Everything I wish I had known about raising a seed round(mdwdotla.medium.com) |
Everything I wish I had known about raising a seed round(mdwdotla.medium.com) |
That’s not to take anything away from Matt. He’s clearly an accomplished individual and his advice is still sound. But he hasn’t included the glaringly obvious reason why he got funded - he was a professor in CS at Harvard and has had a string of prestigious roles in industry.
Networking is all about who knows you, not who you know.
Guessing both are big factors in how easy it is to raise funds as a first time founder.
It’s actually worked out better for me since it’s made me realize that I don’t need that much funding that soon. Working on the prototype and getting some users has also given me far more clarity about the product and customer acquisition strategy.
The main point of my article was the surprise around the extent of the VC network and the helpful interactions with them. Before going through this process, VC was a black box to me. Now, a lot less so.
A few folks below have pointed out that I must have had an extensive VC network to draw on. Not quite. I knew 3-4 VCs casually from having worked at a couple of other startups. None of them invested in us by the way. It certainly didn't hurt to get their advice. Now, of course, I have a rolodex full of dozens I could potentially call up at some point, which is useful. I can see how founders who have done it before likely find it a lot easier to get the ball (and the checks) rolling.
"my first stop was to call up some VC friends of mine"
I wasn't surprised you were funded without a product not knowing your history and current role.
1. He didn't raise that much money. I know this sounds obscene (isn't $5M a lot of money?!), but to a VC, this is a small bet. In particular: this is a bet small enough that a single VC can just... do it -- they don't need the firm to buy in. (Or that buy-in is perfunctory.)
2. He's not a solo founder -- and his founders have startup experience. This might be a push, but if one of his co-founders was a previous startup founder and that company had a successful exit, that co-founder can raise on literally anything -- especially from the VC for whom they made money.
3. This sector is still hot. We don't know much about what he's making, but "it relies heavily on AI" (and, um, it's the TLD), which -- unlike web3 -- has remained (for the moment, anyway) white-hot.
4. The environment is (paradoxically!) great for this kind of startup. I know this sounds absurd because the environment has gotten worse (and he's certainly right that the valuation would have been higher a few months ago!), but because we are coming off of very frothy times, there is tons of dry powder out there: VC firms have raised massive funds, many of them targeting early stage (Seed/Series A). Those firms have to put that capital to use, and the ones that are queasiest about the macro prospects (for good reason!) want to go as early as they possibly can (i.e., first capital in) because that gives the macro factors the longest possible time to sort themselves out.
5. They have deal heat. In part because they have all of these other tailwinds, they got a additional huge tailwind in that multiple firms are vying for a deal. This is every entrepreneur's fantasy, and it results in the kind of behavior he sees: VCs absolutely tripping over themselves to be helpful. This is absolutely the exception, and highlights just how much all these other factors have lined up.
The title of this piece is what he wishes he had known, but it's not really clear what the true lessons are. That it's easier if you've actually built something? That your pitch deck gets around? Perhaps fixie.ai will just live a charmed life where everything is easy (and hey, more power to them), but if they are like most, the blog entry to read will be the one two to three years from now: "What I wish I had known about how hard a Series A is relative to a Seed."
he restates the lesson at the end: he thought that raising money would be like a grant submission, not realizing that it would be more collaborative (after all you're gonna have the investors along for a while, unlike a grant agency).
There were a few other small lessons too (e.g. your deck will be passed around, which used to be a no-no in the "old days")
Of course from recent experience they don't actually respond so there's that.
At the seed or pre-seed stage that Matt was at, what else would it based on? If you have no product or barely an MVP, you're almost certainly not near product-market fit and you probably have close to zero traction. As an investor, you have practically no signal to go off of at that point.
Ideas aren't worth much at that stage, so ability to execute is key. And given that there's been so little done, the best signal for someone's ability to execute should be their background.
> That’s not to take anything away from Matt.
Why would that take anything away from Matt? That's tremendous.
