We're going to have two lectures on fundraising.
This one, which is going to be a high-level overview, which I'll do.
And then next week, my partner, Kirstie, will do a deep dive into the mechanics of fundraising, which are really fun.
So you wouldn't want to miss that.
Before I start, I will say we have an amazing set of resources in our library on fundraising.
You should read Paul Graham's essays on fundraising.
They have aged really well, and they will help you a lot.
I wrote a guide to seed fundraising as well that I think is pretty useful, but there are lots
of other resources, videos from last year's startup school from 2014, how to start a startup, one of which I'll reference later, which will be massively helpful when you go out and raise money in early rounds and in later rounds.
And fundraising can be one of the hardest parts, even though fun is right in the word.
It's really not that fun.
It's a weird marketplace when you get out there.
It seems like kind of an open market, but it's not rational.
And yeah, you will hear of founders who tell you, oh, fundraising was easy.
I started walking down Sand Hill Road and people showered me with cash.
That's the exception rather than the rule.
So while you're fundraising, you're going to hear no a lot, most of you.
You will hear reasons why your startup will not succeed, why your product is not a good one, why the opportunity you're talking about is not real.
Sometimes they'll be right too.
But you should never believe that because you will survive.
The way you will survive the multiple times you're going to go fundraise is by being tough and resilient.
And above all, by believing no matter what you hear, no matter how many times you hear no or reasons why your startup won't succeed, you need to believe.
I promise I'd go fast, but I'm gonna go so fast, I'm gonna give you a complete overview of everything you need to know about fundraising in about a minute or less.
And then I'll go deeper after that.
And anyone who wants to leave after this minute because you got everything that you needed, I won't feel bad.
So, in less than a minute, figure out the story of your startup.
figuring out why you're going to matter in the future.
What is it about your product, your opportunity that's gonna tell a story about the future that adventure capitalists will care about?
So this might mean getting product market fit.
Could mean a lot of things.
Then find the right investors.
This is where organizations like YC can be a ton of help.
You do your homework, you create your spreadsheet, and you get a list of everyone you're going to talk to and you're going to reach out to, or you're going to get introductions to.
You will pitch again and again and again.
You will refine your story again and again, and you will get better at it as you iterate.
And eventually you'll meet the right investors.
Sometimes the right investors will be the investor with whom you resonate the best and who you think is going to be the best added value.
Sometimes the right investor be the person who is willing to write you a check first.
So then you agree on a price, we'll talk about negotiations more later, and then you get the money in the bank.
And lastly, you get back to work.
I think that was less than a minute.
Okay, so let's get a little perspective first.
Well, there's a market for it, right?
You guys need the money, most of you.
Most of you want the money.
But there's sort of another reason, too, which is the returns can be really big.
It wasn't always that way.
Many people track the beginning of Silicon Valley to Bill and Dave starting to kill at Packard.
in around 1957, and they started with $583 of their own money and never raised venture.
It's possible to do that.
But it turns out to do a high-growth startup usually do need money.
And about the same time, this French guy named George D'Oreal kind of kicked off the whole thing by investing $70,000 in this, what was to become Epic Company, digital equipment corporation.
And he turned that $70,000 into $35 million, which as you might imagine got some people interested.
And that kicked off an entire industry.
Well, you need it to pay for stuff, to hire people, to rent offices.
You need it to grow, right?
Startup equals growth, as Paul Graham wrote a long time ago.
And to grow, you almost always need startup capital.
So it's possible to bootstrap, and some companies do, but it is really hard.
And you should keep in mind
It's also true that having money can be a competitive advantage.
So most startups, most of the time, will raise money.
When should you raise money?
Now the obvious answer is when you need it.
That's when you're gonna raise money, when you need the money.
Unfortunately, it's actually the opposite that's true.
The best time to raise money is when you don't need it.
This isn't always possible.
But when you don't need money, investors see the biggest opportunity.
So throughout the lifetime of your startup, if you can't arrange to be in a position where you have lots of money and lots of prospects, the money will come flowing in.
If you're profitable, it helps a lot.
