
Fundraising Advice for YC Companies - cryptoz
https://blog.ycombinator.com/fundraising-advice-for-yc-companies
======
dsugarman
One thing I think might be important to distinguish is how different companies
coming out of YC (and not in YC) are in different stages. No matter how many
times the partners told our batch to not compete over valuations, it still
happened. Personally I felt like without a competitive price tag, we wouldn't
be looked at as a promising company even though we had less traction than
other companies. We had a (rightfully) pretty lame raise after YC. I think one
thing that might help is to be explicit with the companies, give them some
idea of what their perceived stage is and what valuation range would be a good
place for them to start.

~~~
logicallee
what's a "competitive price tag" for a "pretty lame raise" mean in valuation
for you? I was shocked to see the article say:

>I'd close the first, say, $200k from the first reasonably good investors that
offer it on reasonable terms--say a $5 million pre-money valuation or higher.
This removes some uncertainty and pressure, gives you capital to execute with
while raising the rest of your round, puts you in a stronger position, etc.
_It 's worth a discount for all of this._ (Emphasis added.)

Which means that a $5M seed-stage is a 'dicount'! (The true price would be at
a higher valuation.) That is a shocking phrase to use, when selling a company
for $5M outright is a pretty good outcome for 95% of people who create a
company in the tech space.

~~~
peterjancelis
An investor buying $200K preferred equity at 5 million pre is not implying
that investor would buy the entire company for 5 million cash. The preferred
equity makes high valuations possible as the first $200K goes back to the
investor.

~~~
huac
it's kind of a nuance, but an early stage investment is a bet on the
founders/core team as much as it is on the idea. so you want the founders to
retain significant equity (i.e. not purchase outright) to align the
incentives.

------
kzhahou
> It's important to articulate why the company will eventually be in a
> strategically valuable position (i.e. a monopoly).

Is it possible to ever answer this in a meaningful way, besides "we're going
to be the best and get mindshare and beat everyone out of the market"? Anyone
have examples, or care to imagine what the answer would have looked like for
those few companies that DID go on to dominate a market?

I guess if your product has vendor lock-in or network/virual effects then
you're in a better place to answer it well (?).

~~~
patio11
Imagine Slack's answer to this, which is "network effects within teams and,
more subtly, between teams. Slack will be proposed by your engineering team
because their OSS projects use Slavk, their conferences use Slack, their last
client used Slack, etc. Then after your entire corporate brain uses Slack for
its synapses we, not to put too fine a point on it, own your soul."

~~~
kzhahou
Ok, but slack is just like campfire/hipchat/yammer/etc and none of those have
come close to the outcome you're proposing. So what does "your" product,
Slack, plan to do to actually achieve this, besides just being better than the
rest?

~~~
elliotec
How is "just being better than the rest" not a good enough answer? Better
marketing, better features, better marketing, better _marketing_ (!!!). Better
than the rest, but what more do you need to be better at than convincing more
people to use it? That's what makes a monopoly.

~~~
kzhahou
Obviously if you can pull it off then you're golden.

But we're discussing the early pitch here. It's not enough to say We'll do the
same as product X but BETTER. That's totally generic and not a plan.

So there has to be SOME insight at least on what might constitute "better,"
and then how to translate that into market dominance.

------
brotherjerky
I really appreciate that a document like this is public. It would be very easy
to send this out via private email list or internal wiki. Cheers for sharing!

------
apapli
I know this is probably covered in day-to-day conversations with founders at
YC, and this email is about raising funds... but, I'm astounded there is not a
single word in here about building a business to be profitable, or to "polish
up the business plan" ready for investors to review.

Or put another way - with all the issues documented (and probably over-blown)
in the media regarding the current fund raising climate, is it truly good
advice to just give a suggestion to "3) You should raise enough money to get
to your next significant milestone.".

Surely developing the business case and reaching profitability should rate a
mention somewhere when it comes to giving out fund raising advice,
particularly when this is being released publicly for budding entrepreneurs
not part of YC? And even more importantly because investors will be motivated
to use this current climate as an excuse to negotiate harder than usual and
get more stock for less money?

~~~
jusben1369
YC is still YC. Investor's come to YC to win, and win big. They want to see
companies shooting for the moon, not worried about profitability 12 weeks in.

~~~
jblock
Can't you do both?

~~~
lmeyerov
12 weeks in validates a market.. and proves you're easily displaced

~~~
abalashov
May not matter if there's cash to make off with. Plenty of folks don't care
about long-haul world domination or owning a market; if being a Significant
Player for 3 years will earn them enough to retire, why not?

~~~
lmeyerov
That's fine for you and many others. However, it's an anti-pitch for a YC
company: demo day is really auction day. They're selling a chunk of themselves
to an institutional investor sifting for disproportionate returns.

------
volaski
> I'd close the first, say, $200k from the first reasonably good investors
> that offer it on reasonable terms--say a $5 million pre-money valuation or
> higher. This removes some uncertainty and pressure, gives you capital to
> execute with while raising the rest of your round, puts you in a stronger
> position, etc. It's worth a discount for all of this.

Wow 5MM pre-money for seed is considered reasonable (and considered a
discount) nowadays? Or have I misinterpreted?

~~~
jkaljundi
[https://angel.co/valuations](https://angel.co/valuations) shows $6.5m average
for YC, $6–8M 25 th / 75 th (does not include valuations over $10m).

------
cryptoz
> It's important to articulate why the company will eventually be in a
> strategically valuable position (i.e. a monopoly).

I find it interesting, and disconcerting, that articulating a defensible
competitive advantage is no longer sufficient advice. Now it's, "can you be a
monopoly? no? go home". I realize this is a good way to maximize value for
investors, but is this a healthy way to grow new companies and build a better
society?

