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August 2013  
  
When people hurt themselves lifting heavy things, it's usually because they
try to lift with their back. The right way to lift heavy things is to let your
legs do the work. Inexperienced founders make the same mistake when trying to
convince investors. They try to convince with their pitch. Most would be
better off if they let their startup do the work — if they started by
understanding why their startup is worth investing in, then simply explained
this well to investors.  
  
Investors are looking for startups that will be very successful. But that test
is not as simple as it sounds. In startups, as in a lot of other domains, the
distribution of outcomes follows a power law, but in startups the curve is
startlingly steep. The big successes are so big they dwarf the rest. And since
there are only a handful each year (the conventional wisdom is 15), investors
treat "big success" as if it were binary. Most are interested in you if you
seem like you have a chance, however small, of being one of the 15 big
successes, and otherwise not.   
  
(There are a handful of angels who'd be interested in a company with a high
probability of being moderately successful. But angel investors like big
successes too.)  
  
How do you seem like you'll be one of the big successes? You need three
things: formidable founders, a promising market, and (usually) some evidence
of success so far.  
  
**Formidable**  
  
The most important ingredient is formidable founders. Most investors decide in
the first few minutes whether you seem like a winner or a loser, and once
their opinion is set it's hard to change.  Every startup has reasons both
to invest and not to invest. If investors think you're a winner they focus on
the former, and if not they focus on the latter. For example, it might be a
rich market, but with a slow sales cycle. If investors are impressed with you
as founders, they say they want to invest because it's a rich market, and if
not, they say they can't invest because of the slow sales cycle.  
  
They're not necessarily trying to mislead you. Most investors are genuinely
unclear in their own minds why they like or dislike startups. If you seem like
a winner, they'll like your idea more. But don't be too smug about this
weakness of theirs, because you have it too; almost everyone does.  
  
There is a role for ideas of course. They're fuel for the fire that starts
with liking the founders. Once investors like you, you'll see them reaching
for ideas: they'll be saying "yes, and you could also do x." (Whereas when
they don't like you, they'll be saying "but what about y?")  
  
But the foundation of convincing investors is to seem formidable, and since
this isn't a word most people use in conversation much, I should explain what
it means. A formidable person is one who seems like they'll get what they
want, regardless of whatever obstacles are in the way. Formidable is close to
confident, except that someone could be confident and mistaken. Formidable is
roughly justifiably confident.  
  
There are a handful of people who are really good at seeming formidable — some
because they actually are very formidable and just let it show, and others
because they are more or less con artists.  But most founders, including
many who will go on to start very successful companies, are not that good at
seeming formidable the first time they try fundraising. What should they do?
  
  
What they should not do is try to imitate the swagger of more experienced
founders. Investors are not always that good at judging technology, but
they're good at judging confidence. If you try to act like something you're
not, you'll just end up in an uncanny valley. You'll depart from sincere, but
never arrive at convincing.  
  
**Truth**  
  
The way to seem most formidable as an inexperienced founder is to stick to the
truth. How formidable you seem isn't a constant. It varies depending on what
you're saying. Most people can seem confident when they're saying "one plus
one is two," because they know it's true. The most diffident person would be
puzzled and even slightly contemptuous if they told a VC "one plus one is two"
and the VC reacted with skepticism. The magic ability of people who are good
at seeming formidable is that they can do this with the sentence "we're going
to make a billion dollars a year." But you can do the same, if not with that
sentence with some fairly impressive ones, so long as you convince yourself
first.  
  
That's the secret. Convince yourself that your startup is worth investing in,
and then when you explain this to investors they'll believe you. And by
convince yourself, I don't mean play mind games with yourself to boost your
confidence. I mean truly evaluate whether your startup is worth investing in.
If it isn't, don't try to raise money.  But if it is, you'll be telling the
truth when you tell investors it's worth investing in, and they'll sense that.
You don't have to be a smooth presenter if you understand something well and
tell the truth about it.  
  
To evaluate whether your startup is worth investing in, you have to be a
domain expert. If you're not a domain expert, you can be as convinced as you
like about your idea, and it will seem to investors no more than an instance
of the Dunning-Kruger effect. Which in fact it will usually be. And investors
can tell fairly quickly whether you're a domain expert by how well you answer
their questions. Know everything about your market.   
  
