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|  **Want to start a startup?** Get funded by Y Combinator.  
  
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September 2013  
  
Most startups that raise money do it more than once. A typical trajectory
might be (1) to get started with a few tens of thousands from something like Y
Combinator or individual angels, then (2) raise a few hundred thousand to a
few million to build the company, and then (3) once the company is clearly
succeeding, raise one or more later rounds to accelerate growth.  
  
Reality can be messier. Some companies raise money twice in phase 2\. Others
skip phase 1 and go straight to phase 2. And at Y Combinator we get an
increasing number of companies that have already raised amounts in the
hundreds of thousands. But the three phase path is at least the one about
which individual startups' paths oscillate.  
  
This essay focuses on phase 2 fundraising. That's the type the startups we
fund are doing on Demo Day, and this essay is the advice we give them.  
  
**Forces**  
  
Fundraising is hard in both senses: hard like lifting a heavy weight, and hard
like solving a puzzle. It's hard like lifting a weight because it's
intrinsically hard to convince people to part with large sums of money. That
problem is irreducible; it should be hard. But much of the other kind of
difficulty can be eliminated. Fundraising only seems a puzzle because it's an
alien world to most founders, and I hope to fix that by supplying a map
through it.  
  
To founders, the behavior of investors is often opaque — partly because their
motivations are obscure, but partly because they deliberately mislead you. And
the misleading ways of investors combine horribly with the wishful thinking of
inexperienced founders. At YC we're always warning founders about this danger,
and investors are probably more circumspect with YC startups than with other
companies they talk to, and even so we witness a constant series of explosions
as these two volatile components combine.   
  
If you're an inexperienced founder, the only way to survive is by imposing
external constraints on yourself. You can't trust your intuitions. I'm going
to give you a set of rules here that will get you through this process if
anything will. At certain moments you'll be tempted to ignore them. So rule
number zero is: these rules exist for a reason. You wouldn't need a rule to
keep you going in one direction if there weren't powerful forces pushing you
in another.  
  
The ultimate source of the forces acting on you are the forces acting on
investors. Investors are pinched between two kinds of fear: fear of investing
in startups that fizzle, and fear of missing out on startups that take off.
The cause of all this fear is the very thing that makes startups such
attractive investments: the successful ones grow very fast. But that fast
growth means investors can't wait around. If you wait till a startup is
obviously a success, it's too late. To get the really high returns, you have
to invest in startups when it's still unclear how they'll do. But that in turn
makes investors nervous they're about to invest in a flop. As indeed they
often are.  
  
What investors would like to do, if they could, is wait. When a startup is
only a few months old, every week that passes gives you significantly more
information about them. But if you wait too long, other investors might take
the deal away from you. And of course the other investors are all subject to
the same forces. So what tends to happen is that they all wait as long as they
can, then when some act the rest have to.  
  
**Don't raise money unless you want it and it wants you.**  
  
Such a high proportion of successful startups raise money that it might seem
fundraising is one of the defining qualities of a startup. Actually it isn't.
Rapid growth is what makes a company a startup. Most companies in a position
to grow rapidly find that (a) taking outside money helps them grow faster, and
(b) their growth potential makes it easy to attract such money. It's so common
for both (a) and (b) to be true of a successful startup that practically all
do raise outside money. But there may be cases where a startup either wouldn't
want to grow faster, or outside money wouldn't help them to, and if you're one
of them, don't raise money.  
  
The other time not to raise money is when you won't be able to. If you try to
raise money before you can convince investors, you'll not only waste your
time, but also burn your reputation with those investors.  
  
**Be in fundraising mode or not.**  
  
One of the things that surprises founders most about fundraising is how
distracting it is. When you start fundraising, everything else grinds to a
halt. The problem is not the time fundraising consumes but that it becomes the
top idea in your mind. A startup can't endure that level of distraction for
long. An early stage startup grows mostly because the founders make it grow,
and if the founders look away, growth usually drops sharply.  
  
Because fundraising is so distracting, a startup should either be in
fundraising mode or not. And when you do decide to raise money, you should
focus your whole attention on it so you can get it done quickly and get back
to work.   
  
You can take money from investors when you're not in fundraising mode. You
just can't expend any attention on it. There are two things that take
attention: convincing investors, and negotiating with them. So when you're not
in fundraising mode, you should take money from investors only if they require
no convincing, and are willing to invest on terms you'll take without
negotiation. For example, if a reputable investor is willing to invest on a
convertible note, using standard paperwork, that is either uncapped or capped
at a good valuation, you can take that without having to think.  The terms
will be whatever they turn out to be in your next equity round. And "no
convincing" means just that: zero time spent meeting with investors or
preparing materials for them. If an investor says they're ready to invest, but
they need you to come in for one meeting to meet some of the partners, tell
them no, if you're not in fundraising mode, because that's fundraising. 
Tell them politely; tell them you're focusing on the company right now, and
that you'll get back to them when you're fundraising; but do not get sucked
down the slippery slope.  
  