If you're desperate, well, VCs can smell that a mile away.
How much should you raise?
Well, one rule of thumb, and I'll give you another one in a second, one thought process to go through is assume when you raise money that this is the last time you'll ever be able to raise.
So raise enough so you won't need more, so you can get to profitability.
Now, obviously, this is not always possible.
It depends on the kind of startup you have.
So you should at least know what you're going to spend the money on.
Figure out what your average employee is going to cost.
An engineer, for example, might be $15,000.
We usually use a rule of thumb at a seed round of about 18 months.
Whatever time frame that you need to where you can raise more money.
So you have to hit milestones that will be persuasive then, or you have to get to profitability.
and then the number of folks you're going to hire.
Well, there could be a whole lecture on this.
So rather than doing a whole lecture, I'm just going to make a couple of points on this.
So ask yourself, if you were an investor, would you invest in you?
Are you formidable enough?
Are you the kind of person who can take an idea and turn it into a reality that matters into a big company?
Yeah, I know I'm repeating myself, but I'm going to go into a little more detail and I'm going to repeat a little bit of what I said in that very first lecture.
But the other thing that investors are going to invest in is the story of your startup.
What product are you building?
And is this story interesting, believable?
Does it tell a future that they can believe in?
It has to tell a future about a company that you guys are building that has hundreds or thousands of employees.
Like those CTOs you saw sitting up here.
At one point, they were exactly where you are with nothing.
And now they have tens of millions or more in revenue, hundreds of employees.
Can the investor you're talking to believe that about what you're going to build?
So what components of the story are there?
So it has to represent a large opportunity.
And by the way, if that's confusing, why do you need a large opportunity?
Google venture math and understand what the venture capitalist cares about.
What sort of returns they need to make things worthwhile?
Is there a compelling product in traction?
And is the storyteller impressive?
So what if you don't have these things?
Well, you're telling a story.
A story is more persuasive if you actually have that product and traction, but it doesn't mean you can't raise money just with a good story.
If you've heard of Magic Leap, they've raised billions on just a story.
It's a story that matters.
Everything else is just how persuasive you are.
Sure, if you have millions of users and growing like crazy, that's pretty persuasive.
Interestingly, the very best investors want to get you before you have all that stuff, because you're expensive by then.
The greatest best investors are Airbnb before they're Airbnb, before they have traction.
So remember to build your story, I went through this earlier, spend time on this.
Build the vertebrae to find the vertebrae of your story, the key points that are the most memorable, most important, and build a story, a pitch, a sales pitch around that.
Remember, everything you're doing as a founder is being a salesperson.
You're selling to investors here or to yourself to get up in the morning after you've heard no 25 times in a row to your partners, to your customers.
What valuation should you choose?
So this, again, you could do a whole lecture on.
It's complicated what valuation should choose.
It's somewhat of a market, but it's a very strange market.
I would really recommend you look at the video of Sam Altman
talking to Ron Conway, Mark Andreessen and Parker Conrad from Xenophants at the time rippling now when they talk about what valuation you should choose around the 22nd or 23rd minute Parker starts talking about his experience raising money.
It is really dangerous to choose too high evaluation.
And in fact, it can kill your fundraising because it's quite difficult to go to an investor who might kind of be interested.
And you say, I'm going to raise it a $12 million cap on my safe.
And they were like, I was going to invest, but that's really expensive.
And then they go back to them and say, oh, actually, we're a lot cheaper.
You mean you're not as good?
Now I'm not interested in investing.
I have seen companies actually fail fundraising because they chose too high evaluation.
But you don't want to choose too low evaluation either because you can overdo dilution.
We'll talk about dilution in a second.
But the most important thing is to get the money in the bank and get back to work.
And that's why we talk a lot, and you'll see it again and again, about not over-optimizing fundraising.
As I mentioned, Kersi is going to go over the mechanics of raising money in detail later.
So I'm going to go very quickly here about the mechanics of raising convertibles or equity very briefly.
Oh, and yes, I'll mention ICOs.