Why do founders persist in trying to convince investors of things they're not
convinced of themselves? Partly because we've all been trained to.  
  
When my friends Robert Morris and Trevor Blackwell were in grad school, one of
their fellow students was on the receiving end of a question from their
faculty advisor that we still quote today. When the unfortunate fellow got to
his last slide, the professor burst out:

> Which one of these conclusions do you actually believe?

One of the artifacts of the way schools are organized is that we all get
trained to talk even when we have nothing to say. If you have a ten page paper
due, then ten pages you must write, even if you only have one page of ideas.
Even if you have no ideas. You have to produce something. And all too many
startups go into fundraising in the same spirit. When they think it's time to
raise money, they try gamely to make the best case they can for their startup.
Most never think of pausing beforehand to ask whether what they're saying is
actually convincing, because they've all been trained to treat the need to
present as a given — as an area of fixed size, over which however much truth
they have must needs be spread, however thinly.  
  
The time to raise money is not when you need it, or when you reach some
artificial deadline like a Demo Day. It's when you can convince investors, and
not before.   
  
And unless you're a good con artist, you'll never convince investors if you're
not convinced yourself. They're far better at detecting bullshit than you are
at producing it, even if you're producing it unknowingly. If you try to
convince investors before you've convinced yourself, you'll be wasting both
your time.  
  
But pausing first to convince yourself will do more than save you from wasting
your time. It will force you to organize your thoughts. To convince yourself
that your startup is worth investing in, you'll have to figure out why it's
worth investing in. And if you can do that you'll end up with more than added
confidence. You'll also have a provisional roadmap of how to succeed.  
  
**Market**  
  
Notice I've been careful to talk about whether a startup is worth investing
in, rather than whether it's going to succeed. No one knows whether a startup
is going to succeed. And it's a good thing for investors that this is so,
because if you could know in advance whether a startup would succeed, the
stock price would already be the future price, and there would be no room for
investors to make money. Startup investors know that every investment is a
bet, and against pretty long odds.  
  
So to prove you're worth investing in, you don't have to prove you're going to
succeed, just that you're a sufficiently good bet. What makes a startup a
sufficiently good bet? In addition to formidable founders, you need a
plausible path to owning a big piece of a big market. Founders think of
startups as ideas, but investors think of them as markets. If there are x
number of customers who'd pay an average of $y per year for what you're
making, then the total addressable market, or TAM, of your company is $xy.
Investors don't expect you to collect all that money, but it's an upper bound
on how big you can get.  
  
Your target market has to be big, and it also has to be capturable by you. But
the market doesn't have to be big yet, nor do you necessarily have to be in it
yet. Indeed, it's often better to start in a small market that will either
turn into a big one or from which you can move into a big one. There just has
to be some plausible sequence of hops that leads to dominating a big market a
few years down the line.  
  
The standard of plausibility varies dramatically depending on the age of the
startup. A three month old company at Demo Day only needs to be a promising
experiment that's worth funding to see how it turns out. Whereas a two year
old company raising a series A round needs to be able to show the experiment
worked.   
  
But every company that gets really big is "lucky" in the sense that their
growth is due mostly to some external wave they're riding, so to make a
convincing case for becoming huge, you have to identify some specific trend
you'll benefit from. Usually you can find this by asking "why now?" If this is
such a great idea, why hasn't someone else already done it? Ideally the answer
is that it only recently became a good idea, because something changed, and no
one else has noticed yet.  
  
Microsoft for example was not going to grow huge selling Basic interpreters.
But by starting there they were perfectly poised to expand up the stack of
microcomputer software as microcomputers grew powerful enough to support one.
And microcomputers turned out to be a really huge wave, bigger than even the
most optimistic observers would have predicted in 1975.  
  
But while Microsoft did really well and there is thus a temptation to think
they would have seemed a great bet a few months in, they probably didn't.
Good, but not great. No company, however successful, ever looks more than a
pretty good bet a few months in. Microcomputers turned out to be a big deal,
and Microsoft both executed well and got lucky. But it was by no means obvious
that this was how things would play out. Plenty of companies seem as good a
bet a few months in. I don't know about startups in general, but at least half
the startups we fund could make as good a case as Microsoft could have for
being on a path to dominating a large market. And who can reasonably expect
more of a startup than that?  
  
