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How to Convince Investors (paulgraham.com)
489 points by johns on Aug 7, 2013 | hide | past | web | favorite | 113 comments

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors."

This advice applies to many things in life -- getting a job, proposing marriage, networking in general.

For instance, I've occasionally met people who obsess about crafting the perfect CV. For many of those people (not all) if they'd brought the same level of intensity to doing good work in the past, they'd be fighting off would-be employers, without any need to sprinkle pixie dust on their CV. Ditto people who try to find some magical method for networking. Do awesome work, and networking becomes mostly a matter of showing up and saying plainly and understandably what you've done.

I think there is a subtlety here where the effect can reenforce itself and become the cause.

When we were raising our first round of capital, we didn't know what we were doing. We weren't good at analyzing markets, managing product, or managing people/dev process. So to raise money we were forced to lift with our back and do it on the strength of the pitch/story telling, rather than the strength of the company.

Working through the pitch and raising capital helped us get good at all the aspects of building a company. Now that the company can stand on its own two feet, it's much easier to just tell our story and simply explain what we're doing without worrying about the pitch too much. It wouldn't have been possible if we didn't do the first round on the strength of the pitch (since we wouldn't have raised money, wouldn't have gotten good, and wouldn't have built a company that speaks for itself).

I guess the moral here is that it takes a while to build enough confidence to spread your wings. It's an iterative process. You fake confidence while you have to, which in turn gets you the resources to get better at what you do. The next time you don't have to fake as much. The time after that you have to fake even less. Until eventually you're knowledgable enough and confident enough that you can just tell your story and not worry about the pitch at all.

I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.

I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.

Thing is, past the first N years of your career, your CV / resume doesn't (or shouldn't) matter much. Ideally, you are connected to important people in your industry, who know what your work (or portfolio) is, and what you are best suited to do.

In such a situation, a person who wants to hire you would make the decision in advance, coach you to put in the right keywords so that your resume passes all the necessary and appropriate HR tests, and make the hire happen.

It's all about networking, who you know. What you know is obviously important, but if nobody knows in advance that you can do it, it's harder to prove such a thing in an interview? (Of course, this is less true for new grads or newer professionals, who haven't had time to build up a professional track record.)

"Ideally, you are connected to important people in your industry"

That's why being suckered into backend positions with little or no contact with customers or other parts of a company is often not a good idea, even if the pay is good and the tech interesting.

Doing postgraduate studies, participating in events, speaking, all of those are very important, yet, at least in my case, I only learned about those relatively recently.

I know some good people that don't do this, and they get outsmarted in the career ladder by the more gregarious types (which, in some cases, did worse work, or even worse, some sociopathic/liar types). That's also a reason not to work in big companies :) unless you're a good hand at self promotion and office politics yourself (and there are some toxic companies where not even that can save you. Usually monopolies or oligopolies).

Completely second this.And office politics are a nasty thing. One day you are the king pin at it, the next day some restructuring a new boss or a only a little slip in a project and you can be dead in the water. And yes, big companies tend to be more prone to be like that.

EDIT: And after that happened you may just realize that all you can show is some experience in office politics. By trying to sell that in the next interview you just turn into the next CV optimizer. Kind of a vicious cycle.

> Thing is, past the first N years of your career, your CV / resume doesn't (or shouldn't) matter much.

I completely agree with this.

I remember one of the most shocking things one of my professors said was "If you're sending out a resume past the age of 30, you've done something wrong."

This might seem a bit arrogant but I think his point that at some point your achievements and network should be sufficient to stand alone.

Some people do great work but aren't connected to others. They don't immerse themselves in their field, they aren't vocal publishers or active members of organizations.

True, and if the work is "great enough", then it will shine and be recognized (e.g. virally, through being discovered through sharing links or github or similar). Not everyone can do this, of course.

The over-focus on resume is true across all industries. Missing a keyword on the resume can be symptomatic of a bigger problem. If you're impressing the right people (through work, networking, etc) your resume gets put to the top of the pile without going through HR or an on-line keyword search.

"omitting the right keyword from your CV "


Even omitting the right word from you web page if you are a freelancer will cost you business. Outsourcer looks at qualifications and if, say, they are looking for php and the page doesn't list php the freelancer might not get a call for the particular project even if it seems reasonable that they do know php.

Similarly if you are looking for a plumber and you need a water heater put in having "we install water heaters" is much better than "we do all sorts of plumbing". People key into specifics and hot buttons.

I lost out on an otherwise positive interview for a plum job because I hadn't encountered the acronym 'ITIL' before - which was a shame, because I'd effectively done the same thing at a previous job that made medical gear and was frequently audited by the FDA.

My man on the inside said that it wasn't so much that this one thing killed the prospects, but that it caused enough uncertainty that the decision was delayed... during which time they decided to go another way.

I think you are talking about the average Joe. The Parent Poster is talking about industry elites. Not everyone does awesome work that get word-of-mouth. This applies to any field (tech-centric, medical, accounting or what-ever).

