Lecture 9: How to Raise Money | Hacker News Reader

Lecture 9: How to Raise Money

startupclass.samaltman.com

All the top tier VCs (including YC) repeat the mantra "don't sweat the terms". It also appears on Ron Conway's slide in this lecture.

There seems to be a dangerous line between taking a good deal as offered and getting nailed by a bad deal. It's easy for the VC to say "don't sweat the terms", they are setting the terms after all. The advice makes sense if you're working with a top tier firm that has a reputation to protect, but it seems like it could be quite dangerous when applied to lower tier VCs?

I'd argue if a VC is trying to sneak in some non-standard bad terms, you should just walk away. They're definitely not people you want to work with.

The best VCs have extremely simple, straightforward terms. I've seen a term sheet from a top tier VC that was just half a page long with no bs in the share purchase agreement either.

This is one of several significant conflicts of interest in this lecture series. I'm surprised it doesn't seem to bother people to see VC trying to play both sides of the table. The optimal world for investors (a tiny proportion of huge successes) looks very different than the optimal world for startups (many moderate successes). And the idea of investors trying to coach founders on how best to enrich investors is just nuts.

This isn't for charity. In my opinion this startup school is intended to pump college students into the VC environment so that they (Private funds) can capture as many young, smart talents as possible to add to their portfolios.

At the end of the day the "Startup" world is the world of finance, and I think the explosive crop of high risk private equity (Angel, VC, hedge) investors are trying to get as many "makers" into it as possible.

Whether this is good for the new entrants or not is too early to tell. I think it probably is when compared to the alternatives, but my guess is that I am missing something.

Is it an advertisement for YC? Absolutely. So is HN.

It's also interesting. I don't think I'd have gotten much out of the class as an undergrad, but a decade later, I'm learning a lot from this lecture series. Among the things I've learned: I probably don't want to start a startup; I'd rather focus on great products and execution in my field.

I view it as more in line with the Graham/Buffett school of giving back as you go. PG (not BG) has an academic bent, and academics like share what they've learned.

Thank you, YC. It's a worthwhile course.

Heh! Thanks for the clarification. I read Graham/Buffet to mean Ben Graham (http://en.wikipedia.org/wiki/Benjamin_Graham), not PG so I was a bit confused.

My reaction resembled that of yours. My reaction was, "well this isn't so different from the doctrine of investment banking recruiting, and that is seen as acceptable at the very least, right?"

One massive success like Airbnb or Uber means vastly more to the world than even a thousand moderate ones. If your motivation as an entrepreneur is to change the world and not just to make money, your optimal world is one where the chances can be non-zero.

the best investors generally offer the cleanest terms. we advise founders to walk away from messy terms.

what most investors mean here is not to obsess over small differences in valuation (most good investors don't do this either, but some do).

In that case, what would be the key difference between a clean term vs a messy one? How would a first time founder tell the difference?

A simple analog for first time founders is standard docs (series AA & SAFE) vs non standard docs.

As an aside, I think it's really hard to get clean terms when you're outside silicon valley... I had a friend raise money in Utah recently and he was saddled with all sorts of strangeness. (board for a $200k seed investment, etc.)

Another startup hub advantage.

Thank you, yes that's a great first filter (standard vs non-standard docs.) Though, as you said, unfortunately it's rare for terms outside the valley to be standard so that might not be as helpful a criteria for founders outside the Valley, and especially for us here in Asia.

As an aside, I think it's really hard to get clean terms when you're outside silicon valley

Which is the whole point. I was told point blank by Cooley that no one outside of the valley will ever do SAFE because it is different.

They also will never do post money options pools which are what YC seems to push for.

So good luck everyone else (myself included).

Not true. I did a Safe earlier this year with a VC firm in the midwest. Yes, I had to be firm about it but all sides were really happy with it. Things are changing.

That's awesome and congrats, but my guess is you are an outlier and probably have some significant leverage in your market.

