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Ask HN: Learning about fundraising as first-time tech founders

126 pointsMasterScrat46 comments

After working in the Generative AI space as consultant/freelance for a few years, a friend and I have decided to create a company around it.

There seems to be increasing VC interest in the field and we are getting contacted by multiple investors (we do realize this doesn't mean they want to immediately cut us a cheque).

We have deep technical expertise but limited fundraising knowledge.

What are the best resources to learn the fundamentals? eg:

- How much should we aim to raise and at what valuation?

- How to show financial projections in a field that evolves at such a breakneck speed?

- Should we prioritize local (Europe, Switzerland) investors or North-American ones?

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I have six years running one company, no experience prior to that (came out of think tanks).

Four pieces of experience.

1) The first contact people at most VC funds are entry level jobs in finance. They're young, they don't actually have the power to commit funds, and the deals they are doing are teeny-tiny. Baby realtors might move 10x the amount of money in a year. Mostly they're copying the behaviours and ideas of the more senior people in the fund, and trying to look the part. There is a lot of cargo culting.

2) Psychology and decision criteria vary enormously between funding rounds - pre seed, seed, bridge, A Round etc. are different people with different vocabularies. They're all mapping what they see in front of them to an abstract model of how a company "should look" at this stage (see: "cargo culting") and 50% of the battle is making your real world mess look like their model of how a company should be at this point. Remember: they've never worked in a successful start up, they're usually fresh out of business school. This is not true of the fund seniors, who are often wicked smart, but the front line people are usually pretty green and afraid of making mistakes.

3) The perception that <thing> is about to become a huge sector is more important than how clever your capabilities are in <thing>. 100% of a $5m market is a very fragile position. 0.1% of a $5000m market is also pretty fragile unless there's something to stop a category killer emerging. You want to be A Player - a story about being big enough in the market to invest in your advantages and keep moving, vs. a tiny thing in a huge market that could roll over you at any time. How well can you respond do and navigate the unknowns of the future? "<thing> is growing fast and we're in the first wave and intend to stay that way."

4) It's real easy if you can find a network of VCs who are all mates and say "yep, this is good, pile in." Functionally speaking I think that only happens in San Francisco, everywhere else they tend to be extremely catlike and independent to a fault. If you can find a friendly network, work it as hard as you can!

Good luck!

My thoughts…

1. How much and at what valuation?

The answer to this is harder to think about with convertible notes, so I’d tend to think about it the way the VC in your first priced round will think about it. For them, today, they’ll want to, after the round, own ~20% of the company. “Today” is important because that number will fluctuate. A year ago, when money was flowing freely, that number may have been as low as 10%. In a few months, if things tighten up further, it may get as high as 30%. But my sense of the market today is 20%.

While it seems wacky, everything else in your first question then flows from this. If you raise $1M, and the VC wants 20%, then your valuation after the round closes (post-money valuation) is $5M. Raise $2M and it’s $10M. Raise $3M and it’s $15M. Etc… to some rational limit.

So the two numbers you’re really trying to figure out are: 1) how much the VC you want to talk to targets owning in your company; and 2) how much you need to get to the next milestone. If for #1 the answer is greater than 20% then it means either VCs aren’t as excited about you or venture markets have even further seized up. For #2, once upon a time I’d probably have said think about what you need for the next 18 months. Today, as I think we’re headed into tough times, I’d probably be thinking about what you need for 24 – 30 months.

By the way, at Cloudflare we raised our first round in 2009, the last period where venture markets were really seized up. In our first round we raised $2M and sold the VCs ~30% of the company. But 10 years later when we went public, in spite of raising another $200M+, the founding team still owned 25%+ of the company and held super voting shares giving us full control. So sweat these fund raising questions a bit, but mostly just focus on building a great business.

And, again, this is assuming venture not angels. And assuming a priced round, not a SAFE (convertible debt). But it can provide a good mental model to think about what you’ll do when you get to your first VC-led round.

