Fundraising Fundamentals By Geoff Ralston

We're gonna have two lectures on fundraising: the this one, which is going to be a high-level overview, which I'll do, and then next week my partner Kirsty will do a deep dive into the mechanics of fundraising, which are really fun, so you wouldn't want to miss that. Before I start, I will say we have an amazing set of resources in our library on fundraising. You should look at them. You should read Paul Graham's essays on fundraising; they have aged really well, and they will help you a lot. I wrote a guide to seed fundraising as well that I think is pretty useful, but there are lots of other resources: videos from last year's startup school, from 2014, "How to Start a Startup," one of our time I'll reference later, which will be massively helpful when you go out and raise money, in early rounds and in later rounds.

So startups are hard, and fundraising can be one of the hardest parts. Even though "fun" is bright in the word, it's really not that fun. It's a weird marketplace when you get out there. It seems like kind of an open market, but it's not rational. It's seldom fair, and yeah, you will hear of founders who tell you, "I have fundraising was easy. I walked out, you know, I started walking down Sand Hill Road, and people showered me with cash." That's the exception rather than the rule. So while you're fundraising, you're going to hear "no" a lot. Most of you will hear reasons why your startup will not succeed, why your product is not a good one, why the opportunity you're talking about is not real. Sometimes they'll be right - but you should never believe that, because you will survive. The way you will survive the multiple times you're going to go fundraise is by being tough and resilient, and above all, by believing, no matter what you hear. No matter how many times you hear "no" or reasons why your startup won't succeed, you need to believe.

Now I promise I'd go fast, but I'm gonna go so fast I'm gonna give you a complete overview of everything you need to know about fundraising in about a minute or less, and then I'll go deeper after that. Anyone who wants to leave after this minute because you got everything that you needed, I won't feel bad; just walk out. Okay? So in less than a minute: figure out the story of your startup. This means figuring out why you're going to matter in the future. What is it about your product, your opportunity that's gonna tell a story about the future that a venture capitalist will care about? So this might mean getting product-market fit; it might mean growth; it could mean a lot of things. Then find the right investors. Do research. Talk to other founders. This is where organizations like YC can be a ton of help.

Get organized: do your homework, create your spreadsheet, and get a list of everyone you're going to talk to and you're going to reach out to, or you're going to get introductions to. And then you begin. You will pitch again and again and again. You will find your story again and again and you will get better at it as you iterate, and eventually you'll meet the right investors. Sometimes, the right investors will be the investor with whom you resonate the best and who you think is going to be the best added value. Sometimes the right investor may be the person who is willing to write you a check first, so then you agree on a price. We'll talk about negotiations more later, and then you get the money in the bank, and lastly, you get back to work. That's it, simple, right? I think that was less than a minute. Now you can leave.

Okay, so let's get a little perspective. First, why does VC even exist? Well, there's a market for it, right? You guys need the money; most of you want the money. But there's sort of another reason too, which is the returns can be really big. It wasn't always that way. Many people tracked the beginning of Silicon Valley to Bill and Dave's start at Hewlett-Packard in 1957. They started with $583 of their own money and never raised venture. It's possible to do that. But it turns out to do a high-growth startup, you usually do need money.

At about the same time, this French guy named Georges Daurio kind of kicked off the whole thing by investing $70,000, which was to become the epic company Digital Equipment Corporation, and he turned that $70,000 into $35 million, which, as you might imagine, got some people interested, and that kicked off an entire industry. But why raise money? What do you need it for? Well, you need it to pay for stuff: to hire people, to rent offices; you need it to grow, right? "Startup equals growth" is what Paul Graham wrote a long time ago. To grow, you almost always need startup capital.

