This is Dalton plus Michael.
Today we're going to talk about is startup funding fair.
So I'll set this up instead of working on your company, your browsing Twitter, because that's what all good founders do.
And you see company bullshit has just raised a $10 million round from a 16 Z. And you checked out their product last week and you're like, that product sucks.
And you see all these people being like, oh my god, this company is so great.
They're going to win the space.
And you are starting to think, is this all a joke?
I was told this was meritocratic.
And they're raising all the money.
And they look like they're cool.
I mean, look, think about how many office hours that we do.
Where, you know, there's some other topic, but when you get right down to it, what's actually going on is that someone read a fundraising announcement and somehow that caused them to go through like a total spiral.
Like the founders I'm talking to were spiraling.
Sometimes it's because they're sad.
Because they're considered had raised.
Sometimes it's they're enraged because how dare this dumb thing that's so bad that we're better than that raise money.
We need to destroy the venture capital industry.
Sometimes it's kind of magical thinking where it's like, hey, I saw someone raise this money for this voice AI thing.
I think we should do voice AI.
And so they sort of like draw parallels to what they're doing.
I would call that the pivot.
Like we should pivot to that, right?
I think the parallel one is like, a voice AI company raised a billion dollars.
That means we can be worth the billion dollars too.
Like that means this shirt is working, right?
Like there's a 10 or something.
Good news, my startup's working.
These other, these other people, these other guys raised money.
I'm going, my startup's been great.
The number of times I've seen a founder basically, this is a good space because there exists and unicorns in the space.
I'm like, what is that even?
What are these things to do with each other?
Again, what's funny is that for whatever reason, startup culture is heavily centered around
fundraising announcements and reaction to fundraising announcements.
And this is like one of the cool things to talk about with other founders or with your employees.
And it's just a goal, right?
For some reason, this is just like the latent background radiation of working in the space.
is when you get over-rotated on this stuff, you are beating yourself.
That is self-defeating behavior.
If you let yourself have tons of emotions as a result of some stranger raising money from some stranger.
More often than not, it doesn't change your chance of success at all.
And then you like having whatever feelings you have about it.
Again, everyone's feelings are valid, but you want to learn to quiet that part of your mind and to realize that that doesn't really affect you too much.
And think about how much over the years have people on Hacker News or just on Twitter in general spend more time worrying about what stuff you and I have funded that we worry about.
I can't believe why I see fun.
Like it's obviously over.
And so the good news is we don't care.
Like I never once cared what people on social media would say when we chose to accept a company.
And so, we weren't looking for the approval of people on the internet.
What I thought was the meritocracy is we had to have a vote on the internet about whether we were allowed to fund a company or not.
A funding event has become, like, I think the only equivalent that I can imagine in today's day and age
is a strong quarter for a company where the stock price went up.
Because it's like, I think founders truly believe fundraising events are like value creating moments.
What's interesting is like when that stock price went up, that like that is a value created like literally everyone's stock is worth more.
They could sell it right now and make more money than they could sell it two days ago.
A funding announcement is the announcement of an illiquid bet.
And almost every single fundraising announcement you will read is an announcement of an illiquid bet that has a probably less than 50% likelihood of paying off.
all the way down to, I mean, we've joked about 0%, but like all the way down to seed rounds, which like very low expected.
So standard capital, my new firm is operating.
We made a number of investments.
We are going to announce those investments soon.
And so in so far as like, if you just believe fund, all funders announcements are bad, I guess I'm part of the problem.
And you're an investor, right?
And I'm not holding a vote.
You're the internet for who we should fund, so that's not fair.
Yeah, I'm holding a vote.
But the reason funding announcements are good is I want people to check out the products.
of the companies that we invest in and be curious about them.
I want potential job candidates to be more interested in taking a job at the company.
Basically, it's a good way to remind people that a company exists.
And as you know from our other videos, friends, the natural state of startups is no one cares about your startup.
So this is a way to get people to like look at, hey, look at this thing.
And then you take that attention and try to transfer it to something good.
And so in my mind, the healthy way to view a fundraiser announcement is to take an opportunity to look at the product, to check out the founders, to see if there's cool jobs there.
If you're in the job market to have an opinion and not really have a lot of emotions about it.
Yeah, like you're just kind of like oh cool sober opinion.
This is the thing like me I should go check out their product Yeah, and I have noticed a lot of founders get good customers this way Yes, like this is why we do all the the announcements at YC.
Yeah, is it drives customers?
I think this is a really healthy way of thinking about it.
When you see a startup announcement, I think that like an interesting thought would be, check out the product, check out some of the case studies, spend five, 10 minutes, make a pro con argument in your head and assign a percentage.
And I think that as long as you're assigning a percentage, the startup will seem more fair.
I think that when you're assuming that every investor thinks that every investment has 100% chance of success, the bets look stupid.
I mean, people invested in Elon building rockets.
It might have been a high conviction bet, but like no one could basically say that was like a high percentage likelihood to work out.
Look, this was literally in my Twitter ex mentions today.
So I founded a company called Whatnot in winter 20.
And it just announced it's a deca corn.
They just raised money to $11 billion valuation.
It's like, hey, check that out.
And if you know someone that wants a job, if you know someone's a job, they're hiring.
There's actually pro-social reasons to talk about that.
But what's funny is a lot of the comments where
People being like, I would never invest in this.
Why would this Pokemon trading card site?
Because people being like, I don't like cool that this is worth so much.
Like how on earth did you see it?
Did they decide to fund this thing?