2. Financial projections?

Focus on costs, not revenue. Assume you’ll generate no revenue. Think about how long, with that assumption, whatever you raise will last you. Today (again, winter is here or coming soon) think 24 – 30 months until you can raise again.

3. EU or US investors?

10 years ago the answer probably was US. Today venture is much more distributed. I’d think less about where and more about who. And think about the individual, not the firm. It’s so much easier having conversations with people who “get” your space. At Cloudflare, we made a list of the top 10 cyber security investors. We then found ways to meet those 10 people. The number two person on our list offered us a term sheet within 15 minutes of the start of our conversation. Rest is history.

YC and PG has probably the best content.

My advice would be not to go or try raise from VCs until you know what you are doing if you can. I would try to build something first then see if can get some user interest, then see angels that would be interested. Once VCs start to get interested then start talking to them. The reason I say this is that raising without having any kind of momentum or previous experience can be really hard but it’s very easy if you have good momentum.

The fundamental is basically that the more formidable company you can build, more easier it is raise funding. If you have no connections, no product, no traction, no experience it might be close to impossible to raise.

1. Raise the amount you need (like you need to hire 5 people and pay for some servers). If you don’t need to raise then you don’t have to. Just hack your project and raise later. Some common amounts (SV/US): pre-seed $500-750k, seed $1-4M. Ideally you sell less than 15% of the company. The valuation is then factor of amount/15% and how much interest you can get. Eg: $3M/0.15 = $20M

2. I don’t think you need financial projections at seed. Smart investors understand those projections are fantasy anyway. Obviously you should have some napkin math and make sure whatever you are doing is feasible with the amount you plan to raise.

3. There are trade offs. Generally the more west you go, more optimistic people are and more willing they are to invest in unproven companies and fields. Silicon Valley investors are generally the best and easiest, but might be hard to break in if you have no connections, have not worked in SV or generally understand how things work. Many SV investors like Sequoia now have Europe offices. Europe investors are a mixed bag. There are some smart ones but most don’t understand this kind of blue sky investing. But if you are from there then you might have better chance because you might have someone you know that can do a warm intro for you.

> Generally the more west you go, more optimistic people are and more willing they are to invest in unproven companies and fields.

I'm going to raise money in Hawaii then :-p

>My advice would be not to go or try raise from VCs until you know what you are doing if you can.

I'll second that motion. (I am also not a lawyer.)

Speaking as an American, the people I know who I'd hit up if I actually wanted to start a company who are Swiss work for companies in the Bay Area or a satellite office, I've not heard positive things about startups in Switzerland... nor California really.

Basically, high taxes paired with... social stuff? I've known more than one Swiss person but obviously this is the polar opposite of any kind of scientific poll, but I suspect there's something about specific places in Silicon Valley -- like that part of Mountain View with all the coffee shops, or the similar stretch in Palo Alto -- that serve to mix people together in a very analog way that stops happening once you get hired by one of the FAANGs then have to dine every day in the cafeteria.

El Camino Real actually has a similar vibe to the road I used to take to church -- the difference being they've built up all these apartment complexes and there's orders of magnitude more cars on that main drag.

(I'm from Pennsylvania -- I keep running into tech bros who have this aggressively right libertarian attitude in the extreme short term, which really sucks, since from the perspective of a well I can't call myself a tech savvy at risk youth if I'm in my 30s now guy, we just had everything set up perfect: we scared the ever living shit out of the boomers about what would happen if they stopped having elections, had one, and the new president seems to be actually doing his job, though like most elderly white men, he keeps slow walking things to go try to touch people, and thanks to the magic of federalism, even if social security goes bust they can just raise the taxes on DuckDuckGo.)

Anyways sorry to ramble a bit, but the parent's advice of "don't try to raise from VCs until you know what you are doing" tracks with everything I've every heard, and you'd be surprised what the rich, white neoliberals say when they think it's "just us fellas".