Investors will try to lure you into fundraising when you're not. It's great
for them if they can, because they can thereby get a shot at you before
everyone else. They'll send you emails saying they want to meet to learn more
about you. If you get cold-emailed by an associate at a VC firm, you shouldn't
meet even if you are in fundraising mode. Deals don't happen that way.  But
even if you get an email from a partner you should try to delay meeting till
you're in fundraising mode. They may say they just want to meet and chat, but
investors never just want to meet and chat. What if they like you? What if
they start to talk about giving you money? Will you be able to resist having
that conversation? Unless you're experienced enough at fundraising to have a
casual conversation with investors that stays casual, it's safer to tell them
that you'd be happy to later, when you're fundraising, but that right now you
need to focus on the company.   
  
Companies that are successful at raising money in phase 2 sometimes tack on a
few investors after leaving fundraising mode. This is fine; if fundraising
went well, you'll be able to do it without spending time convincing them or
negotiating about terms.  
  
**Get introductions to investors.**  
  
Before you can talk to investors, you have to be introduced to them. If you're
presenting at a Demo Day, you'll be introduced to a whole bunch
simultaneously. But even if you are, you should supplement these with intros
you collect yourself.  
  
Do you have to be introduced? In phase 2, yes. Some investors will let you
email them a business plan, but you can tell from the way their sites are
organized that they don't really want startups to approach them directly.  
  
Intros vary greatly in effectiveness. The best type of intro is from a well-
known investor who has just invested in you. So when you get an investor to
commit, ask them to introduce you to other investors they respect.  The
next best type of intro is from a founder of a company they've funded. You can
also get intros from other people in the startup community, like lawyers and
reporters.  
  
There are now sites like AngelList, FundersClub, and WeFunder that can
introduce you to investors. We recommend startups treat them as auxiliary
sources of money. Raise money first from leads you get yourself. Those will on
average be better investors. Plus you'll have an easier time raising money on
these sites once you can say you've already raised some from well-known
investors.  
  
**Hear no till you hear yes.**  
  
Treat investors as saying no till they unequivocally say yes, in the form of a
definite offer with no contingencies.  
  
I mentioned earlier that investors prefer to wait if they can. What's
particularly dangerous for founders is the way they wait. Essentially, they
lead you on. They seem like they're about to invest right up till the moment
they say no. If they even say no. Some of the worse ones never actually do say
no; they just stop replying to your emails. They hope that way to get a free
option on investing. If they decide later that they want to invest — usually
because they've heard you're a hot deal — they can pretend they just got
distracted and then restart the conversation as if they'd been about to.   
  
That's not the worst thing investors will do. Some will use language that
makes it sound as if they're committing, but which doesn't actually commit
them. And wishful thinking founders are happy to meet them half way.   
  
Fortunately, the next rule is a tactic for neutralizing this behavior. But to
work it depends on you not being tricked by the no that sounds like yes. It's
so common for founders to be misled/mistaken about this that we designed a
protocol to fix the problem. If you believe an investor has committed, get
them to confirm it. If you and they have different views of reality, whether
the source of the discrepancy is their sketchiness or your wishful thinking,
the prospect of confirming a commitment in writing will flush it out. And till
they confirm, regard them as saying no.  
  
**Do breadth-first search weighted by expected value.**  
  
When you talk to investors your m.o. should be breadth-first search, weighted
by expected value. You should always talk to investors in parallel rather than
serially. You can't afford the time it takes to talk to investors serially,
plus if you only talk to one investor at a time, they don't have the pressure
of other investors to make them act. But you shouldn't pay the same attention
to every investor, because some are more promising prospects than others. The
optimal solution is to talk to all potential investors in parallel, but give
higher priority to the more promising ones.   
  
Expected value = how likely an investor is to say yes, multiplied by how good
it would be if they did. So for example, an eminent investor who would invest
a lot, but will be hard to convince, might have the same expected value as an
obscure angel who won't invest much, but will be easy to convince. Whereas an
obscure angel who will only invest a small amount, and yet needs to meet
multiple times before making up his mind, has very low expected value. Meet
such investors last, if at all.   
  
Doing breadth-first search weighted by expected value will save you from
investors who never explicitly say no but merely drift away, because you'll
drift away from them at the same rate. It protects you from investors who
flake in much the same way that a distributed algorithm protects you from
processors that fail. If some investor isn't returning your emails, or wants
to have lots of meetings but isn't progressing toward making you an offer, you
automatically focus less on them. But you have to be disciplined about
assigning probabilities. You can't let how much you want an investor influence
your estimate of how much they want you.  
  
**Know where you stand.**  
  
How do you judge how well you're doing with an investor, when investors
habitually seem more positive than they are? By looking at their actions
rather than their words. Every investor has some track they need to move along
from the first conversation to wiring the money, and you should always know
what that track consists of, where you are on it, and how fast you're moving
forward.  
  