Perhaps then we just need more companies gaining traction? Then it's not so much an issue of funding environment but a relative lack of strong startups.

SAFE may be met with more resistance outside SV but it's certainly not a deal breaker. Sibling cites a midwest firm that agreed to it, and I know one in East Asia that agreed to it.

I've heard that from friends raising outside Silicon Valley, Seattle, and NYC, too. "Shark Tank" terms, so to speak.

I raised a clean $1M with a YC Safe note from a firm in Fargo, ND of all places. Took less than a month from initial meeting to cash in the bank. Times have changed.

> In that case, what would be the key difference between a clean term vs a messy one?

In my experience, terms with lots of if-then conditionals are the most common flag. The last "messy" term sheet I saw had an unusually long diligence period. Predictably, the investor "found" a bunch of problems at the 11th hour and pulled out, leaving the startup in a financial lurch.

Anything that differs from standard docs should be _highly_ suspect, assuming you can get ahold of some.

As a lower bound, I've never seen terms presented on Shark Tank that weren't off-the-wall insane. :D

> How would a first time founder tell the difference?

By talking to other founders, advisors, and their attorneys. This book was useful when I was approaching the first term sheets I ever saw: http://www.amazon.com/Term-Sheets-Valuations-Intricacies-Big...

>By talking to other founders, advisors, and their attorneys.

I 100% agree with you (and I have such contacts to help me out), but I lament the fact that many founders will lack such contacts to give them a sanity check. Perhaps one can reach out to people about it, but without a preexisting network to tap, I am afraid that many will simply accept the bogus terms rather than deal with the discomfort of reaching out for help.

Sam, would it be possible for YC to publish an example of a clean term sheet?

Thanks for this great lecture series, it is very helpful!!

There's a difference between "Don't overnegotiate" (or "Don't jeopardise a deal in an attempt to raise your valuation by a small percentage") and "Don't sweat the terms."

There are some seriously unscrupulous investors out there. If any terms give you cause for concern, get second, third and fourth opinions from independents.

I think their point is, if you have 5 investors, 4 of them are offering you a high valuation and terms, and 1 of them has the lowest valuation but he brings the most to the table in terms of connections, advice, being aligned with you on the vision, etc, then you should go with that last investor, even though his valuation is the lowest. This is the same point that CloudFlare's founders stressed in their recent interview on startup school.

Ironically I was just listening to Geoff Donaker's (from Yelp) talk at Stanford. At the end someone asks what were the biggest problems they faced. #1 was sweating the terms with their investors.

http://ecorner.stanford.edu/authorMaterialInfo.html?mid=3301

One thing that struck me was that both Ron and Marc said they mostly invest on referrals. Ron said that almost no-one came in unannounced anymore - every seed investment was a referral from someone he knew. Marc said that almost every A round was a referral from Ron or someone else he knew.

My question is: If you can't get seed funding without already knowing someone in SV, who are you supposed to know and how do you get to know them? Is there no way but to work at another startup first and then branch out once you've made connections with the management/board? Or go to Stanford and hope your professor has connections like Google?

Edit: Obviously YC is an option too ;)

YC is a hack around the old-boy you-have-to-know-someone network. It's ingenious. YC implements a better filtering algorithm than the dumb who-you-know filter and sells the companies to VC's at a premium.

It's amazing most of the VC's have not worked out a better filtering algorithm themselves.

I'm hazard a guess that YC uses back-channels as well. Firms like SVAngels and a16z get 10-30 deals per day with referrals so they can focus all their attention on making type II errors.

Yeah I've been reading a lot of the "How we applied to YC" articles recently and it does seem that even YC use a lot of referrals. Quite a few were along the lines of: Apply to YC, email a friend who knows a partner and see if you can get a referral.

It may only get you to the interview stage, but when you have the mass of 1000's of applicants, it's more than most people get.

> It's amazing most of the VC's have not worked out a better filtering algorithm themselves.

