March 29, 2023
Hello, everyone. I'm Brad Flora. I'm a group partner here at YC, and I'm going to be talking about how startup fundraising works today. Like I said, I'm a group partner at YC. And what that means is that I read applications, I interview the startups that apply, and then I work with them to try to make something people want. And one of the topics that people ask about all the time at YC is fundraising. In fact, it's probably the thing that we get asked about more often than anything else. And the reason for that is because, as Paul Graham wrote years ago, raising money is the second hardest part of starting a startup after making something people want. So let's take a quick tour of all the awesome stuff that YC has put out about fundraising over the years.
First, there's the Paul Graham essays. He wrote A Fundraising Survival Guide, How to Fund a Startup, How to Convince Investors to invest in your company, and even wrote a great essay about understanding Investor Herd Dynamics.
Years later, just a little bit ago, YC president, Jeff Ralston posted a terrific guide to raising a seed round, where he covers everything from start to finish that you need to know the nitty gritty on how to raise a seed round. And he gave a great video presentation at startup school a few years ago where he presented that material. You should check it out. It'll tell you how to raise a seed round.
Finally, we've posted a lot of tactical guides about specific aspects of fundraising, how to build a seed deck, how to pitch your startup, how to get meetings with investors, and how to raise money online for startups using platforms like AngelList. We've even got something about the different types of investors and their incentives. So if you really want to get specific and drill into stuff, there's content for you that you can find.
What I didn't want to do today is just rehash all of that stuff because it's already out there. What I wanted to do instead is talk about some of the misconceptions and myths that we see as YC partners when we work with founders. Founders out there are consuming all sorts of information in the media. And a lot of it is about startup fundraising. And there's some things in there that just are not true that we're gonna talk about. The goal of this talk is to catch you up on how fundraising actually works today. And we're gonna do that by exploring seven fundraising myths. And for each one of them, we're gonna talk about the myth, the reality behind the myth, and then look at some great YC companies that bust that myth.
Before we get started, just a little bit more about me. I'm a YC partner, but I've also been on both sides of the table as a founder and an investor. From 2008 to 2014, I was building startups. And the company that I got the most success was Perfect Audience, which was an ad retargeting startup for small businesses. I took Perfect Audience through the YC Summer 11 batch, 11 years ago. And we raised $1 million seed round after demo day. I hired a bunch of great people. We grew to $3 million in revenue and we were acquired in 2014.
After that acquisition, I got really into investing in startups. It started with angel investing where I was writing just a few checks, $5,000, $10,000 into YC companies that I thought sounded really cool at demo day. But I got hooked. The thrill of going and meeting founders, finding out what their deal is, trying to figure out, are they making something people want? Should I invest? It was too much for me. And suddenly I was raising a fund with some friends to scale up and invest in even more YC companies. And so through that fund, I invested in 150 YC companies. And the good news for my backers is that we got into some great companies. You may have heard of a few of them: Deel, OpenSea, Retool, Razorpay. It was really awesome to help those companies raise their first round of funding and it's been a lot of fun being involved since. Eventually though, I joined YC as a group partner and I get to do both sides. I get to act as a founder, as a fellow peer to the YC founders and help them figure out how to make something people want and then use my investor experience to help them figure out how to raise money. So I've got a good view of this. I've been involved in a lot of seed fundraising.
So let's get started with these myths. And for the first one I want to talk about is this idea that raising money is glamorous. What's the image in your head that you think of when you think of startup fundraising?
For a lot of you, it might be something like this. This is an image of Shark Tank, and it's a television show where entrepreneurs, they dress up, they make a sign, they get a bunch of materials, and they pitch a bunch of investors at once, called sharks. And these are a bunch of people of varying levels of investor expertise who hear the pitch, ask a bunch of nosy kind of pushy questions, and then fire offers at the founder rapid fire. And so if you watch this, you may be thinking, gosh, I've got to put a whole presentation together like this, and I'm going to pitch a bunch of people and they're going to ask me all these tough questions, and it's going to be this high pressure situation that I've got to figure out.
The reality is that fundraising actually looks like this. This is a picture taken in the Creamery, which is a now-departed cafe in San Francisco. Notice what's happening here? It's just a bunch of people sitting in chairs talking quietly amongst themselves, right? It's just a bunch of coffee chats. That's how fundraising actually looks. That's what it actually feels like — it's just sitting in a cafe talking to someone.
