
Reasons I Won’t Fund You - trjordan
https://www.saastr.com/22-reasons-i-wont-fund-you/
======
dkural
Looks like he won't fund you if billionaires find your company before he does,
and he can't get the cheap equity he'd like. Makes sense for him, but you're
also better off not raising from him in that particular scenario. He calls
this 'cap table is messed up', whereas he's just late and out-priced by the
bigger boys. Your cap table is just fine.

~~~
crdb
The funding market, like that for employment and marriage, clears at different
prices for different individuals.

I'd say the number of founders who can truly aspire to get funded by the "Big
Boys" (and have the choice you talk about) is relatively small - for example
my lack of connections in the US precludes me from raising from them because I
can't get a proper warm intro. You need to align a lot of stars.

That being said, I think he was referring to the complexity of multi-note cap
tables (and time and mental effort required to deal with their preferred stock
classes etc. vs 5 equivalent other deals using a vanilla structure) rather
than the billionaires outbidding him. He talks more about it in another post
[1].

Having been on a desk that traded exotics I very much agree that (unnecessary)
complication in financial products is not a good thing, and is usually
associated with people hoping you'll slip up.

[1] [https://www.quora.com/Y-Combinator-What-are-the-pros-and-
con...](https://www.quora.com/Y-Combinator-What-are-the-pros-and-cons-of-YCs-
SAFE-securities-versus-convertible-notes/answer/Jason-M.-Lemkin)

------
alkonaut
> I want to hear that you are building a unicorn — or at least, trying.

Is this the mentality of the whole startup/venture capital universe? (Excuse
me for being disconnected, this is a completely separate world from mine). Are
there no venture capitalists, or young startup kids who want to build
companies that just grow slowly and organically, and that are profitable
throughout, rather than trying to build some service at breakneck speed while
pumping up a valuation and hoping for an "exit"? Is there no venture capital
invested with a horizon of a decade or three?

Is venture capital in software just basically buying lottery tickets in 100
startups, hoping to find one unicorn (success) instead of zero unicorns
(failure)?

~~~
riteshpatel
VC firms invest other people's money and those people have money in a specific
fund entity. Each fund has a specific structure that has various rules on
stuff like minimum investment sizes, ownership and time to return the
investors' money.

Also, as 9 out of 10 investments, on average, will fail, the 1 that wins has
to be big enough to balance out the losses, plus make a profit for the
investors that's much greater than putting their money into public stocks,
bonds, banks, etc. That's why each investment has to have the potential to be
a billion-dollar-plus company, or it doesn't make sense to make the investment
in the first place.

Very different from angels who are a) happy to wait b) happy to get 3-4x on
their money.

~~~
duncanawoods
> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be
> big enough

This is misleading. It is _only_ because they pursue high risk ventures that
9/10 fail and they are only picking high risk ventures because they dream of
x1000 returns. They could use a different investment thesis to choose lower
risk, lower payoff companies and have a portfolio where only 1/10 fails.

The VC reasoning is that the 1/10 success is not just x20 for an overall x2
return but actually x100 or x1000. I think VC performance over the years has
proven this false, especially if you exclude the top VC as outliers, but its
glamorous to be a high-rolling gambler so the myth that "VC as unicorn hunter"
is the optimal strategy continues.

~~~
jasode
_> It is only because they pursue high risk ventures that 9/10 fail and they
are only picking high risk ventures because they dream of x1000 returns._

But your explanation for their motives is also misleading. A huge constraint
on VC's investment strategy is the _smaller amount of money_ they are given.
VC's are _not_ giant multi-billion dollar private equity funds like
Blackstone/Apollo/Carlyle. (E.g. Blackstone $18 billion fund.[1])

A VC fund may be small like $50 million. Or a more well-known prestige VC can
raise $500 million. The recent news of a VC like a16z raising $1.5 billion is
a new anomaly.[2] However, the $1.5b is still a fraction of what the private
equity guys raise.

With a small $50 million fund, that's not enough money to buy management
control of the more stable mid-cap and large-cap companies. Therefore, using a
portion of a small $50m fund to write a $500k check to a (riskier) YC company
is more meaningful than buying $500k worth of Exxon or Apple stock.

VCs are shooting for 25%+ returns and it's very difficult to do that with
large-cap companies. Even Warren Buffett hasn't been able to do it over a
given 10-year period.

 _> They could use a different investment thesis to choose lower risk, lower
payoff companies and have a portfolio where only 1/10 fails._

If someone can figure out a _consistent_ way to take $50-$100m and return 25%+
by having only 1/10 failures, that would be an amazing investment thesis. I'm
unaware of any industry expert who has that track record.

