Why fundraising is a terrible experience for founders: Lessons learned
kapwing.com
kapwing.com
As much as that sucks to be on the bad end of...this is really common and really understandable.
Ask yourself: Suppose you needed to hire someone to fix your lawn sprinklers, or hire an emply to work at your start up, or invest in a business. What role would personal connections and the trusted endorsements play?
"Professional aptitude" is extraordinarily difficult to judge by other professions, and even more difficult in a reasonably brief amount of time. And character is a still more difficult judgement. Therefore, we rely on our own prior working relationships and recommendations of others.
You can argue this is "unfair" and that everyone be treated at anonymous and unknown for sprinkler repair, early employment, and investment, but what you would call a "fair" strategy (by that standard), I would call a decidedly sub-optimal strategy.
I've always been curious why people like you feel the need to write comments like this. What is the gender neutral phrase for mansplaining, or mansplaining done to a mostly male audience? Do you really think we don't understand all the various reasons why the system is unfair? We can all easily point out why the system is unfair, without having to remind ourselves of how the unfairness of the system perpetuates itself. The question we need to answer is, how to make this system more fair? Because we can all easily think of a few ways the system could be made more fair, if the will existed to make it more fair.
Contrary to your comment though, I've found lots of people who put "decisions businesses/rich people make" and "decisions I make" on different planes.
Example: A business looking to save money on their workforce is inherently Bad. But me looking to save every dollar I can on consumer goods is inherently Good (and different).
I've found lots of people think in this "separate universes" mentality.
I'm thinking here of Plato's "Philosopher King" ideal. It seems reasonable for an average person to think that those who wield greater power (in this case, via money) have a greater obligation to consider the potential negative externalities associated with using that power. Now, whether or not that average person truly has the information and wisdom to tell if the decision being made was indeed the most ethical one is it's own matter of discussion, but holding the powerful to higher standards doesn't seem to be all that unreasonable.
Do as I say, not as I do, is all too common.
(Of course car dealers are all dirty conniving greedy bastards, but not for asking market price for both high demand and high supply cars.)
This is fast and it's hard to believe that it was a terrible experience. How would have been your post if you needed 8 months or didn't raise at all after one year?
Wait until you try to make a business make actual money. :)
Affluent duo with super privileged private school educational pedigree land top tier entry level jobs @ big tech co and bootstrap for an incredibly modest 6 months before raising a relatively fat seed round from big VC firms IN 8 WEEKS and bemoan "how terrible the process was".
Oh woe is fucking me.
I feel like HN should introspect a little more when it comes to this. The high society founders seek to join is going to include people at all levels of the social hierarchy, there's a very fine line between a wish for someone's perspective to be more relatable and lowbrow entitlement which is completely unproductive but very seductive to want to use to explain your lack of success.
Yes, people exist in the world that never had to work for a thing in their entire lives. There exist people that had to work 10% as hard as you did. Dismissing these people's opinions or shared experiences is literally robbing you of valuable perspective that can drastically reduce the amount of effort you have to employ.
I mean they raised an average of over $200k a week. Maybe they could have written something with a headline more like "Here's how to get yourself into this privileged class of people who VC's will meet with and fund".
That's not snark, an article like that could lend some genuine insight to this topic.
Not to mention become paper millionaires because some VC think you have a 1% chance of being the next Instagram.
I mean, that $1.7 million is more than I expect to bring home after tax for the next 10 years. And my income is probably top 95-99% for the area I live in so it's not like I have a hard life. I can't imagine what someone who is actually struggling thinks of their "terrible experience"
Get a Harvard degree, then become a Google PM. Easy.
Is 8 weeks a particularly fast timeframe for raising a seed round? I'm sure that spending fully one quarter of the total lifespan of your company doing something besides building features would be equally unpleasant for many founders.
I didn't read this as the whining of the privileged, but rather as a well-written, detailed account of a business process that is fundamentally important to the tech industry, and yet is extremely opaque to those who haven't directly experienced it.
I particularly want to thank the writers for providing detailed and actionable advice regarding how they frame their business to investors.
Why? Founders are building a business, not implementing a list of features. Businesses need funding. So a serious founder would approach funding with the same about of regard as building features IMO.
That's probably the kicker for me. "Shocked" that some investors didn't get back to them.
