Y Combinator Startup Podcast - YC Founders Made These Fundraising Mistakes

Episode Date: August 18, 2022

Michael Seibel and Dalton Caldwell are back for episode 2 of Rookie Mistakes to discuss common mistakes founders make when fundraising, and how to avoid them. Apply to Y Combinator: https://www.ycombinator.com/apply/   Work at a startup: https://www.ycombinator.com/jobs

If you look at why the Google founders are the Google founders and still have all this control over company, you can look all the way back in time to that at the moment of their earliest fundraisers, they were not desperate for cash and low leverage. Hey, this is Michael Seibel with Dalton Caldwell and welcome to rookie mistakes. We've asked YC founders for their rookie mistakes so we can share them with you and help you avoid them. Okay, so here's the next note that a YC founder wrote in. The easiest way to fundraise is to indeed have a good measure. that's growing. When I ran a startup that wasn't growing, I spoke to 140 investors and only got two angel checks. Now I'm working on a startup that is growing and almost every well-known VC is trying to figure out how to talk to us. It took us one week to raise our seat around. I don't know, Michael. I've heard rumors from around the world that the best time to fundraise is before you have any metrics at all, right? Because once you have any revenue, you will be judged.

on the revenue. In all like 97% of the time, the demo, the product, the MVP, the MVP with customers gives you so much more leverage when fundraising. 97% of the time. Well, we talk about fear-based decision-making a lot. You and I do, and we talk about this with a batch. And I think a lot of times this is a case of fear-based decision-making. If in your heart, you believe that your product is bad and that you will fail, it makes a ton of rational sense. to fundraise before the world figures it out. And before the world realizes, you know, investors see that you launch it and no one actually wants the thing that you're making.

You know that no one wants the thing you're making in your heart, right? And so rather than go and try to sell it and get what you're expecting to be really hard to sell, you know, it's going to be a hard sell. So, hey, let's just raise before we go try to do it. Not the best play. You know, the other common failure path that we see is, people putting the investor as the kind of center of this game, as opposed to the customer. People thinking the investor is almost the teacher, and their job through a pitch or do a deck is to get an A from the teacher.

And the A's money. I think that looking for validation from authority figures is a lot of how we are constructed to look at the world. And if you've been an employee or you've gone to school, your whole lives, a lot of the way you get ahead in life is to figure out who the authority figure is that you need to please. and if you please that authority figure, it's the path to greatness. And so again, like, if you're like a level, whatever,

level three engineer at some big company and you're like, the way you get ahead is to impress the bosses, why not kind of pattern match that onto startups? Not true. If I could redirect that energy towards pleasing people's customers. Yeah, people call this customer obsession,

like it's a buzzword. We're a customer obsessed. But let's take that literally. What is it? literally mean to be customer obsessed. What it literally means is most of your waking hours, who are you thinking about pleasing? It's your customers and you're trying to solve problems from them. I think this is a neat trick for an early stage founder. Audit the amount of time you spent last week talking to your customers building product. If that amount of time in your

waking day is like 80 to 90 percent, you're probably doing it right. If that amount of time and your waking hours in the last week is more like 20%, you're probably doing something very, very wrong. All right, so here's the next note that a YC founder wrote in. Raise what you need and nothing more. You will find a way to spend all of the money in your bank. Stay lean and get your fundamentals right. You know, a lot of founders think money is like oxygen

and you need it to survive. You know, one of the things that Brian Chesky at Airbnb told the batch recently is maybe money's more like food. You definitely need food to survive, but in a lot of places in the world, including America, people are dying from too much food as opposed to too little food. If you're afraid that bad things are going to happen, the idea of stockpiling as much of whatever resources you can as much as possible is totally sane and reasonable. the issue is really successful companies, the oxygen they have is revenue from their customers and they're being pulled ahead by customer demand for their product and that is providing the oxygen of growth is like the pull of customers. It's funny because like those companies tend to own more of their company when they IPO or

exit. Those founders tend to be happier. They tend to have more innovation because if you don't have as much money, you got to innovate. You've got to do things better or different than your competitors. The biggest difference between what founders own more of their companies than others is how desperate they ever were in the history of the company to need to raise money and whether they were smart and had leverage and they fundraised. And so one crazy story that I don't think most people know is that Facebook was apparently always profitable. that even when it was a tiny college social network, they had these ads on the site way back in the day that made them profitable. And so there was never around that Facebook was in trouble and raised on poor terms or raised more money than they needed.

And so I believe at exit, this is kind of why Zuckerberg owns so much of the company. Same with Google. Google had incredible traction. This was a long time ago. But I use Google when it was Google. It was a really popular search engine before they raised a single dollar because they built it when they were grad students and had tons of traction. And so the first money they raised was very good terms. And every additional round they raised after that, they had incredible leverage. And so again, if you look at why the Google founders are the Google founders and still have all this control over company, you can look all the way back in time to that at the moment of their earliest fundraisers, they were not.

desperate for cash and low leveraged. I think that you've just hit on this secret hint to founders. Who you're comparing yourself to matters. Like if you're trying to hit a Grand Slam home run with your startup, compare yourself to the people who have hit Grand Slam home runs. Instead of comparing yourself with like a local peer group or the company that just raised at a unicorn valuation. Other people in your pitch competition.

Yeah, God. Like at a minimum, if you're looking for like heroes, to emulate, can you copy companies that have at least 100 million in revenue? And like, preferably a billion. There's like so much more you can learn from their stories, even if they might be old, I guess, you know, Facebook's an old company now. But even if they might be older, man, like you can learn a lot more. And like, that's what you're trying to emulate. You're not trying to emulate the unicorn valuation. You're trying to emulate the successful multi-billion revenue company. Yeah, that's really well said, Michael. Choosing your piece.

and choosing who you want to be like is one of the most powerful things you can do if you're an ambitious person that wants to do things in the world, is you get to choose who you want to be like.