Startup Experts Share Their Investor Horror Stories

Raising money is a game that you sort of have to figure out. Oftentimes, these meetings can go terribly awry. The worst sort of investor meeting is one that makes you question why you're even doing a company anymore. Today, we're talking about our worst investor meetings. When you need money to start your business, there are some pretty epic ways for it to go wrong. If you're prepared for the worst though, you'll be better off when it's your turn in the hot seat.

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I mean, I did a lot of investor meetings. Oh my God, the worst was easy, it was one in London. I won't name names, but um, a big International fund um, that had this reputation of keeping Founders waiting. That was the first. It was like commonly known. Another competitor of ours flew to London and was made to wait for like six or seven hours to meet this person. I was only made to wait one hour, and I felt like I got off lightly. So that was the first sort of annoying thing.

Then he sort of summoned his court, you know, five or six of his minions, and he was um, in the middle of eating his lunch during the meeting. Fine, whatever, busy busy person. And he had his shoes and his socks off. I don't really understand why and was simultaneously like picking his feet with his hands and then eating his food with his hands. At some point, in a closed office, he decided to light a cigarette and smoke a cigarette in his closed office. I just like, it's kind of looking at everyone like challenging anyone to say anything.

Did he offer you a cigarette? He did not. I mean, because I would have been polite. I'm in the first polite thing maybe. And then, it was just like this test. He was just smoking it and then didn't finish it. He took a cigarette, put it out in his lunch, took his coffee, and poured his coffee over his cigarette and his lunch. I was just like, what is this weird power play? I mean, obviously he did not end up investing, and it was just a bizarre, bizarre experience. So that was probably the worst.

Do you think he remembers that? I think that is not the only time he has done it, and so, for him, this is a Tuesday. Yeah, so when he watches this, he'll be like, God knows the world is full of status games, and unfortunately, a lot of the financial world still operates not by the truth of product problems and the ability to create, but instead this kind of thing.

Don't be shaken. We're at the beginning of a shift in the way business is done. You should know the best Founders in the future will have their pick of the best builder-focused VCs, and the status ego game that VCs play, it's just not going to work for them.

We were at Justin TV, and we had just had a banner year. So we get this meeting with the famous VC. We're in San Francisco. We drive down to Sand Hill Road; it's like this famous journey that everyone does. Yes, um, the shuffle. We go into this very famous office, and on the wall, there are these like stock certificates of these amazing companies that went public, and we're like, that's intimidating.

Then we get into this investor's office and we do our kind of quick introductions. You know, we're nervous, we want to start pitching. Before we start, this investor says uh to Justin, um, uh, Justin's Chinese, says to Justin, "Do you speak Chinese?" And Justin's like, "Oh, you know, my parents do, or maybe my mom does. Like, I understand a little bit, but I never learned how to speak."

And this investor is like, "Oh, you know, I'm studying Chinese. Like, you know, do you understand this?" And says a little phrase, and Dustin's like, "Oh yeah, that kind of, yeah." And then, you know, it felt inappropriate. No, no, no, no, at the time no. At that point, it was just kind of like building rapport, right? It was just like friendly, you know.

But then that continued. So it was like, "Oh well, how about this phrase?" I'm like, "Oh well how would you say this?" And I can't tell how long it lasted, right? As a Founder in the room, it felt like 20 minutes of torture. I bet it was like five minutes, but like five minutes in a room with the super high-powered VC, and literally we have this business that we're here to pitch that we think is good, and you start realizing if this is the thing we're spending time this is the highest value way they can spend this one hour.

Like, maybe he's not that interesting. Laughs. And so, uh, and it turns out that was great. No, they did not invest. That was okay. So the investor starts giving you language lessons at the start of your pitch—probably not a good sign.

One of the things I took away from that experience is that sometimes investors don't understand that their process is their product. In many ways, how Founders experience interacting with them in the process of getting money is going to be the memory that they have of them. There are a couple pieces of advice that we give to YC Founders from talking to investors.