So it's possible to bootstrap, and some companies do, but it is really hard. You should keep in mind it's also true that having money can be a competitive advantage. So most startups, most of the time, will raise money. When should you raise money? Now, the obvious answer, right, is when you need it, right? That's when you're going to raise money - when you need the money. Unfortunately, it's actually the opposite that's true. The best time to raise money is when you don't need it. This isn't always possible, but when you don't need money, investors see the big opportunity. So throughout the lifetime of your startup, if you can't arrange to be in a position where you have lots of money and lots of prospects, the money will come flowing in. If you're profitable, it helps a lot; if you're desperate, well, VCs can smell that a mile away.

How much should you raise? Well, one rule of thumb - and I'll give you another one in a second - one thought process to go through is assume when you raise money that this is the last time you'll ever be able to raise. So raise enough so you won't need more, so you can get to profitability. No, obviously, this is not always possible; it depends on the kind of startup you have. So you should at least know what you're going to spend the money on. So do some math, figure out what your average employee is going to cost. An engineer, for example, might be $15,000.

We usually use a rule of thumb at a seed round of about 18 months, whatever time frame that you need to where you can raise more money, so you have to hit milestones that will be persuasive, or you have to get to profitability, and then the number of folks you're going to hire. How to raise? Well, there could be a whole lecture on this, so rather than doing a whole lecture I'm just gonna make a couple of points on this first.

What you know? Investors invest in you, so ask yourself, if you were an investor, would you invest in you? Are you formidable enough? Are you the kind of person who can take an idea and turn it into a reality that matters, into a big company? Right? Yeah, I know I'm repeating myself, but I gotta go into a little more detail. I'm going to repeat a little bit of what I said in that very first lecture. But the other thing that investors are going to invest in is the story of your startup. What product are you building? For what opportunity? For what customers? And is this story interesting, believable? Does it resonate? Does it tell a future that they can believe in? Think about that; it has to tell a future about a company that you guys are building that has hundreds of thousands of employees. Like those CEOs you saw sitting up here, at one point they were exactly where you are, with nothing, and now they have tens of millions or more in revenue, hundreds of employees.

Can the investor you're talking to believe that about what you're going to build? So what components of the story are there? So it has to represent a large opportunity. And by the way, if that's confusing: why do you need a large opportunity? Google "venture math" and understand what the venture capitalist cares about, what sort of returns they need to make things worthwhile. Is there a compelling product and traction, and is the storyteller impressive? So what if you don't have these things? Well, you tell a story.

A story is more persuasive if you actually have that product in traction, but it doesn't mean you can't raise money just with a good story. Look at Magic Leap; if you've heard of Magic Leap, they raised billions on just a story. It's a story that matters; everything else is just how persuasive you are. Sure, if you have millions of users and growing like crazy, that's pretty persuasive; that's the easy case. Interestingly, the very best investors want to get you before you have all that stuff because you're expensive by then. The greatest, best investors are Airbnb, before they're ever B&B, before they have traction.

So remember to build your story. I went through this earlier: spend time on this; build the vertebra to find the vertebrae of your story, the key points that are the most memorable, most important, and build a story, a pitch, a sales pitch around that. Remember everything you're doing as a founder is being a salesperson. You're selling to investors here or to yourself, to get used to, get up in the morning after you've heard "no" 25 times in a row, to your partners, to your customers.

What valuation should you choose? So this, again, you could do a whole lecture on; it's complicated: what valuation should you choose? It's somewhat of a market, but it's a very strange market. I would really recommend you look at the video of Sam Altman talking to Ron Conway, Marc Andreessen, and Parker Conrad from Zenefits, at the time Rippling, now, when they talk about what valuation you should choose. Around the 22nd or 23rd minute, Parker starts talking about his experience raising money; it is really dangerous to choose too high a valuation!

In fact, it can kill your fundraising because it's quite difficult to go to an investor who might kind of be interested and you say, "I'm gonna raise it a $12 million cap on my SAFE," and they were like, "Oh, I was going to invest, but that's really expensive," and then to go back to them and say, "Oh, actually, we're a lot cheaper." You're cheaper? You mean you're not as good? Now I'm not interested in investing. I have seen companies actually fail fundraising because they chose too high a valuation.

