YC Rookie Mistakes: Fundraising [video]
youtube.com
youtube.com
This is a video by Y Combinator investors made for Y Combinator startups.
Let me speak in generics for a second: A generic YC startup and a generic non-YC startup are perceived very differently by a generic seed-stage investor.
This makes it easier for YC startups to raise that seed round (never easy, just easier). This in turn makes it easier for them to act on this advice - don't raise if you're desperate, focus on speaking with your customers, blah blah blah blah blah.
There are realities in which this advice should be disregarded. If you are running a startup, chances are that your reality is one of them. These kinds of videos are largely devoid of any real value to you or your company. Watch them, but don't give them power over you.
In general, one thing I've learned from growing my business for the last 2.5 years is to always apply a discount to advice, especially advice from people not directly involved in your endeavors.
Even from me. :)
I didn't use to think this way until a few years ago when I experienced true product market fit. Prior to that, I always found myself slugging it out and just accepting that paying with blood, sweat and tears for even the tiniest amounts of success is the only way there is. But there truly are opportunities out there to solve other people's problems that are so important to those people that your experience in building that startup will be vastly different. Suddenly the metrics look good without having to put a spin on them, investors are competing to get into your rounds, you start getting inbound resumes from highly qualified candidates, and you're able to pay generous salaries so that you surround yourself with amazing professionals who are better than you in their specific domains and can work autonomously with a minimal amount of interaction. Next thing you know - you're no longer working on weekends, you can take vacations, go on maternity/paternity leave like other normal people, etc. In other words, life starts feeling normal again.
I struggle with sharing this because I don't want to demotivate anyone. A part of me believes that the slugging out portion of my life was the necessary ingredient that taught me many important lessons and that prepared me for the the moment when the stars finally aligned (but it certainly came with a mental and physical cost that took years to iron out again). There's also this idea that a startup might struggle for many years and then suddenly take off like crazy (I believe life360 is one of the many well-known examples). All I would say is don't overdo it - do the grind for as many years as you think is acceptable, and then at some point start getting a bit more picky about the risks you take. If you've got 10 years of grind behind you and your current startup is unlikely to succeed, shut it down, take a job, and try again in two years (or if you're lucky enough that you can afford going straight into your next startup, then by all means do that as well). Whatever you do, make sure that your next startup benefits from the lessons learnt in the previous one, which almost always means make sure that you have the product market fit (PMF).
That's the hard part - how do you know if you have the PMF without quitting your job and raising capital? Product Hunt, Kickstarter, Shown HN and similar feedback mechanisms can be helpful here.
If you'll bear with me, I will try to articulate my perspective on the slugging out parts and risk-taking. Would love to hear your thoughts on this.
There are two types of markets - open markets and winner-takes-all markets. You can tell the difference between these markets by the number of sustainable players in each market and by the distribution of available revenues across these players. Revenue distribution in open markets follows a power law distribution with a fat tail. Revenue distribution in winner-takes-all markets resembles an exponential distribution with a virtually non-existent tail.
The market you are trying to go after should define your approach to slugging it out and to the way that you take risks.
If you are participating in a winner-takes-all market, you should be pushing your balls to the wall and taking any risks necessary to give yourself the best shot at being one of the winners.
If, on the other hand, you are participating in an open market, there is a pronounced asymmetry between upside and downside from each risk that you take. This asymmetry means that you should be maximizing the number of risks that you take, but you should limit amount that you bet so that a risk not panning out is not catastrophic. The longer you survive, the better chance you have of hitting it big.
Most founders I know act as if they are participating in winner-takes-all markets. However, if you are running a startup, chances are that you are participating in an open market with a fat tailed distribution of long-term valuations for players in that market.
The reason that it is easy to fall into the illusion that you are in a winner-takes-all market is because VC funding is a winner takes all game. It is easy to conflate the act of raising money with the act of growing a business.
Personally, once I understood that my market was open, I was able to comfortably take my foot off the pedal a bit and this had a positive impact on my whole team and on our business.
But back to your point about slugging it out, I think you slugging it out was you taking those small bets in an open market. It was a necessary step to your current success. Because the alternative is sticking with your day job, and that just makes you far too slow to jump on opportunities.
There is some discussion about timing and that it's a bad idea to raise before you have a suitable metric that indicates you are on a successful path.
The fulcrum, though, is really: don't be desperate.
How not to be desperate? Don't NEED investment capital, don't NEED more evidence, don't need anything. How to do that: customers and revenue.
That's great advice generally in life. I think on an individual basis it's important to ask yourself "what makes me desperate?"
For many of us it is the need for validation. Validation is HARD to get in the early stages.
I have two daughters (three actually, but this is about two of them). One of them has a very strong ability to get whatever she wants. She's smart and charismatic and thinks/schemes in advance about what she wants. When she gets it however, she consumes/opens/plays with whatever the thing is. She gets her validation from successfully getting that thing and wants to enjoy it.