Anyway I'd disagree. The number 1 factor is luck. I like this video https://www.youtube.com/watch?v=3LopI4YeC4I but there are plenty like it. Luck accumulates/aggregates/concentrates. I don't know if they cover it that way in that video.
Some parts ring true, as in VC's you never heard of contacting you on LinkedIn, sharing decks between their contacts and keeping in touch to build a relationship. The part about common pitch deck advice being geared towards live pitches especially - we haven't done a single pitch with a deck live. If it was a live meeting, they've already seen the deck or we've done a short pitch over zoom already. The "stand in a meeting room and pitch to VC's" thing is mostly a myth nowadays.
But a 5 million raise without even having a product just sounds insane. We've been offered 50-100k offers due to our team and product, but rarely anyone wants to invest more than that in a pre-revenue/pre-launch startup. And if they do, they would do it in tranches and by the time they would invest 500k we'd be giving them more than 20% equity.
The difference in valuations is just insane, with even VCs straight-up telling us that if we were raising in US we'd be offered 5-10x more than here.
Honestly, this whole ride makes me think I should just get a job at a US startup and use the cost of living difference to pay devs out of my own salary.
Many, many, many future founders are not as lucky.
So, I guess rule -1 is: get to know VC’s, Angels and other previously funded founders.
Rest of the article is interesting, though.
Making friends with VCs before soliciting them for money is a smart move.
Less "lucky" teams (eg. the other 99.9%) spend more time and end up with not even a million Schrute bucks.
Of course there's also a 0.00..1% that is really lucky, finds something at the right time, with the right framing/context.
All true, but somehow still very different.
1. SAFEs are convenient if everyone is amenable, but be careful about having SAFEs sitting around too long or with different terms. They're like the Mogwai in the Gremlins films. They're kind and cuddly unless you feed them after midnight or get them wet.
2. Stay in touch with your angels even if they don't initiate. It'll help in tons of ways and they can interpret lack of contact as a sign that you're dying and that they shouldn't think about you anymore. This isn't good.
3. Be careful about any terms (e.g. in side letters) that might allow someone to stand in the way of a priced round in the future. Even if someone doesn't use them to play hardball for terms (they can), it might make things inconvenient and add dangerous delays.
4. Have a lawyer look things over BEFORE you get into priced round negotiations with VCs or you might end up dragging the process out and risking losing the deal because the lawyers find a problem that needs fixing.
5. If you use standard/canned documents, check (3).
Generally all this boils down to: keep terms simple and universal as much as possible, be communicative, and don't let things sit too long.
It's possible to do a priced round without a lead if you have SAFEs/notes sitting around too long. You can use standard documents to minimize legal. It may be necessary to clean up your cap table.
Your analogy is funny but you don't actually explain why SAFEs are dangerous, could you develop?
If things get confusing some SAFE holders might feel like they're getting a worse deal than others, which can cause acrimony on your investor team.
If they sit around too long the risk of these things increases. SAFEs are so easy someone can offer to invest and you say yes and BAM you sign one... without bothering to carefully look over all previous SAFEs etc. and make sure terms are in line with expectations. They're almost too easy to execute.
My analogy came from the fact that if you have these problems you can get a complexity explosion during the next priced round.
KISS (Keep It Simple Stupid) is really the TL;DR.
The more niche the market, the more difficult it'll be for you to find an investor. But when you find that investor the likelihood of them investing will be higher.
Why is that? Because if you have to educate your VC as to what you're doing, you've lost.
Let's say I'm building an AI that helps agencies set pricing for their ad inventory. Ideally I would want a VC that understands adtech, because they already understand the problems in that field (at some level) and how big it us.
I don't have to explain how much of a fucking pain in the ass it is to manage all the line items, creatives, placements, and pricing rules. Someone who wasn't in adtech would be like "google's GAM does that for you." Uh, not really.
A VC in adtech would be all "here's my money and a LOC."
And, the VC will be able to help you with some client introductions, so you can get more customers.
That said, my business co-founder couldn't sell water to a man in the desert, so we crashed and burned. Live and learn.