The people I've met who've obsessed over the perfect CV. were also, more often than not, the same people who gloated over how much success they've seen with minimal input work. Maybe they're related.

Absolutely. Pitch is a place holder for your understanding about the business you are building - the market, your team, product and your growth strategy. Just like a resume is a placeholder for your skills and experience.

That is something I've been trying to apply in my life (and apply it to other people as well)- words are cheaper than actions, so let your actions do the talking.

I wrote something similar today, only I called it "When the Sh-t Hits the Fan with Your Startup": http://www.erica.biz/2013/startup/

In the post, I wrote: I firmly believe no outside problem (running out of money; struggling to pay bills) can’t be fixed by looking inside yourself and becoming a better, stronger person.

That may sound sort of cheesy and "self-help-y", but for me it was transformative. I had to have internal confidence before I could project confidence externally. In order to have that internal confidence, for me, it involved rethinking absolutely everything about our startup, from our name to our customer demographic to our value proposition. (I go into detail on what happened and how we re-thought our startup in my blog post.)

Once I rethought everything, I found a deep well of internal confidence, and we went from "teetering on the brink" to raising another $175,000 from outside seed investors quickly (some of whom had been sitting on the fence for months), and then applying to and getting into Techstars' first Austin class as well.

External problems like lack of money or investors saying "no" are often reflections of your own internal doubts or lack of confidence. As PG said, it's not fixed by bravado, but by going deep inside yourself and rethinking your assumptions. Why are you doing this? Of all the things you could be doing, is this the #1 thing that drives you every single day of your life?

Once you fix your internal issues, the external issues resolve themselves. However, this lesson may be something you have to experience to believe (as I did.)

Say 'shit' or don't say 'shit'. Don't mask it - it's the worst of both worlds.

Please correct me if I am wrong but you're saying that I should try to identify low hanging fruits, right?

That's the secret. Convince yourself that your startup is worth investing in, and then when you explain this to investors they'll believe you.

This is one of the best advice for both fund-raising or anything else in life and it's basically the same strategy Arnold Schwarzenegger used to become the "number one star" in hollywood [1] as explained by Steve Chandler:

* ...Then I asked just how he planned to become Hollywood's top star. Mind you, this was not the slim, aerobic Arnold we know today. This man was pumped up and huge. And so for my own physical sense of well-being, I tried to appear to find his goal reasonable.

"Easy, It's the same process I used in bodybuilding," he explained. "What you do is create a vision of who you want to be, and then live into that picture as if it were already true." *

edit: attribution added - 1: http://biznik.com/articles/being-like-arnold-schwarzenegger

I don't quite buy it. We may just be seeing selection bias How many thousands do that and fail miserably? We never hear about it. How many luck into things? We hear about them, but don't then discount Arnold's story by some Bayesian amount of doubt. And how many get completely burned by trying to live as if they are something they are not, and get ostracized as a result?

Hollywood is filled with people trying to act like they are a great star. Almost none of them are, nor will they ever be one.

@RogerL "Hollywood is filled with people trying to act like they are a great star. Almost none of them are, nor will they ever be one."

You're skipping over important nuance: Assuming star = bundle of confident, recognized talent that brings values to any endeavour he/she is involved in, radiates this (vs "shouting") in person.

In contrast, Hollywood is filled with many people not acting like they're great stars, but projecting the peripheral benefits of being a great star (ie high visibility, rich lifestyle, entourages, etc) but they do not feel/act like stars at their cores.

The way I'd look at it is that focus and confidence is a pre-requisite, not a guarantee. Arnie was right.

I would like evidence for that statement. Because I have heard many Hollywood stars just exude insecurities. Heck, we talk about it all the time, and it even has a name "imposters syndrome". If you can achieve great things while feeling like an imposter, I would say that is an unanswerable rebuttal to the claim that confidence is a a pre-requisite.

Similar also to "the method" in acting:


I use this in negotiation as well. You convince yourself that you are playing a role and do what is consistent with the role you are playing. You are an actor. Takes quite a bit of practice.

I'm having difficulty squaring what you do with what pg is recommending:

  > And by convince yourself, I don't mean play mind games 
  > with yourself to boost your confidence. I mean truly 
  > evaluate whether your startup is worth investing in.
Isn't "playing a role" a form of mind games?

I think it's reconciliable over the fact that by setting out to become a certain kind of person/startup/something, you become it. After you're there, it'll be the truth, and not a mind game anymore.

As a personal example, I started dancing, and after watching the movie Step Up 3, I decided that this guy (http://youtu.be/EKIgbR_V8fs?t=1m2s) danced really well. So I set out to dance just like him. At the beginning, it was me akwardly dancing in front of my bathroom mirror at 3 in the morning. Now I can do what he does, and more.

So yeah, fake it till you make it, and then go get some investors.

That's not how I see it.

It's more like, if you can't truly convince yourself that your startup is worthwhile (or becoming the character via method acting), then your startup/character/acting method should be changed because other people won't believe it either.