[1]
[https://www.google.com/search?q=latest+blackstone+fund](https://www.google.com/search?q=latest+blackstone+fund)

[2]
[https://www.google.com/search?q=andreessen+horowitz+latest+f...](https://www.google.com/search?q=andreessen+horowitz+latest+fund+billion)

------
urda
> Even (sorry) when you’re with your family. I want you obsessing about your
> company.

Looks like it only takes 1 reason why I will avoid you as a person (and not
just as an investor). This is not a healthy mentality, this is not a good
"reason", this is not something we should celebrate in our line of work.

This is something that should be struck down, called out, and shamed.

~~~
mbrzuzy
He mentioned he knows it isn't healthy.

Personally, I'm not a huge fan of the start up world these days, due to a lot
of clashing ego's. But I can respect Jason for telling it straight.

I don't think anything should be "shamed", just because it's not something you
agree with. Allow people to operate however they want, it's a free country
after all.

~~~
TimJYoung
Yes, which would be fine if _other_ people weren't involved and didn't have to
suffer the consequences, especially children that have absolutely zero control
over their situation. But, it's pretty dangerous territory to actually
advocate in favor of neglecting one's children/spouse. You don't get do-overs
with your children/spouse, and they can be harmed in ways that may not
manifest themselves until later.

Having said that: if you don't have a spouse/children, then go for it.

------
dbg31415
> I don’t want you in the office 100 hours a week. Actually, I don’t even want
> you in the office 40 hours a week — I want you out with customers But when
> you’re home. When you’re out to dinner. When you’re relaxing at the beach.
> Even (sorry) when you’re with your family. I want you obsessing about your
> company.

My last startup we met with an angel investor who was like this. The money
isn't worth it, we turned him down, and ended up going with someone more
reasonable. Reasonable people attract connections and connections are great
for your startup.

And we all did pretty well in the end... without all the unhealthy hyped-up
stress caused by working for someone like this. Investors are your boss, make
sure you like them. If you have a good idea, hell if you have just an OK idea
and can execute... people will line up to give you money.

~~~
nugget
I dislike the majority of his post but most of the people I've known to
achieve ''success'' at the highest levels spent years in this zone where they
obsessed near 24/7 about their work. It sucks to write that family comes
second to work. But if you want to build (and run) a billion dollar company,
or become a neurosurgeon, or be a SEAL team commander - then, for awhile at
least, it's probably true, and I'm not sure we do anyone any favors by
pretending otherwise.

------
superasn
I think when a startup is bootstrapped and gaining traction it's almost always
the opposite nowadays,i.e. 22 reasons why I don't need your money.

Even for my teeny tiny startup (2008) I had several VCs calling us everyday
wanting to invest. I really think if you're in a position where your on the
VC's mercy for funding, it means your startup needs more work on the product.

~~~
jayjay71
What was/is your startup?

------
verroq
Every clickbait title is different. But. 22 Reasons THIS one will blow your
mind.

~~~
tehlike
give the guy his credit, though. he has been pretty active and blunt on
funding related questions/topics, and to his credit, he started companies and
successfully sold them. His sentences, and so on, are sometimes broken, but
what he's trying to tell i think is somewhat solid.

See what he's trying to say, not how he's trying to say.

[edit: grammar]

~~~
cowl
This goes against his own recommendations. He wouldn't have the patience to
hear himself out.

------
adjkant
Frankly, all this article did is remind me all the reasons why I hate the
startup and particularly VC world.

------
bsder
> If you don’t take an amazing VP intro I give you. I’m out.

Um, _MY_ personnel get to choose who comes into the company that they work at.
Thanks.

This _alone_ throws huge red flags about this investor.

I may have a million good reasons for rejecting your "stable boy". Number 1
is: he's a "stable boy". I have _NEVER_ seen a "stable boy" cause anything but
problems.

A _truly_ amazing VP is probably already employed somewhere else and I have to
crack him loose rather than worry about rejecting him.

~~~
mattmanser
I read this that he meant that you didn't at least meet the intro, not that
you had to employ them.

~~~
Smirnoff
What will that intro lead to? Someone getting a job or someone not getting a
job and pissing off the investor?

------
kriro
I got a really strange vibe from this article. Sounded like the author is in
the business of selling VPs/CxO. At least it felt a bit odd that this was
explicitly mentioned a couple of times (the bit about not taking a VP intor
was really irky). I've heard that the management team is more important for
SaaS businesses (as are old school sales people) but I dunno...was a bit odd.

------
CurtMonash
Several of his points boil down to "Tell me how special it would be to have me
as an investor, so that I can tell you you need to accept a low valuation from
me."

At least, I think they do. He might also just have a great desire to be
flattered.

