September 2013Most startups that raise money do it more than once. A typicaltrajectory might be (1) to get started with a few tens of thousandsfrom something like Y Combinator or individual angels, then (2) raise a few hundred thousand to a few million to build the company,and then (3) once the company is clearly succeeding, raise one ormore later rounds to accelerate growth.Reality can be messier. Some companies raise money twice in phase2. Others skip phase 1 and go straight to phase 2. And at Y Combinator we get an increasing number of companies that have alreadyraised amounts in the hundreds of thousands. But the three phasepath is at least the one about which individual startups' pathsoscillate.This essay focuses on phase 2 fundraising. That's the type thestartups we fund are doing on Demo Day, and this essay is the advicewe give them.ForcesFundraising is hard in both senses: hard like lifting a heavy weight,and hard like solving a puzzle. It's hard like lifting a weightbecause it's intrinsically hard to convince people to part withlarge sums of money. That problem is irreducible; it should behard. But much of the other kind of difficulty can be eliminated.Fundraising only seems a puzzle because it's an alien world to mostfounders, and I hope to fix that by supplying a map through it.To founders, the behavior of investors is often opaque — partlybecause their motivations are obscure, but partly because theydeliberately mislead you. And the misleading ways of investorscombine horribly with the wishful thinking of inexperienced founders.At YC we're always warning founders about this danger, and investorsare probably more circumspect with YC startups than with othercompanies they talk to, and even so we witness a constant seriesof explosions as these two volatile components combine.[1]If you're an inexperienced founder, the only way to survive is byimposing external constraints on yourself. You can't trust yourintuitions. I'm going to give you a set of rules here that willget you through this process if anything will. At certain momentsyou'll be tempted to ignore them. So rule number zero is: theserules exist for a reason. You wouldn't need a rule to keep yougoing in one direction if there weren't powerful forces pushing youin another.The ultimate source of the forces acting on you are the forcesacting on investors. Investors are pinched between two kinds offear: fear of investing in startups that fizzle, and fear of missingout on startups that take off. The cause of all this fear is thevery thing that makes startups such attractive investments: thesuccessful ones grow very fast. But that fast growth means investorscan't wait around. If you wait till a startup is obviously asuccess, it's too late. To get the really high returns, you haveto invest in startups when it's still unclear how they'll do. Butthat in turn makes investors nervous they're about to invest in aflop. As indeed they often are.What investors would like to do, if they could, is wait. When astartup is only a few months old, every week that passes gives yousignificantly more information about them. But if you wait toolong, other investors might take the deal away from you. And ofcourse the other investors are all subject to the same forces. Sowhat tends to happen is that they all wait as long as they can,then when some act the rest have to.Don't raise money unless you want it and it wants you.Such a high proportion of successful startups raise money that itmight seem fundraising is one of the defining qualities of a startup.Actually it isn't. Rapid growth is whatmakes a company a startup. Most companies in a position to growrapidly find that (a) taking outside money helps them grow faster,and (b) their growth potential makes it easy to attract such money.It's so common for both (a) and (b) to be true of a successfulstartup that practically all do raise outside money. But there maybe cases where a startup either wouldn't want to grow faster, oroutside money wouldn't help them to, and if you're one of them,don't raise money.The other time not to raise money is when you won't be able to. Ifyou try to raise money before you can convinceinvestors, you'll not only waste your time, but also burn yourreputation with those investors.Be in fundraising mode or not.One of the things that surprises founders most about fundraisingis how distracting it is. When you start fundraising, everythingelse grinds to a halt. The problem is not the time fundraisingconsumes but that it becomes the top idea inyour mind. A startup can't endure that level of distractionfor long. An early stage startup grows mostly because the foundersmake it grow, and if the founders look away,growth usually drops sharply.Because fundraising is so distracting, a startup should either bein fundraising mode or not. And when you do decide to raise money,you should focus your whole attention on it so you can get it donequickly and get back to work.[2]You can take money from investors when you're not in fundraisingmode. You just can't expend any attention on it. There are twothings that take attention: convincing investors, and negotiatingwith them. So when you're not in fundraising mode, you should takemoney from investors only if they require no convincing, and arewilling to invest on terms you'll take without negotiation. Forexample, if a reputable investor is willing to invest on a convertiblenote, using standard paperwork, that is either uncapped or cappedat a good valuation, you can take that without having to think.[3]The terms will be whatever they turn out to be in your nextequity round. And "no convincing" means just that: zero time spentmeeting with investors or preparing materials for them. If aninvestor says they're ready to invest, but they need you to comein for one meeting to meet some of the partners, tell them no, ifyou're not in fundraising mode, because that's fundraising. [4]Tell them politely; tell them you're focusing on the company rightnow, and that you'll get back to them when you're fundraising; butdo not get sucked down the slippery slope.Investors will try to lure you into fundraising when you're not.It's great for them if they can, because they can thereby get ashot at you before everyone else. They'll send you emails sayingthey want to meet to learn more about you. If you get cold-emailedby an associate at a VC firm, you shouldn't meet even if you arein fundraising mode. Deals don't happen that way.[5]But evenif you get an email from a partner you should try to delay meetingtill you're in fundraising mode. They may say they just want tomeet and chat, but investors never just want to meet and chat. Whatif they like you? What if they start to talk about giving youmoney? Will you be able to resist having that conversation? Unlessyou're experienced enough at fundraising to have a casual conversationwith investors that stays casual, it's safer to tell them that you'dbe happy to later, when you're fundraising, but that right now youneed to focus on the company.