Never leave a meeting with an investor without asking what happens next. What
more do they need in order to decide? Do they need another meeting with you?
To talk about what? And how soon? Do they need to do something internally,
like talk to their partners, or investigate some issue? How long do they
expect it to take? Don't be too pushy, but know where you stand. If investors
are vague or resist answering such questions, assume the worst; investors who
are seriously interested in you will usually be happy to talk about what has
to happen between now and wiring the money, because they're already running
through that in their heads.   
  
If you're experienced at negotiations, you already know how to ask such
questions.  If you're not, there's a trick you can use in this situation.
Investors know you're inexperienced at raising money. Inexperience there
doesn't make you unattractive. Being a noob at technology would, if you're
starting a technology startup, but not being a noob at fundraising. Larry and
Sergey were noobs at fundraising. So you can just confess that you're
inexperienced at this and ask how their process works and where you are in it.
  
  
**Get the first commitment.**  
  
The biggest factor in most investors' opinions of you is the opinion of other
investors. Once you start getting investors to commit, it becomes increasingly
easy to get more to. But the other side of this coin is that it's often hard
to get the first commitment.  
  
Getting the first substantial offer can be half the total difficulty of
fundraising. What counts as a substantial offer depends on who it's from and
how much it is. Money from friends and family doesn't usually count, no matter
how much. But if you get $50k from a well known VC firm or angel investor,
that will usually be enough to set things rolling.   
  
**Close committed money.**  
  
It's not a deal till the money's in the bank. I often hear inexperienced
founders say things like "We've raised $800,000," only to discover that zero
of it is in the bank so far. Remember the twin fears that torment investors?
The fear of missing out that makes them jump early, and the fear of jumping
onto a turd that results? This is a market where people are exceptionally
prone to buyer's remorse. And it's also one that furnishes them plenty of
excuses to gratify it. The public markets snap startup investing around like a
whip. If the Chinese economy blows up tomorrow, all bets are off. But there
are lots of surprises for individual startups too, and they tend to be
concentrated around fundraising. Tomorrow a big competitor could appear, or
you could get C&Ded, or your cofounder could quit.   
  
Even a day's delay can bring news that causes an investor to change their
mind. So when someone commits, get the money. Knowing where you stand doesn't
end when they say they'll invest. After they say yes, know what the timetable
is for getting the money, and then babysit that process till it happens.
Institutional investors have people in charge of wiring money, but you may
have to hunt angels down in person to collect a check.  
  
Inexperienced investors are the ones most likely to get buyer's remorse.
Established ones have learned to treat saying yes as like diving off a diving
board, and they also have more brand to preserve. But I've heard of cases of
even top-tier VC firms welching on deals.  
  
**Avoid investors who don't "lead."**  
  
Since getting the first offer is most of the difficulty of fundraising, that
should be part of your calculation of expected value when you start. You have
to estimate not just the probability that an investor will say yes, but the
probability that they'd be the _first_ to say yes, and the latter is not
simply a constant fraction of the former. Some investors are known for
deciding quickly, and those are extra valuable early on.  
  
Conversely, an investor who will only invest once other investors have is
worthless initially. And while most investors are influenced by how interested
other investors are in you, there are some who have an explicit policy of only
investing after other investors have. You can recognize this contemptible
subspecies of investor because they often talk about "leads." They say that
they don't lead, or that they'll invest once you have a lead. Sometimes they
even claim to be willing to lead themselves, by which they mean they won't
invest till you get $x from other investors. (It's great if by "lead" they
mean they'll invest unilaterally, and in addition will help you raise more.
What's lame is when they use the term to mean they won't invest unless you can
raise more elsewhere.)   
  
Where does this term "lead" come from? Up till a few years ago, startups
raising money in phase 2 would usually raise equity rounds in which several
investors invested at the same time using the same paperwork. You'd negotiate
the terms with one "lead" investor, and then all the others would sign the
same documents and all the money change hands at the closing.  
  
Series A rounds still work that way, but things now work differently for most
fundraising prior to the series A. Now there are rarely actual rounds before
the A round, or leads for them. Now startups simply raise money from investors
one at a time till they feel they have enough.  
  
Since there are no longer leads, why do investors use that term? Because it's
a more legitimate-sounding way of saying what they really mean. All they
really mean is that their interest in you is a function of other investors'
interest in you. I.e. the spectral signature of all mediocre investors. But
when phrased in terms of leads, it sounds like there is something structural
and therefore legitimate about their behavior.  
  
When an investor tells you "I want to invest in you, but I don't lead,"
translate that in your mind to "No, except yes if you turn out to be a hot
deal." And since that's the default opinion of any investor about any startup,
they've essentially just told you nothing.  
  
When you first start fundraising, the expected value of an investor who won't
"lead" is zero, so talk to such investors last if at all.  
  