Why should they? Venture capital is a compensation structure disguised as an asset class.

GPs lock in 10+ years of 2% annual fees on the capital their LPs commit to their funds. A few years into an initial fund, they can raise another, larger fund, locking in 10+ years of 2% annual fees on the capital committed to that fund.

There's virtually no incentive to do anything innovative or stray too far from the herd.

This would be the easy way. Another way - harder, but with more chance to succeed after funding, not at it - is following Steve Martin's famous advice "be so good that they can't ignore you".

I don't know much, but i have the impression that was what WhatsApp did. For what I know, it was Sequoia that went to them, not the other way around.

Sequoia is a top VC not because they sit on their throne waiting for the vassals be referred to them. They work their ass to have the chance to back the really good startups. Something similar with what Sam Altman is doing more now at YC - actively pursuing good companies to sell them the benefits of being at YC.

This is not binary (as in "bad companis pitch, good companies are pitched"), but it shows that there is another and eficient way. Even if rarer and harder.

>For what I know, it was Sequoia that went to them, not the other way around.

They talk about that in the Startup School SV 2014 talk

http://www.youtube.com/watch?v=8-pJa11YvCs&feature=youtu.be&...

having realised WhatsApp was a success they resorted to walking the streets of Mountain View to try to bump in to them (13m15s)

It's not that hard to get to know someone who knows someone at SV Angel.

If you have something to show, just write an investor or entrepreneur you like if he can give you advice on something on your startup and they will surely be willing to give you an intro to SV Angel.

This goes for all other investors besides SV Angel as well of course.

you don't need to work at a startup, you should have founder friends or even mentor types from people who are around 12 months ahead of you. if you can impress some small group of people you should gain access to their network and so on. there are other serious benefits of frequently talking to people in the same situation as you (startups can be extremely depressing for one)

Build something that people want and make it grow and things have a way of working out. Many VC firms actively monitor the top of app stores, angellist and ask what software their friends and portfolio companies are using. Build something awesome and people--including investors--will find a way to connect with you.

There are benefits of working at another startup first: gained skills, experience and network. If you want to go right away into starting a startup it'll take some combination of increased hustle and more solid proof/the company being further along before raising a seed round.

Many investors also regularly check app store rankings, angellist, accelerator demo days and ask their friends and portfolio companies about "what is interesting?" or some version of that question. Build something interesting/awesome and word can spread across silicon valley very quickly.

How to succeed in life: 1) Be attractive, 2) Don't be unattractive.

How to raise money: 1) Bootstrap, 2) Don't have a need for VC money.

They might as well have said that in the first 20 minutes instead of beating around the bush. All 3 of them say the best way to get money is to not need it to begin with, i.e. be the twitter guys.

Notes: http://jonalmeida.com/posts/2014/10/21/htsas-lec09/

Sam: I'd live to see a discussion on putting together a party round at the seed stage. I'm not sure how common this is, but we have over $1M of interest in our seed round (angels/micro VCs), but we're operating in a space where very few investors have any domain expertise, and so everyone is waiting for a lead. Is this common? Any ideas how to push this through? In the mean time we're taking the Steve Martin approach.

Did I miss something? They were talking about seed rounds raising on the order of a couple of million dollars.

I thought seed rounds raised a couple of hundred thousand (at valuations of a couple of million), with series A rounds at about ten times those numbers.

Have things changed, or were they talking about valuations rather than the amounts raised?

I don't think there's too much consistency when it comes to dollar amounts and rounds. From what I've seen a seed round is typically 500k - 3m. With series A being 3m - 25m. There's a ton of variability.

Wrote a quick summary of key points in the talk - it really shows what the "top VCs" are looking for, go big or go home: https://www.facebook.com/johan.aardal/posts/1015274252107585...

17 Quotes from Marc Andreessen & Ron Conway each from the lecture: https://medium.com/how-to-start-a-startup/17-quotes-from-mar...