[6]Companies that are successful at raising money in phase 2 sometimestack on a few investors after leaving fundraising mode. This isfine; if fundraising went well, you'll be able to do it withoutspending time convincing them or negotiating about terms.Get introductions to investors.Before you can talk to investors, you have to be introduced to them.If you're presenting at a Demo Day, you'll be introduced to a wholebunch simultaneously. But even if you are, you should supplementthese with intros you collect yourself.Do you have to be introduced? In phase 2, yes. Some investorswill let you email them a business plan, but you can tell from theway their sites are organized that they don't really want startupsto approach them directly.Intros vary greatly in effectiveness. The best type of intro isfrom a well-known investor who has just invested in you. So whenyou get an investor to commit, ask them to introduce you to otherinvestors they respect.[7]The next best type of intro is from afounder of a company they've funded. You can also get intros fromother people in the startup community, like lawyers and reporters.There are now sites like AngelList, FundersClub, and WeFunder thatcan introduce you to investors. We recommend startups treat themas auxiliary sources of money. Raise money first from leads youget yourself. Those will on average be better investors. Plusyou'll have an easier time raising money on these sites once youcan say you've already raised some from well-known investors.Hear no till you hear yes.Treat investors as saying no till they unequivocally say yes, inthe form of a definite offer with no contingencies.I mentioned earlier that investors prefer to wait if they can.What's particularly dangerous for founders is the way they wait.Essentially, they lead you on. They seem like they're about toinvest right up till the moment they say no. If they even say no.Some of the worse ones never actually do say no; they just stopreplying to your emails. They hope that way to get a free optionon investing. If they decide later that they want to invest — usuallybecause they've heard you're a hot deal — they can pretend theyjust got distracted and then restart the conversation as if they'dbeen about to.[8]That's not the worst thing investors will do. Some will use languagethat makes it sound as if they're committing, but which doesn'tactually commit them. And wishful thinking founders are happy tomeet them half way.[9]Fortunately, the next rule is a tactic for neutralizing this behavior.But to work it depends on you not being tricked by the no thatsounds like yes. It's so common for founders to be misled/mistakenabout this that we designed a protocol to fix theproblem. If you believe an investor has committed, get them toconfirm it. If you and they have different views of reality, whetherthe source of the discrepancy is their sketchiness or your wishfulthinking, the prospect of confirming a commitment in writing willflush it out. And till they confirm, regard them as saying no.Do breadth-first search weighted by expected value.When you talk to investors your m.o. should be breadth-first search,weighted by expected value. You should always talk to investorsin parallel rather than serially. You can't afford the time ittakes to talk to investors serially, plus if you only talk to oneinvestor at a time, they don't have the pressure of other investorsto make them act. But you shouldn't pay the same attention to everyinvestor, because some are more promising prospects than others.The optimal solution is to talk to all potential investors inparallel, but give higher priority to the more promising ones. [10]Expected value = how likely an investor is to say yes, multipliedby how good it would be if they did. So for example, an eminentinvestor who would invest a lot, but will be hard to convince, mighthave the same expected value as an obscure angel who won't investmuch, but will be easy to convince. Whereas an obscure angel whowill only invest a small amount, and yet needs to meet multipletimes before making up his mind, has very low expected value. Meetsuch investors last, if at all. [11]Doing breadth-first search weighted by expected value will save youfrom investors who never explicitly say no but merely drift away,because you'll drift away from them at the same rate. It protectsyou from investors who flake in much the same way that a distributedalgorithm protects you from processors that fail. If some investorisn't returning your emails, or wants to have lots of meetings butisn't progressing toward making you an offer, you automaticallyfocus less on them. But you have to be disciplined about assigningprobabilities. You can't let how much you want an investor influenceyour estimate of how much they want you.Know where you stand.How do you judge how well you're doing with an investor, wheninvestors habitually seem more positive than they are? By lookingat their actions rather than their words. Every investor has sometrack they need to move along from the first conversation to wiringthe money, and you should always know what that track consists of,where you are on it, and how fast you're moving forward.Never leave a meeting with an investor without asking what happensnext. What more do they need in order to decide? Do they needanother meeting with you? To talk about what? And how soon? Dothey need to do something internally, like talk to their partners,or investigate some issue? How long do they expect it to take?Don't be too pushy, but know where you stand. If investors arevague or resist answering such questions, assume the worst; investorswho are seriously interested in you will usually be happy to talkabout what has to happen between now and wiring the money, becausethey're already running through that in their heads. [12]If you're experienced at negotiations, you already know how to asksuch questions.[13]If you're not, there's a trick you can usein this situation. Investors know you're inexperienced at raisingmoney. Inexperience there doesn't make you unattractive. Being anoob at technology would, if you're starting a technology startup,but not being a noob at fundraising. Larry and Sergey were noobsat fundraising. So you can just confess that you're inexperiencedat this and ask how their process works and where you are in it.[14]Get the first commitment.The biggest factor in most investors' opinions of you is the opinionof other investors. Once you start gettinginvestors to commit, it becomes increasingly easy to get more to.But the other side of this coin is that it's often hard to get thefirst commitment.Getting the first substantial offer can be half the total difficultyof fundraising. What counts as a substantial offer depends on whoit's from and how much it is. Money from friends and family doesn'tusually count, no matter how much. But if you get $50k from a wellknown VC firm or angel investor, that will usually be enough to setthings rolling.[15]Close committed money.It's not a deal till the money's in the bank. I often hearinexperienced founders say things like "We've raised $800,000,"only to discover that zero of it is in the bank so far. Rememberthe twin fears that torment investors? The fear of missing outthat makes them jump early, and the fear of jumping onto a turdthat results? This is a market where people are exceptionally proneto buyer's remorse. And it's also one that furnishes them plentyof excuses to gratify it. The public markets snap startup investingaround like a whip. If the Chinese economy blows up tomorrow, allbets are off. But there are lots of surprises for individualstartups too, and they tend to be concentrated around fundraising.Tomorrow a big competitor could appear, or you could get C&Ded, oryour cofounder could quit.