Isn't that backwards? The whole point of the method is that you break down the distinction between you and the role, and become the character - you're explicitly not thinking about being an actor.

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get."

I would really love some more color on this. What about a product that addresses a genuinely new market? For example our market is a subset of the analytics market targeted at a new set of data, similar to Mixpanel or KissMetrics. I honestly have no idea how to talk about the market because there is no analogue at this point. How can I apply this advice?

"But every company that gets really big is "lucky" in the sense that their growth is due mostly to some external wave they're riding, so to make a convincing case for becoming huge, you have to identify some specific trend you'll benefit from."

Is this the answer to my question? It doesn't give me an $xy, but it does give me the "wave" I'm riding. Is that a solid foundation for talking to investors?

"It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup"

You have a silver tongue, PG :)

Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between.

This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it?

The advanced way to do market analysis -- which only the most experienced entrepreneurs ever actually do, but which works really well, at least with us -- is to spend very little time on market theory or top-down market estimates (handwaving), and instead put a lot of effort into building a solid, well-though-through BOTTOM-UP market analysis.

What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments.

E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing.

This kind of analysis answers several questions at once for the investor:

(a) Is there a big market? (b) Does the entrepreneur actually understand the dynamics of the market she's going after? (c) Does the entrepreneur understand the sales and marketing requirements and costs of her business? (d) Is this an entrepreneur who takes every aspect of her business seriously and rigorously?

What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments.

Interestingly enough, that totally jibes with the Customer Development methodology from @sgblank, where he talks about developing and validating your "Problem Hypothesis", "Market Hypothesis", "Channel Hypothesis", etc.

E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing.

This is the approach we're taking at Fogbeam. We've identified a beachhead market we're going to pursue to try and get initial traction, done some simulations based on the number of such customers, potential price points, etc., and come up with some potential revenue numbers and what-not. NOW, the next step is to get out and prove that our numbers actually make sense and hold up in the real world. Of course, they won't really, at least not according to our most optimistic projections. But the hope is that they do hold up well enough to get this thing off the ground...

This jives with the overall process advocated in one of my favourite books -- The Strategy and Tactics of Pricing.

Identify value to the customer first.

This is an awesome answer, thank you.

One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.

This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?

Hopefully you will see this. I went and looked at your site: http://www.applieddatalabs.com/ and tried to understand what you do.

It looks like you have a bunch of stuff going on all at once which is hard for investors to analyze and understand. It is important to break each invention/IP/idea in to separate concepts and analyze the market size of a niche market of each.

For your "cognitive data visualization and comprehension" IP you are working on, the key would be understanding a business type it could be sold to, then figuring out how much you would get.

Lets say you looked at the xBox One and Connect along with the PS4. Is there a way to license your technology to those two companies or maybe even game developers? If so, what do you think the licensing would get you per Xbox, PS4 or game?

You need to estimate two numbers: (# of units) and ($ per unit). Where the unit could be consoles or titles etc.

Anyway, hope that helps a little. Feel free to email me, same name at gmail.

The only thing you need is traction. Anything else doesn't matter.

It seems insane, but investors are blinded by traction.

If you are a startup that has low scalability, but you have traction, you will get funding

If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curtains anymore.

Why is this? Because investors have no clue, but you can't blame them, they are mostly 40-50 year olds whose minds are just not built anymore to foresee the future and most of them haven't even build a startup from ground to IPO. How are they supposed to even remotely know what will be the next startup that turns the whole silicon valley upside down.

This applies to 99% of investors, but there is a tiny folk of 1% who are so in the mindset, almost all of them previous founders. They can foresee the future and they are only waiting for the startups to have built the product they have been thinking of for years, but haven't built it due to simply not having the time.

Source: Pitched my no-traction/very scalable startup to hundreds of investors over 4 months until I stopped 2 months ago to get traction, never got a second meeting except for one time. Always thought, do the investors not see how super scalable this all is? Said no-traction startup now has strong traction.

The only thing you need is traction.

You're only saying that because you've never tried raising funding for a company with traction. But except for very rare exceptions, even when you have traction there are a whole new set of questions about the nature of the traction.

Sure, not all startups that have traction will get funding.

The point I wanted to make was that there are just so many startups that got funding because of traction, but that have such a low scalability. I always think to myself when I see read these stories: "Dude, this can be worth $50M/a 10x return max. Blinded by traction again."

"If you are a startup that has low scalability, but if you have traction, you will get funding"

To be fair, I think most people tend to underestimate the scalability (as well as the Total Addressable Market) of successful startups at the early stage. As PG puts it, the big winners often look like bad ideas in their earliest stages.

Take Rap Genius, for example. I'll freely admit that, when I first heard about the site and all the funding it received, I had no freaking clue why it was getting so much attention. I thought that this time, finally, unquestionably, the VC community had gone truly bonkers. Later on, when someone explained the potential to me -- that the underlying technology and platform could become X, Y, Z -- I was floored by the possibilities. And I felt like an idiot for not seeing it earlier.

