Startup Fundraising Lessons For The 99%

http://pando.com/2014/02/26/startup-fundraising-lessons-for-the-99/

by cornish • 12 years ago

79 21 12 years ago

danial• 12 years ago

Always say that you’re raising less than you actually want. If you want to raise $1 million, tell investors you’re raising $750,000. This tactic will come in handy when they ask you how much has already been committed. Always answer in percentages, not actual numbers.

Is this sound advice? Could someone explain the reasoning behind it?

rachellaw• 12 years ago

I think it's part of the TechStars tactic to ask for the bare minimum, and hope for more. It makes your company look leaner, which signals to investors that their money is working hard.

For instance this video has been cited as a "perfect pitch" http://www.youtube.com/watch?v=RAKJcWYAvW4

Percentages always sound more impressive than numbers. For instance if you ask for 300,000 and get 500,000; you can say we were 167% over our goal amount or whatever. I've seen it done on kickstarter funding, and I've done it myself.

gregcohn• 12 years ago

Another way of putting this is that investors value optionality and will maintain it if you give them the option to. If you tell someone you're raising $1,000,000, and they'd be the first $25K in, many will tell you to come back when you have more committed. Exceptions exist, but these will require strong opinions and commitment, something not every angel has (especially in the context here of intro'd people, ie people you don't already have relationships with).

It's also demand-generating if you have the forcing function of closing. If you target $300K and you've got $250 closed and are actively fundraising, it sends a signal of urgency and also creates a sense of momentum that even investors conscious of this effect can't help being influenced by.

You shouldn't randomly take an investment amount that is less than meaningful though; I would re-state this axiom as figure out the minimum amount of funding you'd be prepared to close on, and start out seeking that rather than more; adjust as necessary and as opportunity presents itself.

danaseverson• 12 years ago

I think the logic is, if you want $1M and you've only been able to raise $500k, it's better to say your 66% committed vs. 50% committed. You can always over subscribe, which is what you would want to do. Oversubscribing is also a positive signal.

We used this strategy and it seemed to work fine.

lpolovets2• 12 years ago

I'm an investor. I've talked to a number of companies that have done this, and it seems to work. However, I think the amount you're raising matters.

If you're raising 500k or 700k, then cutting that in half will make investors wonder why you're raising so little. There's not much runway that you can buy for $250k.

On the other hand, let's say you're raising $1.5m at a $6m valuation. You can start by telling people you're raising 750k or 900k. Once you get to, say, 500k, investors will feel pressured to invest if you only have 250k left to go; they won't feel pressured if you have 1m left. Furthermore, if you're struggling to get to 750k, you can stop when you're there/almost there, and not look bad for hoping to raise 1.5m and then quitting. On the other hand, if you get to 750k quickly, you can use that momentum to get to 1.5m and look great doing it ("Wow, she only wanted to raise 750k, but she had so much interest that she ended up taking 1.5m!").

It's kind of silly that this works, but it does seem to work.

zbruhnke2• 12 years ago

I get this to an extent, but it also borders on being dishonest when you're cutting the amount in half and honestly if you're setting out to raise 1.5 but you have a hard time getting to half of that chances are you're raising too early.

I don't mean "too early" in the sense of the VC who met with you for five minutes said it was "too early" since that is a whole different story.

I mean too early in the sense that you probably don't have enough actual traction yet, which can mean users, technology, or any subset of other things that matter to show your company has significant growth potential.

We thought we would start raising a few months ago and we were definitely too early, we thought we could raise based on being smart and a track record, took a couple of meetings and realized that we needed to put our heads down and get back to work for a bit.

Fast forward a few months later and we have lots of inbound, some great outbound leads (I agree with this article in the was that you probably HAVE to ask for some inbound leads unless you're the hottest deal in the valley, all the best fit investors probably won't come knocking for you) and it looks like our round will be able to oversubscribe rather quickly.

That's a product of traction(hello revenue!) and picking the right time to raise.

While I appreciate Leo's sentiment here, personally I think if you're looking to raise 1.5 and you struggle to get to 750, put your head down and get back to work or else you're going to make the next few years of your life really hard.

Presumably you wanted to raise 1.5 because you have a budget, or a runway goal(at least I hope you do) so raising half of that will likely end up with investors wishing they would have passed on the deal, and that's not a win for anyone!

Just my $.02

larrys2• 12 years ago

"Create artificial urgency by compressing your meetings."

