YC
Fundraising Fundamentals By Geoff Ralston
@ Y Combinator
10/11/18
Takeaways
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Geoff Ralston
10/11/18
@ Y Combinator
We're going to have two lectures on fundraising; this one is a high-level overview, and next week my partner Kirsty will do a deep dive into the mechanics of fundraising.
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Geoff Ralston
10/11/18
@ Y Combinator
We have an amazing set of resources in our library on fundraising, including Paul Graham's essays, which have aged well and will help you a lot.
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Geoff Ralston
10/11/18
@ Y Combinator
Fundraising can be one of the hardest parts of starting a company, and while it may seem like an open market, it's often not rational or fair.
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Geoff Ralston
10/11/18
@ Y Combinator
While fundraising, you will hear 'no' a lot and reasons why your startup may not succeed, but you should never believe that; resilience and belief in your vision are crucial.
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Geoff Ralston
10/11/18
@ Y Combinator
In less than a minute, figure out the story of your startup, including why it will matter in the future and what makes your product or opportunity compelling to investors.
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Geoff Ralston
10/11/18
@ Y Combinator
Find the right investors by doing research and talking to other founders; organizations like Y Combinator can be very helpful in this process.
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Geoff Ralston
10/11/18
@ Y Combinator
You will pitch repeatedly, refining your story each time, and eventually, you'll meet the right investors who resonate with your vision.
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Geoff Ralston
10/11/18
@ Y Combinator
The best time to raise money is when you don't need it; this shows investors that you have a strong opportunity and can attract more interest.
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Geoff Ralston
10/11/18
@ Y Combinator
When raising money, assume it might be the last time you'll be able to do so; raise enough to reach profitability without needing more funds soon.
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Geoff Ralston
10/11/18
@ Y Combinator
Investors invest in you as a founder, so ask yourself if you are formidable enough to turn an idea into a successful reality.
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Geoff Ralston
10/11/18
@ Y Combinator
The story of your startup must be interesting and believable, representing a large opportunity that investors can envision as successful.
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Geoff Ralston
10/11/18
@ Y Combinator
Even if you don't have traction, a compelling story can still help you raise money, as demonstrated by companies like Magic Leap, which raised billions based on their narrative.
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Geoff Ralston
10/11/18
@ Y Combinator
Choose your valuation carefully; too high can scare off investors, while too low can lead to excessive dilution. The goal is to get the money in the bank and get back to work. Don't over-optimize your fundraising process; focus on the essentials instead.
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Geoff Ralston
10/11/18
@ Y Combinator
Convertible notes are a type of debt that we no longer recommend using for fundraising.
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Geoff Ralston
10/11/18
@ Y Combinator
When you offer a convertible note, you're selling a promise of equity rather than actual equity in your company.
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Geoff Ralston
10/11/18
@ Y Combinator
Convertible notes are fast and simple, typically requiring only 3 to 5 pages of documentation, unlike equity deals which can involve hundreds of pages.
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Geoff Ralston
10/11/18
@ Y Combinator
Always read every fundraising document thoroughly to avoid agreeing to unfavorable terms you might not understand.
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Geoff Ralston
10/11/18
@ Y Combinator
Issuing new shares to a shareholder is usually slow and expensive, often requiring legal assistance and granting investors rights that aren't necessary with convertible notes.
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Geoff Ralston
10/11/18
@ Y Combinator
Dilution occurs when you sell a percentage of your company, reducing your ownership stake; for example, selling 20% of your company means you own 20% less afterwards.
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Geoff Ralston
10/11/18
@ Y Combinator
Convertible notes complicate the understanding of dilution because you haven't actually sold equity yet, making it hard to determine the real dilution impact until later funding rounds.
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Geoff Ralston
10/11/18
@ Y Combinator
The standard Y Combinator document for fundraising is now a post-money safe, which simplifies the investment process for both investors and founders.
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Geoff Ralston
10/11/18
@ Y Combinator
Angels are typically wealthy individuals investing their own money, while VCs invest other people's money and have a different decision-making process.
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Geoff Ralston
10/11/18
@ Y Combinator
Crowdfunding platforms like Kickstarter and AngelList can play a supportive role in fundraising but are not usually the primary source of funds.
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Geoff Ralston
10/11/18
@ Y Combinator
Initial Coin Offerings (ICOs) are complex and require a deep understanding of SEC regulations; approach them with caution and thorough education.
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Geoff Ralston
10/11/18
@ Y Combinator
In fundraising, it's important to do your homework on potential investors, including their past investments and interests, to position yourself advantageously.
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Geoff Ralston
10/11/18
@ Y Combinator
Capture an investor's attention in the first minute of your pitch; avoid being boring and tell a compelling story about your product.
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Geoff Ralston
10/11/18
@ Y Combinator
Bringing a prototype or demo to your pitch can significantly enhance your chances of convincing investors of your capability to deliver.
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Geoff Ralston
10/11/18
@ Y Combinator
Listening during investor meetings is crucial; it's a conversation, not a monologue, and their feedback can be invaluable even if they decline to invest.
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Geoff Ralston
10/11/18
@ Y Combinator
A successful fundraiser improves with each meeting; practice your pitch and learn from the feedback you receive to enhance your approach.