I know a lot of people who had very similar reactions to airbnb, and to this day, a lot of people still have that reaction to Uber ("An app just for calling cabs??? Seems pretty narrow!"). Same thing with Tesla ("It'll never work at scale; you need to whole infrastructure of power stations on the street corners!").

Scalability is very hard for the average observer to gauge. It's even hard for the average tech enthusiast to gauge, and probably hard for the average VC to gauge.

Yes and it's funny that the 99% I mentioned are all followers, who look for pattern matches. YC also goes so strongly after patterns and they have also gone for lots of startups with very low scalability recently. What they don't realise is that when you go for startups that match the pattern, you actively sign up to not pursue the outliers and this not the big hits.

Investors should exclusive pursue the outliers and for that reason MUST look for the startups that don't match any elements of the "pattern". (except for a team that executes)

But they dont get that.

understand that even the best investors have to pay heed to the Pattern because it tells you when things are different. it is very, very hard to evaluate, from scratch, every opportunity that comes your way. (I myself have been pitched a thousand+ times. Augh.)

the Pattern is helpful because it is the differences that make companies succeed or fail; bad investors automatically think that differences from the Pattern are automatically bad.

that said, traction is one fact that makes all other hesitancies and issues disappear. that is why so many investors have their minds changed by it. "I don't love this idea but the graph goes up and to the right, so I'd better talk to them."

Virtually all of the breakthrough conceptual innovators in any field (music and art, to name two) also have comprehensive knowledge of all of the creative work that came before them. It's really rare to get the big breakthrough out of someone who isn't obsessively steeped in the field.

I've heard it said about jazz and poetry that masters and beginners both break the rules. The difference is that masters know the rules so well that they can decide which rules ought to be broken, and when, and why.

"The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction."

Very true, but why is this insane? Investors see tons of people with great big ideas who talk about passion. Since you have to winnow the field, why not do it on something that matters (traction) versus something that doesn't (the alma mater of the founder, or how they dressed).

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M.

Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val.

And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the difference between a 25x and a 100x.

Nice explanation.

It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.

Thanks and good point and I think that's where new Angels or other investors without any track record or network can get the good deals.

By finding founders whose startups are just about to take off, even better with the founders not knowing it yet. :)

Which leads to a problem pg has pointed out elsewhere... VCs dragging their feet on potential investments, waiting for more data. This steals bandwidth from the founders that could be used to build the company.

Ah, but in order to get that 100x they have to also invest in a larger number of startups, because of all the ones that look promising, they don't know which ones will actually succeed. So their expected return is actually increased -- probably quite substantially -- by requiring traction.

Not insane at all.

As long as a start up with decent traction has 4x more chance of success (ignoring for now the extra time required for due diligence), which seems likely, a rational investor would typically go for the 25x option.

I think they're making a rational call that they can't weed out which ones will make it. So in your example, they would need to invest in more than twice as many at the lower valuation to get the same # of successes.

Just being the devil's advocate. (Not that I intend to compare VCs to devils!)

Is the traction you're referring to here the type limited to web startups or (if anyone else knows) does this hold true for virtually any startup in any industry? I imagine there are a handful of industries where achieving 'traction' may take several years, eg biomed.

On one hand I'm inclined to come out and say, "No, in some industries you simply cannot get traction before going to investors (repeatedly)", given my experience in the biotech industry. Most biotech companies don't get "traction" until even after IPO, because the capital needs associated with making scientific and medical progress are large.

Yet, the reality is that even in these companies there's a notion of traction, and it's absolutely critical. It's not measured in terms of users, but instead manifest in scientific milestones. Every time you demonstrate the scientific validity of a piece of your tech, you are de-risked in the eyes of investors. That mirrors traction, even if it's less direct.

Another way that biotech companies can achieve notions of traction comparable to tech companies is through intermediate business models, such as operating as a contract research organization or reference laboratory.

Despite those parallels, I'd say that biotech traction is still difficult to achieve because most science lacks determinism in the rate of progress.

Traction is the most important for web startups because technology is not the limiting factor. There are a lot of teams out there that can build whatever. The problem is mostly reduced to market-risk. Traction is a big signal that market risks are mitigated even when that may not entirely be true.

Biomed startups have mostly technology risks, the problems are well-known and there is a very defined (and heavily regulated) goto market process. As the comment above mentions, the thing that gets investors excited in biomed startups is mitigation of the technology risk.

One of the biggest changes in my style as an entrepreneur from when I started WePay (4 years ago) to now is that I used to focus so much on "the sell" - but now I focus on the substance. It makes the selling far easier, and it makes it easier for your team to sell it as well.

"But while Microsoft did really well and there is thus a temptation to think they would have seemed a great bet a few months in, they probably didn't. Good, but not great. No company, however successful, ever looks more than a pretty good bet a few months in."

