How to Raise Money -->
Want to start a startup? Get funded by<br>Y Combinator.
September 2013
Most startups that raise money do it more than once. A typical<br>trajectory might be (1) to get started with a few tens of thousands<br>from something like Y Combinator or individual angels, then<br>(2) raise a few hundred thousand to a few million to build the company,<br>and then (3) once the company is clearly succeeding, raise one or<br>more later rounds to accelerate growth.
Reality can be messier. Some companies raise money twice in phase<br>2. Others skip phase 1 and go straight to phase 2. And at Y Combinator<br>we get an increasing number of companies that have already<br>raised amounts in the hundreds of thousands. But the three phase<br>path is at least the one about which individual startups' paths<br>oscillate.
This essay focuses on phase 2 fundraising. That's the type the<br>startups we fund are doing on Demo Day, and this essay is the advice<br>we give them.
Forces
Fundraising is hard in both senses: hard like lifting a heavy weight,<br>and hard like solving a puzzle. It's hard like lifting a weight<br>because it's intrinsically hard to convince people to part with<br>large sums of money. That problem is irreducible; it should be<br>hard. But much of the other kind of difficulty can be eliminated.<br>Fundraising only seems a puzzle because it's an alien world to most<br>founders, and I hope to fix that by supplying a map through it.
To founders, the behavior of investors is often opaque — partly<br>because their motivations are obscure, but partly because they<br>deliberately mislead you. And the misleading ways of investors<br>combine horribly with the wishful thinking of inexperienced founders.<br>At YC we're always warning founders about this danger, and investors<br>are probably more circumspect with YC startups than with other<br>companies they talk to, and even so we witness a constant series<br>of explosions as these two volatile components combine.<br>[1]
If you're an inexperienced founder, the only way to survive is by<br>imposing external constraints on yourself. You can't trust your<br>intuitions. I'm going to give you a set of rules here that will<br>get you through this process if anything will. At certain moments<br>you'll be tempted to ignore them. So rule number zero is: these<br>rules exist for a reason. You wouldn't need a rule to keep you<br>going in one direction if there weren't powerful forces pushing you<br>in another.
The ultimate source of the forces acting on you are the forces<br>acting on investors. Investors are pinched between two kinds of<br>fear: fear of investing in startups that fizzle, and fear of missing<br>out on startups that take off. The cause of all this fear is the<br>very thing that makes startups such attractive investments: the<br>successful ones grow very fast. But that fast growth means investors<br>can't wait around. If you wait till a startup is obviously a<br>success, it's too late. To get the really high returns, you have<br>to invest in startups when it's still unclear how they'll do. But<br>that in turn makes investors nervous they're about to invest in a<br>flop. As indeed they often are.
What investors would like to do, if they could, is wait. When a<br>startup is only a few months old, every week that passes gives you<br>significantly more information about them. But if you wait too<br>long, other investors might take the deal away from you. And of<br>course the other investors are all subject to the same forces. So<br>what tends to happen is that they all wait as long as they can,<br>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 it<br>might seem fundraising is one of the defining qualities of a startup.<br>Actually it isn't. Rapid growth is what<br>makes a company a startup. Most companies in a position to grow<br>rapidly find that (a) taking outside money helps them grow faster,<br>and (b) their growth potential makes it easy to attract such money.<br>It's so common for both (a) and (b) to be true of a successful<br>startup that practically all do raise outside money. But there may<br>be cases where a startup either wouldn't want to grow faster, or<br>outside money wouldn't help them to, and if you're one of them,<br>don't raise money.
The other time not to raise money is when you won't be able to. If<br>you try to raise money before you can convince<br>investors, you'll not only waste your time, but also burn your<br>reputation with those investors.
Be in fundraising mode or not.
One of the things that surprises founders most about fundraising<br>is how distracting it is. When you start fundraising, everything<br>else grinds to a halt. The problem is not the time fundraising<br>consumes but that it becomes the top idea in<br>your mind. A startup can't endure that level of distraction<br>for long. An early stage startup grows mostly because the founders<br>make it grow, and if the founders look away,<br>growth usually drops sharply.
Because fundraising is so distracting, a startup should either be<br>in fundraising mode or not....