As a fellow swiss, I wouldn't recommend raising in Switzerland if you can compete in better markets like US. Swiss investors tend to invest at way lower valuations and are a lot more "stuck up" / don't understand what early-stage startups are really about (there are exceptions of course). This is from experience btw. Book yourselves a flight to SF and try to run into people there [1].

Re. financial projections, you should understand _why_ you are raising. It is very unlikely that your product vision as of now is going to work. The game is about failing as quickly as possible and iterating. Many startups pivot to something different from what they started with. Hence, raising should not be about how much you need to execute on your current plans, but how much you need to validate whether the plan works, with some ~2y of runway to fail fast & iterate. Once you validate that your ideas work, it will be much easier to raise a bigger Series A and execute fast.

Also, don't forget that raising isn't just about money, it's about smart money: Raising from reputable angels and funds can give you excellent connections that grant you a competitive advantage. E.g. raise from people with high reputation and connections in your target market, raise from people who are connected in the AI space, etc.

[1]: Being labeled a "swiss startup" does give you a competitive edge re. distribution in the regional market since the swiss are into that sort of thing. It can be a worthwhile strategy to rely on that, but chances that you scale out of it are slim, so you'll at best end up with some mediocre SMB. Choose the hard path, it will teach you how to succeed.

I'll go against a few fellow commenters by saying that I wouldn't recommend an accelerator if you just want to educate yourself about fundraising. You might end up wasting a few months going through their programs, with not much to gain. You're way better off connecting with a founder in your domain who's been through it and asking for advice/mentorship.

While connecting with 1 good founder for advice can be as beneficial without the time commitment, good accelerators not only provide the education on fundraising but also the network and infrastructure to actually fundraise. Accelerators often have groups of VCs and angels that will both participate in mentorship and allocate funds to invest in each cohort.

How to Raise Investment (2021) - https://news.ycombinator.com/item?id=28509306 - Sept 2021 (42 comments)

Target an opportunity that can grow to (many) billions in revenue. Zero billion dollar markets are the single most common issue for folks seeking VC funding for the first time

VCs are looking for 100x companies that can return their entire fund. Great funds will have a few such winners out of the tens on companies they fund, but all investments had this promise at the time thr investments were made

Just a few thoughts from my experience of fundraising:

> How much should we aim to raise and at what valuation?

You don't generally get to pick your valuation up front: you tell an investors how much you're raising and the lead investor prices the round based on deal heat and a bunch of other pseudoscience. If you have enough interest, i.e. competitive term sheets, you have leverage to negotiate the terms that dictate the valuation: % of ownership and amount of the raise.

wrt to the amount to raise, the classic advice is to figure out what your next milestone is and try to model what it will cost to get there and then raise it. The smarter move is to just find out up what's market for seed deals right now and ask for that.

> - How to show financial projections in a field that evolves at such a breakneck speed?

There are plenty of templates online that do this for you. IMHO, find someone who knows what they're doing and pay them a couple grand to do it well (there's a plethora of former bankers and consultants who will gladly do this). All models are wrong, but a model can quickly tell an investor you know how the game is played.

> Should we prioritize local (Europe, Switzerland) investors or North-American ones?

I'm in America and mostly pitched US base funds, but I did pitch a few funds outside of the US and don't think it was the worth the time. The US has the highest concentration of the the biggest, most prominent, best connected funds looking at the best deals - I'd just focus on them.

I’ve been helping founders with fundraising for some time and compiled my thoughts here:

https://www.lore.vc/

It’s a guide explicitly written with first-time founders in mind. Hope it helps; feedback is welcome.

So, I'm in a weird position and have a question: We're looking for a small investment, technically seed round to bootstrap marketing and sales efforts, product is at v1.0. But we have 50k€ of revenue (enough for ~2 average employees here) and 3 large corporate customers. It's a self founded (pivot from a traditional model) almost entirely automated SaaS for psychometric testing in hiring/development/reorganization with strickly scientifically valid tools.

