This was a great writeup with lots of great information. One thing that bugged me though was the "When to Raise Money" section. It says, in part: "However, for most it will require an idea, a product, and some amount of customer adoption, a.k.a. traction."
There was a great comment on HN a while back (I wish I remembered who said it) that said, "If you're asking about traction or revenue, you aren't making a seed investment".
Andy Bechtolsheim was a seed investor in Google -- he gave them a check based solely on their idea and who they were. Paul Graham/YC made a seed investment in reddit and Justin.tv and whole host of other companies -- none of them existed as more than idea when YC invested.
But VCs are risk averse people (ironic given they are in the risk business), so it makes sense that they would rather invest after a company can show a little traction, especially now that it's so easy to get that initial traction.
I just think we need a new term besides "seed" to differentiate it from the true seed investments.
If you've got a strong track record and connections then you can raise money with just an idea, but in reality most founders don't have that so the only way they can prove their ability is via their actions and these days that tends to mean at least building something to prove what you're capable of.
BTW. Andy Bechtolsheim invested in Google three years after they'd started working on it (as part of their Phd), they'd already launched a public version (google.stanford.edu) with real users by the time he invested. Justin Kan had been working on Kiko for a year before YC invested. Alexis & Steve had been working on MyMobileMenu for a year before they pitched it to YC and PG convinced them to pivot.
It's easy to romanticizes away the slog of work that goes in before a startup raises money, but many successful founders had years of work before they raised seed funding.
I don’t think anyone is disagreeing that a lot of work needs to go into a concept before it can be funded, but Andy still took a lot more risk than the average VC or angel in backing Larry and Sergey when he did.
I believe Google was already in the millions of searches territory by that point. What made Andy a risk taker in that case wasn't the traction (which would still be significant in todays terms with a vastly larger internet population) but rather that search was seen as a dead space. It would have been the equivalent of investing in podcasting in 2013, a space considered played out and dominated by existing players with no significant upside.
There was also the minor point that Larry and Sergey were just a couple of PhD students with no business and no clear path to revenue. Still a gutsy move which many of the current crop of angels and VC would pass on.
LOL- kudos on the guts to admit it. Their portfolio only has a few recognizable names but their anti-portfolio is Silicon Valley- HP, Google, Facebook, Tesla
The set of requirements to raise a seed round changes as the set of requirements to launch, test and validate an idea changes.
Money from seed rounds in the past would be usually spent in infrastructure and distribution. With cloud providers and app stores that part of equation got changed, so some ideas (not all) can be validated on the cheap. (I believe even one of your examples, Google, existed as a proof of concept product called Backrub, working on Stanford network, before the incorporation event took place).
Another point is that investors judge the pitch by the quality of other pitches they heard this day/week/month/year. If you browse AngelList, there are companies raising seed rounds with a functional team, a built-out product, traction and a plan to scale. If someone comes right after them and tries to raise a similar round with nothing but a Powerpoint deck, they will be (even subconsciously) compared against the others.
>Andy Bechtolsheim was a seed investor in Google -- he gave them a check based solely on their idea and who they were.
Institutional seed rounds used to not exist (or barely). Thus angels investing to get the company to the A round was aptly called Seed.
But now, there are many Seed VC funds around and the size of the round has grown. (and so has the size of the A round) You may recall articles in the past 18 months proclaiming that the Seed round is the new A round.
In such an environment, what used to be called the Seed Round can perhaps be called the Angel round. Many startups with credibility (YC, repeat founders, researchers, etc.) may be able to skip the Angel round and go to the Seed round with favorable terms.
> especially now that it's so easy to get that initial traction
It's gotten much cheaper to get traction. In some consumer markets, it is basically cost-free; all it takes is a motivated technical entrepreneur with a couple months of savings.
You can't have very meaningful traction until you release an actual product. Most significant products (e.g. Dropbox) will take one person at least 6-12 months to develop, followed by 3+ months before there are charts showing traction.
a) You raise money after having invested a year of work on your own dime.
b) You raise money based on your connections/pedigree ("reputation").