We'll be watching this lecture and lecture 10 next tuesday in San Francisco http://www.meetup.com/Ycombinators-Stanford-lectures/events/...

There was a lot of good in Lecture 9; although I watched the whole lecture, I eagerly got, saved, and read the transcript.

The part I liked best was Ron Conway's suggestion,

Ron Conway: But in the process, when somebody makes the commitment to you, you get in your car, and you type an email to them that confirms what they just said to you. Because a lot of investors have very short memories and they forget that they were going to finance you, that they were going to finance or they forget what the valuation was, that they were going to find a co-investor. You can get rid of all that controversy just by putting it in writing and when they try and get out of it you just resend the email and say excuse me. And hopefully they have replied to that email anyways so get it in writing.

This advice sounds a lot like the old technique of writing a self-serving letter.

Maybe I'm the only one, but there in Lecture 9, from both Andreessen and Conway, I saw some surprises.

Broadly it seemed to me that some of the messages didn't fit well with some of the other messages. And for some of the messages and examples on some of the questions, maybe there are some better messages and examples.

For one surprise there appeared to be a theme; maybe we should notice the theme:

Andreessen and Conway get new investments mostly only from people they already know and respect.

Then, with this theme, it would appear that in some ways and to a significant extent Andreessen and Conway are living in a Silicon Valley version of an echo chamber.

Then what would be surprising about such an echo chamber is that necessarily what Andreessen and Conway are looking for are strongly exceptional cases:

E.g., Andreessen mentioned

"companies that have the really extreme strengths"

and

"... the venture capital business is one hundred percent a game of outliers, it is extreme outliers".

and

"And so the big thing that we're looking for, no matter which sort of particular criteria we talked about, they all have the characteristics that you are looking for the extreme outlier.

Maybe I'm the only one, but it strikes me that an echo chamber is a poor place to look for strongly exceptional cases. That is, the cases Andreessen and Conway are looking for happen only a few times each decade, Facebook, Twitter, PInterest, and a few more.

Or, for evidence of an echo chamber, there was,

Ron Conway: I think what’s interesting is, we don't really take anything over the transome. Our network is so huge now that we basically just take leads from our own network.

So, either (A) Conway's "network" is really small with, say, just Mark Zuckerberg, Dick Costolo, Ben Silbermann, and a few more or (B) so big that most of the sound in the echo chamber is not much like what Conway is looking for.

and for more on an echo chamber there was,

Marc Andreessen: The other thing is, I mentioned this already, but we get similar to what Ron said, about two thousand referrals a year through our referral network. A very large percentage of those are referrals through the seed investors. So by far the best way to get the introductions to the A stage venture firms is to work through the seed investors. Or work through something like Y Combinator.

Then what holds for Conway and other seed investors means that Andreessen is drawing from what came from the echo chamber of the seed investors.

Maybe I'm the only one who noticed this; seems surprising to me.

The people I know and respect in information technology and especially promising for very valuable start-ups likely know no one in either the Conway or Andreessen networks and, really, are not known by those networks. Conway and Andreessen are working hard to separate themselves from the people I respect.

Maybe Andreessen and Conway would respond with the remark in the lecture,

"The key to success is be so good they can't ignore you."

So, then, it would seem that somehow all concerned should try to avoid or circumvent the echo chamber. E.g., get a lot of traction, publicity, etc. and then the investors will call the entrepreneur. Maybe.

But on

"The key to success is be so good they can't ignore you.",

this characterization of success is not very clear if only because, for the big winners Andreessen wants, he also expects "serious flaws" as in,

Marc Andreessen: On the other side of that, the companies that have the really extreme strengths often have serious flaws. So one of the cautionary lessons of venture capital is, if you don’t invest in the bases with serious flaws, you don't invest in most of the big winners. And we can go through example after example after example of that. But that would have ruled out almost all the big winners over time. So what we aspire to do is to invest in the startups that have a really extreme strength. Along an important dimension, that we would be willing to tolerate certain weaknesses.