[16]Even a day's delay can bring news that causes an investor to changetheir mind. So when someone commits, get the money. Knowing whereyou stand doesn't end when they say they'll invest. After they sayyes, know what the timetable is for getting the money, and thenbabysit that process till it happens. Institutional investors havepeople in charge of wiring money, but you may have to hunt angelsdown in person to collect a check.Inexperienced investors are the ones most likely to get buyer'sremorse. Established ones have learned to treat saying yes as likediving off a diving board, and they also have more brand to preserve.But I've heard of cases of even top-tier VC firms welching on deals.Avoid investors who don't "lead."Since getting the first offer is most of the difficulty of fundraising,that should be part of your calculation of expected value when youstart. You have to estimate not just the probability that aninvestor will say yes, but the probability that they'd be the firstto say yes, and the latter is not simply a constant fraction of theformer. Some investors are known for deciding quickly, and thoseare extra valuable early on.Conversely, an investor who will only invest once other investorshave is worthless initially. And while most investors are influencedby how interested other investors are in you, there are some whohave an explicit policy of only investing after other investorshave. You can recognize this contemptible subspecies of investorbecause they often talk about "leads." They say that they don'tlead, or that they'll invest once you have a lead. Sometimes theyeven claim to be willing to lead themselves, by which they meanthey won't invest till you get $x from other investors. (It's greatif by "lead" they mean they'll invest unilaterally, and in additionwill help you raise more. What's lame is when they use the termto mean they won't invest unless you can raise more elsewhere.)[17]Where does this term "lead" come from? Up till a few years ago,startups raising money in phase 2 would usually raise equity roundsin which several investors invested at the same time using the samepaperwork. You'd negotiate the terms with one "lead" investor, andthen all the others would sign the same documents and all the moneychange hands at the closing.Series A rounds still work that way, but things now work differentlyfor most fundraising prior to the series A. Now there are rarelyactual rounds before the A round, or leads for them. Now startupssimply raise money from investors one at a time till they feel theyhave enough.Since there are no longer leads, why do investors use that term?Because it's a more legitimate-sounding way of saying what theyreally mean. All they really mean is that their interest in youis a function of other investors' interest in you. I.e. the spectralsignature of all mediocre investors. But when phrased in terms ofleads, it sounds like there is something structural and thereforelegitimate about their behavior.When an investor tells you "I want to invest in you, but I don'tlead," translate that in your mind to "No, except yes if you turnout to be a hot deal." And since that's the default opinion of anyinvestor about any startup, they've essentially just told younothing.When you first start fundraising, the expected value of an investorwho won't "lead" is zero, so talk to such investors last if at all.Have multiple plans.Many investors will ask how much you're planning to raise. Thisquestion makes founders feel they should be planning to raise aspecific amount. But in fact you shouldn't. It's a mistake tohave fixed plans in an undertaking as unpredictable as fundraising.So why do investors ask how much you plan to raise? For much thesame reasons a salesperson in a store will ask "How much were youplanning to spend?" if you walk in looking for a gift for a friend.You probably didn't have a precise amount in mind; you just wantto find something good, and if it's inexpensive, so much the better.The salesperson asks you this not because you're supposed to havea plan to spend a specific amount, but so they can show you onlythings that cost the most you'll pay.Similarly, when investors ask how much you plan to raise, it's notbecause you're supposed to have a plan. It's to see whether you'dbe a suitable recipient for the size of investment they like tomake, and also to judge your ambition, reasonableness, and how faryou are along with fundraising.If you're a wizard at fundraising, you can say "We plan to raisea $7 million series A round, and we'll be accepting termsheets nexttuesday." I've known a handful of founders who could pull that offwithout having VCs laugh in their faces. But if you're in theinexperienced but earnest majority, the solution is analogous tothe solution I recommend for pitchingyour startup: do the right thing and then just tell investors whatyou're doing.And the right strategy, in fundraising, is to have multiple plansdepending on how much you can raise. Ideally you should be ableto tell investors something like: we can make it to profitabilitywithout raising any more money, but if we raise a few hundredthousand we can hire one or two smart friends, and if we raise acouple million, we can hire a whole engineering team, etc.Different plans match different investors. If you're talking to aVC firm that only does series A rounds (though there are few ofthose left), it would be a waste of time talking about any but yourmost expensive plan. Whereas if you're talking to an angel whoinvests $20k at a time and you haven't raised any money yet, youprobably want to focus on your least expensive plan.If you're so fortunate as to have to think about the upper limiton what you should raise, a good rule of thumb is to multiply thenumber of people you want to hire times $15k times 18 months. Inmost startups, nearly all the costs are a function of the numberof people, and $15k per month is the conventional total cost(including benefits and even office space) per person. $15k permonth is high, so don't actually spend that much. But it's ok touse a high estimate when fundraising to add a margin for error. Ifyou have additional expenses, like manufacturing, add in those atthe end. Assuming you have none and you think you might hire 20people, the most you'd want to raise is 20 x $15k x 18 = $5.4million.