**Rejection**  
  
If you can make as good a case as Microsoft could have, will you convince
investors? Not always. A lot of VCs would have rejected Microsoft. 
Certainly some rejected Google. And getting rejected will put you in a
slightly awkward position, because as you'll see when you start fundraising,
the most common question you'll get from investors will be "who else is
investing?" What do you say if you've been fundraising for a while and no one
has committed yet?   
  
The people who are really good at acting formidable often solve this problem
by giving investors the impression that while no investors have committed yet,
several are about to. This is arguably a permissible tactic. It's slightly
dickish of investors to care more about who else is investing than any other
aspect of your startup, and misleading them about how far along you are with
other investors seems the complementary countermove. It's arguably an instance
of scamming a scammer. But I don't recommend this approach to most founders,
because most founders wouldn't be able to carry it off. This is the single
most common lie told to investors, and you have to be really good at lying to
tell members of some profession the most common lie they're told.  
  
If you're not a master of negotiation (and perhaps even if you are) the best
solution is to tackle the problem head-on, and to explain why investors have
turned you down and why they're mistaken. If you know you're on the right
track, then you also know why investors were wrong to reject you. Experienced
investors are well aware that the best ideas are also the scariest. They all
know about the VCs who rejected Google. If instead of seeming evasive and
ashamed about having been turned down (and thereby implicitly agreeing with
the verdict) you talk candidly about what scared investors about you, you'll
seem more confident, which they like, and you'll probably also do a better job
of presenting that aspect of your startup. At the very least, that worry will
now be out in the open instead of being a gotcha left to be discovered by the
investors you're currently talking to, who will be proud of and thus attached
to their discovery.   
  
This strategy will work best with the best investors, who are both hard to
bluff and who already believe most other investors are conventional-minded
drones doomed always to miss the big outliers. Raising money is not like
applying to college, where you can assume that if you can get into MIT, you
can also get into Foobar State. Because the best investors are much smarter
than the rest, and the best startup ideas look initially like bad ideas, it's
not uncommon for a startup to be rejected by all the VCs except the best ones.
That's what happened to Dropbox. Y Combinator started in Boston, and for the
first 3 years we ran alternating batches in Boston and Silicon Valley. Because
Boston investors were so few and so timid, we used to ship Boston batches out
for a second Demo Day in Silicon Valley. Dropbox was part of a Boston batch,
which means all those Boston investors got the first look at Dropbox, and none
of them closed the deal. Yet another backup and syncing thing, they all
thought. A couple weeks later, Dropbox raised a series A round from Sequoia.
  
  
**Different**  
  
Not understanding that investors view investments as bets combines with the
ten page paper mentality to prevent founders from even considering the
possibility of being certain of what they're saying. They think they're trying
to convince investors of something very uncertain — that their startup will be
huge — and convincing anyone of something like that must obviously entail some
wild feat of salesmanship. But in fact when you raise money you're trying to
convince investors of something so much less speculative — whether the company
has all the elements of a good bet — that you can approach the problem in a
qualitatively different way. You can convince yourself, then convince them.  
  
And when you convince them, use the same matter-of-fact language you used to
convince yourself. You wouldn't use vague, grandiose marketing-speak among
yourselves. Don't use it with investors either. It not only doesn't work on
them, but seems a mark of incompetence. Just be concise. Many investors
explicitly use that as a test, reasoning (correctly) that if you can't explain
your plans concisely, you don't really understand them. But even investors who
don't have a rule about this will be bored and frustrated by unclear
explanations.   
  
So here's the recipe for impressing investors when you're not already good at
seeming formidable:

  1. Make something worth investing in.  
  

  2. Understand why it's worth investing in.  
  

  3. Explain that clearly to investors. 

If you're saying something you know is true, you'll seem confident when you're
saying it. Conversely, never let pitching draw you into bullshitting. As long
as you stay on the territory of truth, you're strong. Make the truth good,
then just tell it.  
  
  
  
  
  
  
  
  
  
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