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Geoff Ralston
10/11/18
@ Y Combinator
Always conclude an investor meeting with clarity, whether it's securing a commitment or understanding the next steps in the process.
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Geoff Ralston
10/11/18
@ Y Combinator
As an angel investor, I often focus more on the founder's story than on the pitch deck; however, having a concise deck can be beneficial.
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Geoff Ralston
10/11/18
@ Y Combinator
Create a compelling narrative around your product and future rather than just relying on a pitch deck; storytelling is key in fundraising. When raising funds, clearly state your valuation cap, but be open to negotiation if it's perceived as too high.
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Geoff Ralston
10/11/18
@ Y Combinator
It's acceptable to discuss with investors what they consider a reasonable valuation if you're unsure about your own.
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Geoff Ralston
10/11/18
@ Y Combinator
Understanding the investor's perspective is crucial; angel investors and venture capitalists have different priorities and expectations.
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Geoff Ralston
10/11/18
@ Y Combinator
Having multiple funding options strengthens your negotiation position; if you're the only one seeking investment, the investor holds more power.
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Geoff Ralston
10/11/18
@ Y Combinator
In negotiations, you can delay your response to avoid making hasty decisions; don't feel pressured to match the investor's expertise.
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Geoff Ralston
10/11/18
@ Y Combinator
Focus on building a great product that customers love, as this is more important than over-optimizing your fundraising efforts.
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Geoff Ralston
10/11/18
@ Y Combinator
Don't model your fundraising strategy on outliers; instead, identify the right investors and build genuine relationships with them.
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Geoff Ralston
10/11/18
@ Y Combinator
Maintain professionalism in the fundraising community; being a bad actor can damage your reputation and future opportunities.
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Geoff Ralston
10/11/18
@ Y Combinator
When you receive a rejection from an investor, don't take it personally; it often reflects differing visions rather than a personal failure.
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Geoff Ralston
10/11/18
@ Y Combinator
Fundraising is just a step in building a sustainable business; the real goal is to create a product that people want.
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Geoff Ralston
10/11/18
@ Y Combinator
Choose your investors wisely; those who can provide valuable connections and support will contribute to your long-term success.
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Geoff Ralston
10/11/18
@ Y Combinator
The most important aspect of fundraising is to get it done so you can focus on building your company.
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Geoff Ralston
10/11/18
@ Y Combinator
Incorporate your business properly before fundraising; many investors won't consider investing in LLCs or unincorporated entities.
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Geoff Ralston
10/11/18
@ Y Combinator
Convertible notes are great for quick fundraising, but equity is often preferable for larger amounts due to better management and oversight.
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Geoff Ralston
10/11/18
@ Y Combinator
When sharing your vision, avoid exaggeration; ensure your story is credible and believable to gain investor trust.
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Geoff Ralston
10/11/18
@ Y Combinator
If you're investing your own money into your company, it's best to buy equity directly rather than using complex structures. You don't need a lawyer to negotiate with yourself when managing your own investment in a startup, but it's wise to seek legal advice or do thorough research to ensure everything is done correctly.
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Geoff Ralston
10/11/18
@ Y Combinator
When you raise funds through a SAFE (Simple Agreement for Future Equity), you manage the money as a fiduciary, meaning you have responsibilities to use it for the company's benefit, not for personal use.
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Geoff Ralston
10/11/18
@ Y Combinator
Traction for a pre-sales startup is defined by any usage of the product, whether it's free or paid. If no one is using your product, you have no traction.
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Geoff Ralston
10/11/18
@ Y Combinator
Good traction is often measured by growth rate; showing significant growth in revenue is more impressive than having a static revenue figure over time.
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Geoff Ralston
10/11/18
@ Y Combinator
The best way to connect with investors is through a mutual connection, ideally someone who has already invested in your company, as this provides a strong introduction.
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Geoff Ralston
10/11/18
@ Y Combinator
If you're raising funds, clearly explain how the money will be used to achieve specific milestones, such as hiring staff or reaching revenue targets.
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Geoff Ralston
10/11/18
@ Y Combinator
The post-money SAFE structure is clear and unambiguous, ensuring that investors know exactly what percentage of the company they own after their investment.
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Geoff Ralston
10/11/18
@ Y Combinator
When asked for five-year financial projections at the seed stage, it's more realistic to discuss your plans for the next 12 to 18 months, as long-term projections are often unreliable at that stage.
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Geoff Ralston
10/11/18
@ Y Combinator
Customer testimonials are generally not very effective unless they translate into actual sales; investors care more about whether customers are willing to pay for your product.
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Geoff Ralston
10/11/18
@ Y Combinator
When addressing investors who are cautious about blockchain, focus on telling a compelling story about your company and its unique value proposition, rather than trying to fit into conventional expectations.
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Geoff Ralston
10/11/18
@ Y Combinator
YC's investment of $150,000 does not handicap companies; rather, it increases their value and success probability, as the average cap for companies going through YC tends to be over $8 million.
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Geoff Ralston
10/11/18
@ Y Combinator
It's important to communicate the enormous business opportunity your startup presents, even if you can't provide precise long-term financial projections; focus on the potential customer base and market need instead.