Its not the VC world its called the real world. :-)
I don’t understand the comments calling this a humblebrag. If anything, it is useful to have a startup that successfully raised money saying how awful the process was even for them...
The reason we get articles like this is because present society encourages you to write about every little experience. If you don't, then it either didn't happen, or it didn't matter.
I think they simply have no idea how hard raising money actually is.
Pitching for 2 months and raising a fat seed sounds like a dream.
Everyone has imposture syndrome when raising. I wrote this post to let founders know they're not alone and to not lose their self-confidence because of investor rejections.
Really yall did a phenomenal job of raising money. Thats hoe you should have framed your post, not how terrible of an experience it was.
I know someone that took 2 years of pitching and tweaking his company and bootstrapping before finally raising money. And by the way: In the end, his company failed, all the same.
However, I would not characterize what the article encourages as lying, but, rather, bluster is the word I'd choose.
More importantly, my impression of the article (confirme by the sibling comment) is that this is being advocated because that is actually what the VCs want, to the point where they either asked for it explicitly or asked for a lack of the opposite (humility).
Granted, there are specific suggestions to fabricate, literally fake, or pretend, but these need to be understood in context.
> Nonetheless, investors want to hear a passionate origin tale. If you don’t have one, make one up.
Does the factual accuracy of such a story make a bit of difference in terms of due diligence in the business sense, as opposed to, say, other history, such as education/skills/experience of the founders?
> My advice to founders: fake it. Pretend you know exactly what the product will be in five years, even though you know your plan will change.
This seems almost silly to criticize, taken in context. As with the rest of the paragraph, there's no advocacy for a founder to falsely claim anything credible. Rather, the advice is to claim, confidently, the incredible (which everyone involved already knows not to be true, because it can't be true). The point is the confidence, evangelism, and, well, bluster.
To me, this actually paints the VCs in a bad light, rather than the OP founders. It's one thing to encourage a high degree of confidence (perhaps as a proxy for perseverence), but there's a danger of becoming too accustomed to believing seven impossible things before breakfast and thereby blurring the line between credible and incredible, as well as blurring the line between confident and over-confident.
Of course, that doesn't matter if alternate funding decision techniques do no better at overall returns. It's easy to call out Theranos and Juicero as examples, but they just as easily could be nothing more than selection bias.
(And "startup due diligence" is pretty superficial at the seed stage...)
My, my, what the world came to, etc, etc..
The big surprise was that I loved it. Pretty much every bit of it.
Everyone says it, but it'll never sink in until you experience it for yourself: fundraising is always an absurdly slow process where you get nowhere for months, until suddenly everything comes together last minute. For us, it took 4 months of mostly nos, until we got a big name to say yes and suddenly we went from 10% subscribed to 3x oversubscribed with investors calling us with a raging case of FOMO. This is always the process, in any deal I've ever been involved in, as investor or on the other side.
I've come to the conclusion that 99% of startups raise money way too early - hence why it's such a terrible experience for most.
Companies that are doing great business, don't need to pitch, and don't "go fundraising." Those companies seem to be actively sought out by money, and refuse checks more than they take them.
That's probably 1/100 companies and the ones that should actually raise money.
It's all about leverage.
Is it that hard to comprehend that it's rude to share private correspondence without permission? Particularly from a VC that went above and beyond and shared reasons instead of "not a fit" or "maybe".
Comments:
Blatant unfairness: yes, warm intros are required. Yes, this is unfair. However, the onus is on you to make this happen. If you want to found a startup, put your time in to building your network. If you're at a startup now, get intros to the VCs. Ask to go to VC meetings.
When you're building the network of people you're going to ask for angel cash, do the same. Lots of them will be happy to give you those warm intros. So start now building a network of people you can ask for $10-$25k. This wasn't obvious to me, but an intro to a vc from an angel who has invested counts as a great intro.
The same network will get you into one of the good lawyers (cooley, sonsini, gunderson) with a warm intro who will also do a deferred fee deal for $15-$25k. You want this.
The other thing that is unfair is, at least in b2b, the more customers you have the easier a raise will be. How do you get those first customers when you have nothing except a site that breaks all the time and a tiny team? That's your problem; make it happen.
Passionate origin story: we build a b2b tech. Most VCs seemed happy with
1 - we understood this problem from working on/near it
2 - we're building a solution
Oh, and read the book _venture deals_ by brad feld and jason mendelson [1]. Seriously. It's extraordinarily valuable.