**Have multiple plans.**  
  
Many investors will ask how much you're planning to raise. This question makes
founders feel they should be planning to raise a specific amount. But in fact
you shouldn't. It's a mistake to have fixed plans in an undertaking as
unpredictable as fundraising.  
  
So why do investors ask how much you plan to raise? For much the same reasons
a salesperson in a store will ask "How much were you planning to spend?" if
you walk in looking for a gift for a friend. You probably didn't have a
precise amount in mind; you just want to find something good, and if it's
inexpensive, so much the better. The salesperson asks you this not because
you're supposed to have a plan to spend a specific amount, but so they can
show you only things that cost the most you'll pay.  
  
Similarly, when investors ask how much you plan to raise, it's not because
you're supposed to have a plan. It's to see whether you'd be a suitable
recipient for the size of investment they like to make, and also to judge your
ambition, reasonableness, and how far you are along with fundraising.  
  
If you're a wizard at fundraising, you can say "We plan to raise a $7 million
series A round, and we'll be accepting termsheets next tuesday." I've known a
handful of founders who could pull that off without having VCs laugh in their
faces. But if you're in the inexperienced but earnest majority, the solution
is analogous to the solution I recommend for pitching your startup: do the
right thing and then just tell investors what you're doing.  
  
And the right strategy, in fundraising, is to have multiple plans depending on
how much you can raise. Ideally you should be able to tell investors something
like: we can make it to profitability without raising any more money, but if
we raise a few hundred thousand we can hire one or two smart friends, and if
we raise a couple million, we can hire a whole engineering team, etc.  
  
Different plans match different investors. If you're talking to a VC firm that
only does series A rounds (though there are few of those left), it would be a
waste of time talking about any but your most expensive plan. Whereas if
you're talking to an angel who invests $20k at a time and you haven't raised
any money yet, you probably want to focus on your least expensive plan.  
  
If you're so fortunate as to have to think about the upper limit on what you
should raise, a good rule of thumb is to multiply the number of people you
want to hire times $15k times 18 months. In most startups, nearly all the
costs are a function of the number of people, and $15k per month is the
conventional total cost (including benefits and even office space) per person.
$15k per month is high, so don't actually spend that much. But it's ok to use
a high estimate when fundraising to add a margin for error. If you have
additional expenses, like manufacturing, add in those at the end. Assuming you
have none and you think you might hire 20 people, the most you'd want to raise
is 20 x $15k x 18 = $5.4 million.   
  
**Underestimate how much you want.**  
  
Though you can focus on different plans when talking to different types of
investors, you should on the whole err on the side of underestimating the
amount you hope to raise.  
  
For example, if you'd like to raise $500k, it's better to say initially that
you're trying to raise $250k. Then when you reach $150k you're more than half
done. That sends two useful signals to investors: that you're doing well, and
that they have to decide quickly because you're running out of room. Whereas
if you'd said you were raising $500k, you'd be less than a third done at
$150k. If fundraising stalled there for an appreciable time, you'd start to
read as a failure.  
  
Saying initially that you're raising $250k doesn't limit you to raising that
much. When you reach your initial target and you still have investor interest,
you can just decide to raise more. Startups do that all the time. In fact,
most startups that are very successful at fundraising end up raising more than
they originally intended.  
  
I'm not saying you should lie, but that you should lower your expectations
initially. There is almost no downside in starting with a low number. It not
only won't cap the amount you raise, but will on the whole tend to increase
it.  
  
A good metaphor here is angle of attack. If you try to fly at too steep an
angle of attack, you just stall. If you say right out of the gate that you
want to raise a $5 million series A round, unless you're in a very strong
position, you not only won't get that but won't get anything. Better to start
at a low angle of attack, build up speed, and then gradually increase the
angle if you want.  
  
**Be profitable if you can.**  
  
You will be in a much stronger position if your collection of plans includes
one for raising zero dollars — i.e. if you can make it to profitability
without raising any additional money. Ideally you want to be able to say to
investors "We'll succeed no matter what, but raising money will help us do it
faster."  
  
There are many analogies between fundraising and dating, and this is one of
the strongest. No one wants you if you seem desperate. And the best way not to
seem desperate is not to _be_ desperate. That's one reason we urge startups
during YC to keep expenses low and to try to make it to ramen profitability
before Demo Day. Though it sounds slightly paradoxical, if you want to raise
money, the best thing you can do is get yourself to the point where you don't
need to.  
  
There are almost two distinct modes of fundraising: one in which founders who
need money knock on doors seeking it, knowing that otherwise the company will
die or at the very least people will have to be fired, and one in which
founders who don't need money take some to grow faster than they could merely
on their own revenues. To emphasize the distinction I'm going to name them:
type A fundraising is when you don't need money, and type B fundraising is
when you do.  
  
Inexperienced founders read about famous startups doing what was type A
fundraising, and decide they should raise money too, since that seems to be
how startups work. Except when they raise money they don't have a clear path
to profitability and are thus doing type B fundraising. And they are then
surprised how difficult and unpleasant it is.  
  
