How to Start a Startup is a series of video lectures, initially given at Stanford in Fall 2014.

Lecture Transcript: http://www.tech.genius.com/Marc-andreessen-lecture-9-how-to-raise-money-annotated

Sam leads a panel Q&A on Fundraising in this lecture with Marc Andreessen, Founder of Netscape and Andreessen Horowitz, Ron Conway, Founder of SV Angel, and Parker Conrad, Founder of Zenefits.

See Ron Conway's slide, and readings at http://www.startupclass.samaltman.com/courses/lec09

Discuss this lecture: http://www.startupclass.co/courses/how-to-start-a-startup/lectures/64038

I want to start with a question for Mark and Ron, which is by far the number 1 question.

What makes you guys decide to invest in a founder or a company?

Mark can start while we try to get your slide up.

What makes you decide to invest in a founder or a company?

So, what makes us invest in a company is based on a whole bunch of characteristics.

right before Mark got out of the University of Illinois.

So SV Angel and its entities have invested in over 700 companies.

So to invest in 700 companies, that means we've physically talked to thousands of entrepreneurs.

And there's a whole bunch of things that just go through my head when I meet an entrepreneur.

And I'm just gonna talk about what some of those are.

And literally while you're talking to me in the first minute, I'm saying, is this person a leader?

Is this person rifle focused and obsessed by the product?

I'm hoping, because usually the first question I ask is, what inspired you to invent this product?

I'm hoping that it's based on a personal problem that that founder had, and this product is the solution to that personal problem.

Then I'm looking for communication skills, because if you're going to be a leader and hire a team, assuming your product is successful, you've got to be a really good communicator and You have to be a born leader.

Now some of that you might have to learn those traits of leadership.

But, but you better, you better take charge and be able to, to, to be a leader.

I'll switch back to the slide, but let's let Mark.

I guess, and there's a lot of detail to this question that we could talk about.

And we may be even a little bit different than Ron, and that, well, we are different than Ron.

So we invest at the seed stage, venture stage, growth stage.

then we invest in a variety of different business models, consumer, enterprise, and a bunch of other variations.

So, there are kind of fine grained answers, you know, that we could get into if there are specific questions.

So 1 is, the venture capital business is 100% a game of outliers, It's extreme exceptions.

Right, so the conventional statistics are, you know, on the order of 4, 000 venture fundable companies a year.

About, you know, about 200 of those will get funded by what's considered a top tier VC.

About 15 of those will someday get to $100 million in revenue.

And those 15 from that year will generate something on the order of 97% of all the returns for the entire category of venture capital in that year.

And so, venture capital is such an extreme feast or famine business.

You're either in 1 of the 15 or you're not.

And so, the, the big thing that you're just looking for, no matter, you know, which sort of particular kind of criteria we talk about, they all have the characteristic of you're looking for the extreme outlier.

The other thing I'd highlight that we think about a lot internally is we have this concept.

Invest in strength versus lack of weakness.

And at first that sounds obvious, but it's actually fairly subtle.

Which is sort of the, the default way to do venture capital is to kind of check boxes, right?

So, you know, really good founder, really good idea, you know, really good you know, products, really good initial customers, check, check, check, check, okay, this is reasonable, I'll put money in it.

But what you find with those, those sort of check box deals, and they get, they get done all the time, but what you find is they often don't have something that really makes them really remarkable and special.

Right, they don't have an extreme strength that makes them an outlier.

On the other side of that, the companies that have the really extreme strengths often have serious flaws.

And so so 1 of the cautionary lessons of venture capital is, if you, If you don't invest in the basis of serious flaws, you don't invest in most of the big winners.

And we could go through example after example after example of that, but that would have ruled out almost all the big winners over time.

And so at least what we aspire to do is to invest in the 1, in the startups that have a really, really extreme strength along an important dimension.

And then be willing to tolerate some other set of weaknesses.

Okay, I don't want to over dwell on the slide, but When you first meet an investor, you've gotta be able to say in 1 compelling sentence that you should practice like crazy what your product does so that the investor that you're talking to immediately can picture the product in their own mind.

of the entrepreneurs I talk to today still after the first sentence, I don't know what they do.