------
new299
One thing I find a bit weird is the investor focus on SaaS. The desire for
Hardware/science based startups seem to get talk about a lot, but almost every
one of these "how to pitch"/"what I'm looking for as an investor" articles is
focused on SaaS.

I know this particular investor is exclusively SaaS, but isn't there a wider
desire for hardware/science based startups? Or is it all just talk?

~~~
pryelluw
A SaaS allows them to track growth easily. You have n susbcribers who pay x a
month. It costs y to bring them in and they use the product for z months. It a
matter of then looking at the numbers and knowing how much ghr company will be
worth in a given time period.

Other types of tech products are not as straightforward. Becomes more of a
coin toss. Not that a SaaS is a safe investment.

~~~
new299
Right... which comes down to: "it's easy for them to measure and understand".

And ultimately investors say they want hardware/science. But they don't
really...?

~~~
jayjay71
A very prominent investor told me that hardware founders need some sort of
celebrity attached to their name to raise money. Yes, there are exceptions,
but they are rare. Investors know hardware is hard and the lead times are
longer, so they see that as added risk which makes them less likely to invest.

Many investors, as a rule, won't even consider hardware and there are very few
that specialize in hardware. It's a bit of a catch-22 with investors that say
they want you to be different, because most of them really want you to be like
everybody else. The majority are trying to ride the next wave, only a very
small number are actually trying to find it independent of "signalling."

Every investor is different, every company is different, but if you're doing
something unconventional you're probably going to have a very hard time. And
now that Pebble has essentially failed, that's going to make investors a lot
more wary about investing in consumer electronics.

------
rdlecler1
The irony here is that a lot VCs break these rules with either LPs or
entrepreneurs: #1 can't see the future (herd behaviour), running VC as a
lifestyle business rather than building a platform like a16z, NEA, YC, 500; #5
lack of understanding of the competition (or where they sit in the pecking
order); #6 I wouldn't want to work for you (arrogant, or just not that sharp);
#7 too slow/too late (slow or non responsive); #9 party round (I don't lead);
#10 you pay your 1% on AUM with your 2% management fee; #14 on a fishing
expedition with entrepreneurs without being upfront about it; #20 not being
aggressive enough -- sitting around waiting for your network to drop deals in
your lap #22 VC as a lifestyle business, living fat off your 2% management fee
(>$100m funds).

~~~
cocktailpeanuts
The truth to the "irony" is that those are the actual deals that investors
want to invest in. This post is for the rest.

If you are the hottest company on the market, none of this post applies to
you. But 99.9% of the startups out there are not.

I see a lot of people on this thread saying this guy is arrogant, etc., but I
think that's taking it the wrong way. He's just providing his point of view,
and it's not just his. Any investor would feel that way and this guy is just
verbalizing it so the founders can get a better sense of how to interact with
investors.

But like I said, if you're hot, then you're the one who says "22 reasons why I
won't raise money from you".

~~~
rdlecler1
That goes both ways. The best VCs I've met are also the ones working the
hardest and are the most professional. They're also the least likely to be
following the herd and the ones you most want on your captable. As an LP they
are also the hardest funds to get into. Still those funds represent 5-10% of
the funds out there, so the other 90% are falling into the mediocre or worse
category. Still most entrepreneurs will take their money because most
entrepreurs don't have the track record or traction to be choosey. It's still
a buyers market.

------
dandare
I am not sure if my perception is distorted because of HN but is there a class
of investors that do not obsess with unicorns and regularly invest with the
target of 10x-100x profit?

~~~
brianwawok
Wouldn't that be anyone that only does series B or later? I think your risks
go down along with rewards the later you jump on.

------
nickpsecurity
Number 12 surprised me given the number of billionaires that would've failed
it. Most are hyperfocused and opinionated early on to the point they don't
care who they piss off or destroy to dominate the market they're creating.
He'll either get the ones that are consistently good on P.C./P.R. at the
beginning or filter out the unicorns he might have gotten.

That would be my guess based on what I've seen. How many unicorns or higher
have his venture firm created in practice?

~~~
randomdata
> How many unicorns or higher have his venture firm created in practice?

I've never heard of any of them.
[https://angel.co/esignature](https://angel.co/esignature)

The one exit was to another company held by the same firm.

~~~
nickpsecurity
Best part of your link was:

"Babycenter (a Johnson & Johnson Family of Companies)"

Exact kind of line item you expect on the resume of unicorn-creating investors
in Silicon Valley. ;)

------
nzjrs
> I want to hear that you are > building a unicorn

And there we have the problem with the scene today.

~~~
mikekchar
I agree to a certain respect, but that's VC. You want to bootstrap a company
and make a good living? I'm with you 100% of the way, but VC is not going to
be a good fit, I think. If you're not giving them 20:1 ROI, they aren't even
breaking even (because most things fail). In reality, they want significantly
more. Let's say they put in $1 million for even 20%. They need an exit with a
valuation of $100 million to get their 20:1. And if they aim for that, they'll
go out of business because it's such a risky business. You have to aim for an
exit with a valuation of at least a billion. I don't blame him for saying it
the way it is.

My personal opinion is that if you are interested in building a solid business
rather than striking gold in them thar hills, you are better off with other
sources of funding. Hell, if you are doing SaaS, you can probably self fund
it...

