
A Guide to Seed Fundraising - pw
http://themacro.com/articles/2016/01/how-to-raise-a-seed-round/
======
jedberg
This was a great writeup with lots of great information. One thing that bugged
me though was the "When to Raise Money" section. It says, in part: "However,
for most it will require an idea, a product, and some amount of customer
adoption, a.k.a. traction."

There was a great comment on HN a while back (I wish I remembered who said it)
that said, "If you're asking about traction or revenue, you aren't making a
seed investment".

Andy Bechtolsheim was a seed investor in Google -- he gave them a check based
solely on their idea and who they were. Paul Graham/YC made a seed investment
in reddit and Justin.tv and whole host of other companies -- none of them
existed as more than idea when YC invested.

But VCs are risk averse people (ironic given they are in the risk business),
so it makes sense that they would rather invest after a company can show a
little traction, especially now that it's so easy to get that initial
traction.

I just think we need a new term besides "seed" to differentiate it from the
true seed investments.

~~~
kapilkale
> especially now that it's so easy to get that initial traction

It's gotten much cheaper to get traction. In some consumer markets, it is
basically cost-free; all it takes is a motivated technical entrepreneur with a
couple months of savings.

~~~
staunch
You can't have very meaningful traction until you release an actual product.
Most significant products (e.g. Dropbox) will take one person at least 6-12
months to develop, followed by 3+ months before there are charts showing
traction.

a) You raise money after having invested a year of work on your own dime.

b) You raise money based on your connections/pedigree ("reputation").

~~~
mattmanser
I think you're wrong on the 6-12 months.

Not boasting, but simply stating fact, that on my own, I've written:

\- A system for managing employee leave and sickness with google apps
integration in 2 months

\- A credit control application for one of my clients in 3 weeks, automatic
emails, dunning letters, cash-flow forecasting

\- A purchase order system that would automatically raise invoices in their
accountancy system in 3-4 weeks

\- An entire search system a la booking.com in 4 weeks, with named location
search, geo location, tags, categories, blah, blah, blah. Basically the heart
of any listing style startup.

And while I realize I'm a good programmer, I'm not a phenomenal programmer,
I'm fairly lazy, I find it hard to focus on more than about 5 hours of actual
programming unless I'm doing something really interesting.

And these are some off the top of my head examples. I've written loads of
small startup sized apps that would be of the complexity that YC fund in much
less than 12 weeks, let alone 12 months.

You're looking for an MVP with some traction, not a polished product. Reddit,
for example, launched without the ability for users to create their own
subreddits, and many would describe that as one of the key reasons of Reddit's
growth. I believe they actually launched without commenting, but I can't find
a source on that.

While today's startups have more expected of them, it's now easier than ever
to write a web app, even SPAs that even 3 or 4 years ago would be too hard for
individuals to write on their own.

~~~
jedberg
> Reddit, for example, launched without the ability for users to create their
> own subreddits, and many would describe that as one of the key reasons of
> Reddit's growth. I believe they actually launched without commenting, but I
> can't find a source on that.

reddit launched with only voting and submitting of links (no self posts).
Commenting, subreddit creation, self posts and all that was added years after
launch.

(Source: I was there :) )

------
logicallee
This Guide has a step baked in, which is move to Silicon Valley. I know this
because it's the most important step, and geography plays such a defining role
that I expected the guide to talk about it. I didn't see any mention of this.
Then I searched the document for "geography" (0 hits) and then "silicon
valley" which had 3 hits, in the two snippets below:

>A rule of thumb is that an engineer (the most common early employee for
Silicon Valley startups) costs all-in about $15k per month. So, if you would
like to be funded for 18 months of operations with an average of five
engineers, then you will need about 15k518 = $1.35mm.

and

>Most seed rounds, at least in Silicon Valley, are now structured as either
convertible debt or simple agreements for future equity (safes). 17 Some early
rounds are still done with equity, but in Silicon Valley they are now the
exception.