I think the first is believe the no but don't believe the why. You're going to get a lot of no's when pitching, and more often than not, the investor will not be transparent as to why they're saying no. I think the second is that we say often is, you know, an A-grade investor is respectful, through time, responds to your questions, makes a decision quickly, and leaves you alone.

And there are very, very, very many people who aren't that good, and there are very few people who really add value. And so if I were to kind of summarize our advice, it is really hard to tell whether you're interacting with a great investor or not. Oftentimes, as an early-stage YC founder or startup Founder in general, you don't get to choose, right? Like you don't have this like wealth of choice.

I might say the first optimization is try to go for people who regularly invest in startups and who are respectful with your time and respect with you and move quickly. And then I would say the second thing to do is prepare your mind for the idea that it's going to take longer than you want. You're going to have more meetings than you want, and a lot of people are going to promise you value-add that won't come to fruition.

It's less about how do I find the perfect investor, and it's more about how to come in with the right expectations. The big inversion that YC helps companies with is that before YC, it was the investors who had the leverage. You couldn't get in front of that many investors, and when they did want to invest, they could treat you however they wanted because it was money that was scarce.

These days, the lucky thing for you and me is that things have gotten a lot better for Founders, but it's still a crapshoot. Remember why you're raising money; you have a dream to manifest. We tell these stories to you not to bum you out, but to set expectations, so you can build that dream.

Brad Flora is gonna sit with Aaron Epstein next, talking about going back to his seed investors for more funding and what went wrong when he did. We want to talk about our worst investor stories because I think every Founder has had some experience talking to someone about what they're working on that they hope will give them some money to fund the company.

Oftentimes, these meetings can go terribly awry or just leave you feeling like dirt, and we've been there too. Here at Y Combinator, like everybody can relate to this. For me, my worst investor story, I was running my company, Perfect Audience, my last startup. We launched six months ago, and we'd grown the business to like a hundred and fifty thousand dollars a month in sales.

We're keeping 30 grand a month, things were growing, we only had a couple people on the team, but we only had like two hundred thousand dollars in the bank. This was really stressing me out. We were turning over all of our cash basically every month, and so I thought, you know what I'm going to do? I'm going to go to my seed investors, and things are going so well, they'll just give me some more money.

Like, it seems so obvious, right? Yeah! Hey guys, give me some more money. So I wrote this email, and the title of the email was "Cash Crunch," right? And I send this out to my investors, and I just went and looked at the email; it was so cringy.

"Hey, the business is blowing up, we're really tight on cash, we'd love to get your advice," right? Because someone had told me when you ask for advice, you get money. So I thought this was my clever thing. And one of the investors wrote back, um, this VC fund that was based in Chicago. I was in San Francisco at the time and said, "Hey, next time you're in town, we'd be happy to talk to you about this."

And so I, in my like Founder crazed optimism, like uh, thinking thought, oh wow, he's definitely going to give me some money. So I said, "Great! I'll be in town this week!" And I got on a plane, flew to Chicago, and I got there, and none of the partners were in the meeting. It was just a bunch of the associates, so nobody with any check writing power.

I gave them a pitch that was terrible because I just kind of cooked it up on the fly that week, and you know, predictably they had some polite questions after the meeting, but there was a zero interest in investing. And so here I am, I've like flown across the country, given a terrible pitch to people who couldn't possibly invest in my company. Just a total L.

You got to have a game plan, and there was no game plan, and we see this a lot as partners at YC where someone comes to us and says, “Oh, because of this thing that happened, people should just give me more money.” And we have to kind of help them get organized and figure out like, well, like investors want to hear where this fits into the broader scope and strategy of what you're building, and they're not just going to dole out money because something, some weird thing happened with the market.

And I was just so unorganized and deluded about what would motivate people to want to invest in the company at that point. It's interesting because investors have so few data points oftentimes. Like, very few touchpoints with you probably at that point, and so for one of their main touchpoints to be cash crunch and like you scrambling and disorganized—yeah, they're like, "This seems real bad. He's got a cash crunch, and he's getting on a plane to Chicago to come talk. Let's be desperate. Yeah, this guy is in big trouble," yeah.