Because in the moment, can you imagine what the like how it was perceived?
uh, Funko pop trading website raises venture capital.
It was a low percentage bet.
Well, and it would be like infuriating to people.
How dare this company raise money when my startup is, which is so much better.
They're funding this crap.
Well, this is how again, this is an instructive moment.
This is when bringing him up.
That bet worked out and created a lot of jobs and there's a lot of sellers on whatnot.
And so if you look at the economic impact of that bet.
Someone should have made it.
And I also think you make a good point, which is that you might think you can tell the future when you're reading a Twitter funding announcement.
And you might think if you try to product, you know whether it can be good or not in the future, but you might be wrong.
I'll say this is the last version of this that always frustrated me, which is,
This happened in my company, this happened with other founders that I've advised, where you see somebody fundraise and then you say, if they can fundraise, why can't we fundraise?
And you know, none of the supporting facts are materials.
We saw this in one situation, some company we're competing against raised a whole bunch of money and we were just like, we've pitched these people, they know us, we have more traffic, what's going on, it's crazy.
Years later, I found out that that founder made the firm who invested in them like a billion dollars.
I know you're talking about that.
And it was like, well, you know, like if someone makes you a billion dollars, you'll do their series A for the next time, right?
Like, how much money are you handing them back after they handed you a billion dollars, right?
And it had nothing to do with the core fundamentals or anything, like, but reading the announcement, I didn't get that.
And so thinking that announcement as all the supporting materials that would actually make you understand whether it's a good investment.
That's not the purpose of a fundraising announcement.
So that's another reason why you can maybe classify something as unfair.
It's like, you just don't have the facts.
And the last one you bring up, which is like, when people announce their fundraising round, that means they've raised the money that day, right?
That's how that works, right?
Yeah, often it happened in the past.
Often they're sort of... Hopefully not in the future.
Often they're some creative accounting for how they're discussing the amount, raise the valuation.
Like there's all these like sleight of hand things that happen.
And again, the point is to not worry about it too much.
It's just, well, that's why, this is what I love about it.
It's like a sports bet, right?
It's like soon the game will be over and like most of the bats will have made no money and some will like will know the answer soon before it's just a bet.
Don't get all worked up over a bet.
Sometimes founders think the
fundraising game is skewed against them because they make some simple mistakes where it's harder to fund them.
I think that like, you know, for two kids who are CS majors at MIT, the fundraising game might seem real fun, right?
Like it might seem super fair.
Like how do you think about kind of
you're starting conditions impacting whether you think the game is fair.
If I'm two MBAs from the University of Phoenix, this game might not seem so fair.
I think some folks want to believe that the way capital is allocated is like super efficient and that it is like there's some kind of stock market.
Yeah, you can write up a little like report.
It's like this, like public stocks, I guess technically have
price-to-earnings ratios and people are trading them.
I don't think people actually, as you can see in the current stock market, but there's a notional sense that you can value a late-stage company and that there is some sorry way to do it.
And I think people expect that to scale all the way down to startup bets.
Well, if it did work it that way,
there'd be people making lots of money investing that way.
Where are the value investors and startups?
I'm not trying to be, maybe they exist, like let me know.
But from what we have seen, that is a very bad way to invest in startups is to try to find the stuff with the lowest valuation, like the highest revenue stuff.
And instead it's much more of,
an art and it's hard to justify every decision that other people are making about this stuff.
And you're always going to have an opinion.
Maybe this is a weird aside, but it's almost like looking at who gets drafted every year in the draft or who you're like, why didn't this guy get signed?
And you're like, why didn't this team sign this player?
Like it's easy to be on the sidelines and to feel that you have a perfect view of who did what.
You know, ultimately, you're just like a person on a comment board.
And that's someone whose job is on the line to make good decisions, right?
I think sort of funding is more fair than I ever realized.
And I think one of the driving factors in that is there isn't one big company doing all of it.
Like there's just, there are so many... That's probably right.
Basically, there's very little coordination, especially at the seed stage.
And so having all of these... There's some coordination.
Well, like it's more likely to raise money if you're an MIT CS major than not.
I'm just trying to say if someone says no, it doesn't poison the well.
There's no like secret back channel.
So there's a lot of people.
There's a lot of money and they're all operating autonomously.
And I would argue that the most basic things they're looking for tend to be publicized.
We don't hide what we're looking for in a YC application.
And so that's also pretty fair.
I'd also argue nowadays investors are more accessible than they ever were before.
You can tweet at people, you can
Use AI to figure out everyone's email addresses, right?
And so they're accessible.
They compete with each other.
They don't really coordinate with each other.
And they generally communicate what they were looking for.
You know, it's, it's interesting because like, if you think about it in sports analogy, right?
It's like, from that perspective, I think the basketball industry is also kind of accessible.
Like it doesn't mean you're going to become NBA players.
It's pretty straightforward how you would get signed to the Warriors, but that doesn't mean it's easy.
But if you're like the best player in your high school basketball team and you're like six, eight, you know, like, yeah, if you're seven feet, the industry kind of will find you.
So no, I think though, maybe to wrap up, right?
Certainly getting angry and discouraged by fundraising announcements and by thinking the fundraising environment isn't fair.
Like that's not going to help you win, right?
you should trust that if you just put that stuff aside and focus on things that actually might help you win, you might find the fundraising environment more accessible than you thought.
Most of the rounds that we see from most of the good companies, they're doing something interesting or they've done something interesting and investment came as a result.
It wasn't investment just came before they did anything or they were so like, they had agency, you had agency.