

Ask YC: How do you (or how did you), a start-up, get your first lump sum of cash? - donna

I've talked with a VC friend, who was willing to give me a transparent look inside their process.<p>Here's what a VC/Angel is looking for when they ask "Do you have customers?"  What it really means is, do you have 7-8 employees and $1M in annual sales.  It doesn't matter whether a startup is  
profitable or not, but can that startup grow from 2 founders to 7 employees and get customers.  This proves it's worth taking a look at and may be scalable.  Hopefully generating a 10x return on investment over the next <i>5-7 years</i>.<p>Investors know that the failure of a startup isn't necessarily because of the idea, but in not having enough capital to keep afloat while figuring out how to make money.  My VC friend also says raising  
the $500K that's typically needed is a real conundrum for a start-up.<p>So my question is, How do or did you, as a start-up, get your first lump sum of cash to get started?
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modoc
Don't get VC.

Save and don't quit your day job. I've been involved with several start-ups,
including one I'm working on now. The great thing about tech is for the most
part when you're just starting you don't NEED a manufacturing facility,
specialized equipment, a huge support or sales or factory staff, etc...

Hardware and bandwidth is commoditized and available month to month for cheap,
and can easily scale as your demand grows. Start with free software like
Linux, Postgres, Apache, JBoss, etc... even if down the road you want to go
with Oracle or something similar. Go small and grassroots with your marketing
and see if people like your product/service first, before you decide you need
to blow half a million on marketing. Use contractors instead of hiring people
like designers, dbas, etc... Maybe you need to hire them after you get 10
clients or 100,000 users or whatever, but start off paying for the hours you
need.

So what do you really need? You need a few hundred dollars to incorporate,
setup a business bank account, and consult an accountant and/or attorney.
You'll probably need some servers w/bandwidth for a month or two or six. A few
grand here. And you need a product/service.

Start off building/writing it in the evenings, weekends, and make take a week
of vacation and just work on it. See how you can do without quitting your day
job. Sure it takes a little longer, but honestly that's a small price to pay
to keep control of your enterprise, and often is less time than you'd spend
prepping for and applying for VC, and getting turned down, and trying
again....

All this applies only to soft-tech startups (web sites, software, online
services, etc...) but I've dealt with many folks who were convinced we'd need
$250,000 to get things going, and were shocked with a month or two later I had
nice five figure checks rolling in off of a total outlay of just under
$10,000. The company has no debt, and no one controls it but we the founders.

You should be able to scrape together $10,000 with a couple of partners. And
in the end you're in control and you owe nothing to anyone.

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mig
Nice post! What company did you start Modoc?

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modoc
Most recently a specialized hosting company.

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eru
"Most recently [...]": I like your attitude.

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tptacek
We foresook the quest for VC funding 2 years ago, and think it's one of the
best decisions we made. But having said that, I've held key roles at 3 VC-
funded startups, and at none of them was $1MM in revenue a predicate.

At $1MM/yr (in product revenue), you're already funded.

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mrtron
From my experience, you are correct when you say VCs rarely are looking to
lift a startup off the ground.

Most people I know and startups I have been involved in start off with cash
from friends and family. One of the most difficult leaps you take is quitting
a paying job and taking a small sum of money and trying things out. VCs
definitely want to take an idea/product and scale it like you mentioned.

The one thing I would suggest is do you need 500k to start a startup? I would
suggest the number is closer to 1/10th of that to survive for a year, at least
as an Internet startup.

EDIT: To clarify, I meant 1/10th of that to start a company for a year, not to
personally survive for a year. There are many necessary costs for a company
that shouldn't total more than about that 50k mark, lets call it "servers and
shit" costs. I was completely excluding living expenses!

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cperciva
_The one thing I would suggest is do you need 500k to start a startup? I would
suggest the number is closer to 1/10th of that to survive for a year, at least
as an Internet startup._

You need $50k to live for a year? Where are you living?

People often forget about how many of their costs don't exist if they're not
earning income: Obviously you don't have to pay income taxes any more, but
also the cost of commuting disappears, and the cost of food might drop
dramatically (depending on where you would eat lunch if you had a paying job).

I'd say that YC's $5k + $5k/person funding formula is about right -- $5k is
likely to cover startup costs for a company (at least, for the sort of
companies YC funds), and $5k should be more than enough to live off of for 3
months.

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ivankirigin
If you're accustomed to an undergrad or grad budget, sure $5K might be enough
for 3 months.

But not if you have a mortgage, student loans, a car loan, maybe some credit
card debt, etc.

And rounds of funding can take months to close, so it is more like $5K for 7
months, not 3.

