- There will be two lectures on fundraising, with one giving a high-level overview and the other focusing on the mechanics of fundraising.
- There are many resources available on fundraising, including essays by Paul Graham and a guide to seed fundraising.
- Fundraising can be challenging and often involves hearing a lot of "no's" and reasons why your startup won't succeed.
- To succeed in fundraising, you need to be tough, resilient, and believe in your startup.
- The fundraising process involves figuring out the story of your startup, finding the right investors, getting organized, pitching and refining your story, and eventually meeting the right investors.
- VC exists because there is a market for it and the potential returns can be significant.
- Startups raise money to pay for expenses, hire people, and fuel growth.
- The best time to raise money is when you don't need it, as investors see it as a bigger opportunity.
- When deciding how much to raise, consider raising enough to reach profitability or hit milestones that will be persuasive for future fundraising.
- Investors invest in both the founder and the story of the startup, which should represent a large opportunity, have a compelling product attraction, and be told by an impressive storyteller.

- The power of a good story is important for fundraising, as demonstrated by Magic Leap's success in raising billions based solely on a story.
- The best investors are interested in investing before a company has gained traction.
- Building a compelling story and pitch is crucial for founders, as they are essentially salespeople.
- Choosing the right valuation for fundraising is complicated and can impact the success of the fundraising process.
- Convertible notes are a type of debt that represents equity and dilution, but they are fast and simple compared to equity.
- Dilution refers to the decrease in ownership percentage when selling shares of the company.
- Post-money safes are simpler and provide a clearer understanding of ownership percentage for both investors and founders.
- There are different types of investors, such as angels and venture capitalists, each with their own approach to investing.
- Other methods of fundraising include crowdfunding platforms like Kickstarter and AngelList.
- Initial coin offerings (ICOs) are complex and require extensive knowledge of SEC regulations.
- The fundraising process typically involves rounds of funding, starting with personal funds and friends and family, followed by seed rounds and then equity rounds.

- When meeting with investors, do your homework and know what they've invested in and what they care about.
- Simplify your pitch and make it captivating from the beginning.
- Bring a demo or prototype to show that you can build what you're talking about.
- Listen to feedback and improve your pitch with each meeting.
- Always have a conclusion or next steps after an investor meeting.
- For seed fundraising, focus on telling your story rather than relying heavily on a pitch deck.
- Understand the person you're negotiating with and try to have options in negotiations.
- Avoid over-optimizing fundraising and focus on building great products.
- Be responsive, don't break deals, and maintain a good reputation in the startup community.
- Don't gamble the raised funds and be honest and straightforward in your pitch.
- Don't take rejection personally, as it often means a difference in vision for the future.

- Fundraising is just one step towards building a successful business
- Choosing investors wisely is important for long-term success
- Incorporating as a US entity is recommended for fundraising in Silicon Valley
- Convertibles are preferable for seed funding, while equity is better for larger amounts
- Exaggerating facts is not recommended, but sharing an impressive vision is acceptable
- Buying equity in your own company is the recommended way to invest your own money
- YC now invests on a post-money safe basis
- Traction is defined by usage and growth is an important factor in determining good traction.

- The best way to connect with investors is through referrals from someone who knows the investor or through introductions from investors who have already invested in your company.
- Cold emailing and networking with other founders who have investors are also effective ways to connect with investors.
- When raising seed funding, explain how the funds will be used and what milestones will be achieved with the investment.
- The post-money safe does not necessarily force founders to do an equity round sooner, as it provides clarity on ownership percentages.
- Financial projections for seed funding should focus on the next 12-18 months, rather than long-term predictions.
- Customer testimonials may not be very effective in pitching to investors, as paying customers are more important than satisfied customers.
- It is not necessary to mention whether the equity split is dynamic or static when showing a cap table.
- Dilution percentages for each stage of funding can vary, but a general rule of thumb is around 10-30% at seed and 20% or less at series A.
- Researching angels and VCs can be done through online databases and by talking to other founders familiar with the investors.
- Addressing conventional VCs cautious of blockchain and blockchain investors expecting cryptocurrencies requires telling a compelling story that explains the company's unique configuration.
- YC's $150,000 investment does not handicap companies as it does not have a cap and the average cap for YC companies is over 8 million.