There are other ways of raising money nowadays that have little to do with
with equity, and there's also debt of various kinds, but we're going to talk more about this, and a convertible note is a kind of debt as well, although we don't recommend you use convertible notes anymore.
Convertibles are strange.
You go to an investor and say, do you believe in the future of my company?
Would you like to buy a piece of it?
And they say, yes, I want to buy a piece of your company.
And you say, okay, not really.
I'm going to sell you a promise of a piece.
of my company, which is what a convertible is.
It's not actually equity in your company.
It represents equity and it represents delusion.
It's just not actually delusion right at the time.
The great thing, so like why does this even exist?
Why do investors agree to this?
Well, partly because YC demanded that they agree to it.
Partly because it's really good for companies.
The average document here is three to five pages.
It will be three or four documents representing hundreds of pages, lots of legalese.
You don't need a lawyer for this.
It can cost hundreds of dollars or less.
You can do it almost automatically using tools like Clerkey.
But still read the fine print.
You should read every fundraising document you ever have to deal with.
Every last word you really need to.
There are many, many stories of nightmares of people agreeing to things they didn't know they were agreeing to.
equity when you actually issue new shares to a shareholder is slow, almost always expensive.
You almost always need lawyers.
You're going to be giving those investors rights that you don't have to give.
when you do a convertible.
And those rights are important and important to understand.
They're usually called preferred provisions.
So again, read everything.
Okay, so I'm sure you guys all understand dilution.
Dilution's dead simple, right?
You're a shareholder in your company.
If you sell 20% of your company, you now own 20% less.
So if you raise a million dollars on a four million dollar post valuation, post money valuation, you've just sold 20% of your company, one million over five, 20%.
If you own 50% of your company, everyone with me, you've just sold 10% of that 50%, 20% times 50%, and now you own
That's dilution, simple, right?
Well, convertibles actually made that complicated to figure out, because you actually haven't sold yet.
So there's a representative dilution, but not an actual dilution.
As it turns out, when you do a pre-money convertible, the actual dilution that you're selling is
difficult to know because it depends on how much extra money, how much other money you raise besides on that convertible.
If you raise lots of money on lots of different convertible notes, understanding the actual dilution is complicated.
I actually wrote a tool called AngelCalc that helps you figure it out.
It's more complicated than I'm actually letting on because how you calculate the price that you actually get when you convert
includes things you might not expect, like future option pools for pre-money safes.
We've changed that, and now the standard YC document that Kirstie will go into more detail is a post-money safe.
A post-money safe is dead simple, mostly.
And it's dead simple in that if you invest a million dollars on that four million dollar post-money safe, you own 25%.
And you can be pretty sure that at that moment in time, you're really buying about 25%.
So it's good for investors because they understand.
And it's equally good for founders because you guys understand.
You guys have a good feeling for what your cap table looks like.
All right, I'm going to go through this pretty quickly.
You guys probably know all this.
Angels are usually wealthy people that invest their own money.
They usually invest for similar reasons to VCs, but they also invest because they're passionate about things.
It's a different sort of conversation when you're talking to someone who's going to invest their own money and how they close and what their decision process is than a VC, sorry, than a VC who is a professional investing someone else's money, limited partners.
So they have a very different approach, different process for closing.
There's also other ways of raising.
I'm not going to spend a lot of time.
There's all sorts of crowdfunding mechanisms out there now that usually don't play the major role in your fundraising, but often will play an ancillary role that they might help you fill out a round or fill out the amount of money that you're trying to raise.
Everyone's heard of an ICO, right?
An initial coin offering.
I had a conversation earlier in the class with Andy Bromberg, the president of CoinList, which helps companies do ICOs.
The vast majority of you probably want to do an ICO, but shouldn't.
You need to be building usually a certain kind of network for which having a cryptocurrency
You have to know SEC regulations backwards and forwards.
And even though there's big dollars associated with it, you should approach this whole topic with a lot of caution and educate yourself a ton.
So just again, part of the ecosystem.
Usually we talk in terms of rounds.
There's a lot of fuzziness in this now, but usually you might start your company by putting money on a credit card, and then you might get some friends and family money.