~~~
nzjrs
Yeah, I guess I shouldn't post before coffee. Its so depressing coming here in
the morning to see, every day, 10 different versions of the same 2 posts
fetishizing 'disruption' and 'unicorn worship'.

I think we would all be a little happier with some hubris, and fewer delusions
of grandeur.

------
CurtMonash
Ignoring time considerations and otherwise oversimplifying,

[Expected return] = [Probability of a non-zero return] * [Expected return |
Return > 0]

VCs tend to think that the first factor will always be low, so they want the
second one to be high.

So far, so good. But now let's complicate things a bit more.

1\. Actually, the set of all possible outcomes is partitioned into at least
three sets:

{Zero or very low payouts} {Decent but not great payouts} {Huge payouts}

Especially in the middle case, VCs' interests may not be aligned with
founder/employees', because of the preferred/common stock distinction and some
onerous terms that VCs impose on deals.

Also, VCs' benefits aren't just cash, but also reputational, which is another
reason why their interests aren't perfectly aligned with companies' ...

... yet past the earliest stages, VCs tend to control the board, and run
things for their benefit.

2\. It's possible to have other kinds of interest than the classical VCs'. For
example:

A. If you lend against genuinely good collateral, you have a good chance of
getting your money back, and can be more restrained in what piece you take of
the upside.

B. Seed investors who offer notes with unclear conversion prices often are
doing something similar, but with worse odds. Often, they're hoping for a
chance to invest in the next round of the best companies, which makes sense
only if they assume such an investment will be very beneficial to them.

3\. Dave McClure at 500 Startups trumpets the idea of factoring "singles and
doubles" into his return calculations.

------
jcoffland
I could write 22 reasons why I don't want your money.

~~~
rimantas
Many of them are already written by the man himself.

------
betadreamer
Only reason I will fund you. You're going to be successful.

------
ojbyrne
My initial impression: 23. You write in complete sentences.

------
imagist
The first thing I got from this page was a pop-up asking "Want more saastr?"

Given all I've seen of saastr is a pop-up, no, I do not want more pop-ups.

------
logicallee
Why can't an SAAS startup have 100% gross (not net) profit? Because they're
paying $17 per year for their domain?

~~~
ohwello
It's my impression that gross profit includes marginal costs, but not
overhead.

I can't speak for the author, but every SaaS company I have been involved with
had marginal costs such as customer support. When you are a tiny company and
these tasks are performed by founders you could perhaps roll these costs into
overhead and claim 100% gross profit. But as a growing company it would become
clear that you need to hire someone for every X customers.

~~~
logicallee
But selling you a nail for $1 also has some potential support costs - so is it
wrong to say that if I buy a nail for $0.25 and sell it to you for $1.00 that
has gross profit of $0.75?

But the average customer's support costs might be more than $0.75 -- so would
you say that by buying for $0.25 and selling for $1.00 to you, it's actually a
loss leader? (I'm really trying to get you to buy more expensive products from
me)?

Overall I would like confirmation if this is really what is meant. It doesn't
seem to me that support costs would be taken out of _gross_ profit - that is
what I think would be taken out of _net_ profits. . .

But I'm sure accountants have well-defined rules on this so I would like to
heir their take.

------
dandare
> Almost everyone has competition. I get worried if you have no respect for
> your competition, but sometimes, I can get past that. But not understanding
> your competition? That’s a No.

What does such investor expects to hear in if you are Twitter or similar
company entering a blue ocean (creating your own market)?

~~~
trelltron
Twitter had plenty of competition. All existing social media was competition
for Twitter. Email was competition for Twitter.

Competition isn't about some other founder doing the same thing you're doing.
It's about all the ways people can already do the things you're trying to sell
them.

~~~
dandare
That is my point - nobody was doing microblogging before Twitter, they
literally invented new mode of communication. Yes, it could have failed but
not because email or social media would steel their users.

------
nunez
I don't know why he is apologizing so much. It's his money.

------
shostack
Can someone explain the comment around SAFEs?

~~~
brianwawok
Isn't the idea of a SAFE to avoid having to place a valuation on a startup
with no revenue for a seed round? And if you are taking 2 million round at a
10 million valuation, you are a bit beyond that...

(Not a VC just thinking out loud)