But you don't want to choose too low of a valuation either because you can overdo dilution. We'll talk about dilution in a second, but the most important thing is to get the money in the bank and get back to work. That's why we talk a lot, and you'll see it again and again, about not over-optimizing fundraising. As I mentioned, Kirsty is going to go over the mechanics of raising money in detail later, so I'm going to go very quickly here about the mechanics of raising convertibles or equity very briefly.

Oh, and yes, I'll mention ICOs! There are other ways of raising money nowadays that have little to do with equity, and there's also debt of various kinds, but we're gonna talk more about this. A convertible note is a kind of debt as well, although we don't recommend you use convertible notes anymore. Convertibles are strange. It is strange; you go to an investor and say, "Do you believe in the future of my company? Would you like to buy a piece of it?" And they say, "Yes, I want to buy a piece of your company," and you say, "Okay, not really, I'm gonna sell you a promise of a piece of my company," which is what a convertible is. It's not actually equity in your company; it represents equity, and it represents dilution; it's just not actually dilution, right, at the time.

The great thing is, so like, why does this even exist? Why do investors agree to this? Well, partly because YC demanded that they agree to it, partly because it's really good for companies; it's fast and simple. The average document here is 3 to 5 pages; when you do equity, it will be three or four documents representing hundreds of pages of legalese. You don't need a lawyer for this; it's super cheap. It can cost hundreds of dollars or less. You can do it almost automatically using tools like Clerke, but still read the fine print. You should read every fundraising document you ever have to deal with, every last word. You really need to; there are many, many stories of nightmares with people agreeing to things they didn't know they were agreeing to.

Equity, when you actually issue new shares to a shareholder, is slow, almost always expensive; you almost always need lawyers. You're going to be giving those investors rights that you don't have to give when you do a convertible, and those rights are important and important to understand. They're usually called preferred provisions, so again, read everything.

Okay, so this, I'm sure you guys all understand: dilution is dead simple, right? You're a shareholder in your company; if you sell 20% of your company, you now own 20% less. So if you raise a million dollars on a four million dollar post-valuation, post-money valuation, you've just sold 20% of your company: 1 million over five, 20 percent. If you owned 50% of your company, everyone with me? You've just sold 10% of that 50 percent: 20% times 50%, and now you own 40%. That's dilution, simple, right?

Well, convertibles actually made that complicated to figure out because you actually haven't sold yet, so there's a representative dilution but not an actual dilution. As it turns out, when you do a pre-money convertible, the actual dilution that you're selling is difficult to know because it depends on how much extra money, how much other money you raise besides on that convertible. If you raise lots of money and lots of different convertible notes, understanding the actual dilution, it's complicated. I actually wrote a tool called Angel Calc that helps you figure it out. It's more complicated than I'm actually letting on because how you calculate the price that you actually get when you convert includes things you might not expect, like future option pools for pre-money SAFEs. We've changed that, and now the standard YC document that Kirsty will go into more detail on is a post-money SAFE.

A post-money SAFE is dead simple, mostly, and it's dead simple in that if you invest a million dollars on that four million dollar post-money SAFE, you own 25%, and you can be pretty sure that at that moment in time, you're really buying about 25%. So it's good for investors because they understand, and it's equally good for founders because you guys understand; you have a good feeling for what your cap table looks like. Alright, I'm going to go through this pretty quickly. You guys probably know all this: there are angels and VCs. Angels are usually wealthy people that invest their own money. They usually invest for similar reasons to VCs, but they also invest because they're passionate about things. It's a different sort of conversation when you're talking to someone who's going to invest their own money and how they close, and what their decision process is than a VC. Sorry, than a VC who is a professional investing someone else's money - limited partners. So they have a very different approach, a different process for closing.

