When I first started trying to fundraise and talk to investors, I had a lot of misconceptions. I hope this advice will be useful to you, so you don’t repeat the mistakes I’ve seen in myself and my peers.
Note: I’m not an expert. I’ve only had one startup, Ellipsis, which raised a $2M seed after going through YC.
First, read:
- YC's Guide to Seed Fundraising
- My YC Application Guide (the principles apply here too)
ChatGPT: someone diving into a kiddie pool of money. There's barely any money
inside.
Product is everything
If you build a successful business, investors will start lining up to talk to you. Your focus at this stage should be finding product-market fit (PMF), i.e. building something people want.
The typical milestones on the path to PMF that investors look for are roughly:
- Be credible: proof you know what you’re doing (you're an expert in the market and/or are generally competent)
- Find a co-founder: proof one other human being is vouching for you/the business. This isn’t strictly necessary, but it helps (also, startups are hard, and it’s easier as a team than solo).
- Launch a product: proof you’re not one of the large number of startups who die before they ever launch anything
- Earn some revenue: proof that your product is valuable to someone
- Earn ~$5k-10k in MRR (~$60-120k ARR): proof you have “real” revenue, less likely your revenue is illusory
- Earn ~$1M ARR: loose heuristic of when you’ve found PMF and can start thinking about raising a Series A
- …sky is the limit.
The more evidence you have that you’re building a successful business, the easier things will be.
Warning: it is very easy as a founder to get distracted by vanity metrics (clout on social media, $ raised) that do not actually mean you’re building something people want.
Raise the minimum amount necessary
Ideally, the amount you need to raise is $0. Taking investment is selling a piece of your soul, not a cause for celebration.
Valuation should only go up
Note: startups at this stage usually raise on SAFE notes, which technically do not give your startups a valuation, but usually come with a “cap” that functions somewhat equivalently.
Valuation is tricky:
- You want to give up the minimum % of your company possible
- You want to raise money quickly
- Once you raise (or say you want to raise) at a particular valuation, it’s an extremely negative signal to try to raise at a lower valuation.
- The market is constantly changing
Try to figure out what companies in a similar position (founder background, sector, progress) are raising at. Founders/VCs you’re friends with (not the ones you’re trying to raise from!) will often give you a rough range.
One “trick” you can do is to raise in tranches. For example, you might start by raising $500k at a $5M cap, but then when your round starts to fill (actual $ deposited), you might try raising another $500k at a $10M cap. The key here is to remember, there’s no going back - you better be happy with the money you’ve raised so far, because there’s a chance you raised the cap too high and now nobody wants to invest.
The best investor is one who finds you
Ideally, investors reach out to you.
Once you have an existing investor in your round, they are strongly incentivized to help you close it (they don’t want to be left stranded), and so they can help with further intros.
Other warm intros (friends, professional connections) are also good.
Referrals from investors who decline to invest in you can be shaky - their first thought is going to be “Wait, my friend decided to pass on this company, why should I invest?”
Don’t cold email investors. That is a signal to them that you are desperate, which makes them instantly uninterested.
Investor interest is not money in the bank
A common pitfall for pre-seed founders trying to raise for the first time is to start talking to every investor who will listen, without a clear end goal. This feels good in the moment, because investors seem interested in you and your company. But it’s a recipe for time-wasting.
Investors have very different incentives from you, because they are in the information-gathering and networking business. This means they have strong incentives to take a meeting with you and learn about your startup even if there is only an infinitesimal chance of them actually writing a check.
Investors have basically no incentive to ever explicitly say “no” to you, because they want to keep the door open in case your company does turn out to be amazing. Because of this, it’s easy to get strung along.
You don’t need a lead investor
Most pre-seed and seed rounds don’t have a traditional “lead” who writes a single huge check (though this does happen). Instead, a $1M round might be a mix of $100k checks with a few $10k-50k checks.
“But how will I be successful if <well-known fund> doesn’t invest in me?”
At the pre-seed/seed stage, you’re still trying to find PMF, and no investor can do that for you. If/when you do find it, who you have on your cap table is unlikely to make a huge difference. Afterwards (Series A+) as you scale, investors can make a bigger difference.
Build momentum
Fundraising is fundamentally a game of perception, which means that building momentum is key. Usually, the first check is the hardest, and each subsequent one gets easier.
So, ideally you want all your meetings to be in a small time window, with the warmest leads first.
Your pitch
Generally, you should spend less time agonizing over the pitch and more on building your company. A handful of simple slides is all you need.
When it is time to pitch, keep your message simple and hammer home your key points for why your business will be successful. It usually looks something like:
- Problem X is huge ($$$) and painful
- Existing solutions A,B,C don’t work very well
- Our company has <unique insight> to solve X
- Our founders are uniquely perfect for solving this problem
- [Optional] Progress on how well you’re doing, e.g. revenue, customer logos
Be simple. Be direct. Don’t overcomplicate things or overstuff your pitch with tangents that distract from your core message.
It’s OK if it takes a large number (10-20) of pitches before you start feeling really comfortable with the story you’re trying to tell, that’s common.
Do NOT be dishonest, misrepresent facts, or exaggerate
On top of the ethical reasons:
- You are talking with people who detect bullshit for a living. They have had far more interactions with founders than you’ve had with investors.
- The startup scene is a surprisingly small ecosystem, and word travels fast. Dishonesty will come back to ruin you.
Interpreting investor behavior
Looking for funding is a numbers game. Most people will say no. That’s OK! Don’t take rejection too harshly. If you want to feel better, read the rejection emails Brian Chesky got for Airbnb when he was trying to raise $150k at a $1.5M valuation.
Be aware that, because of the incentives above, investors often ghost to avoid explicitly rejecting you, only to magically reappear the moment you gain extra traction or your round gets close to closing. This is normal. Don’t hound them, or you’ll seem desperate, pushing them farther away.
When an investor explicitly declines, don’t read too deeply into the reason(s) they provide. Remember their incentives.
Accelerators
I generally think accelerators can be extremely helpful in coaching founders through the process, especially because every company is different. I recommend Y Combinator (I was in the W24 batch), but there are many others. If you’re interested in YC, I’m happy to help review your application and offer feedback.
In Conclusion
I hope this helps. You can always contact me if you have more questions.
Good luck!