Seriously consider doing the YC pre-YC program. It's all funnel for YC, but the info is good. Though it can be summed up (only somewhat facetiously) as, "Have you talked to customers yet? Maybe you should talk to customers. If you've talked to customers, talk to more! If you've talked to more customers, talk to even more! And after that... talk to some customers!"
Understand that the seed and A all want 25%; plan accordingly. Within that range, they are less price sensitive.
If you have questions, I'm happy to answer them, but I'm busy (the startup experience is everyone in your life is grumpy at you for flaking on them) so no promises on response time.
[1] https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitali...
Which makes me wonder - could male founders be more immunized to this experience due to practice from the dating arena?
Humility is not the opposite of confidence; uncertainty is.
Humility is thoughtlessness of self.
"The result is that well-liked entrepreneurs with shitty business ideas get funding immediately while shrewd founders outside of the Club can’t get a foot in the door. It’s not fun to play a game that isn’t fair, even if you win."
Coming from someone who was successful, this is a pretty unbiased observation!
It would be great to hear VC side of story as well like:
* 4X return to LP's.
* Show enough exits in 7-8 years fund cycle.
* Always on the road for raising next fund.
* Coordinating with portfolio founders or other bigger investors for follow on.
* Managing on a limited management fees.
* How every fund has it's own investment thesis and they keep getting emails from rookie founders.
(1) Product/service in and/or exploiting information technology with traction significant and growing rapidly. Traction can be number of paying customers, traffic to Web site (e.g., Comscore numbers) or, better, revenue, or best, earnings.
(2) The market large enough to permit a company worth $1+ billion in five years, no longer than 10 years.
(3) Something serious in a Buffett moat, that is, a way to beat, i.e., block, competitors. E.g., network effects, high switching costs, cases of lock in, technological advantage, e.g., secret sauce, a platform company that has advantages because others build on, depend on, the work of the company, etc.
(4) Team of at least two that does well covering both business and technology.
(5) Nothing obviously wrong, e.g., not depending on only one or just a few customers, no on-going co-founder disputes, no signs of being sloppy, no signs of criminality, no signs of drug or alcohol problems, no big problems with communications, no bad prior investor situations, etc.
My guess from reading VC Web sites was that they would make a "seed" investment, say, $150,000, with (A) a highly qualified team, (B) some excellent, powerful, valuable secret sauce, work difficult to duplicate or equal, for (C) a service likely of interest to nearly everyone on the Internet, with (D) so far nothing comparable on the Internet, where (E) if successful, worth $0.5-1+ T. Nope. Instead, I conclude (A)-(E) flops and (1)-(5) is about it.
Okay. Wish I'd known that.
Indeed, in the last year or so there was a post by USV's Fred Wilson on his blog AVC.com of a company his firm had their eye on and off and on over some months pursued the company and finally talked them into taking the company's first equity investment. Lesson: If you really have what they want, then they will notice you and call you.
Indeed, likely the best "warm introduction" is that the VCs have already discovered the product/service and really, in the word of Paul Graham, "love" it.
A big surprise to me was the reaction of the information technology community to secret sauce technology: In my career, I've been used to seeing new technology carefully evaluated. I saw this in the beginning of my career in applied math and computing for mostly US national security around DC. E.g., I worked in the group that did the navigation satellites for the US Navy (GPS by the USAF was the second version; the Navy did the first version) and heard the stories of how the work was approved from just the basic physics, essentially back of the envelope. A long list of projects for US national security was funded just from proposals on paper that were carefully reviewed, e.g., the SR-71. My Ph.D. dissertation was carefully reviewed. My published papers were carefully reviewed.
For US information technology VCs, I had to conclude that under no circumstances would they take seriously anything technical about the technology or any technical reviews of the technology and, indeed, quite solidly would absolutely refuse any reviewing of the technology at all. Period. No exceptions. Feet locked 5' deep in reinforced concrete, they simply will not, Not, NOT, NOT consider a technical review of technology. NSF, NIH, ONR, etc. will review technology, insist on it, but information technology VCs will, in a word, NOT.
My understanding is that bio-medical VCs will review and take seriously reviews of the claimed new, powerful, valuable bio-medical technology.
The information technology VCs commonly claim on their Web sites that they want leading edge technology; they neglect to say that they will never consider any such technology in funding decisions and, indeed, will NEVER review it or consider any reviews of it. It was a surprise to me!