There's also other ways of raising. I'm not going to spend a lot of time on this: there's Kickstarter, there's AngelList, there's WeFunder, there's all sorts of crowdfunding mechanisms out there now that usually don't play the major role in your fundraising but often will play an ancillary role; they might help you fill out around or fill out the amount of money that you're trying to raise. Alright, everyone's heard of an ICO, right? An Initial Coin Offering. I had a conversation earlier in the class with Andy Bromberg, the president of CoinList, which helps companies do ICOs. The vast majority of you probably want to do an ICO - but shouldn't! ICOs are complicated: you need to be building usually a certain kind of network for which having a cryptocurrency is a smart thing to do. You have to know SEC regulations backwards and forwards; it's a moving target. And even though there's big dollars associated with it, you should approach this whole topic with a lot of caution and educate yourself a ton.

So, just again, part of the ecosystem: usually we talk in terms of rounds. There's a lot of fuzziness in this now, but usually you might start your company by putting money on a credit card, and then you might get some friends and family money. Usually, this is sort of debt; you don't usually give out equity here, but sometimes you then raise a seed round. We don't recommend you do equity in a seed round; usually, it'll be on some sort of convertible. And then you get into your equity rounds: bigger rounds, usually this is smaller amounts of money to greater amounts of money. You can do a Series A, B, C, D. I've seen Series F, and then eventually, if things go well and you don't get acquired, which could be things going well, you can do an IPO.

Alright, let's talk a little bit about meeting investors. I know I'm repeating myself here, but it bears repeating: if you want to meet investors, do your homework. Know what they've invested in. Know what the particular person you're talking about cares about. If you don't, you're at a disadvantage immediately, or you're certainly not putting yourself in the advantageous position that you can simplify your pitch. Work on this all the time; you want to capture their attention in the first minute or two you're talking to them. And I know this is a hard thing to say, but don't be boring.

I say it's a hard thing to say because you guys all probably think what you're working on is the most fascinating thing in the world, but it might not be fascinating the way you tell it. You might tell it backwards; you might come at it from the wrong way, which, like every detail, is fascinating to you, but you need to capture someone's attention. You need to build a story that's compelling from the beginning, and the simplest way to tell your story is usually the best way to tell it. If you can bring a demo, if you can't, fake it.

Bring a prototype; it's so fast, especially if you have a software product. It's so fast to build things. And even if you're building hardware, bring a prototype of your hardware. Steve Jobs used to demand prototypes in wood; the first tablet, the first iPad was in wood. Anything to get a feel for what it's going to be. Also, remember you're trying to convince the investor that you can actually build what you're talking about, so coming completely empty-handed, well, you better be a really good storyteller. If you come empty-handed, often forgotten, is that you should listen. You're not there to monologue; you're there to have a conversation, to listen to what they have to say in terms of feedback; it can be incredibly useful, even if they say "no."

Also, a good sign that an investor meeting is going well is when they talk at least as much or more than you do. When you're pitching investors, you will suck in the beginning. One of the marks of a successful fundraiser is they get better and better every meeting they have. So yes, you should practice. Probably the first investor meetings you have, it's not necessarily your highest target investors, unless you're positive you have it nailed. But if any of you are golfers, you know that you can hit a lot of golf swings and never improve unless you get feedback and take in that feedback. It's the same thing with pitching: pay attention to what happens, pay attention to how interested they are, pay attention to how the meeting went and what the feedback was, and improve every time.

And do not leave an investor meeting without some sort of conclusion. Now, the best conclusion is a check or an agreement for a check. We have something called a handshake protocol that you can look up as well. Getting a handshake for a deal, getting someone to agree to give you money, that's awesome! But if you don't get that, try to understand whether it's a firm "no" or whether there's next steps so that you can work towards getting that. For most species, including angels, there's a process. Most people won't give you money on the first meeting; some will, but most won't.

Alright, for raising seed, I think decks are not that useful. As an angel investor myself, I almost never even look at the deck. I just want to look at the founder and hear their story and see how they tell it. Many of you won't be comfortable telling it without a deck, and some investors actually want a deck; they're more comfortable too. So you should probably have some short pitch deck. In "A Guide to Seed Fundraising," I outlined the 12 items that are important to have in such a deck, but don't lose sight that don't create a story around the deck. Create a story around your story and your product and your future, and figure out how to tell it without a deck because if you can't - well, you can, right? So you're going to be able to.