The offers (from local VCs) were getting are around 100k eur for 10%. Looking at the threads here... Seem like a shit deal. Or am I wrong?

Based on your description here, you should have a look at https://tinyseed.com/

Revenue + product + need to support the non-dev stuff is right in the sweet spot of what Rob & co support.

Thanks, will check it out!

As I'm in a similar position as you (though not concretely planning to found a company right now), some of my thoughts and experiences:

  - It appears as pitches talking about training/deploying/productionizing "LLMs" and "foundation models" are amongst the most successful these days while MLOps is on the decline (which was massively hyped a few years ago, but reality has caught up)

  - You should be able to somewhat justify your valuation and tell a good story around it. Usual factors on valuation are the experience and network of the founders, stage and traction of the product and overall climate of the business sector. It's a good idea to research recent founding rounds of related start-ups in a similar stage as you.

  - Predicting financial KPIs with a high level of precision is impossible at your stage and everybody including investors knows this. At the same time, this does not mean that you don't need a business plan. At a higher level, the projections should represent your plans on when and how to monetize your product and the cost drivers and KPIs behind it.

  - Where you raise depends on your preferences and business context. For example, if you should have a high focus on data protection and privacy, it would fit greatly into your story if you had only local investors since some customers in Europe immediately see a red flag if US or Chinese people are involved.

I have many more thoughts but not so much time to type - DM me if you think an exchange could be helpful.

> if you should have a high focus on data protection and privacy, it would fit greatly into your story if you had only local investors since some customers in Europe immediately see a red flag if US or Chinese people are involved.

Yeah no. If you're going for a fundraise, you would be extremely foolish to rely on relatively inexperienced EU and local investors over investors from the US and elsewhere. It's an open truth that EU VCs are rather stingy with their pursestrings, and would rather undercut your valuation by a ton.

There are risks around geopolitical issues though, so eg: having a bunch of Chinese/Russian investors may not be the best route for you. The optics can turn sour, and the value they can add is definitely questionable in the current hostile climate.

You can guarantee compliance with EU rules as long as you provide an EU-based option. If some customers don't like that, trust me, you don't want such inflexible customers either. Eg.: PostHog recently launched EU based cloud hosting for GDPR compliance, and they are a successful privacy-centric product even though they're backed by largely American investors (and the founders are European).

I never claimed it was a generally good idea to raise locally. It depends on the context of the bigger Story.

> You can guarantee compliance with EU rules as long as you provide an EU-based option.

Not true due to Patriot Act (if your HQ are in the US). I don't require my customers to be flexible either as long as they are good business and I can create something that helps them.

> Not true due to Patriot Act (if your HQ are in the US).

I forgot about this, but then as Europeans starting a company in Europe, I guess the solution is pretty easy isn't it?

VCs don't care where your HQ is located, and YC and the likes just want a Delaware C Corp for accepting investor money.

I’m probably missing something here but usually a “business” looks to fundraising because it has some goal/need which requires money it does not currently have.

Usually this goal/need has some eventual outcome of generating revenue (whether directly or indirectly) and in doing so, paying its investors back.

Are you asking how to “raise funds” for some specific purpose or because you’ve built “an app” that uses “hot” tech to see how many thirsty “investors” you can get to send you money?

I’m not necessarily saying you can’t “raise funds” just for the sake of doing so (without any clear use for the funds and without any revenue) but unless you have experience/reputation for building valuable businesses/ip, connections to cc’s/capital who trust you’ll make good on their investments, id be kinda surprised if you get any checks.