But of course, from my point of view, I'm like, "This is great! They want to solve my problem for me!" And it's just not how people think about this. So, and again, like when you're running your company, you get this tunnel vision where you're just trying to make your number go up, which is great, but you really need to have someone around, whether it's a friend, an investor, or other Founders, a peer, they can kind of help you get some perspective on things, and so that you understand how you're coming across in something like fundraising or even sales for that matter.

Just reminds me of how one of the best parts of this job that we get to do is helping Founders not do that stuff. Please don’t make those things right. Like, uh, you know, sometimes it's easy to think about the Founders in the batch like walking around with guns pointed at their feet and just being like, "Yeah, yeah, shoot my foot, shoot my foot!"

And we can just be like, "No, no, no, no no, don't do that!" Um, and it's so rewarding when we help people avoid that. And I can only make that joke because like we've shot ourselves in the foot so many times doing this ourselves because it's just really hard to see what's going on when you're in the middle of this stuff.

The way I like to think of what a good investor is, an investor that makes a decision quickly, signs the docs quickly, and wires you the money quickly, and you never hear from them again. That's an A-minus investor. If all you had was A-minus investors, you would be fine because at the end of the day, it's not your investors that are going to make your company successful; it's going to be you, the Founders.

An A investor does anything to help the business, and then an A-plus investor does something to materially change the direction of your company. If all you had is A-minus and above, you're good. You want to avoid all the C's, D's, E's, and F's that are just distracting, that create a bunch of busy work for you, that want to argue with you all the time.

There's a lot of people out there that can be a net negative to your business, and those are the ones that you want to avoid—that's bad money. And we actually have a lot of really great tools within the YC community. We have an investor database where other Founders within the community actually give feedback on investors that they've worked with.

So this encourages good investor behavior, and it also is an incredible source of information when you have investor meetings scheduled and you're trying to figure out who should I prioritize? Who would I like to take money from based on the feedback from other Founders that have taken money from them?

Yeah, and then the thing that enables all that is the fact that because we have demo day at the end of the batch, Founders for the first time for many of them have investors coming to them either ahead of demo day hoping to like get in early or at demo day or after demo day.

So for maybe one of the only times in your career as a Founder, you have a list of people that want to talk to you and learn about your company, and so you can use things like the investor database to pick and choose who you want to talk to and in what order and kind of have some control and agency in the fundraising that you're doing.

It's actually pretty common for Founders to hate fundraising, and if you fall in love with fundraising, like that's probably not a good sign too because you should be focused on talking to your users and building your product and actually getting your company to work and spending as little time as possible trying to get the money that you need to be able to grow and execute on your business.

The money's just a tool, it's not the means to the end. I know a lot of times people like to celebrate the fundraising wins and things like that, but it's just one milestone on the journey that you're trying to build a really big company. VC and investing is a service business, but just as Founders need to think through the experience and empathize with their users, they can apply that same understanding of people and business situations to their own relationships with their investors.

This is why investor updates can be so helpful. Great investors not merely stay out of your way, but they also give you more capital and connect you to the next round, but that only happens if a—they actually are A-plus investors and B—you do a good job of keeping them in the loop.

Next up is Serbi Sarna sitting with Jared Friedman on some of the funny mind games investors play just to see how you might react. You want to tell us about the worst investor meeting that you pitched in?

Look, there's this uh, uh, big-name VC in the valley who we won't say who it is—yeah, leave them unnamed—but it, I was, I was so nervous to meet them, and I really wanted to make a good impression. You know, first-time Founder, 24 years old at the time, so I'm super nervous going in. I prep as much as I can, and he's sort of known for testing Founders in various ways.

For me, well I remember presenting to him, and right in front of him, he had a bowl of candy, and in the middle of me pitching, he reaches over and first of all, he like slowly reaches for it, and then he grabs some piece of candy and slowly comes back. Then he just proceeds to open this candy with this loud wrapper as slowly as he possibly can like the whole—it's like wrinkle, wrinkle, wrinkle.

