
Fundraising Rounds Are Not Milestones - craigcannon
https://blog.ycombinator.com/fundraising-rounds-are-not-milestones/
======
dlevine
Having worked for a couple of startups that raised large Series B rounds early
on without much traction to show, I agree with this analysis 100%.

In both cases, the round was raised because the founders were charismatic
serial entrepreneurs who knew how to play the fundraising game. Neither
company managed to get traction after raising the large round, and I believe
that having a lot of money in the bank made the problem worse. When you have a
large cushion without product/market fit, there is a tendency to spend money
quickly in the hopes that it will somehow lead you down the right track (VCs
often encourage this behavior). Both companies scaled significantly without
much real revenue and later ended up having to cut back (one managed to cut
expenses in time to have runway left, while the other never did and ended up
blowing through an enormous quantity of money in record time).

As a startup employee, I would never again use a funding round as a sign of
traction. My current strategy is to look at the fundamentals that allowed the
company to raise the round, and use those to determine how the company is
doing. If things seem too good to be true, they probably are.

~~~
ThomaszKrueger
Sadly the story of my current professional life. Rapid expansion first couple
of years, two layoffs, now looking for a buyer.

------
ChuckMcM
While I completely agree that fundraising itself isn't a milestone, it is
often a signal of an internal milestone successfully met. And since startups
rarely tell us what is really going on inside, people following along outside
report this indicator so that other interested parties can follow along.

One of the unusual ways that playing the card game Bridge is like startup news
is that bidding in bridge is saying something which is related to what you
have in your hand but not explicitly what is in your hand. And bidding
conventions allow the other players to also follow along and guess what you
have. So it is with startups and funding. You get a seed round there is enough
interest to give you some money, then there is a pause and then either you get
a series A and everyone "knows" your basic idea has at least some legs, or you
don't and people start to wonder if you're going to flame out. Then if you
continue hiring without another funding round everyone gets really excited,
but if you did raise the series A people put a pin in the board to check in
again with you in a year to 18 months. At which point you're either growing
without doing a round, or your out trying to raise a series B. Depending on
who you talk to, some folks think series B is the point where you've got a
product you have de-risked it to the point where you can get to 1.0. Others
think it is the round where you start bringing your vision to market to
convince the larger world you're for real. Series C was the "big one" back in
the day, that one took you into production and made you a going concern, if
you did a series D at that point it was to get ready for your IPO. Series
after D were typically "bad" signs of encroaching zombieness or desperation.
Not self sufficient, but not clearly established enough that the general
public would believe you were going to make it.

So I agree that funding rounds aren't milestones, but they can certainly be
interpreted as a count down.

~~~
AndrewKemendo
I don't follow. You say...

"you get a series A and everyone "knows" your basic idea has at least some
legs"

but then you say

"some folks think series B is the point where you've got a product you have
de-risked it to the point where you can get to 1.0"

I've been in the valley raising money this last year and what I saw no venture
firm will look at you for a Series A before you are on V 2.0 with outsized
traction and breakneck growth.

Where are these companies getting Series A money (3 MM+) without a V1.0?

~~~
ChuckMcM
First, disclaimer, all generalizations about VCs are wrong, including this
one. :-)

I've gone through the process three times (twice as founder, once as executive
level employee, web product, HW product, web product) and the commonality of
those three times was risk evaluation. There is a ton of stuff written about
startups but I think of there being four major phases, Idea Risk, Execution
Risk, Market Risk, Capitalization Risk.

Idea Risk is just that, the idea sounds stupid and we're sure nobody wants it.
So maybe you get someone who has enough free cash that they throw some money
your way as a seed round/party round. There are probably all sorts of
questions about the idea and whether or not people will buy it and whether or
not it is 'sticky' enough to become part of somebody's daily routine. All
basically around is the idea something worth checking out. People get past
that in a variety of ways, sometimes it is iterating several times on
different visions until they are getting sales for real money or commitments
by larger partners in the form of Purchase Orders. Time to move to the next
step, execution risk.

Execution risk is that you won't be able to build a team to put all the moving
parts together to create a functioning business around your idea. At this
point you need to hire some people and actually pay them salaries, and have a
health care plan and an actual office (perhaps) to meet with people. That is
series A time. Sometimes the investment is modest and this looks like a 'big
seed round' sometimes it is a bit larger than that. It is just enough money to
put the team in place, show all the moving pieces of the plan.

With the data from that stage you enter market risk. Can you capture people's
imagination? Is there a competitor with a better domain name moving faster? Do
support costs grow faster than revenue? These are all market fit questions and
they need some capital to show how your product moves into the market and
starts to grow. This is where you want to raise just enough money to get to
the point where you're cash flow positive and banking the training of
delivering, developing, supporting, and selling your thing what ever it is. At
which point you're primary risk becomes capitalization.

Often times you'll need chunks of cash to grow, add a data center location,
hire a support team in a local market, localize your product for
international. These thing take 'chunks' of cash to get going and then
steadily burn cash afterwards, you need to raise enough cash in your round C
to meet those cash crunches and support the growth to meet your revenue and
profitability goals.

In the ideal world once you've gone through a series C you have enough
cashflow to grow organically and accumulate reserves for those future 'chunky'
expenditures.

On the other hand, if this is the nth startup you're doing and the previous
n-1 have netted their investors excellent returns, you can say "Hey I need $5M
for this next one, who's in?" and a suitcase of money will land in your bank
account. Everyone loves a winner.