Usually this is sort of debt.
You don't usually give out equity here, but sometimes you will.
Then you raise a seed round.
We don't recommend you do equity in a seed round.
Usually it'll be on some sort of convertible.
And then you get into your equity rounds, bigger rounds.
Usually this is smaller amounts of money to greater amounts of money.
And you can do a series A, B, C, D, I've seen series F. And then eventually, if things go well and you don't get acquired, which could be things going well, you can do an IPO.
All right, let's talk a little bit about meeting investors.
I know I'm repeating myself here, but it bears repeating.
If you wanna meet investors,
Know what they've invested in.
Know what the particular person you're talking about cares about.
If you don't, you're at a disadvantage immediately, or you're certainly not putting yourself in the advantageous position that you can.
Work on this all the time.
You want to capture their attention in the first minute or two you're talking to them.
And I know this is a hard thing to say, but don't be boring.
I say it's a hard thing to say, because you guys all probably think what you're working on is the most fascinating thing in the world.
But it might not be fascinating the way you tell it.
You might tell it backwards.
You might come at it from the wrong way, which like every detail is fascinating to you, but you need to capture someone's attention.
You need to build a story that's compelling from the beginning.
And the simplest way to tell your story is usually the best way to tell it.
If you can bring a demo, if you can't fake it, bring a prototype.
It's so fast, especially if you have a software product, it's so fast to build things.
And even if you're building hardware, bring a prototype of your hardware.
Steve Jobs used to demand prototypes in wood.
The first tablet, the first iPad was in wood.
Anything to get a feel for what it's going to be.
Also remember, you're trying to convince the investor that you can actually build what you're talking about.
So coming completely empty-handed, well, you better be a really good storyteller if you come empty-handed.
Often forgotten is that you should listen.
You're not there to monologue.
You're there to have a conversation, to listen to what they have to say in terms of feedback.
It can be incredibly useful even if they say no.
Also, a good sign that an investor meeting is going well is when they talk at least as much or more than you do.
When you're pitching investors, you will suck in the beginning.
One of the marks of a successful fundraiser is they get better and better every meeting they have.
So yes, you should practice probably the first investor meetings you have.
It's not necessarily your highest target investors unless you're positive, you have it nailed.
But if any of you are golfers, you know that you can hit a lot of golf swings and never improve unless you get feedback and take in that feedback.
It's the same thing with pitching.
Pay attention to what happens.
Pay attention to how interested they are.
Pay attention to how the meeting went and what the feedback was and improve every time.
And do not leave an investor meeting without some sort of conclusion.
Now the best conclusion is a check.
or an agreement for a check.
We have something called a handshake protocol that you can look up as well.
Getting a handshake for a deal, getting someone to agree to give you money, that's awesome.
But if you don't get that, try to understand whether it's a firm know or whether there's next steps so that you can work towards getting that.
For most VCs, including angels,
Most people won't give you money on the first meeting.
Some will, but most won't.
For raising seed, I think decks are not that useful.
As an angel investor myself, I almost never even look at the deck.
I just want to look at the founder and hear their story and see how they tell it.
Many of you won't be comfortable telling it without a deck.
And some investors actually want a deck.
They're more comfortable too.
So you should probably have some short pitch deck.
In a guide to seed fundraising, I outlined the 12 items that are important to have in such a deck.
But don't create a story around the deck.
Create a story around your story and your product and your future.
And figure out how to tell it without a deck.
Because if you can't, well,
So you're going to be able to.
So word on negotiations, very brief word.
First, I hope you don't have to.
Hopefully you'll meet an investor and say, you know, you'll tell your story.
This is, we're building this awesome product.
We have this, it's great.
And we're raising a million and a half dollars on an eight million dollar cap.
And they say, I'm in for a hundred thousand.
No negotiation, no problem.
Now usually the most likely thing you might negotiate around is that cap.
And sometimes it's okay to state firmly what it is and sometimes if it's too high they might negotiate down.
But if you're not sure really what you're raising on, you haven't raised any money on, you're just talking to investors, it's okay to start talking to them about what they think is reasonable and try to zero in on what the right number is.