And as I get older and less patient, I say, back up.

And then I want to skip to the second column.

The only way to make progress is make decisions.

Procrastination is the devil in startups.

So no matter what you do, you gotta keep that ship moving.

If it's decisions to hire, decisions to fire, you gotta make those quickly.

Once you have a great product, then it's all about execution and building a great team.

Parker, could you talk about your seed round and how that went and what you wish you had done differently as a fundraiser?

Actually, I think my seed round, most of the stuff with my current company felt like from a fundraising perspective felt like it came together relatively quickly.

But actually 1 of the experiences that I had, I, I started a company before this that I was at for about 6 years.

And my co-founder and I pitched almost every VC firm in Silicon Valley.

I mean, we literally went to like 60 different firms and they all told us no.

And we were constantly trying to figure out, you know, how do we, how should we adjust our pitch and how should, you know, how should we do the slides differently and how do we tweak the story and that sort of thing.

And at 1 point there was this sort of key insight that someone gave me when I was pitching, actually someone at Coastal Ventures.

And this VC said, guys, you know, he was looking for some very particular kind of analysis that we didn't have on hand.

He was like, you know, if you guys were the Twitter guys, you guys could come in and you could just be like, and like, you know, put whatever up here.

And like, we would invest in you, but like, you guys aren't the Twitter guys.

So you need to make this really easy and have like all this stuff ready for us and all this kind of stuff.

And I, I took like the exactly opposite lesson of what he, I think, wanted me to take away from that with, which was like, geez, like, I should really just figure out a way to be the Twitter guys.

And like, that's, that's the way to do this.

And so, so actually like 1 of the reasons I, I started my current company, or 1 of the things I, I found very attractive about Zenefits is, as I was, as I was thinking about it, it seemed like a business.

I was so frustrated from this experience of having tried, you know, for like 2 years to raise money from, from VCs.

And it sort of decided like to hell that you can't count on there being capital available to you.

And so this, the business that I started seemed like 1 that like, like actually just maybe I could do it without raising money at all.

Like there might be a path to kind of, you know there was enough cash flow, it seemed compelling enough that I could like do that.

And it turns out that those are exactly the kinds of businesses that, that, that investors love to invest in.

So I, I actually think like, I mean Sam's very kind and said I was an expert in fundraising.

The reality is I, I don't actually even think I'm very good at fundraising.

It's probably something I'm like less good at than, than you know, sort of other parts of my job.

But I think if you can, if you can build a business that's, you know, where everything's like moving in the right direction, if you can like be the Twitter guys, like nothing else matters.

And if you can't like, you know, be the Twitter guys, it's very hard for anything else to make a difference.

For things to kind of come together for you.

Why, why did that VC say be like the Twitter guys when the fail whale dominated the site for 2 years?

The other point I want to make is bootstrap as long as you possibly can.

I met with 1 of the best founders in tech who's starting a new company.

And I said to her, well, when are you going to raise money?

So I was actually going to close on, on, on, on this, But I'm just going to accelerate it because Parker, I think, just gave you the most important thing you'll ever hear.

Which is, so the, the number 1 piece of advice that I've ever read and that I, that I tell people on these kinds of topics is always it's from the comedian Steve Martin who I think is an absolute genius, wrote a great book on his startup career, which obviously was very successful.

The book's called Born Standing Up, and he, literally it's a short little book and it describes how he became Steve Martin.

And the heart of the book is, he says, you know, what's the key to success?

He says, the key to success is be so good they can't ignore you.

And so in a sense, like all this, you know, we're gonna have this entire conversation, I'm sure we'll keep having it about how to raise money.

But in a sense, it's all kind of beside the point.

Because if you do what Parker's done and you build a business that is going to be a gigantic success, then investors are throwing money at you.

And if you come in, you know, with a theory and a plan and no data and you're just 1 of, you know, the next thousand.

It's gonna be far, far harder to raise money.