- YC has been investing at a high level for many years, with most companies raising over $8 million in seed funding.
- YC increases a company's value and probability of success, so investors see it as a cost of doing business.
- Long-term financial projections without a product or significant customer base are not recommended.
- Instead, focus on the potential of the business opportunity and the customer need to demonstrate the potential for success.

- Fundraising involves finding the right investors, telling a compelling story, and refining your pitch.
- Startups raise money to pay for expenses, hire people, and fuel growth.
- The best time to raise money is when you don't need it.
- Investors invest in both the founder and the story of the startup.
- Building a compelling story and pitch is crucial for founders.
- Choosing the right valuation and fundraising method is important.
- There are different types of investors and fundraising platforms.
- The fundraising process involves multiple rounds of funding.
- It is important to do your homework before meeting with investors.
- Simplify your pitch, show a demo or prototype, and listen to feedback.
- Maintain a good reputation and be honest and straightforward in your pitch.
- Don't take rejection personally and focus on building a successful business.
- Incorporating as a US entity is recommended for fundraising in Silicon Valley.
- YC invests on a post-money safe basis and provides clarity on ownership percentages.
- Traction and growth are important factors in attracting investors.
- Connecting with investors can be done through referrals, networking, and cold emailing.
- Explain how the funds will be used and what milestones will be achieved with the investment.
- Financial projections should focus on the next 12-18 months.
- Customer testimonials may not be very effective in pitching to investors.
- Dilution percentages can vary at different stages of funding.
- Research investors through online databases and talking to other founders.
- Addressing conventional VCs cautious of blockchain requires a compelling story.
- YC's investment does not handicap companies and increases their value and probability of success.
- Long-term financial projections without a product or significant customer base are not recommended.

YC Partner Geoff Ralston gives an introduction to the key concepts to keep in mind once you enter a fundraising process.

Learn more at https://www.startupschool.org/

We're going to have 2 lectures on fundraising.

This 1, which is going to be a high-level overview, which I'll do, and then next week, my partner, Kirstie, will do a deep dive into the mechanics of fundraising, which are really fun.

Before I start I will say we have an amazing set of resources in our library on fundraising.

You should read Paul Graham's essays on fundraising.

They have aged really well, and they will help you a lot.

I wrote a guide to seed fundraising as well that I think is pretty useful, But there are lots of other resources, videos from last year's Startup School, from 2014, How to Start a Startup, 1 of which I'll reference later, which will be massively helpful when you go out and raise money in early rounds and in later rounds.

And fundraising can be 1 of the hardest parts.

Even though fun is bright in the word, it's really not that fun.

It's a weird marketplace when you get out there.

It seems like kind of an open market but it's not rational.

It's seldom fair and yeah you will hear of founders who tell you, all right, fundraising was easy.

I walked out at, you know, I started walking down Sand Hill Road and people showered me with cash.

That's the exception rather than the rule.

So while you're fundraising, you're going to hear no a lot most of you.

You will hear reasons why your startup will not succeed, why your product is not a good 1, why the opportunity you're talking about is not real.

Sometimes they'll be right too but you should never believe that Because you will survive.

The way you will survive the multiple times you're gonna go fundraise is by being tough and resilient.

No matter what you hear, no matter how many times you hear no or reasons why your startup won't succeed, you need to believe.

Now I promised I'd go fast but I'm gonna go so fast I'm gonna give you a complete overview of everything you need to know about fundraising in about a minute or less and then I'll go deeper after that and anyone who wants to leave after this minute because you got everything that you needed I won't feel bad just walk out okay so in less than a minute figure out the story of your startup.

This means figure out why you're going to matter in the future.

What is it about your product, your opportunity, that's going to tell a story about the future that a venture capitalist will care about.

So this might mean getting product market fit, it might mean growth, could mean a lot of things.

Then find the right investors, do research, Talk to other founders.

This is where organizations like YC can be a ton of help.

You do your homework, you create your spreadsheet, and you get a list of everyone you're going to talk to and you're going to reach out to or you're going to get introductions to and then you begin you will pitch again and again and again you will refine your story again and again and you will get better at it as you iterate.

And eventually you'll meet the right investors.

Sometimes the right investors will be the investor with whom you resonate the best and who you think is going to be the best added value.

