How Justin Kan fundraises
blog.atrium.co
blog.atrium.co
But there was a valuable lesson... How Justin Kan fundraises is irrelevant for you and me, because we aren't Justin Kan. There was no rational basis for Exec to have been worth so much at that time, but when you are Justin Kan that isn't relevant. And look, good for the Justin Kans of the world who can take advantage of that, but that doesn't mean it is helpful advice for the rest of us.
I can say from experience that going into VC meetings with a bunch of false bravado, hoping to "hold the tension" and out-negotiate the VCs is mostly irrelevant advice. By far the most important thing for the average founder is getting the VCs to look up from their phones and care or be interested in your pitch, which isn't going to happen unless you've created the right fundraising dynamic for your company.
One of my favorite Paul Graham essays of all time, "How To Raise Money" [1], fully captures what my experience was in the fundraising realm, both when it went well and when it went poorly. I'd point you there for more practical advice.
Anybody remember color.com?
https://www.fastcompany.com/3002341/color-failed-what-happen...
I don't think Bill Nguyen would be able to repeat that sort of raise.
For example, charging people before you make a software product. Very rarely can you convince someone you never met over the phone or email to give you money for something that doesn't exist yet but this is apparently what you need to do as an average joe.
If you want investors that actually understand what you do generally, or even better yet understand what you do on a technical level, this is terrible advice to follow. Investors literally become co-owners of your company, and there is no easy way to get rid of them. Raising from the right people slowly is better than raising from just anyone fast. It's a positive sign when investors actually dig in with real substantive questions after thinking things over, and an indication of how thoughtful they'll be as co-owners.
FWIW the real truth is somewhere in the middle: some investors invest based on their gut, and if they are asking factual questions then that means they are not emotionally interested enough. Other investors invest based on their brain, and if they are not asking factual questions then that means they are not intellectually interested enough. (Or your presentation answered all of their questions, which is very rare.) Interpreting the actions of both investors in the same way is a mistake.
There's probably no objective truth, but let me offer a perspective: a founder sees 1 founder (themselves) and 100 VCs and a VC sees 100 founders and 1 VC. In the same way you look for patterns in founders, teams, products and markets to determine who to invest in, founders look for patterns in VCs to see who's likely to invest. A useful and common pattern founders pick up on is VC tire kicking: the ones who are interested enough to dig in but not excited enough to invest immediately. Asking questions in a meeting is one thing, but following up in an e-mail with an itemized list of; "how do you think about [x], what about [y] competitor, have you thought about [z]" is a surefire indicator that an investor's not willing to move right now (not enough confidence in founder, team, product or market) and, as a founder, you need to move on.
So you may sit here and proclaim, "hey, this advice isn't accurate, because I ask questions when I'm interested!" Well... yeah, sure. There's (1) selection bias involved, you're a well-known VC and you're likely meeting with, on average, more experienced founders (by the time a first-time founder gets to you they may have been through an accelerator, faced tens of rejections or more, etc.) and this can lead to more mature relationship building, and (2) for every 1 in 100 founders you invest in this way, you passed on the other 99, making you one of their 99 they need to pattern match and learn from.
Viewed through this lens, founders should absolutely take this advice to heart. If you, as an investor, really wanted to invest in a founder and they snubbed you a bit after a follow up question (not rudely, they just have to choose where to focus), would you suddenly lose interest, or would you pursue a great deal / great opportunity? I have a hard time believing you'd let somebody you thought was the next Zuck walk out of the room without a term sheet. Founders should try to find the investor who thinks they're the next "Zuck", or some reasonable facsimile of such given the product and market.
Hope that helps clarify. I've seen friends put through the ringer by getting too caught up in the weeds with VCs that clearly weren't interested, or were tire-kicking. Can happen to amazing founders and it's wildly distracting.
Where my opinions differ:
> Asking questions in a meeting is one thing, but following up in an e-mail with an itemized list of; "how do you think about [x], what about [y] competitor, have you thought about [z]" is a surefire indicator that an investor's not willing to move right now
That's not true in my case, and also not true for many funds I sometimes share notes with (w/the founder's permission). I often see Q&A email exchanges that either the founder or an investor in a startup forwards to me. So I can see firsthand that other investors are asking email questions (and then making investments), too.