[18]Underestimate how much you want.Though you can focus on different plans when talking to differenttypes of investors, you should on the whole err on the side ofunderestimating the amount you hope to raise.For example, if you'd like to raise $500k, it's better to sayinitially that you're trying to raise $250k. Then when you reach$150k you're more than half done. That sends two useful signalsto investors: that you're doing well, and that they have to decidequickly because you're running out of room. Whereas if you'd saidyou were raising $500k, you'd be less than a third done at $150k.If fundraising stalled there for an appreciable time, you'd startto read as a failure.Saying initially that you're raising $250k doesn't limit you toraising that much. When you reach your initial target and you stillhave investor interest, you can just decide to raise more. Startupsdo that all the time. In fact, most startups that are very successfulat fundraising end up raising more than they originally intended.I'm not saying you should lie, but that you should lower yourexpectations initially. There is almost no downside in startingwith a low number. It not only won't cap the amount you raise, butwill on the whole tend to increase it.A good metaphor here is angle of attack. If you try to fly at toosteep an angle of attack, you just stall. If you say right out ofthe gate that you want to raise a $5 million series A round, unlessyou're in a very strong position, you not only won't get that butwon't get anything. Better to start at a low angle of attack, buildup speed, and then gradually increase the angle if you want.Be profitable if you can.You will be in a much stronger position if your collection of plansincludes one for raising zero dollars — i.e. if you can makeit to profitability without raising any additional money. Ideallyyou want to be able to say to investors "We'll succeed no matterwhat, but raising money will help us do it faster."There are many analogies between fundraising and dating, and thisis one of the strongest. No one wants you if you seem desperate.And the best way not to seem desperate is not to be desperate.That's one reason we urge startups during YC to keep expenses lowand to try to make it to ramenprofitability before Demo Day. Though it sounds slightlyparadoxical, if you want to raise money, the best thing you can dois get yourself to the point where you don't need to.There are almost two distinct modes of fundraising: one in whichfounders who need money knock on doors seeking it, knowing thatotherwise the company will die or at the very least people willhave to be fired, and one in which founders who don't need moneytake some to grow faster than they could merely on their own revenues.To emphasize the distinction I'm going to name them: type A fundraisingis when you don't need money, and type B fundraising is when youdo.Inexperienced founders read about famous startups doing what wastype A fundraising, and decide they should raise money too, sincethat seems to be how startups work. Except when they raise moneythey don't have a clear path to profitability and are thus doingtype B fundraising. And they are then surprised how difficult andunpleasant it is.Of course not all startups can make it to ramen profitability in afew months. And some that don't still manage to have the upperhand over investors, if they have some other advantage likeextraordinary growth numbers or exceptionally formidable founders.But as time passes it gets increasingly difficult to fundraise froma position of strength without being profitable.[19]Don't optimize for valuation.When you raise money, what should your valuation be? The mostimportant thing to understand about valuation is that it's not thatimportant.Founders who raise money at high valuations tend to be unduly proudof it. Founders are often competitive people, and since valuationis usually the only visible number attached to a startup, they endup competing to raise money at the highest valuation. This isstupid, because fundraising is not the test that matters. The realtest is revenue. Fundraising is just a means to that end. Beingproud of how well you did at fundraising is like being proud ofyour college grades.Not only is fundraising not the test that matters, valuation is noteven the thing to optimize about fundraising. The number one thingyou want from phase 2 fundraising is to get the money you need, soyou can get back to focusing on the real test, the success of yourcompany. Number two is good investors. Valuation is at best third.The empirical evidence shows just how unimportant it is. Dropboxand Airbnb are the most successful companies we've funded so far,and they raised money after Y Combinator at premoney valuations of$4 million and $2.6 million respectively. Prices are so much highernow that if you can raise money at all you'll probably raise it athigher valuations than Dropbox and Airbnb. So let that satisfyyour competitiveness. You're doing better than Dropbox and Airbnb!At a test that doesn't matter.When you start fundraising, your initial valuation (or valuationcap) will be set by the deal you make with the first investor whocommits. You can increase the price for later investors, if youget a lot of interest, but by default the valuation you got fromthe first investor becomes your asking price.So if you're raising money from multiple investors, as most companiesdo in phase 2, you have to be careful to avoid raising the firstfrom an over-eager investor at a price you won't be able tosustain. You can of course lower your price if you need to (inwhich case you should give the same terms to investors who investedearlier at a higher price), but you may lose a bunch of leads inthe process of realizing you need to do this.What you can do if you have eager first investors is raise moneyfrom them on an uncapped convertible note with an MFN clause. Thisis essentially a way of saying that the valuation cap of the notewill be determined by the next investors you raise money from.It will be easier to raise money at a lower valuation. It shouldn'tbe, but it is. Since phase 2 prices vary at most 10x and the bigsuccesses generate returns of at least 100x, investors should pickstartups entirely based on their estimate of the probability thatthe company will be a big success and hardly at all on price. Butalthough it's a mistake for investors to care about price, asignificant number do. A startup that investors seem to like butwon't invest in at a cap of $x will have an easier time at $x/2.[20]Yes/no before valuation.Some investors want to know what your valuation is before they eventalk to you about investing. If your valuation has already beenset by a prior investment at a specific valuation or cap, you cantell them that number. But if it isn't set because you haven'tclosed anyone yet, and they try to push you to name a price, resistdoing so. If this would be the first investor you've closed, thenthis could be the tipping point of fundraising. That means closingthis investor is the first priority, and you need to get theconversation onto that instead of being dragged sideways into adiscussion of price.Fortunately there is a way to avoid naming a price in this situation.And it is not just a negotiating trick; it's how you (both) shouldbe operating. Tell them that valuation is not the most importantthing to you and that you haven't thought much about it, that youare looking for investors you want to partner with and who want topartner with you, and that you should talk first about whether theywant to invest at all. Then if they decide they do want to invest,you can figure out a price. But first things first.Since valuation isn't that important and getting fundraising rollingis, we usually tell founders to give the first investor who commitsas low a price as they need to. This is a safe technique so longas you combine it with the next one. [21]Beware "valuation sensitive" investors.Occasionally you'll encounter investors who describe themselves as"valuation sensitive." What this means in practice is that theyare compulsive negotiators who will suck up a lot of your timetrying to push your price down. You should therefore never approachsuch investors first. While you shouldn't chase high valuations,you also don't want your valuation to be set artificially low becausethe first investor who committed happened to be