Shark Tank, the pitch competitions, the business plan competitions, they're just for show. They're marketing events for the organizations that put them on. And in fact, a lot of the investors at these things, they don't invest. They're just there to meet other investors and hang out. And even on Shark Tank, I think Mark Cuban recently said that even though he's put $20 million into these companies, he hasn't made a dime yet. He's still in the red. Actual fundraising is just a bunch of one-on-one meetings on Zoom. Over and over again while you try to collect checks and convince investors. It's a grind.
What you see here is a diagram that was made by an actual YC company called FreshPaint that shows what an actual round of fundraising looked like for their startup. You see at the top the company and each one of these circles and squares represents a different investor that they met with. And when the boxes are connected, it's because that investor made an introduction for them. They met with 160 investors, and 39 of them said yes, which is a very high conversion rate. But the check range was all over the place. They had people write 5K checks and people write 200K checks. Not everybody was some fancy VC that could write a giant check. And it took them four months and 18 days to get through all these meetings and close all these deals. And that was to raise $1.6 million. Fundraising was painful and it was a grind, but it was pretty straightforward. It was just a bunch of conversations. They've written a great blog post. That's where this image comes from that you can check out. You should definitely read it. It's a great example of what it's actually like to raise money.
Okay, the next myth I want to talk about is this idea that I need to raise money before I can start working on my startup. All right, we see this a lot with founders. We meet people that have a big idea, which is great. And the next thought they have is, well, gosh, I guess I need to raise money so I can build my big idea.
But that's not how the best founders actually think about fundraising. The best founders, they build the first version of the product first, even if it's a simple, almost toy-like version of it. And then they go get some users for it. And then, only then, when they see that people are starting to use it and maybe there's some value being created, do they start thinking about raising money.
The reason for this is that it's cheaper than ever to build a prototype of a product, to build a first version, okay? It's cheaper than ever to host a website and build software. It gets easier and easier and easier every year. And also, it's easier than ever to find potential users. You can get users on platforms like ProductHunt, on Hacker News. You can find users on social media, Twitter, LinkedIn. Everybody's on the internet today. And you can use that to find early people to try out your product.
And when you do this, when you've got a little bit of product, just a little bit, and a few users for it, it immediately gives you a great deal of leverage. You've gone from that person waving the pitch deck around trying to figure out how to find $20 million to someone whose startup is in motion. And investors want to jump on trains that are in motion.
Here's an example. Solugen is a YC company from the Winter 17 batch. And they are a chemical manufacturing startup. They literally make chemicals and sell them. As you can imagine, that is a capital intensive business. It requires a lot of money to build a facility that can make chemicals and sell them at scale. And a certain type of founder that had this idea would then make a pitch deck and go around telling investors, I need $10 million, I need $20 million to build the manufacturing plant to make these chemicals. The Solugen folks chose a different path, which is first they built a tiny version of their reactor that fit on a desk, but it worked. Next, they built a slightly larger version of that that could actually make enough hydrogen peroxide to sell. And they took that to YC when they applied for the winter 17 batch. And during the batch, they started making enough hydrogen peroxide using this slightly larger version of the machine that they could go and sell it to first customers. Turned out that hot tub supply stores needed hydrogen peroxide to sell to people that had hot tubs. And so they were making $10,000 a month selling hydrogen peroxide to hot tub supply stores, not a ton of money.
But let's step back for a second. If you were an investor and you were trying to invest in a chemical manufacturing company, Who would you back? The person with the pitch deck asking for $20 million? Or the people that have built a first version of this, even if it's small and making small amounts of the product and selling it to hot tub supply stores, which is hardly a huge business, but it's something. Well, investors clearly want the second. Solugen was able to raise $4 million to get started on their company because they'd already made some progress. And today, they've since raised $400 million, and they've scaled this up to having a full manufacturing plant.
Let's talk about our next myth. It's this idea that my startup needs to be impressive to raise money. I've got impressed people with my startup, but my startup's not very impressive. So how can I ever do this? Well, the reality is you don't need to impress investors. You need to convince them. And that's a slightly different thing. See, most startups seem terrible at first. And in fact, the best startups seem the most terrible at first.