My other daughter is far less finessed in her approach. She often doesn't get what she wants, however she doesn't want things nearly as often. Why is that? It could be partially because it's harder for her, but I also see that she is far less likely to consume/use an item. She has a place in her room and it has unopened toys, a stack of candy/chocolate. She can go there any time she wants and get an instant hit of sugar/fun/whatever. She has control.
The first kid has to give up a lot and make trades to get what she wants. The second one NEVER compromises. She'll walk before she'll trade.
If you want to "don't be desperate", then you need to understand what drives you to desperation.
Desperation is not a corporate attribute, it is the result of of our own wants, needs and desires. Raising capital is hugely rewarding in many non-core ways for a startup. It validates not just your pitch, but the founder's desire to be actualized/desired/congratulated/admired, etc.
The advice of "don't be desperate" is good advice and the solution IS customers and revenue, but before you get to that stage it is often a question of personality and personal needs. Once you make a "desperate" act however, it's very hard to come back from.
Understand your needs, check them, align them to what is best for the company.
I don't doubt that the advice still applies but I'm having a hard time understanding how. Are there illustrative examples of startups that did this well?
What's the smallest/simplest/fastest version of your thing you can build that demonstrates that (a) you can make the thing work, and (b) people will pay for it?
Do that, then find customers who will commit to purchase, or investors who know enough about your space that they'll back you to keep working on it.
For hardware manufacturing in the consumer space, pre-orders (Kickstarter etc) are an ideal way to raise funds and prove demand.
For enterprise, you can get pre-commitments to purchase from customers, contingent on the concept working. E.g., Boom Aero came up with a design, then lined up purchase commitments from major airlines, then were able to use that to fundraise to get them through development. The incentive for the airline to commit to purchase is that they will be the first to have your product when it's ready.
For large-scale energy or telecoms innovation, you could build relationships with utilities companies, government bodies, etc - offer them priority access to your technology in exchange for purchase commitments backed by pre-payments or grants, which can then justify private investment.
Good early-stage investors, especially YC, are experienced enough to know better than to damage the company's future prospects by screwing the cap table through taking too large a stake in the early stages. And now they have their Continuity fund and other programs to help growing companies, they'll work with the company to ensure that their fundraising strategy is optimal for the long term.
Now it is just what it is called, "Related videos" (which you are most likely to see)
It's borderline glib to infer that a startup 'should just do that thing to make it great' instead of seeking funding, because getting to the nice metrics costs money, not just blood and sweat.
This is a very 'software' kind of thinking, and one that applies to the kinds of products that are amenable to value capture at an early stage.
Stripe and AirBnB take a % of the transaction, right from the beginning, they're low-overhead and and 'early revenue'.
Google was the Search Engine 'everyone at Stanford was using' before they took their first check. Kudos to them for doing AdSense to make money, but still, they were 'out of the gates' before the money.
Most startups require material investment before they can get to revenue, let alone metrics, particularly those that require critical masses, or any kind of labour, working capital, esp. hardware.
Imagine this kind of thinking with amazing new Hair Restoration technology - imagine the clinical trials, FDA approvals, maybe it involves some costly tech, new distribution models, or serious economies of scale. Or frankly any Bio/Medtech.
Some industries are really hard to break into without already functional products and enterprise credibility, a lot of companies do not want to deal with fluffy startups with 10 'kids' that could evaporate the next day.
And this is doubly true for Europe, on the Continent you get about as much respect as the glory of your Tech Conference Booth. It's changing, but still.
In this context (successful) YC-model companies represent a pretty thin slice of startup world - those situation which there is the most hype and returns for investors immediately, which is super rational from an investor perspective, but misses other opportunities.
I should point out, to be fair to YC, they definitely invest in a lot of companies that don't fit that paradigm to well, so it's more a criticism of the ethos than their material investments.
It is very good advice these guys give, and every entrepreneur should contemplate it, but there's just too much of a reality gap in there: "Hey, if you have a great situation with customers who love your product, then you can get investors with leverage" - yes, we get that.
In reality, a ton of good companies need 'food', along with the bad ones.
I believe this is where perhaps 'truly model investors' come in, and that should be their ability to decipher between the 'junk' and those that actually do make sense but for which the metrics don't yet demonstrate.
To be slightly more blunt, investors who want in after the 'hot metrics' are basically just basic financiers, more like 'Early Stage Private Equity' or 'Small Scale Investment Bankers'. In an era where capital is cheap, everyone has money and everyone can see what 'hockey stick graphs' look like.
Again - it's very good advice, but I think it needs context.
There are so many FOMO methods startups can employ ranging from comparing yourself to other successful companies (hint hint) to some form of metric that will make you look good.
- others wanting you will make you hot
- not returning calls will make you hot
- occasionally showing-up and being super nice will make you extra hot!