Not boasting, but simply stating fact, that on my own, I've written:
- A system for managing employee leave and sickness with google apps integration in 2 months
- A credit control application for one of my clients in 3 weeks, automatic emails, dunning letters, cash-flow forecasting
- A purchase order system that would automatically raise invoices in their accountancy system in 3-4 weeks
- An entire search system a la booking.com in 4 weeks, with named location search, geo location, tags, categories, blah, blah, blah. Basically the heart of any listing style startup.
And while I realize I'm a good programmer, I'm not a phenomenal programmer, I'm fairly lazy, I find it hard to focus on more than about 5 hours of actual programming unless I'm doing something really interesting.
And these are some off the top of my head examples. I've written loads of small startup sized apps that would be of the complexity that YC fund in much less than 12 weeks, let alone 12 months.
You're looking for an MVP with some traction, not a polished product. Reddit, for example, launched without the ability for users to create their own subreddits, and many would describe that as one of the key reasons of Reddit's growth. I believe they actually launched without commenting, but I can't find a source on that.
While today's startups have more expected of them, it's now easier than ever to write a web app, even SPAs that even 3 or 4 years ago would be too hard for individuals to write on their own.
> Reddit, for example, launched without the ability for users to create their own subreddits, and many would describe that as one of the key reasons of Reddit's growth. I believe they actually launched without commenting, but I can't find a source on that.
reddit launched with only voting and submitting of links (no self posts). Commenting, subreddit creation, self posts and all that was added years after launch.
Not sure why you got downvoted. I think many makers balk at getting customers with an unpolished / unfinished product - "No one will pay for this. We need more features." is the sentiment I have heard often. While I am sure that a product like Stripe might take long to get to stage where people can start using it, in many cases, it is not so hard to create the MVP in 3 - 4 months that solves atleast one pain point for lots of users.
VWO, a bootstrapped A/B testing product, started getting paying customers with a very basic interface and reports[1], and today it is a ~$10M business.
I don't know, HN has changed or someone's stalking my comments. Or perhaps, despite my efforts not to, it sounds like boasting. I was just trying to share my experiences of writing YC-sized apps and the time it took me, and I know better programmers than me.
The thing about this is if you read about ycombinator it's all about getting a product out of the door within 3 months. And they don't expect you to have a product when you start. In a team of two they seem to say one person should be focusing on the business side, so that is one person getting a product out of the door AND get some growth in 3 months with some help from the other. They expect it themselves.
The key part you're ignoring is "Most significant products (e.g. Dropbox)"
There's no way you could clone Dropbox's first version in anything less than 6 months, and that assumes you're a great programmer.
It took the Dropbox team something like 18 months to publicly release, which was all paid for by funding. It required significant funding to build and to operate (freemium).
reddit was also created with funding and could not have existed without funding. It made no money.
I know the story of a lone developer creating a little app that takes off sounds good, but the reality is most significant projects take a good amount of time and money.
I kinda disagree, but it depends on the product/market. You can't pre-sell a nuclear fusion reactor before it's built (I'll bundle that with my swampland in Florida!) but there are ways to generate meaningful traction through list-building, pre-launch sales, commitments, etc. for SaaS apps that you could use to raise money. And frankly, that's what an entrepreneur should be doing in the first place to validate that you should be building that product for the target audience in the first place or that there is a market for your product. And you can always strip down your MVP to it's absolute core to get it out the door faster so you don't spend 6 months building it.
Can you explain, step by step, the cheap, easy way to gain traction as a technical entrepreneur with a few months of savings? This sounds like an infomercial. I'm not sure what the cheap, easy route to gain traction would be unless it's "pay a spammer". If that is the predominant position in SV, it's good to know.
Bummed out that no one has answered this. Maybe it's just something investors say so that it's easy to discard people and startups that aren't already obvious winners; "oh, you don't have enough traction for how long you've been up. Getting traction is super easy these days so you must be dumb. Next!"
Not if what you want to build requires more than 0.5 to 1 developer years of work. There are a large family of problems that can only be tackled with 10+ developer years worth of work to get to a MVP.
I just think we need a new term besides "seed" to differentiate it from the true seed investments.
I agree. I have been thinking about what to call an investment at the concept stage. The obvious one is “seed bed” (you need a seed bed before you can plant a seed). The other is something combining founder and investor as any investor at the concept stage is really more a founder than an investor - festor doesn’t have quite the ring I would like though :)
Commenting a long while after the thread was active, but... there's no reason we couldn't rename other rounds too. The seed round could be the "traction round" and the Series A-Z rounds would be the "scale rounds". Before you have traction, you basically just have a concept, so you have a "concept round".