But investors get this. They know that your startup is going to sound unimpressive early on. Investors are pretty smart. They get it. And in fact, they get bored when founders try to impress them. I really try to win them over and sell to them. It bores them.
About 11 years ago when I did YC, I had a chance to have a five-minute meeting with Michael Moritz, who at the time was a partner at Sequoia Capital, is legendary VC. And I was so excited for this meeting. I made a fancy deck. I practiced all these lines I was going to use on him to impress him and get him to invest in my startup. And I sat down with him and I opened my laptop to get the slides out. And he stopped me and just said, I prefer to just talk about the business you're building. And I was completely disarmed because I wasn't ready for that. I was ready to impress him, not to try to just talk about the business that I was building.
And we see this similar thinking with a lot of founders at YC, where they come to us, they don't explicitly ask us this, but they more or less say, Brad, what are the magic words I need to say to make investors want to invest in my startup? And the reality is that it's not about magic words, it's about making something people want, that YC credo. It's about making a product, getting it into users' hands, and creating some value for them. And then just explaining how there's a 1% chance, even just a 1% chance, that it can get huge. And using plain, simple language to do it. That's how you convince investors, OK? If investors aren't investing, it's not because you didn't say the magic words. It's because your startup isn't good enough and you need to make your startup better. And so have these conversations. You make your startup better and you just explain it to people and talk about it like a human and do it over and over and over again. Because again, startup fundraising is a grind.
Here's an example of a company that did a great job convincing investors when they met with them. This is Retool. And Retool makes software for building internal tools. It's a great company. They raised their seed round. You see the founder, David, one of the CEO and co-founder, by just meeting a bunch of investors in coffee shops in San Francisco. I was lucky enough to meet with David and he had no dec. Instead, he just opened his laptop and showed me the software on his computer. And he used that early kind of crude version of Retool to make a crude but simple internal tool, a little web app in minutes. And then he talked about why his early customers really liked it and we're getting some value from it. And just seeing this, seeing him show me the product and talk about what his customers were making of it put in my head this idea that a lot of companies probably are going to need this. I was convinced. He didn't impress me. He didn't try to wow me. He just showed me and talked in a reasonable way about what he was doing and that convinced me. I wrote a check and today that company is at a $4 billion valuation. Wasn't about doing a fancy pitch. Wasn't about magic words. It was just about making something and then talking about it with me.
The next myth I want to talk about is that raising money is complicated, slow and expensive. If you read a lot about fundraising in the press, you might think that it involves raising giant rounds from big name VCs. Why is that?
Well, let's take a look at yesterday's TechCrunch headlines about fundraising. We've got a story about Shopify, MarkVision, Lockett, Sprig. What do we see, folks? What's the common denominator here? Gigantic numbers.
And so you're reading this at home, and you're just trying to think, how can I raise $25,000 to quit my job or spend more time on this or get a hosting account for the website that I want to build. You're not thinking about $100 million. Gosh, maybe this isn't for you. Well, the reality is, is that all the rounds you read about in the news are series A's and growth rounds. You don't read much about the actual, you don't read anything about the actual first rounds of funding that companies raise. Why? Because it's boring. Okay, it's really boring. We already established that there's no glamour in the actual early fundraising that startups do. So it never makes the press.
These typical A and B rounds are huge, right? You raise $10 to $50 million, they take months to close, and you pay hundreds of thousands of dollars to lawyers and legal fees to get these rounds done.
The good news is, like I said, that's not what a lot of these rounds look like. Your typical seed round is actually much smaller, 500,000, maybe a couple million dollars. You can close it in weeks, if not days, and there's no legal fees. And this is the same for if you're trying to raise a pre-seed or just trying to raise $50,000 from friends and family. You can do that quickly and there's no need to get lawyers involved. Why is that?
Well, in 2013, YC created a new standard fundraising document called the SAFE, Simple Agreement for Future Equity. So initially this was made by YC to be the new standard document that all YC companies would use. And it turned out for fundraising and it turned out to be so great that now every startup uses this to raise their money.
The SAFEs are awesome:
SAFEs are so simple that there's even a website called Clerkey. It's a YC company from MyBatch, Summer 11, that lets you send and sign them in just a few clicks. SAFEs give founders fundraising superpowers, and you don't have to wait months for investors to get organized and for lawyers to review stuff. Founders today just take all the meetings, they sign a bunch of SAFE, and they raise millions for their startup in just a few clicks. And this quick and cheap fundraising gives them more leverage than ever when they're talking to investors.
