00:00we're gonna have two lectures on
00:01fundraising the this one which is going
00:06to be a high-level overview which I'll
00:07do and then next week my partner Kirsty
00:11will do a deep dive into the mechanics
00:15of fundraising which are really fun so
00:18you wouldn't want to miss that before I
00:23start I will say we have an amazing set
00:26of resources in our library on
00:29fundraising you should look at them
00:31you should read Paul Graham's essays on
00:34fundraising they they have aged really
00:37well and they will help you a lot I
00:41wrote a guide to seed fundraising as
00:43well that I think is pretty useful but
00:46there are lots of other resources videos
00:48from last year's startup school from
00:512014 how to start a startup one of our
00:54time I'll reference later which will be
00:57massively helpful when you go out and
00:59raise money in it in early rounds and in
01:02later rounds so startups are hard and
01:10fundraising can be one of the hardest
01:12parts even though fun is bright in the
01:14word it's really not that fun
01:18it's a weird marketplace when you get
01:21out there it seems like kind of an open
01:23market but it's not rational it seldom
01:27fair and yeah you will hear of founders
01:31who tell you I have fundraising was easy
01:33I walked out you know I started walking
01:35down sand hill road and people showered
01:37me with cash that's the exception rather
01:41than the rule so while your fundraising
01:46you're going to hear know a lot most of
01:50you you will hear reasons why your
01:53startup will not succeed while your
01:55product is not a good one why the
01:57opportunity you're talking about is not
01:58real sometimes they'll be right - but
02:03you should never believe that because
02:05you will survive the way you were
02:06survived the multiple times you're going
02:09to go fundraise is by being tough and
02:13and above all by believing no matter
02:17what you hear no matter how many times
02:19you hear no or reasons why your startup
02:21won't succeed you need to believe now I
02:26promise I'd go fast but I'm gonna go so
02:28fast I'm gonna give you a complete
02:30overview of everything you need to know
02:31about fundraising in about a minute or
02:34less and then I'll go deeper after that
02:38and anyone who wants to leave after this
02:39minute because you got everything that
02:41you needed I won't feel bad just walk
02:43out okay so in less than a minute figure
02:49out the story of your startup
02:50this means figure out why you're going
02:54to matter in the future what is it about
02:57your product your opportunity that's
02:59gonna tell a story about the future that
03:01a venture capitalist will care about it
03:04so this this might mean getting product
03:07market fit it might mean growth could
03:11mean a lot of things then find the right
03:14investors do research talk to other
03:18founders this is where organizations
03:22like YC can be a ton of help get
03:27organized you do your homework you
03:30create your spreadsheet and you get a
03:33list of everyone you're going to talk to
03:35and you're going to reach out to or
03:37you're going to get introductions to and
03:39then you begin you will pitch again and
03:44again and again you will find your story
03:46again and again and you will get better
03:48at it as you iterate and eventually
03:52you'll meet the right investors
03:53sometimes the right investors will be
03:55the investor with whom you resonate the
03:58best and who you think is going to be
04:00the best added value sometimes the right
04:02investor be the person who is willing to
04:04write you a check first so then you
04:06agree on a price we'll talk about
04:08negotiations more later and then you get
04:10the money in the bank and lastly you get
04:13back to work that's it simple right I
04:17think that was less than a minute now
04:23okay so let's get a little perspective
04:25first why does VC even exist well
04:30there's a market for it right you guys
04:31need the money most of you most of you
04:34want the money but there's sort of
04:36another reason to which is the returns
04:38can be really big it wasn't always that
04:43many people tracked the beginning of
04:45Silicon Valley to Bill and Dave start
04:47and kill it packard in on 1957 and they
04:51started with 583 dollars of their own
04:53money and never raised venture it's
04:56possible to do that but it turns out to
04:59do a high-growth startup you usually do
05:00need money in about the same time this
05:02French guy named George Daurio kind of
05:04kicked off the whole thing by investing
05:06$70,000 in this what was to become epic
05:13company Digital Equipment Corporation
05:14and he turned that seventy thousand
05:17dollars into thirty five million dollars
05:20which is you might imagine got some
05:22people interested and that kicked off an