~~~
leegreenwood
This four step qualification of risk is one of the smartest models I've seen
for evaluating/validating startup progress.

I've been through multiple businesses, and seen them fail at all these
different hurdles, for the exact reasons you elicit here.

I may have to steal this model for my latest pitch deck.

Bravo.

------
jedberg
The best advice I got was from a VC -- he said, "I'm a salesman, my job is to
sell you money".

If you look at it from that perspective, getting funding should be about as
celebrated as the farm that buys a new combine or the factory that buys a new
robot. You're celebrating a huge new liability on your books.

VC investment is something you buy that you hope will provide more value to
your organization than it costs, just like any other capitol outlay.

~~~
qwrusz
None of the things you listed are liabilities.

ALOE

Cool quote though.

~~~
jedberg
I made the assumption that they all come with loans and interest payments.

~~~
qwrusz
Gotcha. Assumptions definitely are liabilities ;)

------
mbesto
> I believe founders, investors, and the tech press should fundamentally
> change how they think about fundraising.

This is wishful thinking. The concept of "fundraising rounds as milestones" is
an externality of the VC game that no one can control (even YC for that
matter).

Tech press absolutely love fundraising numbers. It gets the most views.

People in the "startup world" (especially in SV) socially need a proxy for how
"serious" a business is, given that there are so many damn startups now. "Oh
you work for a startup, great, best of luck...", "Ya and we're backed by YC
and just raised our Series B".. _eyes perk up_. "very interesting...I might be
able to help you".

This is simply human nature.

~~~
throwaway91111
It's the closest people get to an internal view of a private company,
especially a new and/or small one.

------
kevinburke
Series A/B/C rounds make good headlines because they work mostly the same
across companies and the press knows how to report on them. Companies like
these because the announcements lead to sales leads & are good for recruiting.

If you are e.g. a Techcrunch reporter, what statistics should you report on
instead? Number of users can and is gamed by including fraudulent signups in
counts. "X hits 100k revenue" is good but companies usually want to keep it
confidential.

~~~
mwseibel
If you are a startup reporter I think you can get signal from customers/users
and you should be writing about features/product improvements instead of
funding rounds.

------
lacker
I like this article except for the conclusion. Of course you can over-optimize
on fundraising. But, you can over-optimize on almost any milestone. The point
of a milestone is to communicate to a wide audience that your business has
achieved something important, in a standardized way. That is exactly what
fundraising rounds do - they communicate to all of your employees, customers,
and (most importantly in my experience) potential hires that you have raised
more money, with all of the raised expectations that go along with it. So I
think the right conclusion is that fundraising rounds _are_ a key milestone,
and you should treat them as such, there's just a danger of overoptimizing on
them.