So we're done with negotiations: a very brief word. First, I hope you don't have to. Hopefully, you'll meet an investor and say, "You know, you'll tell your story. This is we're building this awesome product. We have this traction; it's great, and we're raising a million and a half dollars on an 8 million dollar cap," and they say, "I'm in for $100,000," no negotiation, no problem. Now usually the most likely thing you might negotiate around is that cap, and sometimes it's okay to state firmly what it is. And sometimes, if it's too high, they might negotiate down, but if you're not sure really what you're raising on, you haven't raised any money on, you're just talking to investors, it's okay to start talking to them about what they think is reasonable and try to zero in on what the right number is.

But if you do enter negotiations, just a few things to keep in mind. What do I mean by empathy? Well, understand what they care about. Investors are different; each one. If you're talking to an angel, they don't want to seem like an idiot. If you're talking to a venture capitalist, they want to own a certain percentage of your company. So there's this trade-off between how much money they put in and how high the valuation is. Understand the person you're negotiating with, and if you don't, your probability of getting it right and optimizing your negotiation is pretty low.

Try to have options. If I'm negotiating with you, and I'm an investor and I'm the only person they're putting in money, I'm in a pretty strong position. Vise versa, sometimes you'll be in that position, and that's okay as long as you get the money. This is what they do: they're almost certainly better at negotiating than you. So if you do get into a negotiation, the one thing you have on your side is you can delay. You can say, "I don't know. I need to talk to my co-founder or my mother or someone." Don't try to match; don't go toe-to-toe with the pros in negotiating, especially with the VCs because that's what they do. And I've said this a few times: read everything.

Okay, coming to the end here: what's gonna go wrong? Well, I've mentioned over-optimizing. This merely means that the most important thing that you guys can do is build great products that customers love, and that has little to do with fundraising except as an enabler of that. So trying to get the last dime out of fundraising is taking away from that, and it's usually counterproductive. Now, there are fundraising ninjas: people who can do anything, and you look at them and say, "They may raise at a forty million dollar valuation; it was incredible," and you know, again, it was like people were showering them with money. You should not use them, most of you, as your model, right? Figure out who the right investors are, meet lots of them, and then get a deal done.

Please don't be a bad actor. Don't break deals; be responsive; don't be a jerk. It is a really small community, and that stuff gets around, and this might not be the last startup you do. Even if you've raised 90% of what you want to raise, it's not likely to be the last time you're gonna raise. Oh, and when you get your money - and this happened - don't go to Vegas and gamble it, right? Think about this: it's a weird thing for a second; think about what you're asking investors to do. Especially when you're raising a seed round, you're asking them to write a check, a lot of money, to you that you're gonna have control of, that money based on a promise of something in the future.

That's it; there's a lot of trust built in there, which is why, by the way, you shouldn't exaggerate or pretend to know things you don't know because who's gonna trust someone who's not being quite frank? I don't get that feeling for with that kind of, you know, "Here's the money, see you in a couple of years." This is what they do, by the way. If you think you can get away with something here, you usually won't. If there's one thing, VCs aren't all brilliant; they're not actually all that good at being a VC, but what they are good at is sniffing this stuff out. So don't try; it's actually not a good way to go through life anyway, but tell it straight.

Tell your story straight; don't. This is a very little win. Now, there are people we know of them; we can name names who are masters of right, and it seems to work. Don't try to be those people; and when you get a "no," which you will get almost all of you, don't take it personally; they're probably right. And anyway, all you're saying is that their vision of the future is different than your vision of the future. It's really hard to have an accurate crystal ball; I think you'll all agree with that. So don't think it personally; except maybe internalize that you didn't do a good enough job in telling your story of the future.