But if you do enter negotiations, just a few things to keep in mind.
What do I mean by empathy?
Well, understand what they care about.
Investors are different, each one.
If you're talking to an angel, they don't want to seem like an idiot.
If you're talking to a venture capitalist, they want to own a certain percentage of your company.
So there's this tradeoff between how much money they put in,
and how high the valuation is.
Understand the person you're negotiating with.
And if you don't, your probability of getting it right and optimizing your negotiation is pretty low.
If I'm negotiating with you and I'm an investor and I'm the only person there putting in money, I'm in a pretty strong position vis-a-vis you.
And sometimes you'll be in that position and that's okay as long as you get the money.
They're almost certainly better at you in negotiation.
So if you do get into a negotiation, a deep negotiation, the one thing you have on your side is you can delay.
You can say, I don't know.
I need to talk to my co-founder or my mother or someone.
Don't try to match go toe-to-toe with the pros in negotiating, especially with the VCs, because that's what they do.
And I've said this a few times, read everything.
Okay, coming to the end here.
Well, I've mentioned over-optimizing.
This merely means that the most important thing that you guys can do is build great products that customers love, and that has little to do with fundraising, except as an enabler of that.
So trying to get the last dime out of fundraising is taking away from that.
And it's usually counterproductive.
Now there are fundraising ninjas, people who can do anything.
And you look at them and say they raised $40 million valuation.
And again, it was like people were showering them with money.
You should not use them, most of you, as your model.
Figure out who the right investors are, meet lots of them, and then get a deal done.
Please don't be a bad actor.
It is a really small community, and that stuff gets around.
And this might not be the last startup you do.
Even if you've raised 90% of what you want to raise, that's not likely to be the last time you're going to raise.
Oh, and when you get your money, and this happened, don't go to Vegas and gamble it.
Think about, this is a weird thing for a second, think about what you're asking investors to do, especially when you're raising a seed round.
You're asking them to write a check.
A lot of money to you that you're going to have control of that money based on a promise of something in the future.
There's a lot of trust built in there.
Which is why, by the way, you shouldn't exaggerate or pretend to know things you don't know.
Because who's going to trust someone who's not being quite frank, who I don't get that feeling for?
with that kind of, you know, here's the money, see in a couple of years.
This is what they do, by the way.
If you think you can get away with something here, you usually won't.
If there's one thing, VCs aren't all brilliant, they're not actually all that good at being a VC, but what they are good at is sniffing this stuff out.
It's actually not a good way to go through life anyway.
But tell it straight, tell your story straight.
Now there are people, we know of them, we can name names who are masters of bullshit.
Don't try to be those people.
And when you get a know, which you will get almost all of you, don't take it personally.
And anyway, all you're saying is that their vision of the future is different than your vision of the future.
It's really hard to have an accurate crystal ball.
I think you'll all agree with that.
So don't take it personally.
Except maybe internalize that you didn't do a good enough job in telling your story of the future.
Fundraising is not the goal.
You go when you raise $2 million in your seed round, you high five everyone, it's great, and you have gotten to the starting line.
You're building a business.
You're building a product that people want.
You're trying to build something that's sustainable over the long term.
Fundraising is just one small step on the way to that.
By the way, that's another reason not to be competitive about it.
Dropbox raised their first round at like a two or $3 million valuation.
And it worked out okay for Drew and team, right?
Fundraising's not winning.
The company that raises the most at the highest valuation will not necessarily, or even usually, be the biggest, most successful company at the end of the day.
Investors actually do matter.
Now at some point, especially at seed, you need the money.
But the better you can do at choosing your investors wisely, investors who will make great connections for you,
who will help you build your product and who won't be a pain later, the happier you'll be.
You hear this again and again, you'll hear Ron say it several times if you look at that video I mentioned.
The important thing, the most important thing about fundraising is to get it done.
Get back to work, get back to the real work on the real goal which is building your great company.
Good luck, I'm done and I'll take some questions.
So the question is about if you're an international entities in London, what advice would I give to fundraise?