Of course not all startups can make it to ramen profitability in a few months.
And some that don't still manage to have the upper hand over investors, if
they have some other advantage like extraordinary growth numbers or
exceptionally formidable founders. But as time passes it gets increasingly
difficult to fundraise from a position of strength without being profitable.
  
  
**Don't optimize for valuation.**  
  
When you raise money, what should your valuation be? The most important thing
to understand about valuation is that it's not that important.  
  
Founders who raise money at high valuations tend to be unduly proud of it.
Founders are often competitive people, and since valuation is usually the only
visible number attached to a startup, they end up competing to raise money at
the highest valuation. This is stupid, because fundraising is not the test
that matters. The real test is revenue. Fundraising is just a means to that
end. Being proud of how well you did at fundraising is like being proud of
your college grades.  
  
Not only is fundraising not the test that matters, valuation is not even the
thing to optimize about fundraising. The number one thing you want from phase
2 fundraising is to get the money you need, so you can get back to focusing on
the real test, the success of your company. Number two is good investors.
Valuation is at best third.  
  
The empirical evidence shows just how unimportant it is. Dropbox and Airbnb
are the most successful companies we've funded so far, and they raised money
after Y Combinator at premoney valuations of $4 million and $2.6 million
respectively. Prices are so much higher now that if you can raise money at all
you'll probably raise it at higher valuations than Dropbox and Airbnb. So let
that satisfy your competitiveness. You're doing better than Dropbox and
Airbnb! At a test that doesn't matter.  
  
When you start fundraising, your initial valuation (or valuation cap) will be
set by the deal you make with the first investor who commits. You can increase
the price for later investors, if you get a lot of interest, but by default
the valuation you got from the first investor becomes your asking price.  
  
So if you're raising money from multiple investors, as most companies do in
phase 2, you have to be careful to avoid raising the first from an over-eager
investor at a price you won't be able to sustain. You can of course lower your
price if you need to (in which case you should give the same terms to
investors who invested earlier at a higher price), but you may lose a bunch of
leads in the process of realizing you need to do this.  
  
What you can do if you have eager first investors is raise money from them on
an uncapped convertible note with an MFN clause. This is essentially a way of
saying that the valuation cap of the note will be determined by the next
investors you raise money from.  
  
It will be easier to raise money at a lower valuation. It shouldn't be, but it
is. Since phase 2 prices vary at most 10x and the big successes generate
returns of at least 100x, investors should pick startups entirely based on
their estimate of the probability that the company will be a big success and
hardly at all on price. But although it's a mistake for investors to care
about price, a significant number do. A startup that investors seem to like
but won't invest in at a cap of $x will have an easier time at $x/2.   
  
**Yes/no before valuation.**  
  
Some investors want to know what your valuation is before they even talk to
you about investing. If your valuation has already been set by a prior
investment at a specific valuation or cap, you can tell them that number. But
if it isn't set because you haven't closed anyone yet, and they try to push
you to name a price, resist doing so. If this would be the first investor
you've closed, then this could be the tipping point of fundraising. That means
closing this investor is the first priority, and you need to get the
conversation onto that instead of being dragged sideways into a discussion of
price.  
  
Fortunately there is a way to avoid naming a price in this situation. And it
is not just a negotiating trick; it's how you (both) should be operating. Tell
them that valuation is not the most important thing to you and that you
haven't thought much about it, that you are looking for investors you want to
partner with and who want to partner with you, and that you should talk first
about whether they want to invest at all. Then if they decide they do want to
invest, you can figure out a price. But first things first.  
  
Since valuation isn't that important and getting fundraising rolling is, we
usually tell founders to give the first investor who commits as low a price as
they need to. This is a safe technique so long as you combine it with the next
one.   
  
**Beware "valuation sensitive" investors.**  
  
Occasionally you'll encounter investors who describe themselves as "valuation
sensitive." What this means in practice is that they are compulsive
negotiators who will suck up a lot of your time trying to push your price
down. You should therefore never approach such investors first. While you
shouldn't chase high valuations, you also don't want your valuation to be set
artificially low because the first investor who committed happened to be a
compulsive negotiator. Some such investors have value, but the time to
approach them is near the end of fundraising, when you're in a position to say
"this is the price everyone else has paid; take it or leave it" and not mind
if they leave it. This way, you'll not only get market price, but it will also
take less time.  
  
Ideally you know which investors have a reputation for being "valuation
sensitive" and can postpone dealing with them till last, but occasionally one
you didn't know about will pop up early on. The rule of doing breadth first
search weighted by expected value already tells you what to do in this case:
slow down your interactions with them.  
  
There are a handful of investors who will try to invest at a lower valuation
even when your price has already been set. Lowering your price is a backup
plan you resort to when you discover you've let the price get set too high to
close all the money you need. So you'd only want to talk to this sort of
investor if you were about to do that anyway. But since investor meetings have
to be arranged at least a few days in advance and you can't predict when
you'll need to resort to lowering your price, this means in practice that you
should approach this type of investor last if at all.  
  