Take this one in: fundraising is not the goal. You go when you raise two million dollars in your seed round, you'll high-five everyone; it's great, and you have gotten to the starting line. Alright? You're building a business, you're building a product that people want; you're trying to build something that's sustainable over the long term. Fundraising is just one small step on the way to that. By the way, that's another reason not to be competitive about it. Dropbox raised their first round at like a 2 or 3 million dollar valuation, and it worked out okay for Drew and team, right? They went IPO this year.

Fundraising is not winning; the company that wins, that raises the most at the highest valuation, will not necessarily or even usually be the biggest, most successful company at the end of the day. Investors actually do matter. Now at some point, especially at seed, you need the money, but the better you can do at choosing your investors wisely, investors who will make great connections for you, who will help you build your product, and who won't be a pain later, the happier you'll be. You hear this again and again; you'll hear Ron say it several times - if you look at that video I mentioned - the important thing, the most important thing about fundraising is to get it done. Let me get back to work; get back to the real work on the real goal, which is building your great company.

Good luck, I'm done, and I'll take some questions.

So the question is about if you're an international entity in London, what advice would I give to fundraise? So that's always a tough one because it kind of depends, and built into that question where, "Well, should I become a U.S. entity, etc.?" Most U.S.-based, exclusively U.S.-based venture capitalists will not invest in an overseas entity, or they'll do it with a lot of hesitation. So it's certainly required that everyone become a Delaware corporation at YC; it's pretty cheap and easy to do. So if you do intend to raise in Silicon Valley or elsewhere in the States, I strongly recommend you do create a U.S. entity.

If you're building your business in London or in the UK or overseas, there is a venture community there, and a lot of times they'll understand your business better than a U.S. market, so you have to make that trade-off as you figure out what the right target investors are. It's a complex equation and a little hard to answer in too much detail in this context. Sure, yeah, the question is: look for investment and then incorporate, or incorporate? Incorporation - like you can do an incorporation using Atlas if you're international from Stripe. It's sort of instantly - so, like, but I think that's the wrong way to think about it. If you're going to fundraise, you should incorporate because a lot of you will be LLCs, or you're not even LLC yet; people won't invest in that stuff, so incorporate so that's not a barrier.

So you don't have to say, "Oh yeah, we're doing this more LLC." It just doesn't seem right. A corporation is dead simple now, so I would incorporate. Yes, in the back there. So the question is: when is equity preferable to convertible? You know, there are companies that raise up to thirty million dollars on convertibles. Convertibles are fast and simple, so when fast and simple is your priority, convertibles are great. From an investor perspective, equity is often preferable because, like I said, you're just buying this promise and you have no rights, and usually when you raise larger amounts of money, equity works better all around because there's a little more fiduciary management.

You, if you raise five to ten million dollars, you tend to form a board, and you have people who have to talk to about how you're spending that money, and hopefully, they're experienced and can help you through a lot of the issues that you'll run into because they've seen it a lot of times. So generally, when you're raising seed, you want to go fast, and you're just building and trying to get product-market fit, and you don't have time and you don't want to spend twenty-five thousand dollars with lawyers: convertibles. But when you're raising a huge amount and the company is getting serious, usually equity is preferable all around.

Yeah, so I'm undecided to talk about exaggeration: do not exaggerate! Right? So I was trying to understand how do we draw a line? To be not exaggerating but still shading our vision, so it's actually a good question. One of my sites that don't exaggerate, and the question is, "But what about your vision?" Well, a vision by my definition is an exaggeration. I wouldn't even look at it that way: don't exaggerate the facts on the ground! Don't try to hide something that's a problem by either lying about it or obscuring the data. However, when you're telling your story about how you're gonna take over the world, tell your story; take over the world.

The caveat there is don't tell something stupid! Don't, you know, don't tell a story that's that beggar's belief because remember, in the end, it has to be believable. So tell a story that is credible yet impressive. Yeah, so the question is: if you're putting your own money into a company, what's the right way to do that? So I'm not a lawyer or an accountant, so you might want to, if you're here, save that question for Kirsty. But generally, I will say that you should just buy equity in your company, and there's a lot of ways to do that.

