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A Guide to Preemptive Funding Offers (ycombinator.com)
90 points by akharris 73 days ago | hide | past | web | favorite | 12 comments

To be clear, an offer is only an offer if it is a term sheet. Anything short of that is an attempt to get a founder to reveal more information.

Good succinct point that I think gets lost in the shuffle of founder optimism when fundriasing.

That said, my entire mindset around funding a company has shifted after having gone through the spanking machine a few times.

I'm convinced that the entire process of hot intro > send deck > partner pitch > term sheet > shop the term sheet > revise deal > do deal > press release etc... is basically a waste of time if you want to build a massive paradigm shifting company.

It's just a process for the founders to grow their network and build the signals for major corporate acquirers. You'll get market standard terms and have spent a ton of time away from your product. You'll go back to work, build up the team, get enough traction in a niche need to look good for a acquisition by FANG.

It's basically the process for being in the feeder league for being a rookie in the Big Leagues. If that's what you want, then great.

If you intend to completely upend how business is done, there will be a lot of these preemptive offers, IMO it's the best signal that you're on to something completely massive.

Said another way, if you aren't getting preemptive offers, your best long term outcome is likely a middling acquihire.

I understand where you're coming from, but don't actually think this is true. Quite a few of our best companies had difficult times raising their As - they were often too early or too different or too little of a pattern match to what investors wanted at that time.

Preemptive offers can be a signal that what you're building is working, or it might be a signal that you're good at fundraising.

I think it's important to unpack the briefcase term of "best companies."

As clarification I'm not saying that great companies, with great products and wonderful teams don't often have a hard time fundraising.

What I'm saying is that market transforming companies, like Docker and Whatsapp will get good offers without having to "fundraise" in the grinding format that we all know well and is written about and pored over in thousands of blogs and bootcamps and all (the one I described).

Is Docker the best example here? Before Docker built "Docker" they were dotCloud and doing the fundraising game. Had they not done the fundraising game, they may have never built Docker.

We’re using the same definition here. I’m referring to rapidly scaling, $1b+ companies that are fundamentally reshaping markets.

As someone not in the valley (we work out of NYC) I have had a completely different experience.

After many years in the industry doing all kinds of senior developer jobs, I started a company called Qbix in 2011. We spent zero on marketing, and attracted 5 million users around the world. They use our apps millions of times a month.

I have spent seven years building the technology that will decentralize Facebook the way the Web decentralized AOL. We want to unleash the same amount of wealth as the Web did.

Our platform has tons of reusable components for communities. It’s built like BSD - a cathedral approach. We open sourced it and eventually it will be as easy to make your own app as it is to host your own blog.

And we have a roadmap for the next 10 years, to decentralize much further, which you can see at https://qbix.com/blog

Here is my point:

This whole time we have hustled and went to conferences. We were nice, charming, smart, had a growing user base, technology kept getting better, and so on. I met Roelof Botha from Sequoia at Techcrunch Disrupt in NYC around 2009. I met Ron Conway there and he had his son Topher look at our stuff. I met Albert from USV from commenting on his blog. A lot of our views are aligned. I have a determination and passion to make a billion dollar company, while changing the world. If they would bet on anyone, they would bet on...

Startups like Color, Kik Messenger and CryptoKitties. Seriously. Some of whom are then never heard from again.

Who did we raise money from?

Angels. All the time. Individuals. And next ee are trying crowdfunding.

I just find that there is too much that goes into impressing VCs to make it your goal if you don’t have connections to begin with. Having recently learned what happens on the other side of the table (one of our advisors is a crypto VC) I see that it requires a lot of 24/7 fundraising itself, from family offices and so on.

While I enjoy that kind of shmoozing etc. it is a big time sink for what we’re trying to do. We just want to raise the next $100K and then grow our metrics, userbase and recenue 10x, and repeat. Maybe indie.vc would do it. But to most VCs this is a joke. We have tried to raise $1M round with VCs. Not worth the running around. I heard Reid Hoffman speak he said he went to 100 VCs to raise his first money and majority turned him down. And this was shortly after the dot com boom.

Don’t get me wrong, I understand it’s hard to run a fund. Some funds have it made, others have to hustle. But we are builders, and the VC industry doesn’t seem to actually be geared towards that any more than the music industry A&R dept was for artists. Spotify and Patreon came along and artists jumped. If innovative crowdfunding pops up to raise millions, the same thing will happen. It’s mostly the US regulators who are making innovation harder in that space, so you still have gatekeepers and the kind of dynamics we see.

Something like this would be superb: invest $10K, have people hit some lowhanging fruit metrics, then put the next $100K, amd so on. Have a roadmap. That aligns much more with builders.

Edit: YC is much closer to this ideal. But there is some scarcity in terms of geography and having to move to SF. I just want to have a roadmap and milestones and a common online framework for people to use. They make it to the next milestone? Great. If not they can keep trying. The price of the money can vary and go up if they take too long. But all this other running around is, honestly, in my opinion, beside the point. Especially for those guys in Nairobi or Romania.

I'm generally wary of any advice given by people who inherently need to talk their book, especially VCs like YC, however blog posts like this are genuinely helpful. They set the ground rules that appear to be fair for everyone, and if some unscrupulous VC tries to bully a young founder, she just needs to cut and paste the URL for this article and it will instantly shut the VC up.

I understand the skepticism, but I'd point out that, if I was trying to tilt the scenario in my favor, I'd have written about how founders should always take a preemptive deal quickly and secretly. That way, every time I made an offer, someone would accept it.

I was a founder before I became an investor and, for the most part, that's still how I approach advising startups. That's been the ethos of YC from the start, and it seems to work well.

Also, I like your framing - I'm spending quite a lot of time trying to establish norms and ground rules so that founders (and investors) operate on a level playing field. That's been the driving force behind much of my work the Series A Program, and generated resources such as our standardized diligence checklist and term sheet.

Noted your work, and greatly appreciated. Keep rocking.

YC blog's wispy-dark-grey text on a light-grey background is a bit hard to read. I don't recall noticing this earlier. Is it a recent change?

Now that you mention it, I agree, and don't recall having this discomfort in the past. I find it significantly less uncomfortable to read if I disable the custom font (Avenir Light).

It reads fine for me.


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