The other, so that's the positive way to put it.

It's kind of be so good they can't ignore you.

In other words, you're almost always better off making your business better than you are making your pitch better.

The other thing, the, the, that's the positive way of looking at it.

The negative way of looking at it, or the cautionary lesson is that, and this gets me in trouble every single time I say it, but I'm on a ton of flu medication.

So I'm gonna go ahead and just let it rip.

Raising venture capital is the easiest thing a startup founder is ever going to do.

As compared to recruiting, right, as compared to recruiting engineers, in particular as compared to recruiting engineer number 20, it's far harder than raising venture capital.

Selling to enterprise customers is harder.

Getting viral growth going on a consumer business is harder.

Almost everything you'll ever do is harder than raising venture capital.

If you get in a situation in which raising the money is hard, it's probably not hard compared to all the other stuff that's about to follow.

And it's very important to bear that in mind.

You know, it's often said, raising money is not actually a success.

It's not actually a milestone for our company, and I think that's true, and I think that's the underlying reason.

It just, it puts you in a position to be able to do all the other harder things.

Related to that, what do you guys wish funders did differently when raising money?

And specifically Mark, you know, you mentioned this relationship between money and risk, how that applies here.

Yeah, so The single biggest thing that people are just missing, and I think it's all of our faults.

But I think the single biggest thing entrepreneurs are missing, both on fundraising and how they run their companies, is the relationship between risk and cash.

So the relationship between risk and raising cash, and then the relationship with risk and spending cash.

So I've always been a fan of something that Andy Radcliffe taught me years ago.

Which he called the, he calls it the onion theory of risk.

Which basically is, you can think about a startup like on day 1 as having every conceivable kind of risk, right?

And you can basically just make a list of the risks.

And so you've got, you know, founding team risk.

You know, do the founders, are the founders going to be able to work together?

Which is maybe you need a machine learning breakthrough or something to make it work.

You'll have, you know, market acceptance risk.

A, a big risk you get into in a lot of businesses that have a sales force is, can you actually sell the product for enough money to actually pay for the cost of sale?

If you're a consumer product, you'll have viral growth risk.

And so, a startup at the very beginning is basically just this long, this long list of risks, right?

And then the way that I always think about running a startup is also the way I think about raising money, which is it's a process of peeling away layers of risk as you go, right?

And so you raise seed money in order to peel away the first 2 or 3 risks, right?

The founding team risk, the product risk, maybe the initial launch risk.

You raise the A round to peel away the next level of product risk.

Maybe you peel away some recruiting risk because you get your full engineering team built.

Maybe you peel away some customer risk because you get your first 5 beta customers, right?

And so basically the way to think about it is, you're peeling away risk as you go.

You're peeling away risk by achieving milestones.

And then as you achieve milestones, you're both making progress in your business and you're justifying raising more capital, right?

And so you come in and you pitch somebody like us and you say you're raising a B round.

You know, the best way to do that with us is you say, okay, I raised a seed round, I achieved these milestones, I eliminated these risks.

I raised the A round, I achieved these milestones, I eliminated these risks.

Here are my milestones, here are my risks.

And then by the time I go to raise a seed round, here's the, here's the state that I'll be in.

And then you calibrate the amount of money that you raise and spend to the risks that you're pulling out of the business.

And I, I go through all this, in a sense this sounds kind of obvious, but I go through all this because it's a systematic way to think about how the money gets raised and deployed.

As compared to so much of what's happening, especially these days, which is just, oh my God, let me go raise as much money as I can.

For sure, don't ask people to sign an NDA.

We rarely get asked anymore, cuz most founders have figured out that if you ask somebody for an NDA at the front end of the relationship, you're basically saying I don't trust you.

So the relationship between investors and founders involves lots of trust.

The biggest mistake that I see by far is not getting things in writing.

My advice on the fundraising process is do it as quickly and efficiently as you possibly can.

For some reason, founders get their ego involved in fundraising where it's a personal victory.

It is the tiniest step on the way, as Mark said.