Furthermore, how much follow-up there is depends on check size. If someone is investing $15k or $50k as an angel, they might make a decision after a single meeting because that meeting is often their sole shot to meaningfully interact with a founder. But if a fund is writing a $400k or $1m check, more diligence will be required. My fund can't write a $1m check just because I really hit it off with someone. That would be extremely irresponsible financially. Similarly, a founder shouldn't take a $1m check from me (or any other investor) without doing some of their own due diligence.
> For every 1 in 100 founders you invest in this way, you passed on the other 99
Yes, but if most investors (esp. funds) want to do more diligence, and you have to go through more diligence to be the 1 in a 100, then avoiding investors who want to do more diligence means you might not end up anyone's 1 in a 100. A crude dating analogy: a typical person might need to go on a date with 100 people to find their life partner. But if you set a filter like "if you want a second date before deciding whether we should get married then you obviously don't like me that much," then you might end up filtering out most or all of your suitable partners.
> If you, as an investor, really wanted to invest in a founder and they snubbed you a bit after a follow up question (not rudely, they just have to choose where to focus), would you suddenly lose interest, or would you pursue a great deal / great opportunity?
It depends. If I already want to invest, then being snubbed would give me pause, but I would probably continue trying to make the investment work. If I wasn't sure I wanted to invest, then being snubbed would make it much less likely that I'd try to invest. Whether you're a founder or an investor, how someone treats you during the diligence/courtship process is a decent indicator of what working with them will be like after the investment. Working together might be worse than the preview, but in my experience it's very unlikely to be better.
> I have a hard time believing you'd let somebody you thought was the next Zuck walk out of the room without a term sheet.
FWIW, my fund has made ~65 investments in the last 5+ years. Exactly one of those investment offers was made during the first meeting while the founder was in the room. The majority of investments took 2-4 meetings, a few email questions between meetings, and several reference calls. From what I know, most funds that write $250k+ checks work in a similar manner.
> I've seen friends put through the ringer by getting too caught up in the weeds with VCs that clearly weren't interested, or were tire-kicking. Can happen to amazing founders and it's wildly distracting.
100% agree here. This behavior really upsets me.
Sure: but let's dig in. I'm interested. Out of those 65 investments, how many did you explicitly lead? Sure: the majority took 2-4 meetings. But...
(1) What's a meeting to you? Keep in mind that your Principals and / or Associates conducting meetings and diligence should not qualify as meetings. If it's not with a GP it's not really a fundraising meeting and no founder should reasonably consider it such. Yes, I'm adding a semantic layer here, but this semantic layer is extremely important to founder psychology and how we classify meetings, fundraising success and more.
(2) How many of these investments had a term sheet after only one meeting? Not necessarily with the founder in the room, but this is, for all intents and purposes, functionally equivalent to an investment offer made in the room?
On top of that, is the a correlation between leading an investment round and a fewer number of meetings with a founding team before investing? My intuition based on my own experience and anecdotes of other founders would be that there should be a correlation - happy to be wrong, though.
Also, out of the investments that took "2-4 meetings", did the founders ever roadblock you from investing (i.e. it's a meeting but the founder "isn't fundraising"?) - because this is pretty common (some use it as a tactic but often it's just flat out true), in which case "2-4 meetings" isn't actually "2-4 fundraising meetings." If a founder is at this stage, they don't need this Medium Article's advice: they've already developed the maturity to execute upon a fundraising strategy, you just might not see it due to selection and / or survivorship bias (seems natural, and just how things are done). In fact, they're executing the latter part of the strategy outlined here (have found a lead via "focus", or relatively confident in their ability to receive a term sheet when they pull the fundraising trigger).
We're really pulling apart the fabric at the seams here: there's a reason this article isn't a hundred pages or more, which is realistically the volume of information a founder has to internalize while they're developing their own understanding of the fundraising and investment landscape. They'll also find their experience to be very personal. This advice is meant as a launchpad, and I think it's a good starting point for novice founders.
If I were to give advice to new founders (and I do get asked occasionally, but I'm literally nowhere close to a celebrity fundraiser and still a fledgling entrepreneur) it's, "I still don't understand fundraising. Just be yourself and build something you're passionate about, have confidence, be persistent, be kind, and the right people will come along. You'll probably trick yourself into thinking you understand something about the process, but realistically, fundraising is just about people and relationships, and shit is messy. Be humble and thankful, and try not to waste too much time discussing fundraising strategy with investors on Hacker News."
Disclaimer: I often don't follow my own advice.
