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Fundraising Rounds Are Not Milestones (ycombinator.com)
151 points by craigcannon on Feb 6, 2017 | hide | past | favorite | 57 comments

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.

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

We are in total agreement. Well said.

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.

True. You can fundamentally view the relationship between a startup's progress and its wont to fund as occurring against a constantly shifting risk/reward ratio for the VC.

If the startup can say "look, we have product A with feature set B", that's something. If they can say "look, we also have X customers and Y growth with Z profitability", that's something more.

It is perfectly reasonable for startups, seeing that the risk/reward graph shifts significantly at certain achievements, to schedule funding rounds in such a way as to minimize that risk for investors and thus retain maximum ownership.

For example, in our case (a hardware startup with four digit unit prices per product) we are naturally deferring Series A until we have achieved a final manufacturing-ready prototype, both because we need serious cash to make production happen at decent volume, and because anything earlier would be suicidal from the perspective of long term value due to far higher VC-perceived risk.

Don't overthink it. Raise money sparingly, and spend it wisely.

Honestly - looking at how many VC funds actually make good returns - I would say often isn't accurate. Remember that raising a series A is associated with many more failed companies than successful. I think there are far better signals for the core fundamental skills of a business.

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?

I believe user dlevine addressed this above: https://news.ycombinator.com/item?id=13586354

"the round was raised because the founders were charismatic serial entrepreneurs who knew how to play the fundraising game."

From what I've seen folks are often handed huge checks based on past success and strength of the vision; you don't necessarily need a v1.0 (or even v0.1 product). Consider this example:


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.

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.


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.

If I ever start a farm I will definitely celebrate the day we buy our first combine!

I love this quote!

None of the things you listed are liabilities.


Cool quote though.

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

Gotcha. Assumptions definitely are liabilities ;)

> 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.

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

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.

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.

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.

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

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

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.

"[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.

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.

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.

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?

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

- Goodhart's Law

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.

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.

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

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.

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

I agree heartily with the general thesis, that fundraising rounds shouldn't be put on the pedestal they are. About your comments on the tech press, what do you realistically think they can talk about if not funding rounds?

Most forms of impact for early stage companies are typically communicated by traction numbers which you want to keep private from your competitors.

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

Totally fine to need a lot of money. Actually there are a lot of fintech/alternative lending companies where debt fundraising is a big milestone because debt/capital is core to the product. This is relatively rare though.

Is OpenDoor a startup, or a REIT ?

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

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.

their operational side looks/walks/quacks like a startup, so i think something important gets lost in translation if you look at the balance sheets and call OpenDoor a REIT

I suspect this is often used as shorthand as a measurement of progress because it's announced publicly and has some (imperfect) correlation to traction across all companies who receive it.

If you were to define a new standard milestone for "success", what would it be? Revenue, for B2B companies, and active user growth rate for B2C?

I'm not an expert, but I'd probably say a mixture of revenue, gross profit, EBITDA, and growth expectations.

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.

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.

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.

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

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

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


"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."


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.

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.

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.

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

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...

Spot on Michael.


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