As an example, Bessemer Venture Partners passed on investing in Apple, Google, Intel, eBay, FedEx, and many other big companies. Their "anti-portfolio" makes amazing reading, and vividly demonstrates how hard it is to pick winners:


What a phenomenal bit of copy from a VC company as well. This paragraph in particular:

Our reasons for passing on these investments varied. In some cases, we were making a conscious act of generosity to another, younger venture firm, down on their luck, who we felt could really use a billion dollars in gains. In other cases, our partners had already run out of spaces on the year's Schedule D and feared that another entry would require them to attach a separate sheet.

had me laughing aloud as it completely took me by surprise. Thanks for the link!

As a side note, I think the website "paulgraham.com" demonstrates an anti-pattern: It is available with and without "www." prefix, thus splitting the HN comments into two parts:

https://news.ycombinator.com/item?id=6175417 (paulgraham.com, i.e. this one)

https://news.ycombinator.com/item?id=6178042 (www.paulgraham.com)

The solution is simple: Establish an HTTP redirect from "www.paulgraham.com" to "paulgraham.com" or vice versa.

PG's advice reminds me of a story from Surely You're Joking, Mr. Feynman!. Feynman relates how his first (!) scientific talk (as a graduate student at Princeton) was attended by such luminaries as Eugene Wigner, Wolfgang Pauli, Albert Einstein, and John von Neumann. We was terrifically nervous, but discovered that as soon as he started giving the talk his nervousness melted away—he was too focused on the physics to worry about who was in the audience.

I meant "He was", not "We was". Argh. I must have read and missed that ten times, and of course now it's too late to edit it.

As someone who is starting a seed fund with a few friends, I want to address one of the footnotes:

"The best investors rarely care who else is investing, but mediocre investors almost all do. So you can use this question as a test of investor quality."

I think the part about mediocre investors is true, but I'm not sure if I agree with the part about the best investors. There is actual value in knowing who else is investing. First, knowing the caliber of other investors is a signal. It's not the only signal, and it's not the best signal, but it is a signal. Second, my partners and I have a network of trusted coinvestors. If we hear that one of them is investing in a company, we can share due diligence, which is great for founders because it avoids duplicated meetings, and great for us because it saves us some time/helps us focus on questions that haven't already been asked and answered. We have never made a decision to invest in something "because X is investing", but we've certainly used our relationships with various X's to inform our due diligence process.

I found this to be especially refreshing. I may just be placing my own spin on it but it seems to me like Paul was saying: have integrity and know what you're talking about. I'll have to give it another read to ensure I'm not just placing my own biases on the words.

I have about a decade worth of sales experience. Sometimes not very successful, some very successful. I've also succeeded with convincing investors. The two were very similar for me. I've also worked with many other people in sales roles; of the ones that were successful only a small handful sold in the way Paul writes about.

Moving forward I won't be working with, or hiring anyone who doesn't. It's better for everyone.

Thanks for the essay, Paul.

The underlying concept I took from this post was a fundamental rule of marketing and sales...

Every decision made starts with an emotional trigger, and ends with a defensible position.

Yes -- this is what engineers who refuse about sales never come to understand. The decision is typically emotional; the facts are assembled and interpreted to justify the decision.

The reason it isn't insane for VCs to invest money into ambiguous situations even knowing that we are doing this is because the enterpreneur who can't get the a VC to be emotionally positive isn't going to be able to get anyone to be emotionally positive about what they are doing (recruits, customers, press, etc.). Conversely, the best entrepreneurs often marry great product skills with great sales skills.

Jonathan Haidt said it well -- we think our brain works like a scientist when it actually works more like a lawyer.

Incidentally, your second point echoes one of the more persuasive arguments I've heard for cofounding teams -- if you can't convince a co-founder to join, will you really be able to build a team and acquire customers?

"The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup, and misleading them about how far along you are with other investors seems the complementary countermove. It's arguably an instance of scamming a scammer. But I don't recommend this approach to most founders, because most founders wouldn't be able to carry it off."

- Trying to reconcile this with the earlier citation that truth telling is critical. This flies in the face of it and rationalizes this behavior by claiming it's dickish to ask? I don't think that's true and when did two dicks make a right? By the way the much better tactic to solve this problem is pick one or two investors and work with them to get them to commit and then have an honest answer for the others who'll fill out your round.

I enjoy these essays overall but don't enjoy this common thread I see that confuses hustle and sleight of hand as being interchangeable.

PG seems to be saying that the other side "drew first blood".

Of course that is an assumption that because they ask a question they care. While I'm sure they probably do care (because it's a well known fact and human nature) asking doesn't prove that the answer matters to them.

That said in business bluffing and telling lies in certain circumstances about certain things (especially negotiation with an adversary) is a given. There is a line that is walked and it is walked differently by different people according to what they feel comfortable with.

After all if you were at a car dealer and asked them "are you selling me this car cheaper than to any other customer" how do you think they would answer? And if they asked you "tell me the price the other dealer quoted you" how would you answer?