And then I noticed whenever I stopped talking, he stopped trying to open it, and then when I started talking again, he would like open it. So he really was testing you with a candy wrapper? Yes, it wasn't that he was just going for the candy, and the opening of the candy lasted like a 10-minute adventure.

They called us the candy wrapper. I don't know, I would say that every investor has their own unique styles, so if one investor had a style that tripped you up a little bit, try not to carry it into the next meeting. It just means that you and that particular investor are not a good fit for one another, and there's plenty of fish in the sea.

Remember, every investor meeting you might take is as much about them interviewing you as you interviewing them. It's a two-way street. Next up, I'm sitting down with Gustav to talk about one of my mega bad investor meetings this time with the heads of Andreessen Horowitz.

There's a scale of investors—there's the great ones, and they're not so great ones. It's much worse to have a bad one than it is great to have a great one. If you end up getting an investor who's going to hurt the company—and there are many, many ways an investor can hurt the company—and if you end up one of those, that is infinitely worse than having a difference between having a good or a great investor.

Gary, what was your worst investor meeting you ever had as a Founder? So I have a story for you, which is uh, actually not one where the investor did anything wrong, and it was very depressing for us at the time because we were so excited to meet these investors. We had all the metrics.

Posterous was a blog platform at the time, we had been growing, you know, 10 to 20 times year on year. Our servers were on fire, we were sort of, you know, being buzzed about and you know, people were buzzing about Posterous and the right parties. We're on Sandhill Road, sitting down with Ben Horowitz for a final partner meeting. Like, everyone's excited, like this is the last thing we need to do, and seemingly, we will be getting a Series A from one of the hottest Series A firms.

It goes well, we think we have it in the bag, and then at the end, you know, and this is something that we should have known. We should have done our research, and we should have just had the answer for, but we had not figured it out yet, and this is a big question: Who is the CEO? And we said both of us, and that ended the meeting on the spot.

It was obvious that we had said the wrong thing. So we had spent years working on this thing, we had the metrics, but we had still not had that awkward conversation which is, who's the CEO? Definitely by Series A, the board member who makes the decision to pull the trigger, they're going to want to know who am I actually working with.

In that case, the VC I was meeting with was Ben Horowitz. He had written blog posts and even a whole chapter in a book about how important it was to have a single CEO. You should know who you're meeting with, at least take a look at what they've written and what they believe. We had walked right into that investor's worst pet peeve.

We're trying to prepare you for the worst so you can do your best. That's one of the best things about YC—that it gives you choices about who you work with. Most people are truly not so lucky, especially for their first time starting.

Today, can you give me an example of your worst investor meeting? So when we were fundraising, it was in 2017. Investors were at their most best behavior because this was right after that was the #MeToo movement, right after the #MeToo movement.

So I think that we're kind of in the best behaviors. Didn't have any of the weird woman Founder kind of thing, but I did get this awkward question. I don't think the investor thought it was like awkward; he just kind of asked it and blurred it out, but I thought it crossed like a personal line.

What did you ask? So my co-founder is a guy, so you just made the assumption. It's like, "Oh, are you guys dating?" I was like, "What did you just ask? That's like not professional, asking personal questions the first time we meet, and like that's one of the first questions you asked and not about the business?"

That was just awkward, and I think that's one of those things with personal questions that shouldn't really be asked. And I think investors not knowing that it might make Founders uncomfortable, like, is this really what you're asking? Is evaluation for a business to get the meeting started?

Do you take that money? No. I think the mistake the Founders do is really looking up to investors and putting them on a pedestal, right? Yeah, I think the investors know better because they have met so many companies, but actually, the investors are not experts in your business.

A good investor is going to challenge you, but always be respectful about who you are and that you make the calls. A good investor is never going to force you to do something against your will but is still going to tell you what they think so that you can make the best decision.

Investor meetings are a two-way street; they're like auditions. You come correct, and if they come correct, then maybe, just maybe, you can make beautiful music together. Also, remember this is not purely and entirely about raising money, though mechanically, that is what you were trying to do in that moment.