So, for success, have to put up with "serious flaws".

Also there is

Marc Andreessen: Even the big successful companies, even Facebook, all these big companies that are now considered to be very successful, all along the way all kinds of shit hit the fan over, and over, and over, and over again.

So, for success, can expect "serious flaws" and also "all kinds of shit hit the fan over, and over, and over, and over again".

So, here Andreessen admits, say, that the road to success has a lot of bumps. Okay, maybe so.

So, what's the truth,

"The key to success is be so good they can't ignore you."

"serious flaws" and the shit keeps hitting the fan?

To add to the confusion, there is

Marc Andreessen: You want to be very precise on what you can accomplish with your A round and what is going to be a successful execution of your A round.

Would be nice! But we already know that, instead, we can expect "all kinds of shit hit the fan over, and over, and over, and over again".

Andreessen seems vacillate between (A) shit hitting "the fan over and over" and (B) being "very precise".

I see some confusion.

There also appears to be some confusion on planning:

So there is,

Ron Conway: What would convince us, is what usually convinces us, is the founder and their team themselves. So we invest in people first, not necessarily the product idea. The product idea tends to morph a lot. So we will invest in the team first.

which sounds like the planning is useless. For more, commonly there are claims that in projects, planning is important but that

"No plan survives contact with the enemy".

To me, this sounds too negative, that is, there have been a lot of complicated, ambitious projects that were executed as planned, on time, within budget. And for military projects, this can also be the case as in the Mother of All Briefings by General Schwartzkopf as at

https://www.youtube.com/watch?v=wKi3NwLFkX4

And, on the air campaign

https://www.youtube.com/watch?v=i6YP5OalP18

E.g., there we hear that the plan was that the air war would take 4-6 weeks, and it did. Early on several days were lost to some unusually bad weather, but later the got caught up and back on schedule.

The ground war? That was 100.000 hours. Period. The plan was a lot of diversionary efforts and a big left hook "Hail Mary" play -- worked just as planned.

The tank battles? The US Abrams tanks could fire accurately through fog and dust for two miles while moving; the Iraqi tanks could fire accurately only with clear sight, for only one mile, and only while standing still; and the US tank crews were well trained; any doubt about how that planning would come out? The F-117 stealth? Did all the bombing of Baghdad, through all the air defenses, and never got so much as a single scratch -- just the way Lockheed planned it. Similarly for the US F-15c against the Iraqi fighters -- the score was some dozens for the US and 0 for the Iraqis. Net, the planning worked.

Lesson: Planning and then executing the plan as planned really are possible, maybe not usual or common but, still, possible.

I see Conway and Andreessen as asking too little from planning. I can believe that in their echo chamber, they have learned not to think much of plans, but elsewhere in our economy and technology are many cases where ambitious projects were planned and then executed successfully essentially according to plan.

Well, I can believe that Conway and Andreessen were describing their experiences in Silicon Valley looking for the next big thing or at least the next big app to get middle school girls all excited and sell out to Google, Facebook, Yahoo, etc.

And Conway has been at this game for a long time at the earliest stages where the worst of the unpredictability is.

For Andreessen, apparently he likes to argue; or as at

http://avc.com/2014/10/getting-feedback-and-listening-to-it/

there is

"They definitely keep me on my toes, and we’ll see if they’re able to convince me. I mean, part of it is, I love arguing.

"The big thing about Twitter for me is it’s just more people to argue with."

So, maybe Andreessen is mostly just arguing.

Maybe the bottom line is, often Silicon Valley is not very clear on just what they are doing. That, too, can be a valuable lesson for an entrepreneur and worth watching the lecture.

I'm surprised: If with so little clarity I did my applied math and wrote my software, I'm sure the math would be awash in terrible errors and my software would likely never run.

That's how I see it. YMMV.

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