If you're surprised by a lowball offer, treat it as a backup offer and delay
responding to it. When someone makes an offer in good faith, you have a moral
obligation to respond in a reasonable time. But lowballing you is a dick move
that should be met with the corresponding countermove.  
  
**Accept offers greedily.**  
  
I'm a little leery of using the term "greedily" when writing about fundraising
lest non-programmers misunderstand me, but a greedy algorithm is simply one
that doesn't try to look into the future. A greedy algorithm takes the best of
the options in front of it right now. And that is how startups should approach
fundraising in phases 2 and later. Don't try to look into the future because
(a) the future is unpredictable, and indeed in this business you're often
being deliberately misled about it and (b) your first priority in fundraising
should be to get it finished and get back to work anyway.  
  
If someone makes you an acceptable offer, take it. If you have multiple
incompatible offers, take the best. Don't reject an acceptable offer in the
hope of getting a better one in the future.  
  
These simple rules cover a wide variety of cases. If you're raising money from
many investors, roll them up as they say yes. As you start to feel you've
raised enough, the threshold for acceptable will start to get higher.  
  
In practice offers exist for stretches of time, not points. So when you get an
acceptable offer that would be incompatible with others (e.g. an offer to
invest most of the money you need), you can tell the other investors you're
talking to that you have an offer good enough to accept, and give them a few
days to make their own. This could lose you some that might have made an offer
if they had more time. But by definition you don't care; the initial offer was
acceptable.  
  
Some investors will try to prevent others from having time to decide by giving
you an "exploding" offer, meaning one that's only valid for a few days. Offers
from the very best investors explode less frequently and less rapidly — Fred
Wilson never gives exploding offers, for example — because they're confident
you'll pick them. But lower-tier investors sometimes give offers with very
short fuses, because they believe no one who had other options would choose
them. A deadline of three working days is acceptable. You shouldn't need more
than that if you've been talking to investors in parallel. But a deadline any
shorter is a sign you're dealing with a sketchy investor. You can usually call
their bluff, and you may need to.   
  
It might seem that instead of accepting offers greedily, your goal should be
to get the best investors as partners. That is certainly a good goal, but in
phase 2 "get the best investors" only rarely conflicts with "accept offers
greedily," because the best investors don't usually take any longer to decide
than the others. The only case where the two strategies give conflicting
advice is when you have to forgo an offer from an acceptable investor to see
if you'll get an offer from a better one. If you talk to investors in parallel
and push back on exploding offers with excessively short deadlines, that will
almost never happen. But if it does, "get the best investors" is in the
average case bad advice. The best investors are also the most selective,
because they get their pick of all the startups. They reject nearly everyone
they talk to, which means in the average case it's a bad trade to exchange a
definite offer from an acceptable investor for a potential offer from a better
one.  
  
(The situation is different in phase 1. You can't apply to all the incubators
in parallel, because some offset their schedules to prevent this. In phase 1,
"accept offers greedily" and "get the best investors" do conflict, so if you
want to apply to multiple incubators, you should do it in such a way that the
ones you want most decide first.)  
  
Sometimes when you're raising money from multiple investors, a series A will
emerge out of those conversations, and these rules even cover what to do in
that case. When an investor starts to talk to you about a series A, keep
taking smaller investments till they actually give you a termsheet. There's no
practical difficulty. If the smaller investments are on convertible notes,
they'll just convert into the series A round. The series A investor won't like
having all these other random investors as bedfellows, but if it bothers them
so much they should get on with giving you a termsheet. Till they do, you
don't know for sure they will, and the greedy algorithm tells you what to do.
  
  
**Don't sell more than 25% in phase 2.**  
  
If you do well, you will probably raise a series A round eventually. I say
probably because things are changing with series A rounds. Startups may start
to skip them. But only one company we've funded has so far, so tentatively
assume the path to huge passes through an A round.   
  
Which means you should avoid doing things in earlier rounds that will mess up
raising an A round. For example, if you've sold more than about 40% of your
company total, it starts to get harder to raise an A round, because VCs worry
there will not be enough stock left to keep the founders motivated.  
  
Our rule of thumb is not to sell more than 25% in phase 2, on top of whatever
you sold in phase 1, which should be less than 15%. If you're raising money on
uncapped notes, you'll have to guess what the eventual equity round valuation
might be. Guess conservatively.  
  
(Since the goal of this rule is to avoid messing up the series A, there's
obviously an exception if you end up raising a series A in phase 2, as a
handful of startups do.)  
  
**Have one person handle fundraising.**  
  
If you have multiple founders, pick one to handle fundraising so the other(s)
can keep working on the company. And since the danger of fundraising is not
the time taken up by the actual meetings but that it becomes the top idea in
your mind, the founder who handles fundraising should make a conscious effort
to insulate the other founder(s) from the details of the process.   
  