If your pitch lands in the sweet spot of the kinds of things they are looking to fund right now (and you can back it up with experience/traction/team quality/whatever), you will have a relatively easy time raising money. If your idea is good but the timing isn't right for the VC market and they don't have people that understand your idea, you will have a very hard time raising money.
Likewise, different VCs are experts in different areas (even between big name firms). We met VCs who knew our market extremely well and had a very deep network in our specific niche. We also met VCs where we had to explain the basic premise of our market from zero. Do some research to find the VCs that work in the niche you work to have the best chance of not only raising money quickly, but getting access to a network of people who can actually be beneficial to your company.
For god's sake. It's something straight out of the Silicon Valley TV series.
Your pitch should fit the current investing zeitgeist. If you pitch some oddball idea then you need to move your audience from 0 to 100% in 1 hr. If you pitch “AI generated metaverse for basketweaving” then the background hype has sold half your story. But also, VCs need other VCs to co-invest. They need to explain this investment to their LPs. It’s easier to pitch AI nonsense than something truly novel.
Every VC wants to see Matt’s pitch because he’s got a great resume. VCs don’t invest alone, so they will pass the deck around to their VC network. But it’s also sharing deal flow: I send you this, please send me the decks you’ve got.
VCs like to keep their options open. Even if they hate your idea, if A16Z invests then they’ll want to get back in. Or if you succeed then they’ll want to get into the next round. I had a VC offer a very low valuation. When I got 10X more elsewhere, they called back that they wanted in. The numbers are all BS: valuations, seed size, etc. Remember, their goal is to invest as cheaply as possible. Your goal is to sell as little of your company as possible.
Strangely, BS artists love other BS artists. Adam Neumann is a God-tier bullshit messiah with sociopathic self-confidence. It’s no wonder that he raised billions after the self-dealing disaster at WeWork. Matt is right: confidence is insanely important. Your company is a $1T opportunity that will change the course of humanity. (In fact, outrageous confidence is important everywhere. Humans are just really gullible fools.)
I don't get it..
He did hit on the most imp point: be confident in your pitch.
Like 200% more confident than you are about anything.
I can’t overemphasize this. This is more important than anything else.
ah, so it is
is it really that easy?
Anyone have a link to the deck?
In the US, you can raise money ($1m+) with just an idea if you have some combination of the following (often times just one of these is enough)…
- you have some traction in the form of pre-signed customers
- you have previously had startups success (multiple rounds, an exit, etc.)
- you are a master networker with a very large Twitter/LinkedIn following
- you are well known within your circle of expertise. Could be that you run a large newsletter, or podcast, or blog
- you know VCs personally, and are close enough with them that they’re willing to take on some risk with you
- you have a world class team of co-founders. Could be someone that built something open source, or lead some large branch of a FAANG company (I’ve seen former AWS employees raise on the simple fact that they worked for AWS)
- you went to a prestigious university like Harvard or Stanford. Many VCs attended these universities and are more willing to work with you in these cases (as much as people don’t want to believe this it’s true)
There are probably dozens of other scenarios and combinations of scenarios that would allow you to raise with just an idea. But it’s 100% possible (I’ve done it).
I know this was an off-hand remark that you're probably not thinking much about, but you're absolutely right, and it might be worth seriously considering it. Moving to the US is probably the single biggest improvement you can make to your career and opportunity options. You will never have as much opportunity in Europe as you will in the US, not in the tech world. You might be able to eke out some success in Europe, but it'll pale in comparison to what you could've achieved in the US.
I know that career-wise I'd have more opportunity in US, but besides that, not much attracts me there - quality of life is way better here. Especially if I can work remotely for a US based company and use 50% of my salary to hire at least 2-3 developers locally to work on my product. The difference in salaries and cost of living is huge.
Serious question: Then why even remotely bother raising from European VCs? Doing so is clearly not in your best interest. Is it a matter of pride?
1) While US investors can and will invest in Europe, they are more likely to do so at a later stage.
2) Not everybody wants to move to the US on a pipedream, particularly those with family, kids, and roots on this side of the Atlantic. Again, at later stages, when there is more stability to the company, this can change.