Okay by me; I just wish I'd known. The VC information technology Web sites were highly misleading. Okay -- gotta beware of that in business!!!! Being a determined entrepreneur ready to keep going after a few dozen "No" responses, the misleading VC Web sites cost me a LOT of important time, money, and effort. I was ripped off.
But, this is cast in concrete, wrapped in cast iron, and protected with a layer of uranium -- never but NEVER will an information technology VC pay any attention at all to a theorem and proof in measure theory!!!! Not in this solar system!!! Sure, uh, the flip side of that situation is an opportunity!!!!
Finally I reminded myself that in the US, coast to coast, from barns behind farm houses on 50 acres to cross road villages to ... the largest cities, entrepreneurs start and grow successful businesses without equity funding. How? Do well running 10 fast food restaurants -- pizza carryout, McDonald's, ... Chinese -- and can do well. Also, run a successful, local independent insurance agency that knows nearly everyone in town and, thus, has a fantastically good "loss ratio". Run the local, dominating electrical supply house, plumbing supply house, building materials house, or any of many cases of "big truck, little truck" businesses, that is, where buy with a big truck and sell with several little trucks. Commercial real estate. On and on. Can see a lot of examples on Main Street.
I used to go to yacht clubs; saw some big boats and some well off people; never saw anyone who took equity funding.
A guess: For nearly all the students at Ivy League colleges whose parents pay the tuition, the money was from running a successful family owned business without equity funding.
For starting a business, information technology should be a big advantage: E.g., last I checked, the price, quantity one, retail, of the AMD FX-8350 processor, 64 bit addressing, 8 cores, 4.0 GHz standard clock speed, goes for less than $100 (commonly was $300+ -- the one I have looks terrific). For less than $2000, can put together a Web server that is, in the history of computing back 20 years, just astoundingly powerful. If can build a Web site that is popular enough to keep that server half busy 24 x 7 and run ads at the rates suggested in the Meeker KPCB reports, then should be able to get revenue $100,000+ a month.
So, we're talking capex ballpark $2000. So, compare that with the capex for, say, just a grass mowing service -- riding mower, $10,000+, trailer for the mower, ~$5000, truck to pull the trailer, $30,000, etc. Or compare with the capex for a pizza carryout, an auto repair shop, and auto body shop.
With revenue of $100,000 a month, why bother with a dinky seed round of $1.7 million with the term sheet, vesting schedule, loss of control, too many lawyers, BoD, C-corp, etc.?
With revenue of $100,000 and the rest of (1)-(5), let the VCs call you while you have a dozen nice ways to tell them "No".
Don't be cruel to them: They are only finance guys who likely have never written much code and got an MBA instead of a Master of Science! They are unable to review any very technical secret sauce. And likely what they can fund is highly constrained by agreements with their limited partners who supplied nearly all the money.
So I'm sorry, but this is not an advice for founders, this is just plain stupid humblebrag. You don't have to do this, seriously.
fake it till you make it
The merit of the projects themselves can be debated, but the fact that technology entrepreneurs all over the world have easier access to capital has got to be a net positive.
What's less obvious is whether it's a net positive for everyone, e.g. if that "access to capital" comes in the form of naive investors pouring money into projects that are likely to fail (i.e. have been arguably a poor use of capital / a net negative).
A "retail" investor is likely not able to follow this strategy, so people who would invest in a few apparently great projects via blockchain technologies may be in for disappointment.
But I don't see why small-scale venture investment via an appropriate technology could not work. Invest $10 in 500 companies, get $10k back... eventually.
As you've pointed out, there's a distinction between poor use of capital for the individual and a poor use of capital for society, and other groups in between.
I'm not proposing that this is the case about any particular investment it just seemed worth pointing out that such a type of investment does exist.
Personally, I think bootstrapping + ICO is far less trouble that even bothering with VCs, but I am sure many people with Stockholm syndrome will explain me why I'm wrong!
However, one of my primary concerns regarding any "crowd-source" or direct-to-retail investment in startups is the information assymetry. It's tough, if not impossible (and certainly not scalable) for individual investors to do something like due diligence, especially in a manner consistent from startup to startup.
This is a potentially soluble problem, with adequate regulation, and/or with third party providers (although keeping incentives aligned might be tough), but, in the meantime, I fear it could attract businesses that are much higher risk than even VC-funded startups, if not outright scams.
