Startup Fundraising According to Paul Graham
Paul Graham is well-known in the startup world for his past successes and most recently, the launch of Y Combinator. Y Combinator continues to garner a ton of attention, from a combination of the sheer volume in startups being launched through the program, the successful exits, and the way in which they’re shaking up the venture capital industry.
I’m a big fan of Y Combinator. I wish I could have gone through the experience. From the outside looking in, I see an insanely talented and dedicated group of people running the operation, who are working with a slew of bright, young, hungry entrepreneurs. I’ve met several Y Combinator folks and have been impressed with all of them.
I think Canada needs a similar model, although for a whole host of reasons, it can’t be quite the same. But that’s a topic of discussion for another time.
Paul Graham recently published his Fundraising Survival Guide, and I wanted to take a few moments to go through some of his key points and add my own thoughts and experiences to the mix.
- Fundraising is brutal. That’s Paul’s first point, and he’s absolutely correct. He goes on to explain his reasons, but I think one of the biggest problems with raising capital is that no one teaches you how to do it. And if you don’t know what you’re doing, you’ll get eaten alive. Obviously, Y Combinator and other similar early stage “incubators” are helping with the education process, but they can’t reach the real masses of people trying to raise money.
I’ve written quite a bit on the challenges of raising money, but reading about it and actually going out there and doing it are two very different things. Having said that, here are some starter points for you:
- There are no secrets. Paul Graham points out that, “Startup investors all know one another, and (though they hate to admit it) the biggest factor in their opinion of you is the opinion of other investors.”
You would think that all venture capitalists would hoard opportunities that come in and not share them, but that’s definitely not the case. They have to speak amongst one another for a variety of reasons, and of course, they realize they can’t own the relationship — if you’re speaking to one VC, you’re almost certainly talking to others (if you’re not that’s another problem).
- Consulting is the only option you can count on. Paul talks about the fact that bootstrapping is hard. Very true. He then goes on to say that consulting is the only option for bootstrapping if you don’t want to (or can’t) raise capital. That’s true, but it’s extremely hard to do (which he points out as well). The fact is I have rarely met any founders who were able to successfully run multiple businesses, and even fewer (if any!) who could use one business to fund another. It’s just too hard. If you’re running a business that generates modest cash, but you’re trying to start something new, you will eventually have to make a choice between the two.
- Low expectations. Paul points out that you should have low expectations dealing with investors, because the fact is you will be rejected way more than you’re accepted. If you let the rejection get to you, you’re in big trouble.
He’s 100% right. It still sucks that it has to work this way though. And the worst part about it is that it creates an us vs. them attitude. Even when you do raise money, you may be so soured by the experience that you’re already drawing lines in the sand against the people who are investing (let alone those that didn’t!)
Paul talks later on about how to respond to a VC when they ask, “How much are you trying to raise?” He suggests that you don’t provide a definitive number, but instead offer different scenarios. Each of those scenarios is painted so that you’ll succeed, regardless of the actual amount of money you raise. That’s extremely tough to do, because the pressure will be to given VCs an amount. But nevertheless, having those various strategies is a way of buoying yourself against rejection. If you feel you can execute on $50,000 for a year (albeit much more slowly than $1M in a year), you can defend yourself emotionally against the inevitable rejection. If you feel like you can only succeed if you raise $1M from VCs (in the next 20 minutes no less…) you’re in big trouble.
- Keep working on your startup. This is obvious, but as Paul points out, it’s harder to do than it looks. I’ve been told on numerous occasions that a CEO will spend 60-70% of his time raising capital. That’s a lot of time…I’ve never measured that myself, but anecdotally that sounds about right. Scary, but true.
Raising money is hard.
That’s one of the key take-home messages in Paul Graham’s essay. I think it should go further than that, because no first-time entrepreneur raising capital will really appreciate the words.
Raising money without really understanding the process is almost impossible
Y Combinator (and others like them) helps by providing a ton of education / training to its startup members. The rest of us … well … we’re not quite as lucky. You can’t rely on reading alone, although that helps. You need to sit in a room with experienced entrepreneurs and have them talk you through their experiences. You need them to critique your presentations. You need them to help you review term sheets. You need them to walk you through the roadblocks and minefields of the process.
Raising money for the first time alone is almost impossible.
I’m not suggesting you hire consultants to help you, because that’s a minefield in and of itself. I’ve always been wary of consultants stepping in to help in the process, especially when they charge money … after all, you don’t have any, that’s why you’re raising it in the first place!
First-time entrepreneurs need active mentors and advisors who can walk them through the process. Heck, let’s call it what it is — hand-holding. There’s no shame in that and without it your likelihood of success is significantly lower.