And it's, it's, it's the most fundamental.

But in the process, when somebody makes a commitment to you, you get in your car and you type an email to them that confirms what they just said to you.

Because a lot of investors have very short memories, and they forget that they committed to you that they were going to finance.

Or they forget what the valuation was, or that they were going to find a co-investor.

You can get rid of all that controversy just by putting it in writing.

And when they try and get out of it, you just resend the email and say excuse me.

And hopefully they've replied to that email anyway, so get it in writing.

In meetings, take notes and, and follow up on what's important.

I, I want to talk a little bit more about the tactics here.

How many meetings does it take for you to make a decision?

How do you figure out what the right terms are?

That was about, that was like, that was like 6 questions.

Why don't you describe, why don't you describe, because you'll describe seed and then I'll, I'll describe.

Yeah, yeah, so, you know, so SV Angel, you know, invests in seed stage startups.

So we like to be the very first investor.

We normally invest today in a round that's a million to 2 million.

So if we invest 250k that means there's 5 or 6 other investors in that syndicate.

I just help on major projects for for the portfolio companies that are starting to mature.

We at SV Angel end up investing in 1 company for every 30 that we look at, and we end up investing in about 1 a week.

I think what's interesting is we don't really take anything over the transom.

Our network is so huge now that we basically just take leads from our own network.

We evaluate the opportunity, which means you have to send in a really great short executive summary, and if we like that, we actually vote, although I'm not in this meeting anymore but the group actually votes on do we make a phone call that's how important time is in this process and if enough of the of the of the team at SV thinks it's interesting, then they appoint a person to make a phone call to that founder.

Usually somebody on our team who has domain experience.

If the phone call goes well, bingo, we want to meet you.

If SV Angel asks you for a meeting, we are well on our way to investing.

If that meeting goes well, we'll do some background checks, backdoor background checks, get a good feeling about the company, the market that they're going after, and then make the commitment to invest.

And then start helping get other value-add investors to be part of the syndicate, because if we're going to have an equal workload, we want the other investors in this company to be great angel investors as well.

So I'll talk a little bit about the venture stage, kind of the series A stage, you know, that follows.

So to start with, I think it's fair to say at this point that the top tier venture capitalists pretty much only invest in 2 kinds of companies at the series A stage.

1 is if they have previously raised a seed round.

And so it's, it's almost always the case when we're doing a series A investment for the company has a million or 2000000 dollars in seed financing.

You know, from, from Ron and, and, and folks that he likes to work with.

Almost always, by the way, Ron, just to be clear.

So if you're going to raise series A, the first thing to do is raise C.

Cuz, cuz that's, that's generally the, the, the, the way the, the progression works at this, at this point.

Every once in a while, we'll go straight to A on a company that hasn't raised a seed round.

Really the only times, though, that that happens are when it's a founder who has been a successful founder in the past.

And is almost certainly somebody we've worked with in the past.

Where it's a founder who, I was an angel investor.

Actually I think Ron was also in the team's company in like 2006 And then the company did its thing and then ultimately was acquired by another big company.

And then that team now is, is starting their new thing.

So in that case, we're just gonna jump it straight to an A.

Cuz they're so, they're so well known and they have a plan all lined up for it.

But, you know, that, that's the exception.

It's almost always preceded, preceded by a seed round.

The other thing is yeah, I guess I mentioned this already, but we get similar to what Ron said.

We get 2, 000 referrals a year through our referral network.

A very large percentage of those are referrals through the seed investors.

And so by far the best way to get, to, by far the best way to get the best introductions to the A stage venture firms is to be able, is to work through the seed investors.

Or to be able, or to work through something like Y Combinator.

founders care most about and how should founders negotiate?

Well, I think probably precisely because of what Mark said, the most important thing at the seed stage is picking the right seed investors because they're going to sort of lay the foundation for future fundraising events.

You know, they're gonna make the right introductions.

See all Y Combinator transcripts on Youtube

How to Raise Money with Marc Andreessen, Ron Conway, and Parker Conrad (HtSaS 2014: 9)