a compulsivenegotiator. Some such investors have value, but the time to approachthem is near the end of fundraising, when you're in a position tosay "this is the price everyone else has paid; take it or leave it"and not mind if they leave it. This way, you'll not only get marketprice, but it will also take less time.Ideally you know which investors have a reputation for being"valuation sensitive" and can postpone dealing with them till last,but occasionally one you didn't know about will pop up early on.The rule of doing breadth first search weighted by expected valuealready tells you what to do in this case: slow down your interactionswith them.There are a handful of investors who will try to invest at a lowervaluation even when your price has already been set. Lowering yourprice is a backup plan you resort to when you discover you've letthe price get set too high to close all the money you need. Soyou'd only want to talk to this sort of investor if you were aboutto do that anyway. But since investor meetings have to be arrangedat least a few days in advance and you can't predict when you'llneed to resort to lowering your price, this means in practice thatyou should approach this type of investor last if at all.If you're surprised by a lowball offer, treat it as a backup offerand delay responding to it. When someone makes an offer in goodfaith, you have a moral obligation to respond in a reasonable time.But lowballing you is a dick move that should be met with thecorresponding countermove.Accept offers greedily.I'm a little leery of using the term "greedily" when writing aboutfundraising lest non-programmers misunderstand me, but a greedyalgorithm is simply one that doesn't try to look into the future.A greedy algorithm takes the best of the options in front of itright now. And that is how startups should approach fundraisingin phases 2 and later. Don't try to look into the future because(a) the future is unpredictable, and indeed in this business you'reoften being deliberately misled about it and (b) your first priorityin fundraising should be to get it finished and get back to workanyway.If someone makes you an acceptable offer, take it. If you havemultiple incompatible offers, take the best. Don't reject anacceptable offer in the hope of getting a better one in the future.These simple rules cover a wide variety of cases. If you're raisingmoney from many investors, roll them up as they say yes. As youstart to feel you've raised enough, the threshold for acceptablewill start to get higher.In practice offers exist for stretches of time, not points. Sowhen you get an acceptable offer that would be incompatible withothers (e.g. an offer to invest most of the money you need), youcan tell the other investors you're talking to that you have anoffer good enough to accept, and give them a few days to make theirown. This could lose you some that might have made an offer ifthey had more time. But by definition you don't care; the initialoffer was acceptable.Some investors will try to prevent others from having time to decideby giving you an "exploding" offer, meaning one that's only validfor a few days. Offers from the very best investors explode lessfrequently and less rapidly — Fred Wilson never gives explodingoffers, for example — because they're confident you'll pickthem. But lower-tier investors sometimes give offers with veryshort fuses, because they believe no one who had other options wouldchoose them. A deadline of three working days is acceptable. Youshouldn't need more than that if you've been talking to investorsin parallel. But a deadline any shorter is a sign you're dealingwith a sketchy investor. You can usually call their bluff, and youmay need to.[22]It might seem that instead of accepting offers greedily, your goalshould be to get the best investors as partners. That is certainlya good goal, but in phase 2 "get the best investors" only rarelyconflicts with "accept offers greedily," because the best investorsdon't usually take any longer to decide than the others. The onlycase where the two strategies give conflicting advice is when youhave to forgo an offer from an acceptable investor to see if you'llget an offer from a better one. If you talk to investors in paralleland push back on exploding offers with excessively short deadlines,that will almost never happen. But if it does, "get the bestinvestors" is in the average case bad advice. The best investorsare also the most selective, because they get their pick of all thestartups. They reject nearly everyone they talk to, which meansin the average case it's a bad trade to exchange a definite offerfrom an acceptable investor for a potential offer from a betterone.(The situation is different in phase 1. You can't apply to all theincubators in parallel, because some offset their schedules toprevent this. In phase 1, "accept offers greedily" and "get thebest investors" do conflict, so if you want to apply to multipleincubators, you should do it in such a way that the ones you wantmost decide first.)Sometimes when you're raising money from multiple investors, aseries A will emerge out of those conversations, and these ruleseven cover what to do in that case. When an investor starts totalk to you about a series A, keep taking smaller investments tillthey actually give you a termsheet. There's no practical difficulty.If the smaller investments are on convertible notes, they'll justconvert into the series A round. The series A investor won't likehaving all these other random investors as bedfellows, but if itbothers them so much they should get on with giving you a termsheet.Till they do, you don't know for sure they will, and the greedyalgorithm tells you what to do.[23]Don't sell more than 25% in phase 2.If you do well, you will probably raise a series A round eventually.I say probably because things are changing with series A rounds.Startups may start to skip them. But only one company we've fundedhas so far, so tentatively assume the path to huge passes throughan A round.[24]Which means you should avoid doing things in earlier rounds thatwill mess up raising an A round. For example, if you've sold morethan about 40% of your company total, it starts to get harder toraise an A round, because VCs worry there will not be enough stockleft to keep the founders motivated.Our rule of thumb is not to sell more than 25% in phase 2, on topof whatever you sold in phase 1, which should be less than 15%. Ifyou're raising money on uncapped notes, you'll have to guess whatthe eventual equity round valuation might be. Guess conservatively.(Since the goal of this rule is to avoid messing up the series A,there's obviously an exception if you end up raising a series A inphase 2, as a handful of startups do.)Have one person handle fundraising.If you have multiple founders, pick one to handle fundraising sothe other(s) can keep working on the company. And since the dangerof fundraising is not the time taken up by the actual meetings butthat it becomes the top idea in your mind, the founder who handlesfundraising should make a conscious effort to insulate the otherfounder(s) from the details of the process.