That said, do lmk if you score - I’ve got a retired mining rig turned gpu farm for SD running with custom (locally trained/tuned) models as well as all of the 4chan/Reddit/etc ones as I’m sure many HNers have :)

Best of luck

FYI here's a demo of our tech (50% of pics are our own models, 50% are stable diffusion): https://nyx.gallery/

We work on photorealistic image generation

More info about our models (incl some open-source ones): https://nyx-ai.github.io/stylegan2-flax-tpu/

Currently it does look like something a smart middle-schooler can do in a week. It looks like someone had followed a tutorial for stable diffusion, cherrypicked a few images and served these with a gallery site.

I think they are trying to compete with Stable Diffusion, etc. But training those models is expensive so I wonder where they got the money for it.

If they are simply using the actual pretrained SD model I don’t understand what exactly they are offering. There got to be more than a gallery site, right?

EDIT: they clarified they’re using 50/50 own models/SD. OK, so in this case I’d like to see how their models are better.

Added some more details!

Already discussed on HN:

- Tech demo: https://news.ycombinator.com/item?id=33179730

- Underlying tech: https://news.ycombinator.com/item?id=32167704 (no mention of Stable Diffusion there… as it wasn’t out yet)

Which metrics do you use to show that your models are better than competition?

Lots of good advice on online resources here. To round this out, I’d highly recommend an accelerator as a first time founder. Any accelerator will be able to introduce you to resources and people, but I’d look for a tech stars accelerator nearby. Getting a mentor you can trust that has recently done a similar path will yield the best advice!

2nd this, a top tier accelerator will do a lot to get you prepared for launching your product or raising money.

Applying to accelerators is a good advice. Even if you don't get accepted, it will give you a clear idea on what they look for so you prepare for the next.

It will help you to clarify your vision and where you want to be.

It might not be relevant at this stage, but I recommend reading Value Proposition Design [0]. Since you're technical founders, you might fall into the trap of building without validation. This book will give you the framework to understand what are you building, for who, what pains are you solving, and what gains customers should expect. Any investor will ask you these questions, so being prepared will increase your chances.

Good luck.

[0] https://www.strategyzer.com/books/value-proposition-design

The only thing that matters is who you know. Business plans and financial models don't matter. If you know people with money and have a relationship with them going back a long time, that is how you raise money. I've come to learn this after spending 1000s of hours making business plans and pitching in europe and silicon valley. People often think that with a good idea, prototype and plan you can raise. We were not able to do that. Meanwhile, other people with a much shittier prototype in the same problem space, but with connections, were able to raise money. They went bankrupt and we are still around, bootstrapped.

As I'm sure you are aware Generative AI is absolutely the hot button VC area of interest right now. This should greatly ease your funding process. That said there will be a number of hygiene factors that your company must meet in order to maximise the number of VCs competing the deal and thus create favourable terms for yourself.

I've been raising pre-seed for a no-code platform for about a month now so very much in the trenches, happy to chat and share my learnings. Email me at paul (at) railsrocket.app

Tech Stars has released a Venture Deals course which is an excellent introduction to how to raise investment and aims to level out the playing field for entrepreneurs vs VCs!

Nail It Then Scale It: The Entrepreneur's Guide to Creating and Managing Breakthrough Innovation Book by Nathan Furr and Paul Ahlstrom

Oh and as a quick follow up, it’s probably best not to give up any equity at all (aka not raise funds - borrow if really needed but otherwise bootstrap) if you can.

If you really believe there is a revenue generating business there the worst thing you could do is give equity away at a value far below what you believe it’s worth

Connect with a founder. NA VCs are superior to EU. Make sure to get a VC that knows your industry. VCs are hungry for good companies, don't sell yourself short. Connect with a founder. Don't hunt just for the biggest check. Everything else is subjective and personal to your company. Connect with a founder.

What is a "founder" these days in this context?. The term seems to not mean someone founding a company, but i guess not a vc? Not an angel, ceo... someone with experience building a business?