Here's an example. You could build your company like Asher Bio. So this is a biotech startup from the summer 19 match that's developing cancer therapies. Again, capital intensive business and the typical first rounds of funding are tens of millions of dollars for companies like this. And so founders go, they make a pitch deck and they've got to go get this money before they can start working on the startup.
The founders of Asher Bio came into YC with just the idea. And they were able to raise the first round of funding using SAFEs quickly from angels. This is pretty novel for a biotech company. And using that first million or so that they raised, they could accelerate their progress. They could make more progress in the lab. And when they were ready to start talking to larger investors in the pharma space about a proper round, they'd made a lot more progress, and they had more leverage in talking to those investors. They've since raised over $150 million, but that first million that they raised in SAFEs totally changed the power dynamics for them when talking to investors. The SAFES changed the game for them.
Related myth is this idea, and I hear this a lot. Hey, if I raise money, I'm going to lose control of my company. Well, the reality is that seed rounds today give founders more control than ever. Founders have more control over their companies today than ever in the history of startups.
And why is this? It's because when you raise with safes, you don't give up any board seats. There's no board seat nonsense in SAFES. After you close the investment, it's still just you and your co-founders calling the shots. There's no shareholders after you close money with SAFES. The investors on SAFES get shares in the next round. So no shares are actually changing hands. And there's no information rights granted in SAFES. So there's nobody requesting to look into your books, looking over your shoulder. You get to choose how and when to update your investors when you raise money with SAFES.
So again, founders are raising millions of dollars. They're only selling 10% to 20% of their company, and they're keeping total control of the companies. And when you do that, you can build the company the way you want and answer to no one except your customers. Well, pretty important, but instead of answering to investors, you answer to your customers when you raise seed rounds today.
Here's a great example. You could build your startup like Zapier. They describe themselves as three dudes from Missouri and Zapier is software that help you set up integrations. If you've got one app that you use in another app and you want them to talk to each other, you can use Zapier to set that up. It's awesome. They did the YC summer 12 match and they applied with an early version of their software. They had a few customers and they raised over a million dollars from angels and small funds at demo day. And because they did that, because they raised on safes and they just raised a bunch of checks, they were able to run their company the way they wanted. And for them, 10 years ago, that meant going fully remote. 10 years ago, a decade before it was cool for startups to do that. It was pretty weird at the time. And they ran their company the way they wanted to. They spent the next decade just delighting thousands and thousands of customers. And they also made the decision to never raise money again. They never needed to.
So folks thinking, gosh, if I raise money, I'm always going to be indebted to investors, yada, yada, yada, no. Maybe later, if you raise these crazy priced rounds, but for the early money that you raise on safes, you have total control, and you can be like the Zapier founders and never raise money again. And today, that's $100 million revenue business, and they only raised money that one time.
When you raise with SAFEs:
Now, what about bootstrapping? You might be thinking, I should bootstrap my company. Well, everybody bootstraps at first, that's true. But I want to tell you that bootstrapping your company forever sucks. And here's why.
I actually want to propose a definition of bootstrapping. So bootstrapping is taking the pain of fundraising and stretching it out across the entire life of your company. Why would you want to do that? I propose to you that you should rip off the Band-Aid and take the pain up front and raise money for your company. And then you never have to raise money again if you don't want to. You can be like the Zapier founders.
And besides, at the end of the day, who's more in control of their startup in the end? Is it the bootstrapped founder who's always worried about running out of money, or the founders that raise enough money to get the company going after they've built a product and gotten some users, and they can just make their customers happy and they never have to raise again?
Why bootstrapping forever sucks:
The next myth I wanna talk about is this idea that I need a fancy network to raise money. The reality is that if you are making something people want, investors don't care about where you went to school, where you worked, who you're friends with, how old you are, even. Investors are human, and sure, they notice pedigree. But guess what, folks? Investors are coin-operated lizard people, and they care a lot more about making money.
You could build your company like Podium. Podium is a company that started off making customer review management software for tire shops. If you're a tire shop and you're worried about what people are saying about you on Yelp, you might use Podium to keep track of that. The co-founders were two guys from Utah. They had no Silicon Valley network. However, they were really good at sales. And they came into YC. They were already making money. And by the end of the batch, they were making tens of thousands of dollars a month.