One thing I do know is that if you don't know how to be devious in business you will have problems. This is not to say you should be a thief lying all the time and ripping people off. But you need to have some common sense about what is done in a business transactions and what is generally considered acceptable. And how in some cases you could even be viewed negatively for being "to honest".

Paul's stance on this form of bluffing being "arguably permissible" is dangerous -- if you try that with a VC and they find out you're bluffing, you're screwed, not just on that deal but with that VC for the rest of your career. VCs talk to one another about this more often than entrepreneurs think.

Some of it is word play. E.g. investor y invites person x to an event and they chat, person x then says he is meeting with investor y, which can imply it was a face to face meeting with just them, which then implies more interest than exists. If they compliment the idea at all then person x goes around saying investor y likes it. There seem to be a lot of defenses against this already, though. If you say something vague involving another investor you often get asked to clarify or expound on that immediately. That then breaks it down flat out to lie or tell the truth.

Make the truth good, then just tell it.

That closing line is the equivalent of a gymnast sticking a landing.

I loved the wings metaphor but i found it still frustrating - pg is clearly an intelligent, observant person, at the heart of some of the best and brightest entrpreneurs globally. And yet we still cannot tell what makes a child grow into a twenty something whose wings can unfurl and a twenty something with raggedy stumps.

I hope that no one comes out of the "tube" of school and college without wings - but if that's true why do so few seem to fly?

What is it about those who fly that they learnt that others did not? Formidable-ness seems to simply be a tell for a good investor - not an explanation.

Please keep pushing them off cliffs - maybe we can work it out soon.

A pitch is required to present your startup's idea to some people. Like friends - if they understand, they will engage and support you, give advices; if not, they will change the subject, think you're a little lost and tell you to "get a job". Or to your parents - if they understand, they will be happy and optimistic about your future; if not, they will worry and tell you to, guess, "get a job". To other entrepreneurs and developers - if they understand, they will try to give advices, make contacts, keep you in their mental list of people they would like to work; if not, they will you consider one wantrepreneur. This pitch is very important, it needs to come out without any thinking, on automatic. You need only one answer on this pitch, two or three sentences and a complement if the interlocutor is interested and give you space to talk about your startup. More than that is a conversation, and for conversations you do not need pitches.

Do you know for whom you do not need a pitch? Investors. I am not talking about potential investors, who may one day remember you and consider the investment as the entrepreneurs I said earlier. I am speaking of that meeting with the investor, face to face, where you're to present your startup and they will decide whether to invest in you or not. A meeting is a conversation, not a pitch. It is the time that you will present what you know, not what you memorized. We must listen to the investor, to understand his doubts, it takes a lot of empathy. When going to a meeting for such a conversation you should prepare your knowledge, not your speech. You must have a deep understanding of the strengths and weaknesses of your startup, you have to create a presentation only to show some specific numbers that you have no reason to decorate. Those data that are calculated in a serious, rigorous method and not "estimated" or "expected".

In summary, I think two things are essential: i) to have a carefully prepared pitch, ready to go out without thinking, the standard answer about your startup - something that is clear and visionary at the same time, to show the idea and attract person's interest and ii) not to have anything memorized if this short answer turn into a conversation, but you have to be completely updated to all relevante knowledge about your business - and this will tell not only the investors, but yourself, if you are prepared to run this business.

"The time to raise money is not when you need it, or when you reach some artificial deadline like a Demo Day. It's when you can convince investors, and not before."

Been waiting for someone to articulate this for a while now. Pitch people an idea a few thousand times and you get pretty good at reading if people buy it. Getting close to the "convince" threshold for investors and when we do reach it, watch out!

PG led the charge on the idea you should start a company instead of going to grad school or taking a safe job. It's very important that he's now also saying, "your startup, despite needing money, might not be ready to raise money yet" because it adds an important constraint on your decision to take the plunge - either be sure you can reach the goal in a few months or have more personal runway.

I have found the binary thing to be true with west coast investors (especially in San Fran). Here in NYC, many angel investors think in terms of "when will I start getting returns on my money", and not "will this be the next big hit"? Catering to both types is often impossible, you have to pick one to go after.

Neophyte question: Why do investors have to ask founders who else is investing? Is it not possible for them to check this themselves, via public records? [There are some sites that even pre-package the SEC filings for consumption by journalists, etc.]

It makes perfect sense to me why investors would want to know who else is investing, for a number of reasons. For one, standing on the sidelines knowing that most startups will fail is not a reasonable strategy. This is because some startups, no matter how unlikely, will succeed, and some VC will, despite our better judgment, have invested in them. If other VC deliver higher value for their clients than we do for ours because we cautiously and prudently stand on the sidelines, then we stand to lose the confidence of our clients.

But I do not understand why anyone would rely on the statements of founders to determine who else may or may not be on board as investors.

The way VC and angel rounds work, is in rounds...

Each round has investors commit and before they close, some investors may ask who else is investing. Most closed rounds on really early stage companies are hard/impossible to find, but all pre-closed rounds are impossible to find since there is no record of something that hasn't happened yet.