[25](If the founders mistrust one another, this could cause some friction.But if the founders mistrust one another, you have worse problemsto worry about than how to organize fundraising.)The founder who handles fundraising should be the CEO, who shouldin turn be the most formidable of the founders. Even if the CEOis a programmer and another founder is a salesperson? Yes. If youhappen to be that type of founding team, you're effectively a singlefounder when it comes to fundraising.It's ok to bring all the founders to meet an investor who willinvest a lot, and who needs this meeting as the final step beforedeciding. But wait till that point. Introducing an investor toyour cofounder(s) should be like introducing a girl/boyfriend toyour parents — something you do only when things reach a certainstage of seriousness.Even if there are still one or more founders focusing on the companyduring fundraising, growth will slow. But try to get as much growthas you can, because fundraising is a segment of time, not a point,and what happens to the company during that time affects the outcome.If your numbers grow significantly between two investor meetings,investors will be hot to close, and if your numbers are flat ordown they'll start to get cold feet.You'll need an executive summary and (maybe) a deck.Traditionally phase 2 fundraising consists of presenting a slidedeck in person to investors. Sequoia describes what such a deckshould contain, andsince they're the customer you can take their word for it.I say "traditionally" because I'm ambivalent about decks, and (thoughperhaps this is wishful thinking) they seem to be on the way out.A lot of the most successful startups we fund never make decks inphase 2. They just talk to investors and explain what they planto do. Fundraising usually takes off fast for the startups thatare most successful at it, and they're thus able to excuse themselvesby saying that they haven't had time to make a deck.You'll also want an executive summary, which should be no more thana page long and describe in the most matter of fact language whatyou plan to do, why it's a good idea, and what progress you've madeso far. The point of the summary is to remind the investor (whomay have met many startups that day) what you talked about.Assume that if you give someone a copy of your deck or executivesummary, it will be passed on to whoever you'd least like to haveit. But don't refuse on that account to give copies to investorsyou meet. You just have to treat such leaks as a cost of doingbusiness. In practice it's not that high a cost. Though foundersare rightly indignant when their plans get leaked to competitors,I can't think of a startup whose outcome has been affected by it.Sometimes an investor will ask you to send them your deck and/orexecutive summary before they decide whether to meet with you. Iwouldn't do that. It's a sign they're not really interested.Stop fundraising when it stops working.When do you stop fundraising? Ideally when you've raised enough.But what if you haven't raised as much as you'd like? When do yougive up?It's hard to give general advice about this, because there havebeen cases of startups that kept trying to raise money even whenit seemed hopeless, and miraculously succeeded. But what I usuallytell founders is to stop fundraising when you start to get a lotof air in the straw. When you're drinking through a straw, you cantell when you get to the end of the liquid because you start to geta lot of air in the straw. When your fundraising options run out,they usually run out in the same way. Don't keep sucking on thestraw if you're just getting air. It's not going to get better.Don't get addicted to fundraising.Fundraising is a chore for most founders, but some find it moreinteresting than working on their startup. The work at an earlystage startup often consists of unglamorous schleps. Whereas fundraising, when it'sgoing well, can be quite the opposite. Instead of sitting in yourgrubby apartment listening to users complain about bugs in yoursoftware, you're being offered millions of dollars by famous investorsover lunch at a nice restaurant.[26]The danger of fundraising is particularly acute for people who aregood at it. It's always fun to work on something you're good at.If you're one of these people, beware. Fundraising is not whatwill make your company successful. Listening to users complainabout bugs in your software is what will make you successful. Andthe big danger of getting addicted to fundraising is not merelythat you'll spend too long on it or raise too much money. It'sthat you'll start to think of yourself as being already successful,and lose your taste for the schleps you need to undertake to actuallybe successful. Startups can be destroyed by this.When I see a startup with young founders that is fabulously successfulat fundraising, I mentally decrease my estimate of the probabilitythat they'll succeed. The press may be writing about them as ifthey'd been anointed as the next Google, but I'm thinking "this isgoing to end badly."Don't raise too much.Though only a handful of startups have to worry about this, it ispossible to raise too much. The dangers of raising too much aresubtle but insidious. One is that it will set impossibly highexpectations. If you raise an excessive amount of money, it willbe at a high valuation, and the danger of raising money at too higha valuation is that you won't be able to increase it sufficientlythe next time you raise money.A company's valuation is expected to rise each time it raises money.If not it's a sign of a company in trouble, which makes youunattractive to investors. So if you raise money in phase 2 at apost-money valuation of $30 million, the pre-money valuation ofyour next round, if you want to raise one, is going to have to beat least $50 million. And you have to be doing really, really wellto raise money at $50 million.It's very dangerous to let the competitiveness of your current roundset the performance threshold you have to meet to raise your nextone, because the two are only loosely coupled.But the money itself may be more dangerous than the valuation. Themore you raise, the more you spend, and spending a lot of money canbe disastrous for an early stage startup. Spending a lot makes itharder to become profitable, and perhaps even worse, it makes youmore rigid, because the main way to spend money is people, and themore people you have, the harder it is to change directions. Soif you do raise a huge amount of money, don't spend it. (You willfind that advice almost impossible to follow, so hot will be themoney burning a hole in your pocket, but I feel obliged at leastto try.)Be nice.Startups raising money occasionally alienate investors by seemingarrogant. Sometimes because they are arrogant, and sometimes becausethey're noobs clumsily attempting to mimic the toughness they'veobserved in experienced founders.It's a mistake to behave arrogantly to investors. While there arecertain situations in which certain investors like certain kindsof arrogance, investors vary greatly in this respect, and a flickof the whip that will bring one to heel will make another roar withindignation. The only safe strategy is never to seem arrogant atall.That will require some diplomacy if you follow the advice I've givenhere, because the advice I've given is essentially how to playhardball back. When you refuse to meet an investor because you'renot in fundraising mode, or slow down your interactions with aninvestor who moves too slow, or treat a contingent offer as the noit actually is and then, by accepting offers greedily, end up leavingthat investor out, you're going to be doing things investors don'tlike. So you must cushion the blow with soft words. At YC we tellstartups they can blame us. And now that I've written this, everyoneelse can blame me if they want. That plus the inexperience cardshould work in most situations: sorry, we think you're great, butPG said startups shouldn't ___, and since we're new to fundraising,we feel like we have to play it safe.The danger of behaving arrogantly is greatest when you're doingwell. When everyone wants you, it's hard not to let it go to yourhead. Especially if till recently no one wanted you. But restrainyourself. The startup world is a small place, and startups havelots of ups and downs. This is a domain where it's more true thanusual that pride goeth before a fall.