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vlad
In this thread, we've been led from 500K/yr to 50K/yr to 20k/yr (5k for 3
months) and now back to 50K. I think most everybody has loans, credit card
debt, and a mortgage. But if you're sufficiently young enough and want to have
a startup in the next 5 years, don't get a mortgage, get a normal job to pay
off the student loans and credit card debt, and save up some money.

I seriously doubt pg actually expects people to do YCombinator with $0 saved
up and tons of debt and live on 5k for 3 months. Or worse, with an illness or
surgery that needs to be done. Get all that out of the way, pay off your loans
and credit card debt, and save up some money by working corporate. Plus you'll
have experience, good references, friends, and maybe good contacts from
working at a company.

I used to think I was old when I turned 21 and 22, but if you're 25 or 30 when
you start a startup, that's fine! But before you work at corporate, make sure
you do your own startup with customers and everything in college so when
you're hired, you're respected and management wants to hear what you're
saying, rather than HR placing you in a "trainee" program like two high school
acquintances my age will be at the same company for the next two years. That
gives you credibility from your coworkers, experience leading your own project
from your startups, and a degree you've been able to pay for. Maybe you could
even get a Master's degree in Business or Computer Science that the company
will pay for while you work.

This means you won't be a "millionnaire by the time you're age 25" like
everybody our age who's heard of Bill Gates during the late 90's has wished
for, but getting out of debt by the time you're in mid-twenties is the new
"being a millionnaire", with the cost of everything these days.

~~~
ivankirigin
I don't think they think it's enough, but it isn't really about the money. You
get in the right mindset when you start asking yourself, "well, how little can
I live on?"

That is the right question to ask. People will made due -- not all the money
needs to come from YC. Personal savings, credit cards, friends & family (both
money and spare bedrooms), etc. make up the difference.

~~~
eru
No sane German would ever dream about living on credit cards. But perhaps
that's just because nobody uses credit cards here anyway.

~~~
eru
I guess the equivalent is to overdraw your checking account. The interest you
have to pay for that matches credit cards.

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skmurphy
For a software startup I don't know that you need a "lump of cash" of more
than say $5-10K. You don't have that many capital expenditures compared to
other industries (e.g. if you are going to design a chip you need at least $1M
for the masks and almost that much for the design tools).

In my experience, VC's are asking "do you have customers" because they want to
talk to them and double check that the reasons customers purchased and the
benefits that the customers believe that they have gained match what you are
telling them.

Also, it matters quite a bit if you are profitable in terms of your
negotiating position. If you are unprofitable and tell an investor "we'll be
out of money in six months" guess when the serious negotiations often start?

I have never heard of 7 employees being a magic number. Or $1M in revenue.

Also, I would gently disagree with your statement:

"Investors know that the failure of a startup isn't necessarily because of the
idea, but in not having enough capital to keep afloat while figuring out how
to make money."

I think investors value demonstrated results (e.g. happy customers) a team
that can execute well together, and the possibility that they are investing in
acceleration of the business, not salaries for folks still trying to figure
out how to make money.

Consulting and working on the product in parallel has been one approach I've
taken, another is keeping my day job and working nights and weekends with a
partner. I think if you conceptualize the problem as how to raise 500K to $4M
you overlooking the most important risk: market risk (is there a market for
your product). Most teams don't fail because they can't build what they set
out to build in my experience, most fail because there wasn't a market and
they were not willing to adapt, refine, and improve the product until they
found a market.

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ojbyrne
digg.com got $50k from the founder of textamerica.com. We did some cross-
linking at the time. Before that it was all Kevin's savings.

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bigbee
Our first lump of cash came from angel investors that I got to know working
(as an employee, not a founder) in a previous startup. In general, people who
know you already, are more likely to be willing to bet on you.

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ALee
Biz plan competition, some family and friends, and we work out of a house. We
pay for food and servers, haven't even reached the $500K mark yet. You don't
need much when you're hacking.

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rob
I don't. I prefer to create content-type websites that require no up front
capital (aside from time and hosting coosts) or "investors" and build quality
backlinks, focus on SEO, and continue the process until I have 5-10 good
websites. From there, the money slowly comes in month after month.

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davidw
For example?

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mrtron
Everyone is always interested in "which site? which startup?", but quite a few
people wish to remain anonymous.

If he doesn't mention it and its not in his profile, he probably doesn't want
to say. (sorry if I am answering incorrectly for rob)

~~~
irrelative
That's a great point. I bet there are 100 people in the "get sort of rich,
slowly" category for every 1 internet millionaire.

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imsteve
Another interesting measure would be of how many deserving startups never did
end up getting the initial money together...

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electric
Self-financed. Bootstrapped with savings.

