
Fundraising Mistakes Founders Make - rickharrison
http://blog.samaltman.com/fundraising-mistakes-founder-make
======
webwright
To me, one of the biggies is raising too early. To Sam's point, you want a
competitive environment. To get that you want to obviously be a good
investment to as many investors as possible.

If you don't have some combination of an amazing v1 product, a traction graph
that's moving in the right direction, credible investors already on board, a
big/timely market, or a top 5% team, you're almost certainly fundraising too
early... And you should do whatever you can to get one or more of the above.

See: [http://andrewchen.co/2011/06/21/video-the-anatomy-of-a-
funda...](http://andrewchen.co/2011/06/21/video-the-anatomy-of-a-fundable-
startup-by-naval-ravikant-of-angellist/#)

(note: salesmanship can trump all of the above)

~~~
DenisM
It's sort of silly though - founders already take risk with years of their
life going nowhere, why should they also bear the entirety of the financial
risk? Isn't the purpose of early stage investment to validate the idea? And by
contrast late-stage investment is to grow the validated idea? It feels like
these days everyone wants to invest only in validated ideas. It just feels
suboptimal that hardly anyone ever wants to finance the actual validation...
Am I missing something?

~~~
ddt
The "graph moving in the right direction" doesn't have to be impressive in
absolute terms. If I can prove that I have 100 paying, engaged customers this
week, 50 last week, 25 the week before, etc. I've proved that the idea
resonates with a market, and its growing. Note that this is still early stage.
You have to be able to prove _some_ indication of longterm value though.

~~~
jkarneges
If you have paying customers with consistent growth then you are well past
idea stage.

I think DenisM's point is that founders often need to be somewhat wealthy on
their own in order to create a product in the first place. This doesn't seem
like an optimal division of responsibilities.

------
chollida1
I don't know Sam, but I really like this experiment he's doing with writing.
Lot's of decent articles being written a a high speed.

It's almost like he's trying to replicate Paul Graham circa 2004- 2008.

I haven't seen an article yet that breaks any new ground, ie he's still
looking for his "blub paradox" article, but all his articles generate
discussion.

Just look at his article on AI from yesterday. It didn't really break any new
ground in the AI conversation and it got 260+ comments.

~~~
lawnchair_larry
Except unlike PG, he hasn't really established authority on what he is writing
about (other than perhaps a confusing endorsement from PG). What are Sam's big
hits?

Edit: That sounds meaner than intended, but it's actually an honest question.
How does this guy share a top 5 list spot with Jobs, Larry, and Sergey? How do
we know we should take him at his word when he didn't learn these things be
being successful doing them? I feel like I'm missing something.

~~~
devfeed
But PG wasn't an established authority back when PG was writing fast. I
remember reading PG in 2006, and you'd read lots of snarks on the tech forums
of the time (Slashdot, Digg): who is this guy, and why should we listen to
this bored washed up multi-millionaire who sold his startup to Yahoo? He
hasn't done anything of note in the past 10 years! (They said the same thing
about Philip Greenspun too, who was also writing at a faster clip back then).

Look, at the end of the day, "established authority" is only loosely
correlated with worthwhile meaning. At some point you're going to have to move
past the author and evaluate the words on the page on their own merit.

~~~
lawnchair_larry
> At some point you're going to have to move past the author and evaluate the
> words on the page on their own merit.

For this type of writing, you can't. You don't have the experience or the data
to judge anything. That's just how expert advice works. It's not falsifiable
to anyone that would be learning from it, so that's why the credentials are
important.

------
tlogan
This is great but I will offer a simplistic view how to raise money.

First, you need to get "social proof". Getting accepted into Y-combinator is a
very good one. Or if you already sold a company then you are golden. But if
you are super smart working in large tech company such as Yahoo! for 15+ years
- good luck. Especially if you are over 40. When you are 40 it is easier to
convince Discovery Loan to give you 100K loan than seed round from any VC.

Second, you should not have any revenue or god forbid any profit. You might
think that is needed but actually revenue and profit are bad for raising
money: investors will look your numbers and make projection based on these
numbers. It much easier to sell "blue sky" than business with actual revenue
and profit.