Sometimes the right investor be the person who is willing to write you a check first.

We'll talk about negotiations more later and then you get the money in the bank.

Okay, so let's get a little perspective first.

But there's sort of another reason, too, which is the returns can be really big.

Many people track the beginning of Silicon Valley to Bill and Dave starting Hewlett Packard in around 1957 and they started with $583 of their own money and never raised venture.

It's possible to do that but it turns out to do a high-growth startup you usually do need money and about the same time this French guy named George Dorio kind of kicked off the whole thing by investing $70,000 in this what was to become Epic company, digital equipment corporation.

And he turned that $70,000 into $35 million.

Which as you might imagine, got some people interested.

Well, You need it to pay for stuff, to hire people, to rent offices.

Startup equals growth, as Paul Graham wrote a long time ago.

And to grow you almost always need startup capital.

So it's possible to bootstrap and some companies do but it is really hard and you should keep in mind it's also true that having money can be a competitive advantage so most startups most of the time will raise money.

Now the obvious answer right is when you need it.

Unfortunately it's actually the opposite that's true.

The best time to raise money is when you don't need it.

But when you don't need money, investors see the biggest opportunity.

So throughout the lifetime of your startup, if you can arrange to be in a position where you have lots of money and lots of prospects, the money will come flowing in.

If you're desperate well VCs can smell that a mile away.

Well 1 rule of thumb and I'll give you another 1 in a second, 1 thought process to go through is assume when you raise money that this is the last time you'll ever be able to raise.

So raise enough so you won't need more, So you can get to profitability.

Now obviously this is not always possible.

It depends on the kind of startup you have.

So you should at least know what you're gonna spend the money on.

Figure out what the average employee is going to cost.

An engineer for example might be $15,000.

We usually use a rule of thumb at a seed round of about 18 months.

Whatever time frame that you need to where you can raise more money.

So you have to hit milestones that will be persuasive then or you have to get to profitability.

And then the number of folks you're gonna hire.

Well, there could be a whole lecture on this.

So rather than doing a whole lecture I'm just gonna make a couple of points on this.

So ask yourself if you were an investor would you invest in you?

Are you the kind of person who can take an idea and turn it into a reality that matters into a big company?

Yeah, I know I'm repeating myself but I'm going to go into a little more detail and I'm going to repeat a little bit of what I said in that very first lecture.

But the other thing that investors are going to invest in is the story of your startup.

What product are you building for what opportunity for what customers?

And is this story interesting, believable, does it resonate, Does it tell a future that they can believe in?

It has to tell a future about a company that you guys are building that has hundreds or thousands of employees.

Like those CTOs you saw sitting up here at 1 point they were exactly where you are with nothing and now they have tens of millions or more in revenue hundreds of employees.

Can the investor you're talking to believe that about what you're going to build?

So what components of the story are there?

So it has to represent a large opportunity.

And by the way if that's confusing why do you need a large opportunity?

Google venture math and understand what the venture capitalist cares about.

What sort of returns they need to make things worthwhile?

Is there a compelling product attraction?

A story is more persuasive if you actually have that product interaction but it doesn't mean you can't raise money just with a good story.

If you've heard of Magic Leap, they've raised billions on just a story.

Everything else is just how persuasive you are.

Sure, if you have millions of users and growing like crazy.

Interestingly the very best investors want to get you before you have all that stuff because you're expensive by then.

The greatest, best investors are Airbnb before they're Airbnb, before they have traction.

So remember to build your story, I went through this earlier, spend time on this, build the vertebrae, define the vertebrae of your story, the key points that are the most memorable, most important, and build a story, a pitch, a sales pitch around that.

Remember everything you're doing as a founder is being a salesperson.

You're selling to investors here or to yourself to get you to get to get up in the morning after you've heard no 25 times in a row, to your partners, to your customers, what valuation should you choose?

So this again you could do a whole lecture on.

It's complicated what valuation you should choose.

It's somewhat of a market, but it's a very strange market.

I would really recommend you look at the video of Sam Altman talking to Ron Conway, Mark Andreessen, Parker Conrad from Zenefits at the time, Ripley now, when they talk about what valuation you should choose.

Around the 22nd or 23rd minute Parker starts talking about his experience raising money.