05:24entire industry but why raise money what
05:28do you need it for well you need it to
05:33pay for stuff to hire people to rent
05:37offices you need it to grow right
05:42startup equals growth this Paul Graham
05:45wrote a long time ago and to grow you
05:48almost always need startup capital so
05:56it's possible to bootstrap and some
05:59companies do but it is really hard and
06:01you should keep in mind it's also true
06:04that having money can be a competitive
06:08so most startups most of the time will
06:11raise money when should you raise money
06:14now the obvious answer right is when you
06:17need it right that's when you're going
06:19to raise money when you need the money
06:22unfortunately it's actually the opposite
06:25the best time to raise money is when you
06:27don't need it this isn't always possible
06:32but when you don't need money investors
06:36opportunity so throughout the lifetime
06:39of your startup if you can't arrange to
06:42be in a position where you have lots of
06:44money and lots of prospects the money
06:46will come flowing in if you're
06:48profitable it helps a lot if you're
06:53well VC's can smell that a mile away how
06:57much should you raise well one rule of
07:00thumb and I'll give you another one in a
07:02second one thought process to go through
07:06is assume when you raise money that this
07:10is the last time you'll ever be able to
07:12raise so raised enough so you won't need
07:16more so you can get to profitability no
07:19obviously this is not always possible it
07:21depends on the kind of startup you have
07:25so you should at least know what you're
07:28going to spend the money on so do some
07:29math figure out what your average
07:33employee is going to cost an engineer
07:35for example might be $15,000 we usually
07:38use a rule of thumb at a seed round of
07:40about 18 months whatever time frame that
07:44you need to where you can raise more
07:47money so you have to hit milestones that
07:50will be persuasive than or you have to
07:52get to profitability and then the number
07:55of folks you're going to hire so how to
07:57well there could be a whole lecture on
07:59this so rather than doing a whole
08:01lecture I'm just gonna make a couple of
08:02points on this first what you know
08:05investors invest in you so ask yourself
08:10if you are an investor would you invest
08:12in you are you formidable enough are you
08:15the kind of person who can take an idea
08:17and turn it into a reality that matters
08:21into a big company right
08:30yeah I know I'm repeating myself but I
08:33got to go into a little more detail and
08:34I'm going to repeat a little bit of what
08:35I said in that very first lecture but
08:38the other thing that investors are going
08:40to invest in is the story of your
08:42startup what product are you building
08:44for what opportunity for what customers
08:47and is this story interesting believable
08:51does it resonate does it tell a future
08:54that they can believe in think about
08:56that it has to tell a future about a a
08:58company that you guys are building that
09:00has hundreds of thousands of employees
09:02like those CEOs you saw sitting up here
09:05at one point they were exactly where you
09:07are with nothing and now they have tens
09:12of millions or more in revenue hundreds
09:14of employees can the investor you're
09:19talking to believe that about what
09:21you're going to build so what components
09:23of the story are there so it has to
09:27represent a large opportunity and by the
09:31way if that's confusing why do you need
09:33a large opportunity Google venture math
09:35and understand what the venture
09:38capitalist cares about what sort of
09:39returns they need to make things
09:42worthwhile is there a compelling product
09:44and traction and is the storyteller
09:46impressive so what if you don't have
09:49these things well you tell a story a
09:55story is more persuasive if you actually
09:57have that product in traction but it
09:59doesn't mean you can't raise money just
10:01with a good story look at magic leap if
10:04you've heard of magic leap they raise
10:05billions on just a story it's a story
10:09that matters everything else is just how
10:12persuasive you are sure if you have
10:15millions of users and growing like crazy
10:17that's pretty persuasive that's the easy
10:19case interestingly the very best
10:22investors want to get you before you
10:24have all that stuff because you're
10:26expensive by then the greatest best
10:29investors are Airbnb before they're ever
10:33B & B before they have traction so
10:35remember to build your story I went
10:37through this earlier spend time on this
10:39build the vertebra to find
10:42the vertebrae of your story the key
10:44points that are the most memorable most
10:46important and build a story a pitch a