Your whole endeavor, the bigger one, is to create an incredible business, not to ace the test and raise money on its own. The worst sort of investor meeting is one that makes you question why you're even doing a company anymore.

It actually is like tremendously demotivating where you're like, "Why am I doing this with my life?" Um, it's like, you know what I'm saying? It transcends the level of even talking about your company. It's more—it’s okay, I feel like if you're on the other side of someone asking you hard questions or engaging and pushing back on stuff, but there's someone who just clearly doesn't want to be there at all.

Yeah, like someone put it on their sister’s calendar, and they're like, "I don't know what, who are you? Like, what? Why are we meeting?" And I went to a few of those where I can remember one in particular was exactly like that.

I have one, but it was like me being on it—that it was very, I was—we were very young, so I first start-up, um, and we were like, you know, we basically our office was our apartment. There were like five of us in a two-bedroom apartment, just like living and working all the time, and we set up a meeting with a VC who really wanted to meet us at our office.

So we're like, "Oh yeah, of course! Like, yeah! Um, just come by." We, it was a morning meeting, so that was the number one mistake. We just worked all night, we were always up late, and we fell asleep, and we didn't have any furniture so we would sleep in like the hallway on these airbeds.

We slept through the meeting, and we woke up to an email saying, "Hey, um, I came by this morning at 10 A.M. But you guys were busy, so you know, let's reschedule." Um, obviously what happened is they had come in, opened the door, and just seen us sleeping on airbeds in the hallway and laughed.

Again, both parties should bring an air of professionalism. Like this is ultimately a professional type conversation, and you want investors to have to be professional. Again, don't show up late, don't make people wait, don't cancel, don't no-show.

And then the Founders on the other side need to be the same way, and so the extent both parties are on board to be professional, everyone's going to be much happier. Whether the investment happens or not, investor traction is not how you should be keeping score, and you should not be getting your validation if your startup is good, if you are good, if your idea is good based on the reception of investors.

Too many Founders, the barometer for how excited they are about their startup is 100% based on investor feedback, and nothing good comes of this. It's like completely the wrong barometer. You have to realize what we tell people to prepare is when you're going in, expect all no’s, expect all bad feedback, expect people not to get it.

If you're surprised on the upside, great, but prepare your mind for a lot of like rough times so that you don't fall into this trap of actually getting discouraged and giving up on your really promising startup just because you got a bunch of investors that were not enthusiastic, right? That's what I experienced.

There's also another really bad outcome here, which is, I think it's a very fine line between being smart and adjusting your pitch based on investor feedback and going too far and adjusting your product based on investor feedback.

I think we've probably both seen examples of companies that had a promising enough idea, they went out to pitch it, didn't get the initial reaction from investors that they wanted, but they did keep taking on board all the investor feedback, "Oh, have you like considered this or this?"

And then you end up with this sort of Frankenstein idea that no one actually wants, but investors are really excited about. You can actually raise money for that; we see that happen, right? But like now you're stuck with a whole bunch of money and like investor intention without any actual like traction or a product that people want.

This happens a lot during hype cycles, as you and I both know, where people will sort of triangulate what investors want to hear. Yeah, they'll be excited if they can like con people into investing in their thing, but then they wake up, and they have to actually like make the business work.

The sophisticated Founders recognize that to some extent, raising money is a game that you sort of have to figure out, and it is smart to play up parts of your startup that are in vogue right now. Like, um, it's smart to do that, but you have to keep attention to what you're actually building.

Um, and that's where you see it fail, right? Less sophisticated Founders will play up the stuff that's hot in the moment but then actually change their strategy around it as well, whereas the smart ones separate the two things out. Yeah, it's almost like you can talk a big game as long as you can back it up.

The point of your startup is not to raise money or gain status; the point is to create something that actually solves a real problem. If you choose to raise money, you too will pile stories up just like what the YC Partners have detailed here, but don't take your eye off the ball.

We are here to make something people want. If you like this video, don't forget to click subscribe and the bell icon so you can see every single YC video we make for you. We're here to help you build the future. I'll see you next time.

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