You can, you can do a convertible, you can just buy the equity; you can probably, in the beginning especially, because you don't need a lawyer to negotiate with yourself, and if you do, that's a separate issue; you can probably just buy the stock in the company at the right price. You might want to get a little legal advice to get that right, or at least do your research. I've seen people do that; it works. Oh, how you do it is you just write the SAFE and give yourself the money, right? Like that's the thing about this: you guys are managing the money; you literally when you do a SAFE, you write this thing, you sign it, and you give them your bank account, and they wire you the money, right? And then you spend it, but you spend it keeping in mind that you are now a fiduciary for that money. You have responsibilities; that's just not your money; it's the company's money.

Yeah, so you said YC invests on a SAFE; that's true, but what's your question? Actually, in the future, our investments are going to be entirely on a post-money SAFE; we just announced our new deal, and that's what we announced: $150,000 for 7% on a post-money SAFE. Yeah, the question is what's the definition of traction? Indeed, for a pre-sales startup, well, if no one's using your product, you have no traction. The definition of traction is usage of some kind, and it can be any kind of usage. It can be free usage, or it can be paid customers.

Now, you might ask a better question, which is what's the definition of good traction, and the answer is, unfortunately, it depends! Right? Usually, the one thing to look at with traction is growth: how fast are you growing? Because like, you know, you can go to a VC and say, "I have a million dollars in sales," and that might sound really good: "a million dollars in annual recurring revenue." If five years ago you had a million dollars in annual revenue, and now you still have a million dollars in revenue, they would much rather see someone with a hundred thousand dollars in revenue that grew that over the past month!

So growth! Yeah, one question at a time, please! So ask the most important one. The question is, what are the best practices for connecting with investors? I think you said other a lot of the things I'm going to say, but I'll say them anyway. So clearly, the best way to connect with an investor is via someone who knows that investor. The absolute ultimate best way to connect with an investor is via an investor who invested in your company who will connect you to another investor. That is the best possible introduction. In fact, it's a pretty bad introduction to have an investor and introduce you to someone if they passed on your company. Think about it; it doesn't really scan very well!

The other way I'd say is find other founders who have investors and get them to introduce you. Other than that, yeah, you have to cold email, but that's what they do. They look for cold emails. You know that you have to, you have to pound the pavement; there's no way of escaping that. Yeah, so I think the question is how do you explain the use of funds when you raise your seed? I don't think there's any formula for that. I wouldn't get into the weeds too much: if you're going to raise a million dollars, you say, "Look, with a million dollars, we get here; we achieve this milestone; we get to this level of revenue, and the way we're going to do that is by hiring three engineers, two salespersons, and you know, three support people. That staff is gonna cost us this much money, and that's why we're raising this much money."

Yeah, so yeah, so the question is: is there an unintended consequence of the post-money SAFE that it will force founders to do an equity round sooner? Because the definition of a post-money SAFE is that future equity feature convertibles also get diluted by that post-money SAFE because it's post-money, and it is what it is. So the answer is no, we haven't seen that because we just launched it, so I don't think that's that likely.

And here's the reason: the nice thing about a post-money SAFE is it's clear; it’s not ambiguous. You know what percentage that was sold. So if they have a percent of the company, they have a percent. By the way, if you do a post-money SAFE and after all, if I invest $50,000 at a five million dollar valuation, I have a percent. If later you invest a hundred thousand and a ten million dollar SAFE after me, and it's a post-money SAFE, you own one percent: clear! So I suspect that your concern will not become reality.

Yes, what sort of financial projections should you have? If you run into an investor who is asking for five-year projections at seed, you've run into what we colloquially call a "noob." They don't know whether... till who who has five-year production at this point. In fact, if you can tell what you're gonna do about four, twelve, or eighteen months, that's great! When you raise future rounds, Series A's and B's, you're going to start to say, like, "Okay, so you have twelve months of revenue or two years of revenue experience; what are the next two or three years look like?" You'll be wrong, but at least you can do that.