10:48sales pitch around that remember
10:52everything you're doing as a founder is
10:54being a salesperson you're selling to
10:57investors here or to yourself to get
11:01used to get to get up in the morning
11:03after you've heard no 25 times in a row
11:05to your partners to your customers what
11:12valuation should you choose so this
11:16again you could do a whole lecture on
11:21what valuation should choose it's
11:23somewhat of a market but it's a very
11:25strange market I would really recommend
11:27you look at the video of Sam Altman
11:33talking to Ron Conway Marc Andreessen
11:36and Parker Conrad from zenefits at the
11:38time rippling now when they talk about
11:41what valuation you should choose around
11:44the 22nd or 23rd minute Parker starts
11:46talking about his experience raising
11:48money it is really dangerous to choose
11:52too high evaluation and in fact it can
11:55kill your fundraising because it's quite
11:58difficult to go to an investor who might
12:02kind of be interested and you say I'm
12:03gonna raise it a 12 million-dollar cap
12:06on my safe and they were like oh I was
12:11going to invest but that's really
12:12expensive and then to go back to them
12:14and say oh actually we're a lot cheaper
12:16you're cheaper you mean you're not as
12:18good now I'm not interested in investing
12:20I have seen companies actually fail
12:22fundraising because they chose too high
12:24a valuation but you don't want to choose
12:27too low evaluation either because you
12:29can overdo dilution we'll talk about
12:33dilution in a second but the most
12:36important thing is to get the money in
12:38the bank and get back to work and that's
12:40why we talk a lot and you'll see it
12:42again and again about not over
12:44optimizing fundraising as I mentioned
12:47kursi is going to go over the mechanics
12:49of raising money in detail later so I'm
12:54going to go very quickly here
12:55about the the mechanics of raising
12:58convertibles or equity very briefly oh
13:01and yes I'll mention icos there are
13:04other ways of raising money nowadays
13:06that have little to do with with equity
13:10and there's also debt of various kinds
13:12but we're gonna talk more about this and
13:14a convertible note is a kind of debt as
13:16well although we don't recommend you use
13:18convertible notes anymore convertibles
13:22are strange it is strange
13:25you go to an investor and say do you
13:30believe in the future of my company
13:31would you like to buy a piece of it and
13:33they say yes I want to buy a piece of
13:36your company and you say ok not really
13:38I'm gonna sell you a promise of a piece
13:42of my company which is what a
13:44convertible is it's not actually equity
13:46in your company it represents equity and
13:48it represents dilution it's just not
13:50actually dilution right at the time the
13:53great thing so like why does this even
13:54exist why do investors agree to this
13:56well because partly because YC demanded
13:59that they agree to it partly because
14:01it's really good for companies it's fast
14:05the average document here is 3 to 5
14:07pages when you do equity it will be
14:11three or four documents representing
14:13hundreds of pages lots of legalese you
14:18don't need a lawyer for this it's super
14:20cheap it can cost hundreds of dollars or
14:22less you can do it almost automatically
14:25using tools like Clerke but still read
14:30you should read every fundraising
14:33document you ever have to deal with
14:36every last word you really need to uh
14:39there are many many stories of
14:42nightmares with people agreeing to
14:43things they didn't know they were
14:44agreeing to equity when you actually
14:48issue new shares to a shareholder is
14:53slow almost always expensive you almost
14:57always need lawyers you're going to be
14:59giving those investors rights that you
15:02don't have to give when you do a
15:05convertible and those rights are
15:07important and important to understand so
15:09usually called preferred provisions so
15:12again read everything okay so this I'm
15:15sure you guys all understand dilution
15:18dilution is dead simple right you're a
15:21shareholder in your company if you sell
15:2420% of your company you now own 20% less
15:29so if you raise a million dollars on a
15:33four million dollar post valuation
15:36post-money valuation you've just sold
15:3920% of your company 1 million over five
15:4120 percent if you owned 50% of your
15:44company everyone with me you've just
15:50sold 10% of that 50 percent 20% times
15:5350% and now you own 40% that's dilution
15:59simple right well convertibles actually
16:03made that complicated to figure out
16:05because you actually haven't sold yet so
16:09there's a there's a representative
16:13dilution but not an actual dilution as
16:16it turns out when you do a pre-money