3) the lower cost of operations in most of Europe partially makes up for the lower amount you raise - our monthly personnel cost is a fraction of what it would be in the bay area. And again, as you grow, and need to hire really senior experienced talent, this changes.
4) there is early stage money in Europe. Maybe you don’t raise 5M with a PowerPoint, but you can raise. There is also a vibrant startup scene with several hubs (Berlin, London, Barcelona). Though I will admit, it’s not as crazy as Silicon Valley where everyone I meet seems to have a crazy startup idea.
The biggest downside I see is that, as a European founder, you likely have to go through one if not two pre-seed rounds before you can raise ‘decent’ money, which dilutes you and puts you at a disadvantage for when you eventually move to the US (which you probably will do at some point, at least in terms of incorporation).
Yet, despite knowing this, I’m not sure I would have done that much different in my journey so far.
In a way it is, the more you know about the US tech scene - the more it feels like you're handicapped in Europe - especially if you're not living in a tech hub.
And: re new pitch decks. Is there a good template for the new type of pitches?
2. Also, not really - we did the YC style one but had to explain a lot more in the slides, which means adding more pages and more tradeoffs in what's important/what's not. Also influences the design a lot, since you can't just do the "pretty minimal slides" presentation. If you are used to speaking at conferences/meetups/companies, this will probably throw you off guard since you have to completely switch-up your style.
Given that they did have deal heat, I would love to know what they actually did for round composition and how they made that decision -- especially if it was on something deeper than firm prestige or valuation.
Often there is important insight and market detail in a deck, especially first-financing deck, that could help a fast follower, so you wouldn't want it shared widely.
But in the end there's a big, big difference between idea an execution, and if a fast follower could get it from a deck, perhaps there isn't much differentiation in what you do.
Decades ago I was advised to act as if any competitor had full access to our internal systems (payroll #s, marketing plans, the works) and assume that prospects and customers not only don't know anything about what we do but also that they could not care less. I've taken this to heart.
For my current company (self-funded for the past year, raising about the same size seed round now) I have a goal of 1/3 strategic partner, 1/3 customer, 1/3 professional investor. But I know if I get a professional investor(s) to cover more than 1/3, or all of the round I'll just take it and move on to the next task. Fundraising always takes too long and is too distracting to try to optimize on this scale at this point in time.
A strategic investor is extremely rare at the seed stage, and for many of the reasons that it is rare, it usually a problem when you do it. Our plan is a very special case...but still it's unlikely, despite expressed interest.
I was sorry when SAFEs switched to post money -- it was a power play for the investors.
1. Become a professor in CS at Harvard. Achieve big career successes in prestigious technology companies. Build a network of SV founders and VCs.
2. Raise the f*king seed round.
Need to steal that.
And is this a reason why Twitter, Social Media, and self branding on the internet are so important? Since it is all who knows you?
Your amount-of-luck is the surface area of a rectangle. A side is the interestingness of what you do, B side is how many know about it. The bigger the rectangle, the more opportunities you get.
https://swizec.com/blog/your-luck-and-opportunity-surface-ar...
This is how you get opportunities when you aren’t even in the room. Someone says ”Oh yeah I know <ksec>, they’re doing cool things X in the area you just mentioned an interest in”. Or ”Oh yeah for problem Y, you should ping <ksec>, they’re the expert”
The idea was also expanded upon by one of his friends in a mental models book here: https://www.amazon.com/gp/product/0525533583/
https://www.holloway.com/g/venture-capital/sections/pattern-...
https://www.adamantventures.com/blog-post/the-problem-with-p...
However if you're far away it's harder to keep up with what's going on with your company and many will not want to deal with that.
They could well try to claim stake or ownership on your company, even if they lost, the distraction and money it would cost to defend probably aren’t worth it.
Note that not only is this not legal in California (but is in others -- Texas is particuarly notorios) but any employment agreement in California must specifically include a copy of the relevant section of law so that the employee is a aware of their rights. But don't use any of the employer's property (e.g. computer, IP) or do it when you are supposedly working: in that case the law does not apply and the employer does get the rights.