Here's one website I was thinking of: http://formds.com

Is the information disclosed in Form D's severely limited or useless for determining who is being funded and who is funding them? If yes, then what is the purpose of this website?

No one likes risk. Even early stage investors. A good investor deck should convince the investor that whatever risks are associated with particular investment opportunity are seemingly mitigated.

Team - not your first rodeo, know how to win, subject matter experts. Focus - clearly stated value proposition. Dream - big market, big value. Plan of Attack - clear path to capture market share. Validation/ Traction - customers! Tech - solid, non-obvious, not easily replicable. (i.e. if your successful, someone else can't just hop into the market and eat your lunch). Use of proceeds - not just pay my salary, but grow this business. Next big milestone: profitability? another fund raise?

If you hit on these, then investors will want to put money in their favorite types of companies: the one's that don't look like they need it. ;)

"You need three things: formidable founders, a promising market, and (usually) some evidence of success so far."

Evidence of success often makes the first two way less relevant. Up to the point where tables are turned and investors will be trying to convince founders to take their money.

Where this whole thing breaks down, though, is where you need more money than you can self-fund, to get to that point of having some evidence of success so far. In theory, the whole point of "seed stage" capital is to take a company who aren't at that point yet, and get them there, where they can leverage that success to either grow organically, get acquired, or attract additional investment.

But these days, would-be "seed stage" investors are acting more like VCs looking at an A round. Everybody seems to have become incredibly risk averse, and acts like they've forgotten the "high risk" part of the expression "high risk, high reward".

Now to be fair, I'm speaking from an East Coast perspective, and I understand the investors here tend to be more risk averse than their West Coast counterparts. But from the sounds of this, this mindset may be spreading.

Oh well, at least, in our case, we aren't trying to raise money (yet) anyway. Our goal is to self-fund as far as possible and only raise outside money if we absolutely have to.

It's a bit like a game. It's the investors job to eliminate false positives and vs. a first time founder, investors will typically have an advantage in that they've been through this many times before.

Trying to "beat the system" is like trying to beat investors at what they would on average be the best at doing and potentially sending inadvertent false positive signals caused by the nervousness of being new to fundraising.

If you focus on what PG recommends, you eliminate a lot of that friction since you eliminate the nervousness.

My tl;dr: In the fundraising lottery, it's easier to sell investors a ticket than trying to convince them you have the winning combination.

What's also interesting about all of this (when looking at qualitative factors) is that while we have plenty of data on certain people's success after the "nth" investor took a gamble (and it is a gamble since many had passed on the same person/opportunity [1]) on their idea and we have statistics on people that they gambled on and failed, what we don't have is any statistics on someone that everyone passed on and what would have happened if one person took a chance on them and gave them an opportunity.

[1] (as with Drew Houston and the east coast))

> There are a handful of angels who'd be interested in a company with a high probability of being moderately successful.

Is YC in this camp or do you guys and gals try to stay in the huge success side of speculation?

From the "Philosophy" section of ycombinator.com/about (the whole section is relevant really):

One concrete consequence is that Y Combinator funding lets you sell early, if you want to. It can sometimes make sense to sell yourself when you're small for a few million, rather than take more funding and roll the dice again. Google likes to do early-stage acquisitions, and we expect them to become increasingly common as other companies learn what Google has.

If you take a large amount of money from an investor, you usually give up this option. But we realize (having been there) that an early offer from an acquirer can be very tempting for a group of young hackers. So if you want to sell early, that's ok. We'd make more if you went for an IPO, but we're not going to force anyone to do anything they don't want to.

I think YC prefers big successes but doesn't try to pressure everyone to be the next Dropbox or AirBnB

"Why do founders persist in trying to convince investors of things they're not convinced of themselves?"

This line hit home with me. Applies perfectly to job interviews.

It also applies to dating; indeed, any human activity where you are selling your own self.

So a question... how do you balance confidence from a well-understood solution to a well-understood problem in a well-understood market, with the kind of blue-sky dreaming that seems to excite investors? Crossing into that blue-sky world starts smelling like BS to me, but when I say "We could realistically get a $100M chunk of an existing multi-billion market", it doesn't seem ambitious enough?

It smells like BS to you because you don't really, honestly believe that you're addressing a multi-billion dollar market.

That's not necessarily bad, but the whole point of the essay is that you should first come up with a strategy for a market that you really think has a shot of being that big.

Thanks for the advice Paul. It's very well timed as I have an investor meeting later today!

My biggest takeaway from your essay: the truth prevails. As cliche as it sounds, its apt advice for those aspiring to be the biggest startups of our generation. Its easy to get carried away with our dreams and visions.

> When people hurt themselves lifting heavy things, it's usually because they try to lift with their back.

It's got more to do with a weak back, actually. Folk with strong backs can lift very heavy weights safely.

In terms of the analogy, I dunno what I'm saying. Just fulfilling my HN nitpick quota.