[27]Be nice when investors reject you as well. The best investors arenot wedded to their initial opinion of you. If they reject you inphase 2 and you end up doing well, they'll often invest in phase3. In fact investors who reject you are some of your warmest leadsfor future fundraising. Any investor who spent significant timedeciding probably came close to saying yes. Often you have someinternal champion who only needs a little more evidence to convincethe skeptics. So it's wise not merely to be nice to investors whoreject you, but (unless they behaved badly) to treat it as thebeginning of a relationship.The bar will be higher next time.Assume the money you raise in phase 2 will be the last you everraise. You must make it to profitability on this money if you can.Over the past several years, the investment community has evolvedfrom a strategy of anointing a small number of winners early andthen supporting them for years to a strategy of spraying money atearly stage startups and then ruthlessly culling them at the nextstage. This is probably the optimal strategy for investors. It'stoo hard to pick winners early on. Better to let the market do itfor you. But it often comes as a surprise to startups how muchharder it is to raise money in phase 3.When your company is only a couple months old, all it has to be isa promising experiment that's worth funding to see how it turnsout. The next time you raise money, the experiment has to haveworked. You have to be on a trajectory that leads to going public.And while there are some ideas where the proof that the experimentworked might consist of e.g. query response times, usually the proofis profitability. Usually phase 3 fundraising has to be type Afundraising.In practice there are two ways startups hose themselves betweenphases 2 and 3. Some are just too slow to become profitable. Theyraise enough money to last for two years. There doesn't seem anyparticular urgency to be profitable. So they don't make any effortto make money for a year. But by that time, not making money hasbecome habitual. When they finally decide to try, they find theycan't.The other way companies hose themselves is by letting their expensesgrow too fast. Which almost always means hiring too many people.You usually shouldn't go out and hire 8 people as soon as you raisemoney at phase 2. Usually you want to wait till you have growth(and thus usually revenues) to justify them. A lot of VCs willencourage you to hire aggressively. VCs generally tell you to spendtoo much, partly because as money people they err on the side ofsolving problems by spending money, and partly because they wantyou to sell them more of your company in subsequent rounds. Don'tlisten to them.Don't make things complicated.I realize it may seem odd to sum up this huge treatise by sayingthat my overall advice is not to make fundraising too complicated,but if you go back and look at this list you'll see it's basicallya simple recipe with a lot of implications and edge cases. Avoidinvestors till you decide to raise money, and then when you do,talk to them all in parallel, prioritized by expected value, andaccept offers greedily. That's fundraising in one sentence. Don'tintroduce complicated optimizations, and don't let investors introducecomplications either.Fundraising is not what will make you successful. It's just a meansto an end. Your primary goal should be to get it over with and getback to what will make you successful — making things and talkingto users — and the path I've described will for most startupsbe the surest way to that destination.Be good, take care of yourselves, and don't leave the path.Notes[1]The worst explosions happen when unpromising-seeming startupsencounter mediocre investors. Good investors don't lead startupson; their reputations are too valuable. And startups that seempromising can usually get enough money from good investors thatthey don't have to talk to mediocre ones. It is the unpromising-seemingstartups that have to resort to raising money from mediocre investors.And it's particularly damaging when these investors flake, becauseunpromising-seeming startups are usually more desperate for money.(Not all unpromising-seeming startups do badly. Some are merelyugly ducklings in the sense that they violate current startupfashions.)[2]One YC founder told me: I think in general we've done ok at fundraising, but I managed to screw up twice at the exact same thing — trying to focus on building the company and fundraising at the same time.[3]There is one subtle danger you have to watch out for here, whichI warn about later: beware of getting too high a valuation from aneager investor, lest that set an impossibly high target when raisingadditional money.[4]If they really need a meeting, then they're not ready to invest,regardless of what they say. They're still deciding, which meansyou're being asked to come in and convince them. Which is fundraising.[5]Associates at VC firms regularly cold email startups. Naivefounders think "Wow, a VC is interested in us!" But an associateis not a VC. They have no decision-making power. And while theymay introduce startups they like to partners at their firm, thepartners discriminate against deals that come to them this way. Idon't know of a single VC investment that began with an associatecold-emailing a startup. If you want to approach a specific firm,get an intro to a partner from someone they respect.It's ok to talk to an associate if you get an intro to a VC firmor they see you at a Demo Day and they begin by having an associatevet you. That's not a promising lead and should therefore get lowpriority, but it's not as completely worthless as a cold email.Because the title "associate" has gotten a bad reputation, a fewVC firms have started to give their associates the title "partner,"which can make things very confusing. If you're a YC startup youcan ask us who's who; otherwise you may have to do some researchonline. There may be a special title for actual partners. Ifsomeone speaks for the firm in the press or a blog on the firm'ssite, they're probably a real partner. If they're on boards ofdirectors they're probably a real partner.There are titles between "associate" and "partner," including"principal" and "venture partner." The meanings of these titlesvary too much to generalize.[6]For similar reasons, avoid casual conversations with potentialacquirers. They can lead to distractions even more dangerous thanfundraising. Don't even take a meeting with a potential acquirerunless you want to sell your company right now.