(If the founders mistrust one another, this could cause some friction. But if
the founders mistrust one another, you have worse problems to worry about than
how to organize fundraising.)  
  
The founder who handles fundraising should be the CEO, who should in turn be
the most formidable of the founders. Even if the CEO is a programmer and
another founder is a salesperson? Yes. If you happen to be that type of
founding team, you're effectively a single founder when it comes to
fundraising.  
  
It's ok to bring all the founders to meet an investor who will invest a lot,
and who needs this meeting as the final step before deciding. But wait till
that point. Introducing an investor to your cofounder(s) should be like
introducing a girl/boyfriend to your parents — something you do only when
things reach a certain stage of seriousness.  
  
Even if there are still one or more founders focusing on the company during
fundraising, growth will slow. But try to get as much growth as you can,
because fundraising is a segment of time, not a point, and what happens to the
company during that time affects the outcome. If your numbers grow
significantly between two investor meetings, investors will be hot to close,
and if your numbers are flat or down they'll start to get cold feet.  
  
**You'll need an executive summary and (maybe) a deck.**  
  
Traditionally phase 2 fundraising consists of presenting a slide deck in
person to investors. Sequoia describes what such a deck should contain, and
since they're the customer you can take their word for it.  
  
I say "traditionally" because I'm ambivalent about decks, and (though perhaps
this is wishful thinking) they seem to be on the way out. A lot of the most
successful startups we fund never make decks in phase 2. They just talk to
investors and explain what they plan to do. Fundraising usually takes off fast
for the startups that are most successful at it, and they're thus able to
excuse themselves by saying that they haven't had time to make a deck.  
  
You'll also want an executive summary, which should be no more than a page
long and describe in the most matter of fact language what you plan to do, why
it's a good idea, and what progress you've made so far. The point of the
summary is to remind the investor (who may have met many startups that day)
what you talked about.  
  
Assume that if you give someone a copy of your deck or executive summary, it
will be passed on to whoever you'd least like to have it. But don't refuse on
that account to give copies to investors you meet. You just have to treat such
leaks as a cost of doing business. In practice it's not that high a cost.
Though founders are rightly indignant when their plans get leaked to
competitors, I can't think of a startup whose outcome has been affected by it.  
  
Sometimes an investor will ask you to send them your deck and/or executive
summary before they decide whether to meet with you. I wouldn't do that. It's
a sign they're not really interested.  
  
**Stop fundraising when it stops working.**  
  
When do you stop fundraising? Ideally when you've raised enough. But what if
you haven't raised as much as you'd like? When do you give up?  
  
It's hard to give general advice about this, because there have been cases of
startups that kept trying to raise money even when it seemed hopeless, and
miraculously succeeded. But what I usually tell founders is to stop
fundraising when you start to get a lot of air in the straw. When you're
drinking through a straw, you can tell when you get to the end of the liquid
because you start to get a lot of air in the straw. When your fundraising
options run out, they usually run out in the same way. Don't keep sucking on
the straw if you're just getting air. It's not going to get better.  
  
**Don't get addicted to fundraising.**  
  
Fundraising is a chore for most founders, but some find it more interesting
than working on their startup. The work at an early stage startup often
consists of unglamorous schleps. Whereas fundraising, when it's going well,
can be quite the opposite. Instead of sitting in your grubby apartment
listening to users complain about bugs in your software, you're being offered
millions of dollars by famous investors over lunch at a nice restaurant.   
  
The danger of fundraising is particularly acute for people who are good at it.
It's always fun to work on something you're good at. If you're one of these
people, beware. Fundraising is not what will make your company successful.
Listening to users complain about bugs in your software is what will make you
successful. And the big danger of getting addicted to fundraising is not
merely that you'll spend too long on it or raise too much money. It's that
you'll start to think of yourself as being already successful, and lose your
taste for the schleps you need to undertake to actually be successful.
Startups can be destroyed by this.  
  
When I see a startup with young founders that is fabulously successful at
fundraising, I mentally decrease my estimate of the probability that they'll
succeed. The press may be writing about them as if they'd been anointed as the
next Google, but I'm thinking "this is going to end badly."  
  
**Don't raise too much.**  
  
Though only a handful of startups have to worry about this, it is possible to
raise too much. The dangers of raising too much are subtle but insidious. One
is that it will set impossibly high expectations. If you raise an excessive
amount of money, it will be at a high valuation, and the danger of raising
money at too high a valuation is that you won't be able to increase it
sufficiently the next time you raise money.  
  
A company's valuation is expected to rise each time it raises money. If not
it's a sign of a company in trouble, which makes you unattractive to
investors. So if you raise money in phase 2 at a post-money valuation of $30
million, the pre-money valuation of your next round, if you want to raise one,
is going to have to be at least $50 million. And you have to be doing really,
really well to raise money at $50 million.  
  
It's very dangerous to let the competitiveness of your current round set the
performance threshold you have to meet to raise your next one, because the two
are only loosely coupled.  
  