That and rounding the spine rather than maintaining an arch.

Though the back musculature is sufficiently complex that a mis-firing can make for a bad week even if you're just picking up a bar of soap.

Yeah, I cringe when I see obvious-but-sadly-erronious out-of-scope analogies being made. Particularly if I happen to have some idea of the subject area in which the analogy is being drawn. Sort of detracts from the whole message.

These days I just let it slide. It's like being annoyed by inaccuracies in movies. Everyone's annoyed by something.

It's a sign of sloppiness, lack of attention to detail, and a fundamental lack of interest in facts.

If the issue is sufficiently allegorical, I'm reasonably OK with letting it slide, but increasingly this is a sign that there are much deeper flaws in a piece, and it's time to shift my limited attention elsewhere.

E.g., "weight loss" stories in the popular press (in my case most often on NPR or The New York Times) which fail to distinguish adipose tissue from skeletal muscle, or address the role of strength training in both body recomposition and fitness. Both Gina Kolada and Gretchen Reynolds have particularly caught my attention in this regard.

Or this stunning display of cavalier disregard for facts from The Economist: http://www.economist.com/news/leaders/21582516-worlds-thirst...

Notice in particular: dismissal of the opposing argument is limited to unnamed "several theorists, who have since gone strangely quiet". ORLY?

Not that The Economist hasn't (editorially at least) been notoriously and conspicuously cornucopian.

I <3 this essay. "Fake it 'til you make it" seems to be the m.o. in a lot of entrepreneurial circles. I've honestly never known if this is actually a good strategy or not. It seems the answer is no.

IMHO "fake it til you make it" is sometimes necessary and sometimes it produces quick wins - but if you let it distract you from building authentic value then it is a net negative in the long term.

"Fake it 'till you make it" embeds the assumption that you are going to make it, which is a thing you need to constantly and actively work on doing.

Otherwise, it's just faking it.

Fake It Till You Make It is a fantastic strategy for some things, utter disaster for others. There is no panacea in startups, but don't discount the colloquialism as devoid of value, either.

The real problem is that most people are not convincing during the "fake it" portion.

I agree, but I think there's a bigger problem.

I think first time entrepreneurs are prone to thinking that raising money is a win. Second time entrepreneurs almost never think that, they view it as an obligation.

A lot of young, first time entrepreneurs, if you told them: you can with certainty raise a $5M Series A, but with certainty the business will not work in the end, which you will figure out in 3 years -- they would still raise the money. They have a burning desire to to be a CEO, to build something, and they'll worry about the rest later.

In my view, raising money when you either have no idea if it's a good opportunity, or believe on early data that it's actually not (but you'll figure it out or pivot later), -- this is what I see in "fake it til you make it", "hustler" thinking -- is that when you're successful, you've now signed up to use some of the most productive years of your life chasing an opportunity that is likely not to be any good, when you could have held out for something better.

Happiness research indicates that people are consistently wrong about what's going to make them happy (or sad) -- the shiny new car will lift their spirits every time they get behind the wheel, but within a few weeks, it's just another car. I think this applies to fundraising as well: raising money for an idea you're not 100% convinced on has proven to tempt many founders, but in my experience, they later come to regret it.

Maybe a little out of context, but how easy is it to start talking about an idea without a working prototype? Of course it would make things easier, but maybe not always possible without a minimum funding.

Sometimes is the other way too. They have to convince you, that they are the best fit for the company.

Hi pg,

I admire the clarity of your thoughts.

This is a really fine and insightful article. Thank you for sharing this.

There's one error: Microsoft did raise venture capital. They did it a matter of months before they went public.


Yeah, I know. But that was not fundraising in the sense I'm talking about. That was just to support the IPO price.

Whatever. When you consider the whole concept of the "pivot" it's clear that this is a business of betting on people rather than business plans, which makes this essay a bit redundant.

s/both your time/both your time and theirs/

Shakespeare. amazing clarity of thought put to words.

This is a really fantastic essay, but I was disappointed by this:

The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic.

By engaging in this tactic, you are working to make foolish behavior on the part of the investor successful, which then leads to the very climate that makes the dishonesty so tempting in the first place. It's a vicious cycle.

Why not stick to the "always be 100% honest" approach? This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay.

I recognize you didn't recommend this approach. But I think you should go one step further and not claim it is arguably acceptable.

"This will reform the investor climate over the long-term if the best startups consistently use it, and after all, these best startups are the target of your essay."

Seems that the target of PG's advice is a particular individual and what benefits them. Not what benefits all startups. If he were writing to investors he might write differently.

Fundraising climates cycle from optimistic to pessimistic. If you take a ten year view, this would be an average to above average time to raise money in my view.

In the difficult environments, everyone has their wallets stashed in their pockets and it's hard for even good startups to raise money. In that environment I think engaging in "permissible levels of salesmanship" is probably rational.

But in an average to strong market, I agree, why compromise even at the margin? If it's a good idea you'll get funded.

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