So that's always a tough one because it kind of depends and built into that question where should I become a US entity etc.
Most US based, exclusively US based venture capitalists will not invest in an overseas entity or they'll do it
with a lot of hesitation.
So it's certainly, we require that everyone become a Delaware corporation at YC.
It's pretty cheap and easy to do.
So if you do intend to raise in Silicon Valley or elsewhere in the States, I strongly recommend you do create a US entity.
If you're building your business in London or in the UK overseas,
There is a venture community there and a lot of times they'll understand your business better than a U.S.
So you have to make that trade off as you figure out what the right target investors are.
It's a complex equation and it's a little hard to answer into its detail in this context.
What's critical to get a start looking for if you can integrate your own enterprise in general?
The question is look for investment and then incorporate or incorporate.
You can do an incorporation using Atlas if you're international from Stripe, sort of instantly.
I think that's the wrong way to think about it.
If you're going to fundraise,
You should incorporate, because a lot of you will be LLCs, or you are not even LLC yet.
People won't invest in that stuff.
So incorporate, so that's not a barrier.
So you don't have to say, oh yeah, we're doing this in LLC.
It just doesn't seem right.
Incorporation is dead simple now.
To mention two possibilities, equity and control.
When equity is controlled?
So the question is, when is equity preferable to convertible?
There are companies that raise up to $30 million on convertibles.
Convertibles are fast and simple.
So when fast and simple is your priority, convertibles are great.
For an investor perspective equity is often preferable because like I said you're just buying this promise and you have no rights and Usually when you raise larger amounts of money equity works better all around because
There's a little more fiduciary management if you raise five to ten million dollars you tend to form a board and You have people who have to talk to about how you're spending that money and hopefully their experience and can help you through a lot of the issues that you'll run into because they've seen it a lot of times so so generally When you're raising seed and you want to go fast and you're just building and trying to get product market fit and you don't have time and you don't want to spend $25,000 with lawyers convertibles
But when you're raising a huge amount and the company's getting serious, usually equity is preferable all around.
So in one of the slides, you talked about exaggeration, do not exaggerate, right?
So I was trying to understand how do we draw lines between not exaggerating, but still sharing our vision?
because you're talking about the future of the company.
So it's actually a good question.
One of my sites said, don't exaggerate.
And the question is, but what about your vision?
Well, a vision by definition is an exaggeration.
I wouldn't even look at it that way.
Don't exaggerate the facts on the ground.
Don't try to hide something that's a problem by either lying about or obscuring
However, when you're telling your story about how you're gonna take over the world, tell your story.
The caveat there is don't tell something stupid.
Don't tell a story that beggars belief.
Because remember in the end it has to be believable.
So tell a story that is credible, yet impressive.
Hey, if you saved up money from consulting or an exit or whatever, it's a fun doing this style.
It was a rough way to put it in, but it's your own money, but it's basically a seed round of money.
So the question is, if you're putting your own money into a company, what's the right way to do that?
So I'm not a lawyer or an accountant.
So you might want to, if you're here, save that question for Kersti, but
Generally, I will say that you should just buy equity in your company.
And there's a lot of ways to do that.
You can do a convertible.
You can just buy the equity.
Probably in the beginning, especially because you don't need a lawyer to negotiate with yourself.
And if you do, that's a separate issue.
You can probably just buy the stock and the company at the right price and just you might want to get a little legal advice to get that right or at least do your research But I've seen people do that it works.
Oh How you do it is you just rate the safe and give yourself the money
Like, that's the thing about this.
You guys are managing the money.
You literally, when you do a safe, you write this thing, you sign it, and you give them your bank account and they wire you the money.
And then you spend it, but you spend it keeping in mind that you are now a fiduciary for that money.
You have responsibilities.
You're not, that's just not your money.
It's the company's money.
So you said YC invests on a safe, that's true.
But what's your question?
Actually, in the future, our investment's going to be entirely on a post money safe.
We just announced our new deal, and that's what we announced.
It's $150,000 for 7% on a post money safe.
What's the definition of traction for a pre-sale startup?