As you can see, this means the entire guide is written from the point of view
of Silicon Valley. It still calls raising a seed round "brutal" and "long,
arduous, complex, and ego deflating."

But it is, at least, possible. For the vast majority of the cases they are
talking about, after the long, arduous, complex, and ego deflating process,
outside silicon valley there is still no seed round that has been put
together.

So, if you are reading this guide outside of silicon valley, please realize is
that your first step toward having a crack at this arduous process, is to move
to SV. Airbnb, based in San Francisco, still had these 7 famous rejections for
its modest seed round:
[https://medium.com/@bchesky/7-rejections-7d894cbaa084](https://medium.com/@bchesky/7-rejections-7d894cbaa084)

There's not a chance in hell it would have been funded on that model at all
basically anywhere else in the world. Do what it takes: if your business needs
a seed round, you owe it to your business to move to silicon valley.

------
urs2102
This is fantastic. I am more and more impressed with the wealth of knowledge
being shared by YC, especially regarding clarifying common financial
vocabulary (which is often used to make people believe that finance is
difficult as the terminology used in discussing finance is designed to sound
more complicated than it is).

Similar to how clear and concise the SAFE documents are, this is really nice
to read.

~~~
soheil
This seems to be a trend, it reminds of having a blog for your product. It's a
way to attract leads, gives your free SEO traffic, makes people that much more
likely to convert. I'd like to see some numbers on how much more likely to
convert (to join YC/others) hackers/founders will be after reading such posts.

------
javajosh
These rules are nowhere near as complex as combat rules in AD&D and yet I find
my eyes glaze over when reading even clearly well-written summaries. I think
the problem is actually that these are actually "combat rules", but they are
never explained as such. The combat is between the investor and the investee,
in that the investor wants as much as possible for his money under every
circumstance, and the investee wants to give as little as possible in every
circumstance. Certain important moments and thresholds have become "standard
circumstances" over time, and these are basically used to divvy up the battle
into bite-sized pieces.

Imagine a variant of D&D where every encounter begins with you and your party
naked, and after assessing your enemy you have to negotiate with Elves for
your armor and weapons - to be paid for after either winning the battle. (If
you lose, you might have to give back your battered armor, and try a different
group of Elves). In the best case, if you beat the final Boss (which is always
the same, the Grand Vizier of Product Market Fit) then you get to keep like
10% of the treasure and the Elves get 90%.

(You could grind lower level monsters to buy your own armor, but that can take
a very long time and it might wear you down until you're no longer fit to be a
warrior anymore. The Elves are smart because they risk money (which is
replaceable) but not life (which is not).)

~~~
jacquesm
You should really make this into a novella, it would be a fascinating world to
map the world of start-ups onto.

~~~
javajosh
Thanks Jacques, I might actually do that! It's a bit of a niche, but nerd-
finance-fantasy could be a viable genre, for books anyway.

------
salmonet
Seed fundraising is so confusing, especially for first-time founders. Everyone
seems to have a different opinion and you can never be sure about people's
bias or motives. I appreciate YC leveling the playing field with
straightforward founder-friendly information.

~~~
josh_carterPDX
I agree with this so much. For me, I was getting so many people hitting me
with different advice. Don't include this in your pitch deck. Ask for less
money. Don't reach out without an intro. It's tough to know who to listen to.
However, the best advice will come from yourself and just putting yourself out
there. I met with some really cool VC folks who gave me great feedback. I
think the best feedback I got (and would equally give) is to have a thick
skin. This is your baby, but if you can't take honest criticism then you're in
the wrong business. People may not like what you are doing, but as long as
your open minded enough to listen to the feedback and take it to heart, you're
doing the right thing.

------
aagha
If you hear an angel/VC saying they're interested in investing in you but they
haven't done so within a couple of meetings, politely walk away.