16:19convertible the actual dilution that
16:22you're selling is difficult to know
16:25because it depends on how much extra
16:27money how much other money you raise
16:29besides on that convertible if you raise
16:30lots of money and lots of different
16:32convertible notes understanding the
16:34actual dilution it's complicated I
16:36actually wrote a tool called angel calc
16:37that helps you figure it out it's it's
16:40more complicated than I'm actually
16:42letting on because how you calculate the
16:45price that you actually get when you
16:47convert includes things you might not
16:51expect like future option pools for pre
16:54money safes we've changed that and now
16:56the standard YC document that Christie
16:58will go into more detail is a post money
17:00safe a post money safe is dead simple
17:04mostly and it's dead simple in that if
17:07you invest a million dollars on that
17:09four million dollar post money safe you
17:13own 25% and you can be pretty sure that
17:16at that moment in time you're really
17:18buying about 25% so it's good for
17:20investors because they understand and
17:23for founder's because you guys
17:25understand you guys have a good feeling
17:27for what your cap table looks like
17:29alright I'm going to go through this
17:31pretty quickly you guys probably know
17:33all this there's angels and VCs angels
17:36are usually wealthy people that invest
17:39their own money they usually invest for
17:42similar reasons to VC's but they also
17:44invest because they're passionate about
17:45things it's a different sort of
17:48conversation when you're talking to
17:49someone who's going to invest their own
17:51money and how they close and and what
17:53their decision process is then a VC
17:55sorry then a VC who is a professional
18:00investing someone else's money limited
18:03partners so they have a very different
18:06approach different process for closing
18:10there's also other ways of raising I'm
18:12not going to spend a lot of time there's
18:14Kickstarter there's angel list there's
18:17we funder there's all sorts of crowd
18:18funding mechanisms out there now that
18:20usually don't play the major role in
18:24your in your fundraising but often will
18:28play an ancillary role that they might
18:30help you fill out around or fill out the
18:32amount of money that you're trying to
18:33raise all right everyone's heard of an
18:35ICO write an initial coin offering I had
18:38a conversation earlier in the class with
18:41Andy Bromberg the president of coin list
18:43which helps companies do I cos the vast
18:46majority of you probably want to do an
18:49IC o---- but shouldn't I seals are
18:52complicated you need a certain need to
18:55be building usually a certain kind of
18:56network for which having a
18:59cryptocurrency is a smart thing to do
19:02you have to know SEC regulations
19:05backwards and forwards it's a moving
19:08target and even though there's big
19:10dollars associated with it you should
19:11approach this whole topic with a lot of
19:14caution and educate yourself a ton so
19:17just again part of the ecosystem usually
19:20we talk in terms of rounds there's a lot
19:23of fuzziness in this now but usually you
19:26might start your company by putting
19:27money on a credit card and then you
19:29might get some friends and family money
19:31usually this is sort of debt you don't
19:34usually give out equity here but
19:37then you raise a seed frown to get seed
19:39round we don't recommend you do equity
19:41in a seed round usually it'll be on some
19:44sort of convertible and then you get
19:46into your equity rounds bigger rounds
19:49usually this is smaller amounts of money
19:52to greater amounts of money and you can
19:54do a Series A ABCD I've seen Series F
19:57and then eventually if things go well
20:01and you don't get acquired which could
20:03be things going well you can do an IPO
20:06all right let's talk a little bit about
20:08meeting investors I know I'm repeating
20:11myself here but it bears repeating if
20:12you want to meet investors do your
20:15homework know what they've invested in
20:18know what the particular person you're
20:21talking about cares about if you don't
20:24you're at a disadvantage immediately or
20:26you're certainly not putting yourself in
20:28the advantageous position that you can
20:30simplify your pitch work on this all the
20:33time you want to capture their attention
20:36in the first minute or two you're
20:39talking to them and I know this is a
20:44hard thing to say but don't be boring I
20:47say it's a hard thing to say because you
20:49guys all probably think you're what
20:50you're working on is the most
20:51fascinating anything in the world but it
20:54might not be fascinating the way you
20:56tell it you might tell it backwards you
20:58might come at it from the wrong way
21:00which like every detail is fascinating