On the other hand, I'm not convinced VCs have quite solved the problem, either, beyond, presumably, filtering out straightforward [1] scams. They do provide some minimum of risk-spreading by not investing in a single company (but their LPs get no say in those choices anyway).
[1] i.e. embezzle the money and run, not complex fraud like Theranos, or even dot-com era spending all the money running the business, just with no credible business plan
However, I believe individual investors will bridge the information asymmetry, since regulation of anonymous fungible crypto is bound to fail (or to be "as successful as the war on drugs" if your excuse my french)
Since it can't be regulated, enough people will be scammed to cool down the taste for risk for the remaining ones. Whether the remaining ones is >0, IDK. Maybe yes, because out of a few billions, there will always be a few hotheads?
In any case, I see the funding of highest risk business as a positive. I want to see crazy innovation like transhumanism!
I'm not sure I follow. I'm willing to assume the latter as being true, but how does that failure lead to the former?
Also, are you assuming that crypto will be the only viable crowdfunding venture investment method (perhaps because of its relative immunity to regulation)?
> Since it can't be regulated, enough people will be scammed to cool down the taste for risk for the remaining ones. Whether the remaining ones is >0, IDK.
That's the thing, though, I wasn't really talking about the supply of capital (i.e. the cash side), but rather the supply of ventures (i.e. the shares/securities side). If scams are possible, would enough legit founders bother going this route? I worry some version of Gresham's Law would take hold.
> I see the funding of highest risk business as a positive.
I do think that's, generally, the "access to capital" argument I've seen elsewhere in the thread.
The counter-argument, which I don't necessarily agree with (and I surmise you firmly disagree with), is that some ventures are just so obviously unlikely to succeed that it's downright irresponsible to allocate any capital to them. (Although, to be fair, some of that criticism may be about the fundamentals of the business model, rather than the risk profile).
Such a counter-argument strikes me as inconsistent with the generally-held maxim in capitalist investing regarding capital and asset allocation, which is the joke version of the Golden Rule, "he who has the gold makes the rule".
I would be happy to support a system that allows investors the choice of putting their cash into as risky a venture as they want. What I'm leery of is a system that enables tricking investors into putting their cash into something that is riskier than they thought (or locks the cash up for longer, etc).
I'm not sure which will happen. Like you, I firmly believe anyone should be free to invest as they want, as long as no one is tricked. I just do not see the tricking as a stable equilibrium.
I do not assume only crypto will be viable - just that it would be the best option.
Given Gresham's law, it would make sense for investors to only want to pay in USD (to be protected) and for entrepreneurs to only want to accept crypto (to be free / high risk /etc). But USD and investment are regulated, while entrepreneurship is free, so I would bet on crypto winning.
In the middle, I see a small opportunity for existing VC to turn into middlemen for those who have USD and are accredited investors.
It is all still very uncertain. We sure live in intersting times!
I think one way to look at it is that the process of fundraising kind of sucks, and that it could be more efficient. I agree with this.
Another way to look at it is that fundraising is one of the easiest parts of building a multi-billion dollar company (and if you're aiming to raise from VCs like A16Z, Sequoia, Greylock, then you need to be building a multi-billion dollar company). The "100% responsibility" mindset for fundraising would involve "owning" all of this difficulty. E.g. getting a deep understanding of the business of fundraising by talking to other founders who have raised recently (much more accessible than VCs, in general), accepting that it's a sales process, accepting that it's hard and that it'll suck, but that there'll be many much harder things.
I guess I just react with some concern that readers of this post will take the wrong things away from a post like this. So I wanted to emphasize this perspective: It is hard. Like you note, it should be hard to convince strangers to give you a few million dollars. It would certainly be great if it was purely merit based. But for many (not all) companies, sales is a critical part of success of the business, and fundraising is another sales process - so it's a good approximation. And yes, that's not true of all businesses and it would be better if it was perfectly merit based.
I think the most helpful takeaway for readers is that fundraising is hard, and that it should be approached with a mindset of "it's really hard so I'm going to figure out why people succeed and fail at fundraising so that I maximize my chances of success." If readers take away a victim mindset with respect to the difficulty, then they'll find it much harder to succeed in fundraising.
I know this isn't really what people want to hear, but fundraising is hard, building a company is harder, you don't have to choose to start a startup.