If you're the sort of person who has to get info from a website on how to raise a seed round, then you're probably not in a position to raise money based on just an idea or who you are.
Some people can have solid technical chops, a good idea and a working prototype and not know angels. Not everybody lives in Silicon Valley or some startup hubs. In fact, there is an essay from Paul Graham explaining why some of the best ideas come from outsiders [0].
This Guide has a step baked in, which is move to Silicon Valley. I know this because it's the most important step, and geography plays such a defining role that I expected the guide to talk about it. I didn't see any mention of this. Then I searched the document for "geography" (0 hits) and then "silicon valley" which had 3 hits, in the two snippets below:
>A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k518 = $1.35mm.
and
>Most seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes). 17 Some early rounds are still done with equity, but in Silicon Valley they are now the exception.
As you can see, this means the entire guide is written from the point of view of Silicon Valley. It still calls raising a seed round "brutal" and "long, arduous, complex, and ego deflating."
But it is, at least, possible. For the vast majority of the cases they are talking about, after the long, arduous, complex, and ego deflating process, outside silicon valley there is still no seed round that has been put together.
So, if you are reading this guide outside of silicon valley, please realize is that your first step toward having a crack at this arduous process, is to move to SV. Airbnb, based in San Francisco, still had these 7 famous rejections for its modest seed round: https://medium.com/@bchesky/7-rejections-7d894cbaa084
There's not a chance in hell it would have been funded on that model at all basically anywhere else in the world. Do what it takes: if your business needs a seed round, you owe it to your business to move to silicon valley.
This is fantastic. I am more and more impressed with the wealth of knowledge being shared by YC, especially regarding clarifying common financial vocabulary (which is often used to make people believe that finance is difficult as the terminology used in discussing finance is designed to sound more complicated than it is).
Similar to how clear and concise the SAFE documents are, this is really nice to read.
This seems to be a trend, it reminds of having a blog for your product. It's a way to attract leads, gives your free SEO traffic, makes people that much more likely to convert. I'd like to see some numbers on how much more likely to convert (to join YC/others) hackers/founders will be after reading such posts.
These rules are nowhere near as complex as combat rules in AD&D and yet I find my eyes glaze over when reading even clearly well-written summaries. I think the problem is actually that these are actually "combat rules", but they are never explained as such. The combat is between the investor and the investee, in that the investor wants as much as possible for his money under every circumstance, and the investee wants to give as little as possible in every circumstance. Certain important moments and thresholds have become "standard circumstances" over time, and these are basically used to divvy up the battle into bite-sized pieces.
Imagine a variant of D&D where every encounter begins with you and your party naked, and after assessing your enemy you have to negotiate with Elves for your armor and weapons - to be paid for after either winning the battle. (If you lose, you might have to give back your battered armor, and try a different group of Elves). In the best case, if you beat the final Boss (which is always the same, the Grand Vizier of Product Market Fit) then you get to keep like 10% of the treasure and the Elves get 90%.
(You could grind lower level monsters to buy your own armor, but that can take a very long time and it might wear you down until you're no longer fit to be a warrior anymore. The Elves are smart because they risk money (which is replaceable) but not life (which is not).)
Seed fundraising is so confusing, especially for first-time founders. Everyone seems to have a different opinion and you can never be sure about people's bias or motives. I appreciate YC leveling the playing field with straightforward founder-friendly information.
I agree with this so much. For me, I was getting so many people hitting me with different advice. Don't include this in your pitch deck. Ask for less money. Don't reach out without an intro. It's tough to know who to listen to. However, the best advice will come from yourself and just putting yourself out there. I met with some really cool VC folks who gave me great feedback. I think the best feedback I got (and would equally give) is to have a thick skin. This is your baby, but if you can't take honest criticism then you're in the wrong business. People may not like what you are doing, but as long as your open minded enough to listen to the feedback and take it to heart, you're doing the right thing.
If you hear an angel/VC saying they're interested in investing in you but they haven't done so within a couple of meetings, politely walk away.