21:02to you but you need to capture someone's
21:04attention you need to build a story
21:06that's compelling from the beginning and
21:08the simplest way to tell your story is
21:12usually the best way to tell it if you
21:14can bring a demo if you can't fake it
21:18bring a prototype it's so fast
21:23especially if you have a software
21:24product it's so fast to build things and
21:30even if you're building hardware bring a
21:32prototype of your hardware Steve Jobs
21:34used to demand prototypes in wood the
21:38first tablet the first iPad was was in
21:41wood anything to get a feel for what
21:43it's going to be also remember you're
21:46trying to convince the investor that you
21:49can actually build what you're talking
21:52so coming completely empty-handed well
21:55you better be a really good storyteller
21:58if you come empty-handed often forgotten
22:02is that you should listen you're not
22:05there to monologue you're there to have
22:08a conversation to listen to what they
22:11have to say in terms of feedback it can
22:12be incredibly useful even if they say no
22:17also a good sign that investor meeting
22:21is going well as when they talk at least
22:22as much or more than you do when you're
22:25pitching investors you will suck in the
22:28beginning one of the marks of a
22:30successful fundraiser is they get better
22:31and better every meeting they have so
22:34yes you should practice probably the
22:36first investor meetings you have it's
22:38not necessarily your highest target
22:39investors unless you're positive you
22:42have it nailed but if any of you are
22:46golfers you know that you can hit a lot
22:48of golf swings and never improve unless
22:49you get feedback and take in that
22:51feedback it's the same thing with
22:53pitching pay attention to what happens
22:56pay attention to how interested they are
22:58pay attention to how the meeting went
23:00and what the feedback was and improve
23:02every time and do not leave an investor
23:06meeting without some sort of conclusion
23:09now the best conclusion is a check or an
23:13agreement for a check we have something
23:15called a handshake protocol that you can
23:17you can look up as well getting a
23:19handshake for a deal getting someone to
23:21agree to give you money that's awesome
23:23but if you don't get that try to
23:25understand whether it's a firm no or
23:27whether there's next steps so that you
23:29can work towards getting that for most
23:31species including angels there's a
23:34process most people won't give you money
23:36on the first meeting some will but most
23:38were all right for raising seed
23:41I think decks are not that useful as an
23:46angel investor myself I almost never
23:49even look at the deck I just want to
23:50look at the founder and hear their story
23:51and see how they tell it many of you
23:54won't be comfortable telling it without
23:55a deck and some investors actually want
23:57a deck they're more comfortable too so
24:01you should probably have some short
24:02pitch deck in a guy to see
24:05fund-raising I outlined the 12 items
24:07that are important to have in such a
24:09deck but don't lose sight that don't
24:12create a story around the deck create a
24:14story around your story and your product
24:16in your future and figure out how to
24:18tell it without a deck because if you
24:20can't well well you can right so you're
24:25going to be able to so we're done
24:28negotiations very brief word first I
24:31hope you don't have to
24:32hopefully you'll meet an investor and
24:34say you know you'll tell your story this
24:37is we're building this awesome product
24:38we have this attraction it's great and
24:40we're raising a million and a half
24:43dollars on an 8 million dollar cap and
24:45they say I'm in for $100,000
24:49no negotiation no problem now usually
24:53the most likely thing you might
24:54negotiate around is that cap and
24:58sometimes it's okay to state firmly what
25:01it is and sometimes if it's too high
25:02they might negotiate down but if you're
25:05not sure really what you're raising on
25:07you haven't raised any money on your
25:08just talking to investors it's okay to
25:10start talking to them about what they
25:12think is reasonable and try to try to
25:15zero in on what the right number is but
25:19if you do enter negotiations just a few
25:22things to keep in mind what do I mean by
25:25empathy well understand what they care
25:30investors are different each one if
25:34you're talking to an angel they don't
25:37want to seem like an idiot if you're
25:39talking to a venture capitalist they
25:41want to own a certain percentage of your
25:43company so there's this trade-off
25:45between how much money they put in and
25:48how high the valuation is understand the
25:51person you're negotiating with and if
25:52you don't your probability of getting it