But the money itself may be more dangerous than the valuation. The more you
raise, the more you spend, and spending a lot of money can be disastrous for
an early stage startup. Spending a lot makes it harder to become profitable,
and perhaps even worse, it makes you more rigid, because the main way to spend
money is people, and the more people you have, the harder it is to change
directions. So if you do raise a huge amount of money, don't spend it. (You
will find that advice almost impossible to follow, so hot will be the money
burning a hole in your pocket, but I feel obliged at least to try.)  
  
**Be nice.**  
  
Startups raising money occasionally alienate investors by seeming arrogant.
Sometimes because they are arrogant, and sometimes because they're noobs
clumsily attempting to mimic the toughness they've observed in experienced
founders.  
  
It's a mistake to behave arrogantly to investors. While there are certain
situations in which certain investors like certain kinds of arrogance,
investors vary greatly in this respect, and a flick of the whip that will
bring one to heel will make another roar with indignation. The only safe
strategy is never to seem arrogant at all.  
  
That will require some diplomacy if you follow the advice I've given here,
because the advice I've given is essentially how to play hardball back. When
you refuse to meet an investor because you're not in fundraising mode, or slow
down your interactions with an investor who moves too slow, or treat a
contingent offer as the no it actually is and then, by accepting offers
greedily, end up leaving that investor out, you're going to be doing things
investors don't like. So you must cushion the blow with soft words. At YC we
tell startups they can blame us. And now that I've written this, everyone else
can blame me if they want. That plus the inexperience card should work in most
situations: sorry, we think you're great, but PG said startups shouldn't ___,
and since we're new to fundraising, we feel like we have to play it safe.  
  
The danger of behaving arrogantly is greatest when you're doing well. When
everyone wants you, it's hard not to let it go to your head. Especially if
till recently no one wanted you. But restrain yourself. The startup world is a
small place, and startups have lots of ups and downs. This is a domain where
it's more true than usual that pride goeth before a fall.   
  
Be nice when investors reject you as well. The best investors are not wedded
to their initial opinion of you. If they reject you in phase 2 and you end up
doing well, they'll often invest in phase 3\. In fact investors who reject you
are some of your warmest leads for future fundraising. Any investor who spent
significant time deciding probably came close to saying yes. Often you have
some internal champion who only needs a little more evidence to convince the
skeptics. So it's wise not merely to be nice to investors who reject you, but
(unless they behaved badly) to treat it as the beginning of a relationship.  
  
**The bar will be higher next time.**  
  
Assume the money you raise in phase 2 will be the last you ever raise. You
must make it to profitability on this money if you can.  
  
Over the past several years, the investment community has evolved from a
strategy of anointing a small number of winners early and then supporting them
for years to a strategy of spraying money at early stage startups and then
ruthlessly culling them at the next stage. This is probably the optimal
strategy for investors. It's too hard to pick winners early on. Better to let
the market do it for you. But it often comes as a surprise to startups how
much harder it is to raise money in phase 3.  
  
When your company is only a couple months old, all it has to be is a promising
experiment that's worth funding to see how it turns out. The next time you
raise money, the experiment has to have worked. You have to be on a trajectory
that leads to going public. And while there are some ideas where the proof
that the experiment worked might consist of e.g. query response times, usually
the proof is profitability. Usually phase 3 fundraising has to be type A
fundraising.  
  
In practice there are two ways startups hose themselves between phases 2 and
3. Some are just too slow to become profitable. They raise enough money to
last for two years. There doesn't seem any particular urgency to be
profitable. So they don't make any effort to make money for a year. But by
that time, not making money has become habitual. When they finally decide to
try, they find they can't.  
  
The other way companies hose themselves is by letting their expenses grow too
fast. Which almost always means hiring too many people. You usually shouldn't
go out and hire 8 people as soon as you raise money at phase 2. Usually you
want to wait till you have growth (and thus usually revenues) to justify them.
A lot of VCs will encourage you to hire aggressively. VCs generally tell you
to spend too much, partly because as money people they err on the side of
solving problems by spending money, and partly because they want you to sell
them more of your company in subsequent rounds. Don't listen to them.  
  
**Don't make things complicated.**  
  
I realize it may seem odd to sum up this huge treatise by saying that my
overall advice is not to make fundraising too complicated, but if you go back
and look at this list you'll see it's basically a simple recipe with a lot of
implications and edge cases. Avoid investors till you decide to raise money,
and then when you do, talk to them all in parallel, prioritized by expected
value, and accept offers greedily. That's fundraising in one sentence. Don't
introduce complicated optimizations, and don't let investors introduce
complications either.  
  
Fundraising is not what will make you successful. It's just a means to an end.
Your primary goal should be to get it over with and get back to what will make
you successful — making things and talking to users — and the path I've
described will for most startups be the surest way to that destination.  
  
Be good, take care of yourselves, and _don't leave the path_.  
  
  
  
  
  
**