I actually randomly bumped into them at an alumni event during their batch, and I was stunned that there was a company selling software to tire shops in Y Combinator, and even more stunned when I found out how much money they were making. Investors noticed that too, that they'd made something people want and they were able to raise, and now today that company makes $100 million a year and has raised more than $200 million. These folks had no network. These are not fancy founders. They just made something people want.
Slide tangent while we're on this topic. You'll probably run into people, if you're thinking about fundraising, who are going to offer to raise money for you. I have the network. I know investors. Let me go in there and pitch your company. It is not a good idea. It's always best for the founders to talk to investors themselves. It's an important relationship and you want to own it. So if someone makes you that offer, you should get them to make an introduction instead, and then you can go take the meeting.
All right, the last myth I'm gonna talk about today is the myth that if investors reject my startup, that means it's a bad startup. The reality is that no matter how great your product is, how much traction you have, investors are going to reject you, and that's okay. In fact, it puts you in great company, right?
Here's a great example, nVision. So Envision is a medical device startup for cancer detection, and it was started by Serbi Sarna, who's a YC group partner today. When Serbi started building Envision, she had a devil of a time raising her first check. She was rejected more than 50 times by investors to just get the first money for the company. And the way that she was able to convince someone to write that first check and to help her get this company started was she told them she was going to bet on herself and take no salary for the first two years if the investor was willing to bet on them. And that was for a $25,000 check. Her first round of funding for the company was only $500,000, but she got it done, and she got, even though she got rejected over and over again. And since then, the company was acquired for $275 million. So here's this awesome medical device company that sold for hundreds of millions of dollars, and yet, rejection after rejection after rejection.
If you want to read more about Serbia's story, she actually has an awesome book coming out in the spring. And it's on Amazon right now, and we'll share the link with you in the chat if you want to check it out and pre-order it. Serbi is awesome. It's a privilege to get to work with her, and the book is terrific.
One other example of this is WhatNot. It's a marketplace for collectibles. They were in the winter 20 batch, and they came in with a beta product, but no users. They hadn't launched yet. And during the batch, they got started. And it was just initially a marketplace for selling Funko Pop toys, right? Those toys with the big heads. During the batch, they got some early traction. They started making some money. They got in some buyers. They got in some sellers. Revenue was going up. Sales were going up. Things were looking good, right? But investors hated it. And they only raised a fraction of the amount of money that they were hoping to raise for their seed round. And the amazing thing is that today, what not, just two and a half years later is worth $3.7 billion and they've raised over $400 million. And just two and a half years ago, they couldn't pay people to invest in their company at a fraction of that valuation.
Everyone gets rejected. It's just part of it. Even if you're building a four billion dollar company, people are getting rejected. And the thing is, the founders were not really that bummed out about it because they had already done that work of convincing themselves that what they were building was working and was going to work. Investors just weren't seeing it yet. Some did, enough did, but they still faced a ton of rejection. You don't need every investor to like what you're building. You just need a few of them to believe.And the good news is that today there's more investors than ever with more money than ever looking to invest in startups.
All right, let's step back for a second and wrap this up. There's a common theme to these myths that we talked about. The idea that organizes all of these is the big myth, which is this — "This isn't for you". These ideas that are out there, these misconceptions that founders have, they add up to people thinking, gosh, maybe this isn't for me. Maybe I shouldn't start my startup because I don't know how to do this stuff. I don't have a fancy network. I don't know all these people. I don't know how to pitch. I don't know how to impress people. But the reality is you can do this.
Fundraising is just a bunch of coffee chats and Zoom calls. You can do that. You don't need to raise money to get started. You can just start working on your startup. You don't need permission from investors. You don't need an intricate pitch. You just need to make something people want and be able to talk about it like a normal human. You do that every day with your friends and family. Using safes, it's easier than ever for you to go raise the money that you need without lawyers and quickly. And the terms you're going to get today mean that you can run your company exactly how you want. There's not some secret special way that you have to run your startup. You can call the shots. You don't need a big network and fancy connections to raise money. And finally, the rejection that you're going to experience doesn't mean anything. It's just part of the process.
It turns out there's never been a better time in the history of the world to raise money than now. So if you're thinking of doing a startup, get building. You can do this. You can do all of this. You can do this.