It is really dangerous to choose too high a valuation and in fact it can kill your fundraising because it's quite difficult to go to an investor who might kind of be interested and you say I'm gonna raise it a 12 million dollar cap on my safe and they were like oh I was gonna invest but that's really expensive and then to go back to them and say oh actually we're a lot cheaper you're cheaper you mean you're not as good no I'm not interested investing I have seen companies actually fail fundraising because they chose too high a valuation.

But you don't want to choose too low a valuation either because you can overdo dilution.

We'll talk about dilution in a second, but the most important thing is to get the money in the bank and get back to work and that's why we talk a lot and you'll see it again and again about not over optimizing Fundraising.

As I mentioned, Kirstie's going to go over the mechanics of raising money in detail later.

So I'm going to go very quickly here about the mechanics of raising convertibles or equity very briefly.

There are other ways of raising money nowadays that have little to do with equity.

And a Convertible note is a kind of debt as well.

Although we don't recommend you use convertible notes anymore.

You go to an investor and say, Do you believe in the future of my company?

And they say yes, I want to buy a piece of your company, and you say okay, not really I'm gonna sell you a promise of a piece of My company which is what a convertible is It's not actually equity in your company.

It represents equity and it represents dilution.

It's just not actually dilution right at the time.

The great thing, so like why does this even exist?

Well, because, partly because YC demanded that they agree to it.

Partly because it's really good for companies.

The average document here is 3 to 5 pages.

When you do equity, it will be 3 or 4 documents representing hundreds of pages, lots of legalese.

You can do it almost automatically using tools like Clerky.

You should read every fundraising document you ever have to deal with.

There are many, many stories of nightmares of people agreeing to things they didn't know they were agreeing to.

Equity, when you actually issue new shares to a shareholder, is slow, almost always expensive, you almost always need lawyers, you're going to be giving those investors rights that you don't have to give When you do a convertible and those rights are important and important to understand they're usually called preferred provisions So again read everything Okay, so this I'm sure you guys all understand dilution.

If you sell 20% of your company you now own 20% less.

So if you raise a million dollars on a 4000000 dollar post valuation, post money valuation, you've just sold 20% of your company.

If you owned 50% of your company, everyone with me?

You've just sold 10% of that 50%, 20% times 50% and now you own 40%.

Well, convertibles actually made that complicated to figure out because you actually haven't sold yet.

So there's a there's a representative dilution but not an actual dilution.

As it turns out when you do a pre-money convertible the actual dilution that you're selling is difficult to know because it depends on how much extra money, how much other money you raise besides on that convertible.

If you raise lots of money on lots of different convertible notes understanding the actual dilution is complicated.

I actually wrote a tool called AngelCalc that helps you figure it out.

It's more complicated than I'm actually letting on because how you calculate The price that you actually get when you convert includes things you might not expect like future option pools for pre-money safes.

We've changed that and now the standard YC document that Kirstie will go into more detail is a post money safe.

And it's dead simple in that if you invest a million dollars on that 4000000 dollar post money safe you own 25%.

And you can be pretty sure that at that moment in time you're really buying about 25%.

So it's good for investors because they understand and it's equally good for founders because you guys understand.

You guys have a good feeling for what your cap table looks like.

All right, I'm going to go through this pretty quickly.

Angels are usually wealthy people that invest their own money.

They usually invest for similar reasons to VCs, but they also invest because they're passionate about things.

It's a different sort of conversation when you're talking to someone who's going to invest their own money and how they close and what their decision process is than a VC, sorry, than a VC who is a professional investing someone else's money, limited partners.

So they have a very different approach, different process for closing.

There's also other ways of raising, I'm not gonna spend a lot of time.

There's Kickstarter, there's AngelList, there's WeFunder, there's all sorts of crowdfunding mechanisms out there now that usually don't play the major role in your fundraising, but often will play an ancillary role that they might help you fill out around or fill out the amount of money that you're trying to raise.

All right, everyone's heard of an ICO, right?

I had a conversation earlier in the class with Andy Bromberg, the president of CoinList, which helps companies do ICOs.

The vast majority of you probably want to do an ICO but shouldn't.

You need a certain, you need to be building usually a certain kind of network for which having a cryptocurrency is a smart thing to do.

You have to know SEC regulations backwards and forwards.