So to raise money:

    
    
      1 build "social proof", 
      2 make powerpoint presentation, 
      2 go raise money

~~~
wh-uws
If you worked at large tech company for that long and didn't make enough
connections, learn enough, and/or save enough money to start a startup on your
own...

I wouldn't invest in you either

------
cwilson
This is a great compilation of wisdom passed on while participating in YC,
plus lessons learned I can appreciate 1.5 years later. Well written Sam.

My personal favorite on this list is to focus on what you're most passionate
about during your pitch. This should drive the entire conversation. Investors
do not expect you to know everything from day one. Don't go into a pitch
trying to have the perfect answer for every question, focus on what you do
know and can speak passionately about.

------
beat
This basic point is something I keep thinking, too… either you have your shit
together, or you don't. If your fundamentals are strong, you should be able to
get funding easily. If your fundamentals are weak, no amount of would-be
cleverness will make funding viable.

If you want to impress investors, impress your customers.

Interestingly, this just falls out of something I've learned from years of
developing big systems, which is that the line between success and failure is
narrow, but the grounds on either side of that line are broad. So back of the
envelope calculations that strongly suggest one conclusion or the other are
almost always right, assuming there's nothing wrong with your analysis.
Because of this, I've learned to not be pedantic about precision. Quick
decisions are usually more effective than cautious ones.

Maybe that's why I've set out on a path away from the enterprise and toward
entrepreneurship.

------
jheriko
No 1. by miles and miles is fundraising at all.

Just saying, but nobody successful I know spends or spent any time raising
funds for their company that wasn't just saving their wages.

The one case I know of where they tried (after already being successful I
would add) they were already doomed before going down that path ... it just
took a while for it to come to fruition. Given that the only people I know who
thought this was a good idea lost their business from right under their nose
anyway I'm not inclined to think that in general it is a good idea.

The small number of spectacular successes that came from VC capital make it
seem more reasonable as a choice than it is... they also make it easier for
VCs to invest and see a return because some of those spectacular success are
worth a lot and more than make up for the fact that without them its just a
game of losing money constantly...

~~~
ballard
It's push vs pull. If you build value, investors will beat down your door.

------
namenotrequired
> _So don’t do obviously dumb things like talk about potential acquirers in a
> seed round pitch - that will suggest you’re not trying to build a really big
> company._

Question, should one talk about potential acquirers - specifically, those you
have offers from - at _any_ point during fundraising?

~~~
nairteashop
Acquisition offers are a great external validation of both your product and
the market you're in. So my take is that it's a very positive thing to talk
about any potential acquisition offers, _as long as you stress that that 's
not your end game_.

Take for example Drew Houston turning down the acquisition offer from
Jobs/Apple back in the day; probably did wonders for Dropbox's valuation in
the following round (and very rightly, if so).

~~~
namenotrequired
Great point, thank you!

------
bsder
"Not hearing no"

I've never heard an investor actually say "no". They will hem, haw, delay,
excuse, etc. and do everything except give a definitive "no". You just have to
learn to treat "maybe" as "no" until you decide it's worth talking to them
again.

I'd love to have an actual "no" from an investor.

It's like dating: "no" is no. "maybe" is no. "yes" is maybe until you've
closed the deal.

------
adamzerner
> It’s actually quite simple; if you have a good company, you will probably be
> able to raise money.

IMO, investors tend to be very formulaic. Traction + social proof + impressive
team etc. The formula might be a good heuristic, but I think that it misses
out on some genuinely good companies.

See [https://medium.com/p/2ef77c6acb](https://medium.com/p/2ef77c6acb)

------
somberi
As someone who has found a startup, one point I would add is - Make sure you
are within 50 miles of where the VC activity is. That for practical purposes
means this; be based out of SFO (+Bay Area), NYC (+Boston).

VCs want to fund businesses that reach all over the world, but they themselves
must be reachable within an hour or two commute.

------
yid
_> Some founders try things like carefully timing news articles, casually
mentioning to one investor that they'll be having dinner with another
investor, claiming their schedule is really packed except for one specific
hour, and other tricks - _but if you just build a good company, you generally
won’t need to. __

(Non-italics mine) This is such wonderfully simple advice. Investors, by
definition, want to make money. Build something that can, show them it will,
and they will give you an investment. If you can 't raise money, you're doing
something wrong with the first two -- so that should show you where to focus
on instead of using poorly thought out social engineering tricks.