[7]Joshua Reeves specifically suggests asking each investor tointro you to two more investors.Don't ask investors who say no for introductions to other investors.That will in many cases be an anti-recommendation.[8]This is not always as deliberate as its sounds. A lot of thedelays and disconnects between founders and investors are inducedby the customs of the venture business, which have evolved the waythey have because they suit investors' interests.[9]One YC founder who read a draft of this essay wrote: This is the most important section. I think it might bear stating even more clearly. "Investors will deliberately affect more interest than they have to preserve optionality. If an investor seems very interested in you, they still probably won't invest. The solution for this is to assume the worst — that an investor is just feigning interest — until you get a definite commitment."[10]Though you should probably pack investor meetings as closelyas you can, Jeff Byun mentions one reason not to: if you packinvestor meetings too closely, you'll have less time for your pitchto evolve.Some founders deliberately schedule a handful of lame investorsfirst, to get the bugs out of their pitch.[11]There is not an efficient market in this respect. Some of themost useless investors are also the highest maintenance.[12]Incidentally, this paragraph is sales 101. If you want to seeit in action, go talk to a car dealer.[13]I know one very smooth founder who used to end investor meetingswith "So, can I count you in?" delivered as if it were "Can youpass the salt?" Unless you're very smooth (if you're not sure...),do not do this yourself. There is nothing more unconvincing, foran investor, than a nerdy founder trying to deliver the lines meantfor a smooth one.Investors are fine with funding nerds. So if you're a nerd, justtry to be a good nerd, rather than doing a bad imitation of a smoothsalesman.[14]Ian Hogarth suggests a good way to tell how serious potentialinvestors are: the resources they expend on you after the firstmeeting. An investor who's seriously interested will already beworking to help you even before they've committed.[15]In principle you might have to think about so-called "signallingrisk." If a prestigious VC makes a small seed investment in you,what if they don't want to invest the next time you raise money?Other investors might assume that the VC knows you well, sincethey're an existing investor, and if they don't want to invest inyour next round, that must mean you suck. The reason I say "inprinciple" is that in practice signalling hasn't been much of aproblem so far. It rarely arises, and in the few cases where itdoes, the startup in question usually is doing badly and is doomedanyway.If you have the luxury of choosing among seed investors, you canplay it safe by excluding VC firms. But it isn't critical to.[16]Sometimes a competitor will deliberately threaten you with alawsuit just as you start fundraising, because they know you'llhave to disclose the threat to potential investors and they hopethis will make it harder for you to raise money. If this happensit will probably frighten you more than investors. Experiencedinvestors know about this trick, and know the actual lawsuits rarelyhappen. So if you're attacked in this way, be forthright withinvestors. They'll be more alarmed if you seem evasive than if youtell them everything.[17]A related trick is to claim that they'll only invest contingentlyon other investors doing so because otherwise you'd be "undercapitalized."This is almost always bullshit. They can't estimate your minimumcapital needs that precisely.[18]You won't hire all those 20 people at once, and you'll probablyhave some revenues before 18 months are out. But those too areacceptable or at least accepted additions to the margin for error.[19]Type A fundraising is so much better that it might even beworth doing something different if it gets you there sooner. OneYC founder told me that if he were a first-time founder again he'd"leave ideas that are up-front capital intensive to founders withestablished reputations."[20]I don't know whether this happens because they're innumerate,or because they believe they have zero ability to predict startupoutcomes (in which case this behavior at least wouldn't be irrational).In either case the implications are similar.[21]If you're a YC startup and you have an investor who for somereason insists that you decide the price, any YC partner can estimatea market price for you.[22]You should respond in kind when investors behave upstandinglytoo. When an investor makes you a clean offer with no deadline,you have a moral obligation to respond promptly.[23]Tell the investors talking to you about an A round about thesmaller investments you raise as you raise them. You owe them suchupdates on your cap table, and this is also a good way to pressurethem to act. They won't like you raising other money and maypressure you to stop, but they can't legitimately ask you to committo them till they also commit to you. If they want you to stopraising money, the way to do it is to give you a series A termsheetwith a no-shop clause.You can relent a little if the potential series A investor has agreat reputation and they're clearly working fast to get you atermsheet, particularly if a third party like YC is involved toensure there are no misunderstandings. But be careful.[24]The company is Weebly, which made it to profitability on aseed investment of $650k. They did try to raise a series A in thefall of 2008 but (no doubt partly because it was the fall of 2008)the terms they were offered were so bad that they decided to skipraising an A round.[25]Another advantage of having one founder take fundraisingmeetings is that you never have to negotiate in real time, whichis something inexperienced founders should avoid. One YC foundertold me: Investors are professional negotiators and can negotiate on the spot very easily. If only one founder is in the room, you can say "I need to circle back with my co-founder" before making any commitments. I used to do this all the time.[26]You'll be lucky if fundraising feels pleasant enough to becomeaddictive. More often you have to worry about the otherextreme — becoming demoralized when investors reject you. Asone (very successful) YC founder wrote after reading a draft ofthis: It's hard to mentally deal with the sheer scale of rejection in fundraising and if you are not in the right mindset you will fail. Users may love you but these supposedly smart investors may not understand you at all. At this point for me, rejection still rankles but I've come to accept that investors are just not super thoughtful for the most part and you need to play the game according to certain somewhat depressing rules (many of which you are listing) in order to win.[27]The actual sentence in the King James Bible is "Pride goethbefore destruction, and an haughty spirit before a fall."Thanks to Slava Akhmechet, Sam Altman, Nate Blecharczyk,Adora Cheung, Bill Clerico, John Collison, Patrick Collison, ParkerConrad, Ron Conway, Travis Deyle, Jason Freedman, Joe Gebbia, MattanGriffel, Kevin Hale, Jacob Heller, Ian Hogarth, Justin Kan, ProfessorMoriarty, Nikhil Nirmel, David Petersen, Geoff Ralston, JoshuaReeves, Yuri Sagalov, Emmett Shear, Rajat Suri, Garry Tan, and NickTomarello for reading drafts of this.