~~~
nostromo
I think they're using the Peter Thiel version of the word, not the traditional
economics version of the word.

For example, while Facebook, Apple, Google, and present-day Microsoft all are
not strictly speaking monopolies (they have viable competitors) -- they each
have various features that make switching difficult (but not impossible).

~~~
mbesto
> I think they're using the Peter Thiel version of the word, not the
> traditional economics version of the word.

Which is a poor way to communicate a point when the widely considered
definition of one of your words doesn't match the one you're articulating. It
assumes everyone has read Peter Thiel's book (ps - everyone has not).

It's the same with the word "startup". For a majority of the world a startup
is business that has just started, but for YC (well, pg specifically[0]), the
definition is "A startup is a company designed to grow fast" and more
specifically notes "Being newly founded does not in itself make a company a
startup". The definitions are not only considered inconsistent but they're
explicitly inconsistent.

Communication is important and this is one of those instances where I think
many people might scoff at the notion that YC is building monopolies and
that's "bad".

[0] -
[http://www.paulgraham.com/growth.html](http://www.paulgraham.com/growth.html)

~~~
chejazi
Maybe a clarification is in order. BUT, this is YC's attempt to make their
advice available to the broader community. If you're interested in YC and
listen to their advice, you will likely have heard about Peter Thiel's
monopoly (see Sam Altman's "How to Start a Startup" series w/ Peter Thiel
otherwise).

I'm just happy they're making this advice available.

EDIT: Here ya go
[https://www.youtube.com/watch?v=-oKjLVECMKA](https://www.youtube.com/watch?v=-oKjLVECMKA)

------
arasmussen
> "so far we haven't seen nearly as much of an effect on early-stage
> fundraising as the level of press coverage would seem to indicate"

This is pretty interesting to me. I wonder if the press is just blowing things
out of proportion, or if there's some Big Money™ behind this so that investors
can convince companies to agree to worse terms.

~~~
api
It's the unicorn crash. It's mostly affecting later stages of hugely valued
companies. So far the impact in the seed and A markets and more reasonably
valued companies is minimal.

Whether that changes depends on a bunch of factors. The two biggest are the
overall health of the economy and how economically incestuous high-tech has
become. If write-downs and possibly failures among the unicorns trickles down
a _lot_ to smaller ventures and investors, it will get worse. Otherwise it
will be mostly isolated to that segment of the market.

Edit: check the other response to the parent-- looks like we might indeed be
seeing a pullback in angel/seed.

------
kirinan
This seems like the same advice YC has been giving for years minus the fact
that the market seems to restricting based on the unicorn mess happening which
is ultimately probably a good thing in the long term to avoid a bubble and a
later collapse. Maybe I've missed the difference between this and the message
they had been saying for years now. Though this does seem very solid and
something not just YC companies should aim to do. Picking good investors is
much more valuable than having a lot of money. Bad investors will give you a
lot of money to spend on whatever they tell you spend it on, sometimes good
sometimes bad, whereas good investors will give you a little less money and
give you the freedom as the founder who may know best to spend it on what you
think is best in the long run with some guidance.

------
ryporter
Question for Sam -- How do you raise the first 200K at a different valuation
without significant extra cost and hassle? I'm guessing it would be a SAFE or
convertible note, in order to avoid issuing such a small amount of equity.

~~~
paul
Yes, the SAFE is designed to make seed funding very cheap, easy, and fast (and
it has proven very successful at doing so).

~~~
ryporter
And the 5MM valuation refers to the cap?

~~~
paul
Yes

------
spoiledtechie
I love this article, but would love to see some Marketing advice for YC
companies....

~~~
staunch
Probably the single best essay on startup advice that has ever been written:
Jessica Livingston: Why Startups Need to Focus on Sales, Not Marketing

[http://blogs.wsj.com/accelerators/2014/06/03/jessica-
livings...](http://blogs.wsj.com/accelerators/2014/06/03/jessica-livingston-
why-startups-need-to-focus-on-sales-not-marketing/)

~~~
spoiledtechie
thanks

------
rcarrigan87
Missing from all of this...

Hey, you may not be ready to take investor money and that's completely fine.
Maybe you've realized you'd rather have a bootstrapped business instead of a
unicorn. Cool, actually think about what taking investor money means. Figure
out what's best for you and your team.

~~~
_sentient
To be fair, this letter was targeted at companies in the current YC batch.
They've already explicitly opted-in to going the venture route, at least in
some capacity.

Bootstrapped businesses can be awesome; I've built a couple myself. But the
time to be asking these sorts of existential questions would be before you
take VC money, not after.

~~~
rcarrigan87
For a group that focuses primarily on young, inexperienced founders and is so
founder focused, I think it would be reasonable to expect them to allow for
founders to take the exit ramp if they decided the VC route didn't make sense
for their business based on their YC experience.

------
whitenoice
As an employee how can you get these details? and how should you act once you
have the information?

~~~
cududa
As an employee, you probably aren't the one fundraising.

~~~
whitenoice
Yes, what I was implying is - based on the result of the fundraising what
point of action should an employee at an early stage start-up take considering
the current climate. Or what questions should you ask the founders.

~~~
argonaut
Just ask the founders what you want to know. No need to play mind games or
whatever, tiptoeing around what you actually want to know.

If you're at an early stage startup and you don't get a satisfactory answer,
you need to leave.

------
robertpohl
This post tell us how undervalued Swedish startups are. We created the term
`Swedish series A` a while back, which is around ~$1m - $3m. Interesting that
this a seed round elsewhere. High tax and all.. :)