~~~
mwseibel
How do you explain all the situations where companies raise money and no/very
little value has been created?

~~~
lacker
Like any milestone, it's possible to get to milestone X but fail to get to
milestone X+1.

------
tyre
This is great advice—many founders reverse the cause and effect here.

We think of them as milestones in the company's success. For example, as a
SaaS company selling to government (often bucketed with enterprise), us
reaching "Series A" means we have a repeatable sales playbook and defined
customer acquisition funnel. It may be inefficient, but we can say that
roughly X dollars in equals Y dollars out.

The funding is a tool that can only be used once we have reached that
milestone in our company's maturity. Seed stage companies can't put $10m to
work, and shouldn't try to, because they aren't at that point in their
development.

------
OliverJones
"[Fundraising] is literally cash."

Right. It's a fancy payday loan. It's cash you owe to other people, often with
real fun participating-preferred shares making sure they get theirs before you
get yours, and as you get yours.

DO NOT SPEND THAT CASH ON FINE WINE or fancy office decor or other
nonproductive stuff.

Making the news for closing a round is (I'm told: I never won the lottery)
like making the news for winning the lottery: you'll suddenly have lots of new
best friends hoping for some of the money. The difference is, if you give away
your lottery winnings, you don't have to also pay them back tenfold to the
lottery commission.

Getting a payday loan is nothing to brag about. Getting a round of financing
isn't either. It's just a way to fuel your business. Be careful out there.

~~~
edblarney
A 'raise' is a huge signal that the company has operated successfully in at
least some areas, and some 'intelligent people who should know better' are
making a 'big risky bet' on the outcome.

That someone is willing to put $X in likely an entirely unprofitable company
is a very strong indicator that they are doing something right.

Think of it this way: if 95% pitches don't get funding, it means that funding
is roughly a sign the company is in the top 5% of companies at that stage.

A round A raise means they are the best of those who got seed and didn't get
to round A. A seed is for those who made it past Angel, because so many don't.

And - 'money is not just money'. Money is the essential fuel, without which
it's nary impossible to build a company.

There are tons of unfunded companies that would be able to be considerably
more successfull were they to have 'more money' \- but they just don't fit
some investors criteria, or they don't have the right fundraising skills.

------
dmritard96
well, someone should tell Techcrunch this...the fact that fundraising
announcements dominate startup/media relations arguably makes fundraising a
stage lingua franca for better or for worse.

A few thoughts on fundraising as a milestone - I think it wholly depends.
There is no doubt that it is merely the ability to convince an investor that
you will make them a bunch of money, but when I see founders that I know raise
a round and know that they did on merit, sales, shipment (I am in the hardware
world) etc then I think it is a milestone in that its often based on
accomplishment. There is another side here though, I have seen a handful of
massive rounds raised without anything besides a founder with an idea, and a
background. In particular, there are at least a few hardware startups (I won't
call these out explicitly) that raised north of 10M simply because their
founder was a VC and the old boys club of silicon valley tends to really place
a lot of value on trust over execution or at least as a substitute. Similar
for founders that have executed in the past. Most of these companies have also
downsized and struggled a bit from what I have seen after burning massive
amounts of cash. My observation is undoubtedly wildly biased and anecdotal but
I have seen a surprising number of companies without a shipping product raise
10M-30M which is seemingly crazy to me.

------
AndrewKemendo
Even back to 2011 I remember reading similar things here on HN about how
raising funds isn't something that is a milestone. I think that is a generally
good rule when thinking about the question "can this company last long term."

That said, I think this analysis works for companies that do something small
to start with, fundraise on fundamentals and grow from there.

Where I think it doesn't make sense is for hard-tech companies that can't
"start small" in the same sense and are moonshots from the start. These
companies will take years to show an MVP and are actually making new core
technologies: SpaceX, Cruise etc...

So having a 100M seed round might be necessary and is a huge win because you
can actually hire the people and build the infrastructure you need for
success.

Now the big question is, are those the types of companies that can be
successful as startups, or (what I often hear) should we just only assume
bigco can execute on those?

------
joelg
"When a measure becomes a target, it ceases to be a good measure."

\- Goodhart's Law

------
adamzerner
I agree with the core point and it's nice to have YC's vote of confidence on
this issue. However:

1) While the value of fundraising is currently overrated, it's important to
not go too far in the opposite direction and underrate it.

2) I would have liked to see an objective alternative proposed in this
article.

~~~
pbiggar
RE 2): The article proposes "success". Each company and perhaps founder group
will have it's own definition of success, but that's what you should aim for.
Do you want to be profitable? To change the world? To be a unicorn? Whatever
milestones correlate with that goal - that's what you go for.