Now you're just so guaranteed to have error bars that are fifty or one hundred percent. Why bother? So I would actually deprioritize any investor who asked for that sort of revenue projection. So the question is how effective are customer testimonials? Well, I would generally say not very. One of the most common slides we get rid of in demo day is "Our customers love us." You know, that's great! But do they pay you? If they love you enough to pay you, that's interesting. If they just love you, well, you know, of course, you're gonna find the customers that say they love you.

Now, it is true that sometimes what you're doing is so radical or changes their life so much that having customers who are willing to talk to venture capitalists serve as references, and venture capitalists less – it's seed, more at later rounds – will check customer references; those matter a lot! Yes, what does that mean? Dynamic or static? I've never seen this dynamic thing. People should know what they have. Like, you mean dynamic based on performance or something?

Oh, so you’re sort of vesting into your... it's not... if you have a vesting schedule, that's fine and you can show them that. I don't think it matters; the math is the same in the end, right? Yes, so the question is: what sort of dilution do you expect at each stage in the company? And there are just very general rules of thumb for that. We usually say 10% to maybe 20% at seed; if you sell as much as 30%, we start to get a little squirrelly.

It happens sometimes! 20, 25 percent, sometimes 30 percent at Series A, and after that, it's too variable to talk about. It depends on how well the company's going. Series Bs are usually 20 percent or less, but again, it really depends. So the question is what's the best way to research angels and VCs? Of course, the best way is to get into YC, so you should try because we have a database; there's lots of information online that you can look up. But I would also say the very best thing to do is to talk to as many founders as you can, who are familiar. Like, you can look up what their portfolio company is and see if you know anyone in that portfolio company and try to get connected to someone who has some knowledge of how that investor was.

Yeah, I don't chain company, and how do I address traditional VCs that are a bit cautious with the donkey? And on the other hand, how do I address dog chain disease, or investors that the currency? And this is a very, this is a very individual question for his company, which is, it seems like it's a blockchain company without crypto, and I'm not really sure I know what that means. But so the question was, how do I address conventional VCs that are afraid of blockchain and non-conventional blockchain investors who expect him to be more cryptoe? Or something? And I don't know!

You have to tell a really good story to each. A lot of conventional investors just won't go there for good reason; there's so much fraud and so much uncertainty outside of the fraud in that space and the ICO space, especially, that a lot of people run away. So I would tend to just stay with the investors who are familiar with it, and then explain why whatever strange configuration of your company makes sense for you, the new deal. So the question is: does YC's $150,000 investment handicap the companies that do YC because the imputed value of the company is too low?

It's not a problem. Look, we don't even actually have a cap on our investment because we don’t think it's appropriate to think of it that way. We've been investing at this level for many years now, and the vast majority of companies that go through YC is seed, and the average cap tends to be over 8 million now, so it's clearly not a handicap. The reason you do YC is because it increases your value and increases your probability of success, and investors get that, so they don't look at that. They look at that as the sort of the cost of doing business with YC. Correct?

Yes, this is gonna be the last question, so hopefully it's a good one. I'm not sure I understand the question: something to do with how can you square the fact that we're supposed to be a billion-dollar company, yet we don't make financial projections? Do I have that right? You shouldn't make long-term financial projections that are complete and utter, and the vast majority of you who try to make a long-term financial projection pre-product, or when you have one or two customers, it's a joke; you can't do that.

And if an investor asks you to do that, they're not very smart or they're not very good investors. However, that doesn't mean you can't talk about your opportunity. You can't talk about the fact that, "Look, this business opportunity is enormous. We have these customers who have started using our product in a very fundamental, very deep way, and they're gonna be our customers forever." It shows the customer need, and there are many, many, many thousands of those customers. If I just get five percent of that customer base, I'll have a hundred million dollars in revenue, and then I'm a billion-dollar company.

But that's different than making a financial projection: you're not actually projecting the framed to get to 5%; you're just saying, "Imagine if we got those customers." Okay, thanks very much, guys. We'll see you next week. [Applause]