I can't be certain what khloto meant, but reading their comment I envisioned them meaning connect with a founder of another company that the new startup team (like the op) would mutually "vibe with." I imagined that other founder to maybe have already raised money before and could mentor you a bit, but that really the hope is that you just keep meeting other founders and some of these relationships could go different ways, some stay mentoring, some become customers, some become partners in some promotional initiative. Basically I interpreted khloto to be nudgding a first time startup entrepreneur to take the first step to a mini yc of their own doing (i.e. build business relationships with other founders that go beyond just schmoozing and networking, and doing it with a three month or so timeline to start).

Thank you, spot on :)

Networking is a king, and depending on what kind of exit OP envisions, they will need those contacts.

One way to get them is definitely going through an accelerator (YC), but this process is time-consuming and might not be worth it unless the startup is in early stages (just my opinion!). The other one is just reaching out to other founders who went through similar situation or are planning to.

Again, all is subjective and deeply personal to what kind of startup do you want to run and what is your dream scenario. No advice will answer your question, as they require context and dialog.

A Good VC will listen and connect you with other founders, even before raising, but especially after.

Get into calls with some of the investors who want to talk to you, and ask them exactly what they would do in your position.

Some of them will bullshit you, others will give honest advice. Figuring out which is which is a skill that can't really be taught, you've just got to take meetings and practice.

Venture Deals by Feld

+1 This book will give you a good understanding about the language used in VC, and steps included.

Talk to the guys at Funden (funden.app). Steve and his team are all fantastic and their entire model is built around helping teams like yours.

Not affiliated in any way, just a fan. We've sent several clients their way and they've always been helpful.

yc startup school on startupschool.org

yc startup investor school 2018 on youtube

I want to build an IoT device but own no IP. How f*cked am I from the get-go?

Probably local ones as European VCs are pretty active right now.

> What are the best resources to learn the fundamentals?

There’s no substitute for running the gauntlet yourself. ;) The best way to learn the fundamentals is to do it and make mistakes, but you can prepare, and you can keep learning; try to always stay open minded during this bumpy ride.

Learn as much as you can about the perspective that VCs have, and how they work and how they think. If at all possible, find some VCs to talk to who you’re not pitching to. Nothing will help you more than this, if you want to raise VC money. They generally don’t care very much about your technology or understand it or get excited by it, and a few one hour meetings won’t change that. They, like you, are having an exchange with you over money, and they are motivated to learn about your tech enough to see if you have an advantage over other companies. Some VCs are playing the odds, and others believe in their investments.

Pay the most attention to whether VCs can help you with anything other than money. Networking, business and marketing advice, and even technical issues (consider that some might know a lot about your competition, and that some can help you with thing like patent filing.)

> How much should we aim to raise and at what valuation?

Start with : how much do you need to be profitable? You might not know, but you should take a real effort stab at estimating it (which could take weeks or months to research, depending on how far along you are). How quickly do you need to raise money? How long can you go without any investment? How long can you go with investment? How many people do you need in 2 months, 6 months, 1 year, 2 years…? How many times do you expect to raise money? How much of the company are you willing to sell?

Last time I was pitching, the best investors I talked to told me I wasn’t asking for enough money, because they could easily see it didn’t give me enough growth and runway to succeed or even make it to the next round.

> How to show financial projections in a field that evolves at such a breakneck speed?

FWIW, this question is a red flag. Your business plan needs to be able to succeed in spite of technology’s progress, and you need to be truly confident about that by understanding how you’ll weather new technologies and smart companies that adopt new technologies. If you view technology as a risk, then VCs will look at it that way too. BTW, technology is (of course) always a risk in a tech company, but look around for how successful companies deal with this and make their business depend primarily on people and not technology, and take note of how many tech businesses are not running on the latest developments in their field. VCs might be happiest if you have some kind of unfair advantage that cushions and buffers you against technology risks.

I'd start here: https://wesammikhail.com/2022/10/15/due-diligence-advice-for...

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