Urgency. Yes. The above stands out as being true from my experience in any type of negotiation at all. It's the opposite of the "time kills all deals". Every negotiation needs a deadline and a reason to get people off the fence and make a decision (either way). Don't let things drag on. Don't give people the impression that you will always be around.

Also, don't do obvious telegraphs like "I have the following days opening" which essentially any person who takes meetings knows actually means "I am always available".

"Another cheap idea: Create a keyword campaign for the top investors on your list. Use their names as the keywords. They sure as hell Google themselves, and when they do, there you are."

My personal feeling is that this is a waste for several reasons. It obviously assumes that people will google themselves on a regular basis but also assumes they won't feel they are being stalked by an investee as well. Not to mention the fact that it's a little cliche, like the billboard that asks for a marriage proposal.

lsc• 12 years ago

Also, don't do obvious telegraphs like "I have the following days opening" which essentially any person who takes meetings knows actually means "I am always available".

Hang on... explain this, please, in small words. So I'm supposed to pretend I work on a schedule, and that schedule is super full, I get that.

But, wouldn't saying 'i have the following days available' mean that I'm working on a schedule and it's not wide open? What are you supposed to say? "I'm really busy so just call me sometime and I'll see if I can fit you in?"

'cause that's what I do most of the time, not because I'm trying to fool people into giving me money, but because I'm... deficient when it comes to scheduling. Let me tell you, outside of trying to get people to give you money, it works less well than you might guess, and you might guess that it works pretty poorly.

chacham15• 12 years ago

I think that the ideas is that by giving him an option of multiple times suggests that there are multiple times. If you instead say "I have some time tomorrow to discuss this" it sets a deadline as the grandparent suggested.

birken• 12 years ago

I think this is generally decent advice about the mechanics of fundraising if you aren't an "in-demand" startup. However, this does gloss over the major fact that this is a bad situation to find yourself in, and you are much better off spending energy getting yourself into a good situation than you are swimming upstream in a bad one. And while I'm sure being in YC does help with fundraising (extra social proof), you certainly don't need to be in YC to raise money successfully.

If you don't think you will be good at fundraising (because you don't know a lot of rich people, you are a first-timer, you aren't good at pitching, etc), then you should be operating your business in a way where you don't need to fundraise. Be incredibly incredibly lean, generate revenue from day 1, figure out how to incrementally achieve ambitious goals, etc. There are a lot more ways to run a successful business than there are to run a successful fundraising --- investors are all looking for the same thing, and they could all be wrong. But if you grow fast enough or make enough money they'll come around.

There isn't too much reason to get into more details because pg wrote the canonical piece on fundraising, which certainly applies to non-YC companies as well: http://paulgraham.com/fr.html

But generally, the premise of this whole article is flawed. Most startups fail. If you want to successfully raise money, you should be in the 1% (or 5% or 10%, but some suitably small number) of top startups. And if you aren't, then you should be spending your time getting there instead of raising money.

brandnewlow• 12 years ago

Agreed 100%. If this guy had to resort to this stuff, he has bigger problems than fundraising that he might be ignoring for one reason or another.

DanielRibeiro• 12 years ago

Alternatively you can build what Naval, the founder of Angel List, defined as a fundable startup[1]. Video on more details: http://vimeo.com/25392719

[1] Summary: http://andrewchen.co/2011/06/21/video-the-anatomy-of-a-funda...

cornish2• 12 years ago

Honest question here: I'm the OP, but my original title was, Reaction to “Was YC Worth It” – Startup Fundraising Lessons for the 99%. Someone changed my title? Is that normal when YC is mentioned in the headline?

r0h1n• 12 years ago

Your submitted title wasn't the article's title (on Pando), but now, post the edit, they are.

zaidf• 12 years ago

I hope you ask Pando.

cornish2• 12 years ago

What do you mean by that? It was my decision to select the title that I did. I thought it was relevant to the audience. No?

NoodleIncident• 12 years ago

A horrible paraphrase of the relevant rule and comments on the rule:

"Links to articles should be submitted with the original article title. Titles are common property... The person who submits an article to shouldn't have the ability to inject their opinions, so to prevent this we revert all titles to the original article title.

It would be better if submitting a link could just automatically pull the title from the article, but there's no reliable way to make that work. Instead, we just have to make this a rule and have moderators enforce it."

Startup Fundraising Lessons For The 99%

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