The only point I want to add:
- the article explicitly mentions it is advice for EARLY STAGE startups (see "No one knows the value of an early stage startup")
Yes, if the startup is already Series D, the traction numbers are there, I'd see why you would want to ask lots of quantitative questions to get a yes/no decision.
But for an EARLY STAGE startup--would digging in with factual questions really change your decision? At that point everything is just projections and guesswork. The signals are more qualitative than quantitative.
Put another way--as an investor, when was the last time you met an Early Stage startup, came out of the meeting with a "default not invest", emailed them a follow up FACTual question, and the FACTual answer they replied back to you, turned you from a "default no" into a "yes"?
Example: "During the call you mentioned the market potential for a CRM for plumbers is $3b. When I did some napkin math I came up with $400m. Can I ask how you arrived at the $3b number?"
Bad answers: "Gartner says the market is $3b" or "CRMs are a $100b market overall, and plumbers are 3% of the workforce."
These are factual answers, but pretty weak.
Good answer: "There are 3.3m plumbers in the workforce. 30% of them are solo entrepreneurs, so they are unlikely to need a CRM. The other 2.3m spend 14 hours per month on managing their contact lists [citation]. We surveyed 30 plumbers and saw a willingness to pay $100/mo if we can reduce the 14 hours down to 2 hours. $100/mo x 12mo x 2.3m plumbers = $2.8b."
This is also a factual answer, but you can tell the founder thought about this more, they did customer development to get good data, etc. As an investor, an answer like this gives me a lot more confidence.
I think that, unless this was a real example with founders you can name, this is a dangerous example, and even then it's suspect. I have literally not once swayed a "maybe" investor via an email. It's "maybe" and not "yes" for a reason, and the way you've framed it here is as if "maybe" converts to "yes" with enough elbow grease and a cleverly crafted answer. Founders can spend hours writing single e-mails to investors, especially if they're desperate for funding. So what you read as a simple e-mail response may realistically have been half a day of lost fundraising productivity, for, at best, a 10% chance they convert your gut-feeling "maybe" to a "yes."
This is where founders have an intuition about fundraising, especially first-time founders raising early rounds, that investors often just have no way to empathize with because they simply don't know.
I have, however, swayed "maybe" and even outright "no" / "not now" investors by walking away, mentally divesting, and re-engaging particularly helpful ones later with additional proof points. YMMV as a founder but I would recommend this approach 100 times before I ever recommended sinking hours into a clarifying e-mail with an investor who was a "maybe."
Your response may be, "well, just don't spend hours on e-mails then." Sure, tell that to the founder who has literally sunk $20,000 off of their 20% interest credit card and another $20,000 of their lower-middle-class parents' retirement money into their startup. They'll nod and spend the hours anyway. (The cruel irony is that many of the founders insecure enough to spend hours on an e-mail are almost guaranteed to not sway you, meaning that the 10% that do sway you only represent something like 1% of the total time spent on e-mails. This is why this sort of advice exists.)
I can empathize with founders at least somewhat because funds have to raise money too. Our first fund required 100+ investor meetings, took about 8-10 months to close, and consisted of a lot of small checks. So I do know what a slog fundraising can be, how frustrating investor signals and behavior can be, how hard it is to change someone's mind if they have a strong bias, etc.
> So what you read as a simple e-mail response may realistically have been half a day of lost fundraising productivity, for, at best, a 10% chance they convert your gut-feeling "maybe" to a "yes."
I hope it's not half a day =(. I do have a different framing of time spent though: if you can invest 30 minutes (or even half a day) into an email that has a 10% chance of converting a Maybe to a Yes, then that's very worth it. If you talk to 10 funds like mine that all write $750k checks, then spending 30 minutes x 10 funds to get a $750k commitment means your time is earning $150k/hour. Even if it's half a day instead of 30 minutes -- and I hope it's not -- that's ~$20k/hour. That's a great ROI when you might be trying to raise $1m or $3m.
Fundraising, for founders, is not a back-of-the-envelope ROI calculation. It’s purely founder psychology management. You’ve raised multiple funds from LPs and should be insanely proud of that fact. Kudos. I’m sure it’s one of the more, if not most, difficult things you’ve ever done.
However: you did that based on, correct me if I’m wrong, a pre-existing network and a safety net of wealth from previous exits as an employee. I’m not trying to “class shame”, that’s not wrong or bad and it doesn’t diminish you, your abilities, your insights or your fund, but founders’ predicaments are often very different and they have a lot more riding on the success of their startup. (Please - if I’m wrong, correct me! I’m not trying to be an ass here and I am making assumptions. I’m prepared to be very wrong.)