It's a moving target and even though there's big dollars associated with it you should approach this whole topic with a lot of caution and educate yourself a ton.

So just again part of the ecosystem usually we talk in terms of rounds.

There's a lot of fuzziness in this now but usually you might start your company by putting money on a credit card and then you might get some friends and family money.

You don't usually give out equity here, but sometimes you will.

We don't recommend you do equity in a seed round.

Usually it'll be on some sort of convertible.

And then you get into your equity rounds, bigger rounds.

Usually this is smaller amounts of money to greater amounts of money.

And you can do a series ABCD, I've seen series F.

And then Eventually, if things go well and you don't get acquired, which could be things going well, you can do an IPO.

All right, let's talk a little bit about meeting investors.

I know I'm repeating myself here, but it bears repeating.

If you want to meet investors, Do your homework.

Know what the particular person you're talking about cares about.

If you don't, you're at a disadvantage immediately, or you're certainly not putting yourself in the advantageous position that you can.

You want to capture their attention in the first minute or 2 you're talking to them.

And I know this is a hard thing to say but Don't be boring.

I say it's a hard thing to say because you guys all probably think what you're working on is the most fascinating thing in the world, but it might not be fascinating the way you tell it.

You might come at it from the wrong way, which like every detail is fascinating to you but you need to capture someone's attention you need to build a story that's compelling from the beginning and the simplest way to tell your story is usually the best way to tell it if you can bring a demo if you can't fake it.

It's so fast, especially if you have a software product, it's so fast to build things.

And even if you're building hardware, bring a prototype of your hardware.

Steve Jobs used to demand prototypes in wood.

The first tablet, the first iPad was in wood.

Anything to get a feel for what it's going to be.

Also remember, you're trying to convince the investor that you can actually build what you're talking about.

So coming completely empty-handed, well you better be a really good storyteller if you come empty-handed.

Often forgotten is that you should listen.

You're there to have a conversation, to listen to what they have to say in terms of feedback.

It can be incredibly useful even if they say no.

Also a good sign that an investor meeting is going well is when they talk at least as much or more than you do.

When you're pitching investors, you will suck in the beginning.

1 of the marks of a successful fundraiser is they get better and better every meeting they have.

So yes, you should practice probably the first investor meetings you have.

It's not necessarily your highest target investors unless you're positive you have it nailed.

But if any of you are golfers you know that you can hit a lot of golf swings and never improve unless you get feedback and take in that feedback.

Pay attention to how interested they are.

Pay attention to how the meeting went and what the feedback was and improve every time.

And do not leave an investor meeting without some sort of conclusion.

Now the best conclusion is a check or an agreement for a check.

We have something called a handshake protocol that you can look up as well.

Getting a handshake for a deal, getting someone to agree to give you money, that's awesome.

But if you don't get that, try to understand whether it's a firm no or whether there's next steps so that you can work towards getting that.

For most VCs, including angels, there's a process.

Most people won't give you money on the first meeting.

For raising seed I think decks are not that useful.

As an angel investor myself I almost never even look at the deck.

I just want to look at the founder and hear their story and see how they tell it.

Many of you won't be comfortable telling it without a deck and some investors actually want a deck.

So you should probably have some short pitch deck.

In a guide to seed fundraising I outlined the 12 items that are important to have in such a deck.

But don't create a story around the deck.

Create a story around your story and your product and your future and figure out how to tell it without a deck because if you can't well, well you can right?

So a word on negotiations, very brief word.

Hopefully you'll meet an investor and say you know you'll tell your story this is we're building this awesome product we have this traction it's great and we're raising a million and a half dollars on an 8000000 dollar cap and they say I'm in for a hundred thousand.

Now usually the most likely thing you might negotiate around is that cap and sometimes it's okay to state firmly what it is and sometimes if it's too high they might negotiate down but if you're not sure really what you're raising on you haven't raised any money on you're just talking to investors it's okay to start talking to them about what they think is reasonable and try to try to 0 in on what the right number is.

But if you do enter in negotiations, just a few things to keep in mind.

If you're talking to an angel they don't want to seem like an idiot.

If you're talking to a venture capitalist they want to own a certain percentage of your company.

See all Y Combinator transcripts on Youtube

Fundraising Fundamentals By Geoff Ralston