~~~
adamzerner
Fair point, but the author still could have given some examples of common
ones.

------
edblarney
Yeah yeah yeah, I get it. But no.

Raising money is one of the hardest things on the planet to do, right after
'building a great product and getting revenue'.

And you don't get money 'just because you have a good product and company'.

Let's not be naive about that - there is a lot of 'game' to raising money, and
to have done that successfully is a huge 'win' for the founders.

So sure, it's 'not a milestone', but really it is. The founders have to put so
much energy into it, it's very risky, and since most companies absolutely must
raise subsequent rounds after Angel ... it's a _big_ milestone.

You can have a decent company and not raise money. That's reality. So there's
'existential risk' in that part of the process.

Sure, it's by no means an excuse to rest on one's laurels, or to think it
equates to success is fine - but - to guffaw founders for exhibiting pride,
excitement, and even a 'sense of accomplishment' for having done it is just
unfair.

Besides - the mere fact of raising money ups the companies cred quite a lot as
well, which is very beneficial outside of simply the financial aspects.

------
mwseibel
Hey folks - new blog post out this morning - happy to answer any questions

~~~
codyzazulak1
Hi Michael! How do you (& ycomb) feel about startups that require huge amounts
of money to function? Vroom, OpenDoor, etc?

~~~
aorloff
Is OpenDoor a startup, or a REIT ?

~~~
evancharles
We're a startup that builds software to simplify real estate, and we use
capital markets to power that experience. The ability to buy the home directly
allows us to put the homeowner in control of their timeline. I like pg's
definition of startup here
[http://www.paulgraham.com/growth.html](http://www.paulgraham.com/growth.html)

Internally, we talk about fundraises as "moments" but not milestones.
Fundraising takes work and is critical to growing our business, so we
recognize that effort but don't celebrate rounds as successes for the business
or for our customers.

------
gnicholas
So if we agree that rounds are not milestones, then what is some good
replacement terminology? Anyone can _say_ they have product-market fit, or
that they're "profitable" in some pro forma sense.

It would be great to have some concepts that are a little more verifiable,
that provide alternate milestones for folks to talk about. I completely agree
that it's silly to rate startups based on what round they've raised, but at
the same time there aren't alternative shorthand phrases in the current
lexicon.

------
pbreit
It's become conventional wisdom that fundraising is not to be praised. I would
disagree. Having cash in the bank is absolutely critical to building a company
and raising money is not easy.

~~~
gkoberger
Nothing saves a company like cash in the bank, but nothing kills a company
like increased burn due to raising followed by the inability to raise the
following round.

~~~
pbreit
Burn is 100% in company's control, fundraise 100% out.

~~~
AstralStorm
Not true. Certain people have connections and experience as well as reputation
to raise money much more easily.

~~~
pbreit
Maybe more easily but ultimately 100% someone else's decision. Whereas
spending is 100% in company's control.

------
jroseattle
"Using fundraising itself as a benchmark is dangerous for the entire community
because it encourages a culture of optimizing for short term showmanship
instead of making something people want and creating lasting value."

This.

To be sure, fundraising is a milestone of a certain type -- just never
conflate it with an accomplishment. Buying a home is a milestone; it's also a
gigantic liability.

TLDR: let's keep our eye on the ball.

------
vannevar
They _are_ milestones, if your startup is just a vehicle for an investment
Ponzi scheme, where the bulk of the management effort is devoted to getting to
the next round with a higher valuation, rather than building a lasting
business and letting investment flow naturally from business needs. Too many
startups today have tipped toward the Ponzi side of the scale.

------
jordangonen
Hey Michael! What do you think about access to capital? Can too easy access to
capital actually be a bad thing for the tech world?

I feel like, in the perfect world, there is a balance between making it easy
to raise money (for good ideas) but also challenging so founders have to
really work for it.

~~~
mwseibel
Too much capital has certainly harmed companies (of course too little as
well).

------
cft
I cynically disagree: when a founder sells 3-15m worth of his equity in an
upround, his goal inevitable shifts from achieving the sustainability and
profit to "prepping" the stats for a new round...

------
paulfoley
Spot on Michael.

------
god_bless_texas
Sanity!