When you're in the seed stage, angels are investing in you and the idea. Some will want to know about traction MRR (walk away)and others will want to do deep-dives of your concept (again, walk away).
It's funny. I read this and thought about a meeting with a VC a friend of mine had where the VC Partner was on his phone the whole time. My friend suddenly stopped talking and sat there for a good minute before the VC realized he had stopped. When he asked why he stopped, my friend said that he took the meeting to get his full attention. After a while the VC did it again. My friend closed his laptop and walked out of the building without saying a word. Weeks later they closed their seed round without that firm and now they're growing like crazy. I'm sure that VC Partner is kicking himself for being so inconsiderate.
You are 100% spot on. I've been part of 3 seed rounds, and one of those had a bunch of savvy investors jerking the founders around waiting to see how desperate they would become before investing (better terms I guess). I didn't want any part of it, called a meeting with all the wanna-be investors and the two founders and committed on the spot. Then those that would have eventually invested all followed afraid to miss out on the deal as it was set at that moment (which was a pretty sweet one for the founders).
So if you are in a situation like this force their hand, the ones that are in will still be in and the ones that were just dicking you around will bow out right away.
The company is still around, they're doing fine. They will never be a 'homerun' but I don't care, they're good people and they work hard, it's just that their pivot turned out to be less of a money maker than the project they envisioned starting out (it was either pivot or die, I give them great respect for staying alive and generating a ton of work during the last 8 years), and I'll always have their back, no matter what.
> The difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists.
That's a pretty broad statement I would take issue with calling angels as a group, amateurs and hobbyists. Especially since some well know VC's also do angle investing.
So much incredible information in this document. I think the misstep some Founders make is trying to raise too early. I hear stories all the time about people trying to raise on an idea. And while that can be useful, it is usually the wrong time to go after Investors.
We made this mistake and failed miserably. It was only after we had a beta, some customers, and some press that people started to pay attention. Now we're close to closing our seed round and it's because we had better focus around what we were doing, how we were going to do it, and why it was important.
At the end of the day, a VC is interested in answering one question, "What's the 10x return?" How will you make them lots of money. Unless the pieces are all there to answer that question, Founders will get a lot of no's. The goal should be to go through your pitch deck and find ways to eliminate the ability for VCs/Angels/Investors to say "no."
How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive.
I wish this was a bit more specific -- how long exactly is "several weeks"? 3 weeks (total growth of 33%)? 7 weeks (total growth of 95%)? 13 weeks (total growth of x3.45)? 52 weeks (total growth of x142)?
It turns out that it is hard to be specific, other than the longer you have that sort of growth, the better. Also, it is, perhaps, obvious that large percentage growth beginning from very small numbers is not as impressive as sustained growth even as the numbers get larger. Impressive / interesting growth is very much in the eye of the beholder, and most investors will just say they know impressive when they see it. This being said, I take the point that more discussion around this point would be helpful (unfortunately, this is true about much of the guide and I was trying to keep it reasonably short).
Thank you! Your point about "starting from small numbers" is something else I was considering -- obviously increasing from $1/week to $10/week of revenue over the course of three months is not that impressive, despite being a 20%/week growth rate!
I wonder if a good way to explain this would be via examples of (starting point, growth rate, duration) tuples and an "interesting" / "not interesting" assessment for each. (Can YC publish anonymized data on its portfolio companies?) This would allow readers to look for an example which roughly matches their performance -- which may sound silly to people in the valley who are surrounded by startups all day long, but there are a lot of us outside of the valley who rarely meet anyone working for a startup and never see any sort of concrete numbers like these.
I absolutely agree about keeping the guide short though -- this is more a matter of something I'd like to see you (or someone else at YC) write more about in the future.
There was a great comment on HN a while back (I wish I remembered who said it) that said, "If you're asking about traction or revenue, you aren't making a seed investment".
Andy Bechtolsheim was a seed investor in Google -- he gave them a check based solely on their idea and who they were. Paul Graham/YC made a seed investment in reddit and Justin.tv and whole host of other companies -- none of them existed as more than idea when YC invested.
But VCs are risk averse people (ironic given they are in the risk business), so it makes sense that they would rather invest after a company can show a little traction, especially now that it's so easy to get that initial traction.
I just think we need a new term besides "seed" to differentiate it from the true seed investments.