The government talks about traction, there's no definition for it.
The question is, what's the definition of traction indeed for a pre-sale startup?
Well, if no one's using your product, you have no traction.
The definition of traction is usage of some kind and it can be any kind of usage.
It can be free usage or it can be paid customers.
Now, you might ask a better question, which is what's the definition of good traction?
And the answer is unfortunately is it depends, right?
Usually, the one thing to look at with traction is growth.
How fast are you growing?
Because like, you know, you can go to a VC and say, I have a million dollars in sales.
And that might sound really good.
A million dollars in annual recurring revenue.
If five years ago you had a million dollars in annual current revenue and now you still have a million dollars in revenue, they would much rather see someone with a hundred thousand dollars in revenue that grew that over the past month.
One question at a time, please.
So I asked the most important one.
So other than referrals from other people, you know, startup founders or other investors, what we recommend are best practices to connect with investors other than just coding them down?
The question is what are the best practices for connecting with investors?
I think you said other, a lot of the things I'm gonna say, but I'll say them anyway.
So clearly the best way to connect with an investor is via someone who knows that investor.
The absolute ultimate best way to connect with an investor is via an investor who invested in your company who will connect you to another investor.
That is the best possible introduction.
In fact, it's a pretty bad introduction to have an investor introduce you to someone if they passed on your company.
It doesn't really scan very well.
The other way I'd say is find other founders who have investors and get them to introduce you.
And other than that, yeah, you have to cold email, but that's what they do.
They look for cold emails and, you know, that you have to pound the pavement.
There's no way of escaping that.
How do you know that each of these funds need funding for filling out a product?
So along those lines, the one thing, if certain money needs to be allocated to our developers and some other staff that may be required and how do you itemize that when you're raising
So I think the question is how do you explain the use of funds when you raise your seed?
I don't think there's any formula for that.
I wouldn't get into the weeds too much.
If you're going to raise a million dollars, you say, look, with a million dollars, we get here.
We achieve this milestone.
We get to this level of revenue.
And the way we're going to do that is by hiring three engineers, two salespersons, and three support people.
That staff is going to cost us this much money.
And that's why we're raising this much money.
The thing I was going to say, it seems like if you use that in, let's say, a pre-seed stage, a regular seed stage, it's quite a problem to work with.
And, you know, if you use the pre-seed or the seed, maybe like a post-seed or something like that to create, it forces you to, to a price ground if an extra piece is inclusive of all other, other instruments that seems like, has a problem.
So the question is, is there an unintended consequence of the post-money safe that it will force founders to do an equity round sooner because the definition of a post-money safe is that future convertibles also get diluted by that post-money safe because it's post-money.
So the answer is, no, we haven't seen that because we just launched it.
So I don't think that's that likely.
The nice thing about a post money safe is it's clear.
You know what percentage that was sold.
So if they have a percent of the company, they have a percent.
By the way, if you do a post money safe and after, if I invest $50,000 at a $5 million valuation, I have a percent.
If later you invest $100,000 on a $10 million safe, after me, and it's a post-money safe, you own 1%.
So I suspect that your concern will not become reality.
Financials, five-year projections.
What sort of financial projections should you have?
If you run into an investor who is asking for five-year projections at seed, you've run into what we locally call a noob.
They don't know what they're doing.
Who has five year productions at this point?
In fact, if you can tell what you're going to do about for 12 or 18 months, that's great.
When you raise future rounds, series A's and B's, you're going to start to say like, okay, so you have 12 months of revenue or two years of revenue experience.
What are the next two or three years look like?
You'll be wrong, but at least you can do that.
Now you're just so guaranteed to have error bars that are 50% or 100% why bother?
So I would actually de-prioritize any investor who asked for that sort of revenue projection.
How effective, like if you're doing a B2B pitch, how effective are customer testimonies?
Like if you've gone to the public and replicated the process, business would have.
So the question is how effective are customer testimonials?
Well, I would generally say not very.
One of the most common slides we get rid of in demo day is our customers love us.
You know, that's great, but do they pay you?
