

there are negative reasons, too. deals get overheated all the time. vcs patternmatched too hard. etc.

Another home run. I'm really taking a liking for Jason Baptiste's style.

Having said that, I'd be interested in more articles on how to gain traction. The last one (http://jasonlbaptiste.com/featured-articles/if-you-build-it-...) was incredible, and it definitely left me wanting more.

Thanks, Jason.

You're welcome josh :). I sincerely love writing this stuff (more than startups themselves sometimes). I was thinking of doing separate posts on PR, Marketing, etc. for startups. Some I know myself and that which I don't I'd heavily research further. Open to suggestions.

That sounds great. Maybe focus on the topics you're more knowledgeable in and then expand upon concepts you're not 100% familiar with? I would certainly love a series on Marketing & PR. Specially for startups at pre-launch stage.

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