My guess is that Justin Kan’s fundraising style is an emergent result of his initial conditions (circumstances at first fundraise) and intuition, and that it’s designed to minimize psychological risk (harmful self-doubt, second-guessing) as much as it’s designed to optimize for a successful close, because the two are tied hand-in-hand.
My only conclusion is that it shouldn’t be dismissed based on anecdotal evidence from a VCs perspective without considering how wildly different founders’ perspectives can be. Again, probably no objective truth, just a whole ton of things to think about!
Re: safety net -- I had some cash saved up from a previous exit, but certainly not enough to not work again. And the first year of Susa Ventures was pretty stressful because I was taking $0 salary, not sure how successful we'd be at fundraising, and getting staler and staler on the coding side (which makes going back to sw development jobs harder). Having a financial safety net definitely helped though.
- an Early Stage, pre-traction startup gave a pitch to you at a meeting
- you came out feeling "default not invest" (i.e. if nothing new happens you won't invest)
- you later emailed them a Factual question
- they replied with an elaborate Graph/Pie/Chart with lots of numbers to clarify some detail, that the founders decided were not important enough to be in the original pitch
- that Graph/Pie/Chart turned you from "no" to "yes"
when was the last time that happend?
Factual answers have sometimes swayed me in a positive direction when I'm skeptical about some number or claim and the founder's answer is strong and changes my mind. They've also swayed me in a negative direction when I'm skeptical or confused about something and a so-so answer takes me from a "maybe" to a "no".
Our first fund wrote $200k-$300k checks and made 40+ investments. Those checks were small parts of seed rounds, and we only led about 10% of the time.
The current fund writes ~$750k checks and has done 20+ investments, and we've led (or co-led) about 50% of the time.
> (1) What's a meeting to you? Keep in mind that your Principals and / or Associates conducting meetings and diligence should not qualify as meetings.
They count for my fund :). Generally we do 2 smaller meetings (maybe associate the first time and partner the second time, maybe partner the first time and partner+associate the second time, etc), then a full partnership meeting.
The rough theme of these meetings are Get to know each other (1st meeting), Dig in more deeply (2nd meeting), and Crowdsourced Q&A (3rd meeting).
> If it's not with a GP it's not really a fundraising meeting and no founder should reasonably consider it such.
It's part of our process. If you don't do well with the first meeting -- regardless of whether it's with a partner, associate, or both -- the process ends. If you do well, again regardless of whom it's with, we'll ask to do a 2nd meeting where we can go deeper.
> How many of these investments had a term sheet after only one meeting?
Of the term sheets we've offered, all took at least a couple of meetings. When we participate on someone else's term sheet, we committed once during the first meeting, and I don't think we've ever committed after the first meeting but w/o a second meeting.
> On top of that, is the a correlation between leading an investment round and a fewer number of meetings with a founding team before investing?
Not for us. If anything, the correlation for us is that we tend to do more diligence/meetings when we lead. When we lead, we know other investors will ask us to share diligence, and the founder will send some investors to us so that we can tell them why we're excited, so we want to have even more conviction than usual. We can get that extra conviction through a little more diligence.
> Also, out of the investments that took "2-4 meetings", did the founders ever roadblock you from investing (i.e. it's a meeting but the founder "isn't fundraising"?)
We don't do a great job of outbound tbh, so usually we meet founders because they are already fundraising or about to start. If someone says they're not fundraising, we've rarely preempted, but for companies we really like, we will continue to communicate regularly with the founders until they decide they want to raise. (And we realize they might decide they don't want to raise at all).
> If I were to give advice to new founders (and I do get asked occasionally, but I'm literally nowhere close to a celebrity fundraiser and still a fledgling entrepreneur) it's, "I still don't understand fundraising. Just be yourself and build something you're passionate about, have confidence, be persistent, be kind, and the right people will come along. You'll probably trick yourself into thinking you understand something about the process, but realistically, fundraising is just about people and relationships, and shit is messy. Be humble and thankful, and try not to waste too much time discussing fundraising strategy with investors on Hacker News."
I think this is great advice :)
(FWIW all of these answers are on behalf of my fund, and other funds might be different. But I generally don't see established seed funds committing after a single meeting.)