If they love you enough to pay you, that's interesting.
If they just love you, well, you know, of course you're gonna find the customers that say they love you.
Now it is true that sometimes what you're doing is so radical or changes their life so much that having customers who are willing to talk to venture capitalists who serve as references and venture capitalists, less at seed, more at later rounds, will check customer references.
What does that mean dynamic or statically?
I've never seen this dynamic thing.
People should know what they have.
Like you mean dynamic based on performance or something.
Oh, so you're sort of vesting into your stuff.
If you have a vesting schedule, that's fine, and you can show them that.
I don't think it matters.
The math is the same in the end, right?
Common splits for how much equity do you people generally sell off at C, AB, and C?
So the question is, what sort of dilution should you expect at each stage in the company?
And there's just very general rules of thumb for that.
We usually say 10% to maybe 20% at seed.
If you sell as much as 30%, we start to get a little squirrely.
20, 25%, sometimes 30% at Series A, and after that it's two variable to talk about.
It depends on how well the company's going.
Series Bs are usually 20% or less, but again, it really depends.
So the question is what's the best way to research angels and VCs?
Of course the best way is to get into YCs, so you should try.
Because we have a database.
There is lots of information online that you can look up.
But I would also, I think the very best thing to do is to talk to as many founders as you can who are familiar.
Like you can look up what their portfolio company is and see if you know anyone in that portfolio company and try to get connected to someone who has some knowledge of how that investor was.
I have a blockchain company and how do I address traditional VCs that are a bit cautious when it comes to blockchain and on the other hand,
this is a very this is a this is a an individual question for his company which is it seems like it's a blockchain company without crypto and I'm not really sure I know what that means but
So the question was, how do I address conventional VCs that are afraid of blockchain and non-conventional blockchain investors who expect him to be more crypto-y or something?
You have to tell a really good story to each.
A lot of conventional investors just won't go there for good reason.
There's so much fraud and so much uncertainty
outside of the fraud in that space, in the ICO space especially that a lot of people run away.
So I would tend to just stay with the investors who are familiar with it and then explain why whatever strange configuration of your company makes sense for you.
I want to come back to the 150,000 new deal from YC.
Yes, so I'm trying to understand because generally companies tend to raise their C or C after YC, or maybe a few months after.
And 150,000 suggested 2 million dollar valuation.
Is that where companies are going to raise their C?
So the question is, does YC's $150,000 investment handicap the companies that do YC because the imputed value of the company is too low?
Look, we don't even actually have a cap on our investment, because we don't think it's appropriate to think of it that way.
We've been investing at this level for many years now, and the vast majority of companies that go through YC raise seed, and the average cap tends to be over 8 million now, so it's clearly not a handicap.
The reason you do YC is because it increases your value.
And increases your probability of success and Investors get that so they don't look at that they look at that as the sort of the cost of doing business with I see That's correct Yes This is gonna be the last question so hopefully it's a good one
So I just want to know a little bit about what you mentioned about financial projection versus your vision because one of the way to reach to investors at some point in your company will be a billion dollar company.
That's some advice I got from the world that you want to produce.
So what is coming from that like is invariably somewhere related to some financial projection?
I'm not sure I understand the question.
It is something to do with, how can you square the fact that we're supposed to be a billion dollar company and yet we don't make financial projections?
You shouldn't make long term financial projections that are complete and utter bullshit.
And the vast majority of you who try to make a long-term financial projection pre-product or when you have one or two customers, it's a joke.
And if an investor asks you to do that, they're not very smart or they're not very good investors.
However, that doesn't mean you can't talk about your opportunity.
You can't talk about the fact that, look, this business opportunity is enormous.
We have these customers who have started using our product
in a very fundamental, very deep way.
And they're gonna be our customers forever.
It shows the customer need, and there's many, many, many thousands of those customers.
If I just get 5% of that customer base, I'll have $100 million in revenue.
And then I'm a billion dollar company.
But that's different than making a financial projection.
You're not actually projecting the timeframe to get to 5%.
You're just saying, imagine if we got those customers.
Okay, thanks very much guys.