------
earbitscom
I would second webright's comment about raising too early. One other mistake
we made was underestimating the number of investors we needed to speak with in
order to create momentum and a competitive environment. You definitely do want
to raise in parallel, and in order to truly do so you should overshoot the
number of people you plan to talk to so that you don't find yourself done with
all of your leads and not with the full amount raised. Chase more leads than
you think you'll need to.

------
wellboy
Normally, I find Sam's articles maybe interesting, but not that insightful.

However, this one is really awesome, it pins down the dynamics happening in
fundraising exactly. It actually feels a bit Paul Graham like, very good
article.

Especially liked the part about not being arrogant. I'm always trying to be
very assertive while actually sounding really nice and likeable, it's a very
important art to master.

------
ballard
With actual rockstar startups not burning through cash like it's their own
personal vacation from profitably and reality, the dilemma is often centered
between reasonable frugality and trying too hard to seem frugal ending up
penny wise-pound foolish.

FWIW I'm impressed more by how little actual (non-bullshit numbers) cash and
time went into something.

------
ballard
Business people that don't add value tend to focus on appearances than
substance because it's an easier business theather to bikeshed than to show
progress and interest. The upside is that anyone that's built a business
before is unlikely to be fooled by clever packaging or a well-defended
presentation.

------
cindywu123
i wish i had this when we were fundraising for experiment.com

------
awkwit
We've been in fundraising mode for the last 6 months and some of Sam's points
really shine through.

In particular the valuation bit strikes close to home.

------
rjf90
Great article, comes at a very good time for me and my company.

------
michaelochurch
_Beware, though, that saying things like “our round is closing really fast”
when you have no offers usually backfires. Investors talk and will call your
bluff._

True, but this sort of investor collusion is unethical and only (possibly)
legal because private stock isn't regulated in the way that publicly traded
stock is. In fact, the whole and only purpose of the VC-funded economy is to
take stock strategies that were made illegal 30-100+ years ago and apply them
to fast-growing, private, volatile tech stocks.

Shit like this is why most of us who are paying attention hate VC, and why the
U.S. has gone from admiring Silicon Valley to vilifying it (and justly so; the
ethics in Wall Street are way better than those in the VC-funded world.)

That this kind of scumbag collusion is tolerated is just unconscionable.
Investors are supposed to be competitors, but they compare notes so much as to
function as a cartel.

~~~
minimax
Collusion is a pretty big charge. If investors are upfront about the fact that
they talk to each other (and, hey, it's right there in the blog post) then
investor A calling up investor B to verify he has made an offer to a startup
isn't collusion. It's just due diligence. I'm also unclear about the analogous
situation in the public markets that you alluded to.

~~~
michaelochurch
On the public markets, using social sway or inside connections to
intentionally up- or downregulate the reputation or market price of another
company for personal profit (say, a pump-and-dump scheme) will put you in
prison. No question about it; it's unambiguously illegal to do that. You don't
get to, for example, spread negative rumors about a company and ruin its
reputation because you think you should be able to buy it at a discount.

Investors do the same thing, and it wrecks peoples' careers and makes it hard
as hell for people to get started amid that feudalistic reputation economy.
The excuse is "well, investors talk".

I say: fuck that and fuck them. If Silicon Valley entrepreneurs are really
going to tolerate that shit-- which only hurts them-- instead of agitating for
proper laws to be written, then they're a pack of self-hating losers for not
knowing how to fight for themselves.

~~~
minimax
It is illegal to give false or misleading statements in order to defraud other
investors, but it isn't illegal to "talk your book" if you aren't outright
lying about what you are saying. You can flip on CNBC and expect to see lots
of hedge fund managers hyping up their positions. That's not fraud.

If you are saying there is some fraudulent behavior involved in one investor
calling another investor to fact check a founder's claim, I'm still not seeing
it.

~~~
michaelochurch
The main difference is that, in this case, the investor is playing to screw
the founder, not other investors.

If you want to argue that it's only unethical but not strictly illegal, then
fine. I still think we should aim to do better, and it's sad that Silicon
Valley doesn't care about better than "not clearly illegal" when it comes to
ethics.