Great post, going to nitpick here: it doesn't matter what you consider a meeting, it matters what the founder considers it. A meeting with an Associate is not a meeting. It's a "get to know you" - it's not a real meeting until a GP is involved. That's the only time when there's money on the table. And if there's money on the table and there's not a "default invest", that's when you (as a founder) should mentally divest from the relationship. This is, as I understand, literally stock advice from most accelerators and experienced Angels / founders. In fact, I think the general advice is, "do not take meetings from Associates at all if you can avoid it. Get to a GP as fast as is humanly possible."
That's how most founders see it, and why the advice of most former founders is 'avoid associates unless there is absolutely no way you can get in front of a GP directly.'
That's not meant to sound offensive, but it's definitely how most founders I've spoken to see it.
I can only speak personally, of course, but all the time you spend here on HN, and the helpfulness of your posts, have definitely established you as someone I will want to talk to when the time comes.
(Cruise was funded entirely by Vogt and a small circle of investors, including Kan and other Twitch veterans.)
Justin founded Justin.tv and Exec. Justin.tv became Socialcam and Twitch.
Read the article out of curiosity, but understand that this was in no way a normal process.
[0] https://www.crunchbase.com/funding_round/atrium-lts-series-a...
In the article somewhere it suggested that Justin was more or less testing the waters and getting investors interested as future customers in their product. It sounds like a weird mix between sales and fundraising, but a smart interesting one none the less.
If 100 investors write $50k checks, it's a small amount of money to them compared to the value the legal automation software could potentially deliver.
100 * $50k = $5M let's say for 20% of the company --> $25M round for them. Numbers are hypothetical but that'd be a pretty big A round. I bet he didn't just raise $10M off that many checks.
One million times this. Especially for entrepreneurs (like myself) with an engineering background, this is something that’s hard to grasp intuitively at first. If you’re asked for financial projections, for example, it’s already over. You can win that investor over more reliably by following up a month later with, “[famous Angel investor] joined our round,” than responding with a spreadsheet.
I’m nowhere near Justin Kan’s level of experience and expertise, but another favorite piece of advice it can take some time to internalize is: “if you didn’t get a term sheet, it wasn’t a good meeting.”
This doesn’t mean investors dislike you or won’t invest if you don’t get a term sheet right away. It’s that when you find an investor highly aligned and / or motivated to invest, they will move quickly, like sub-24h quickly. The easiest way to burn yourself out as an entrepreneur is getting too attached to “not good meetings”, with “but I really like that firm!” Or “and they were so nice and understood our business!” You’ll drive yourself nuts wondering why everybody says nice things and yet nobody wants to invest.
The saying is not that it’s a BAD meeting if there’s no term sheet, just that it wasn’t a good meeting. Stay grounded. It can be a long journey.
Remember: actions speak louder than words, always, and the fundamental action an investor can take to show support is to invest.
[Edit] I will add that, in my own experience, investors can be all over the map and there’s actually no such thing as “one size fits all” fundraising advice. Fundraising is a hyperpersonal activity that’s just as much about relationship building as anything else, if not moreso. You’ll want your first checks from investors that don’t fuck around (see above advice) and who are willing to bet on you. As you grow as an entrepreneur and become more confident in your ability to build relationships and “bullshit detect”, you’ll become more comfortable with long term relationships. In my admittedly limited experience, the people who spend time with you and learn to appreciate you and your business before they invest are the most valuable to both your bottom line and personal psychology.
But, hey, the above one size fits all advice is still a good launchpad :). If you’re starting your fundraising journey, good luck, it’s a hell of a ride but if you’re deeply passionate about your business it is more than worth it!
But, on a completely unrelated note, if you're an experienced ML engineer and you want to help distrupt one of the most needing-to-be-disrupted-stodgy-old-industries there is as part of a very fast growing team, drop me a note: max <AT> atrium.co.
I run our fundraising bootcamp Atrium Academy w/Justin to help founders meet the right investors and raise a great Series A.
Check it out/Apply here for our next one in March: www.atrium.co/academy
We started Atrium Academy to help democratize the fundraising process for founders (ie. speaking with first time founders who just raised their Series A, reviewing pitch decks and narratives with mentors, being matched with recommended investors based on industry and expertise)
Atrium Academy doesn't take any fees, or charge any money. Our mission is to help founders by offering free, educational workshops for the startup community.
Check it out here: atrium.co/academy
So, I'd value the company at X but, I'd value the company at X+Y if you added a new phd in XYZ or a CTO from a fortune 1000 company or if you add this many new accounts in this time frame.