When you're in the seed stage, angels are investing in you and the idea. Some
will want to know about traction MRR (walk away)and others will want to do
deep-dives of your concept (again, walk away).

~~~
josh_carterPDX
It's funny. I read this and thought about a meeting with a VC a friend of mine
had where the VC Partner was on his phone the whole time. My friend suddenly
stopped talking and sat there for a good minute before the VC realized he had
stopped. When he asked why he stopped, my friend said that he took the meeting
to get his full attention. After a while the VC did it again. My friend closed
his laptop and walked out of the building without saying a word. Weeks later
they closed their seed round without that firm and now they're growing like
crazy. I'm sure that VC Partner is kicking himself for being so inconsiderate.

~~~
AndrewKemendo
I've seen this so many times and did the same thing. Actually turned out about
the same for us, so I'm glad other people aren't taking any guff.

------
gist
> The difference between an angel and a VC is that angels are amateurs and VCs
> are pros. VCs invest other people’s money and angels invest their own on
> their own terms. Although some angels are quite rigorous and act very much
> like the pros, for the most part they are much more like hobbyists.

That's a pretty broad statement I would take issue with calling angels as a
group, amateurs and hobbyists. Especially since some well know VC's also do
angle investing.

------
josh_carterPDX
So much incredible information in this document. I think the misstep some
Founders make is trying to raise too early. I hear stories all the time about
people trying to raise on an idea. And while that can be useful, it is usually
the wrong time to go after Investors.

We made this mistake and failed miserably. It was only after we had a beta,
some customers, and some press that people started to pay attention. Now we're
close to closing our seed round and it's because we had better focus around
what we were doing, how we were going to do it, and why it was important.

At the end of the day, a VC is interested in answering one question, "What's
the 10x return?" How will you make them lots of money. Unless the pieces are
all there to answer that question, Founders will get a lot of no's. The goal
should be to go through your pitch deck and find ways to eliminate the ability
for VCs/Angels/Investors to say "no."

------
cperciva
_How rapid is interesting? This depends, but a rate of 10% per week for
several weeks is impressive._

I wish this was a bit more specific -- how long exactly is "several weeks"? 3
weeks (total growth of 33%)? 7 weeks (total growth of 95%)? 13 weeks (total
growth of x3.45)? 52 weeks (total growth of x142)?

~~~
geoff
It turns out that it is hard to be specific, other than the longer you have
that sort of growth, the better. Also, it is, perhaps, obvious that large
percentage growth beginning from very small numbers is not as impressive as
sustained growth even as the numbers get larger. Impressive / interesting
growth is very much in the eye of the beholder, and most investors will just
say they know impressive when they see it. This being said, I take the point
that more discussion around this point would be helpful (unfortunately, this
is true about much of the guide and I was trying to keep it reasonably short).

~~~
cperciva
Thank you! Your point about "starting from small numbers" is something else I
was considering -- obviously increasing from $1/week to $10/week of revenue
over the course of three months is not that impressive, despite being a
20%/week growth rate!

I wonder if a good way to explain this would be via examples of (starting
point, growth rate, duration) tuples and an "interesting" / "not interesting"
assessment for each. (Can YC publish anonymized data on its portfolio
companies?) This would allow readers to look for an example which roughly
matches their performance -- which may sound silly to people in the valley who
are surrounded by startups all day long, but there are a lot of us outside of
the valley who rarely meet anyone working for a startup and never see any sort
of concrete numbers like these.

I absolutely agree about keeping the guide short though -- this is more a
matter of something I'd like to see you (or someone else at YC) write more
about in the future.

------
estefan
I've been reading "Angels, Dragons & Vultures" recently to learn about this
stuff. I highly recommend it.

~~~
aagha
Looked it up, but couldn't find it. Who's it by?

~~~
estefan
Simon Acland - [http://www.amazon.co.uk/Angels-Dragons-Vultures-Simon-
Acland...](http://www.amazon.co.uk/Angels-Dragons-Vultures-Simon-
Acland/dp/1857885511/)

------
kevindeasis
This is exciting. I've always tried to imagine and wonder what the process
would be like. I've never seen a detailed document like this.

Great job~