25:55right and optimizing your negotiation is
25:57pretty low try to have options if I'm
26:00negotiating with you and I'm an investor
26:02and I'm the only person they're putting
26:03in money I'm in a pretty strong position
26:05Visa vu sometimes you'll be in that
26:08position and that's okay as long as you
26:11get the money this is what they do
26:13they're almost certainly better at you
26:15in negotiation so if you do get into a
26:19negotiation the one thing you have in
26:21your side is you can delay you can say I
26:24don't know I need to talk to my
26:25co-founder or my mother
26:27or someone don't try to match don't go
26:32toe-to-toe with the pros in negotiating
26:35especially with the VCS because that's
26:37what they do and I've said this a few
26:39times read everything okay coming to the
26:41end here what's gonna go wrong
26:44well I've mentioned over optimizing this
26:47merely means that the most important
26:50thing that you guys can do is build
26:52great products that customers love and
26:55that has little to do with fundraising
26:57except as an enabler of that so trying
27:01to get the last dime out of fundraising
27:03is taking away from that and it's
27:06usually counterproductive now there are
27:09fundraising ninjas people who can do
27:11anything and you look at them and say
27:13they may raise at forty million dollar
27:16valuation it was incredible and you know
27:18again it was like people were showering
27:20them with money you should not use them
27:22most of you as your model right figure
27:28out who the right investors are meet
27:29lots of them and then get a deal done
27:33please don't be a bad actor
27:35don't break deals be responsive don't be
27:44a jerk it is a really small community
27:47and that stuff gets around and this
27:50might not be the last startup you do
27:51even if you've raised 90% of what you
27:54want to raise us not likely to be the
27:56last time you're gonna raise oh and when
28:01you get your money and this happened
28:03don't go to Vegas and Gamble it right
28:07think about this is a weird thing for a
28:10second think about what you're asking
28:11investors to do especially when you're
28:15raising a seed round your ask them to
28:18write a check a lot of money to you that
28:21you're gonna have control of that money
28:23based on a promise of something in the
28:26future that's it there's a lot of trust
28:31which is why by the way you shouldn't
28:33exaggerate or pretend to know things you
28:35don't know cuz who's gonna trust someone
28:40who's not being quite frank I don't get
28:43that feeling for with that kind of you
28:49know here's the money see in a couple of
28:51years this is what they do by the way if
28:58you think you can get away with
28:59something here you usually won't if
29:01there's one thing V sees aren't all
29:03brilliant they're not actually all that
29:05good at being a VC but what they are
29:07good at is sniffing this stuff out so
29:11don't try it's actually not a good way
29:13to go through life anyway but tell it
29:16straight tell your story straight don't
29:19 this is a very little win now
29:22there are people we know of them we can
29:24name names who are masters of
29:27right and it seems to work
29:30don't try to be those people and when
29:34you get a no which you will get almost
29:36all of you don't take it personally
29:40they're probably right and anyway all
29:44you're saying is that their vision of
29:46the future is different than your vision
29:48of the future it's really hard to have
29:51an accurate crystal ball I think you'll
29:53all agree with that so don't think it
29:57except maybe internalize that you didn't
29:59do a good enough job and telling your
30:01story of the future take this one in
30:04fundraising is not the goal you go when
30:08you raise two million dollars in your
30:09seed round you'll high-five everyone
30:10it's great and you have gotten to the
30:15all right you're building a business
30:17you're building a product that people
30:19want you're trying to build something
30:21that's sustainable over the long term
30:23fundraising is just one small step on
30:26the way to that by the way that's
30:30another reason not to be competitive
30:33Dropbox raised their first round at like
30:37a 2 or 3 million dollar valuation and it
30:41worked out okay for drew in team right
30:43they went IPO this year
30:45fundraising is not winning the company
30:47that win that raises the most at the
30:49highest valuation well not necessarily
30:51or even usually be the biggest most
30:55successful company at the end of the day
30:57investors actually do matter now at some
30:59point especially its seed you need the
31:01money but the better you can do it
31:04choosing your investors wisely investors
31:06who will make great connections for you
31:07who will help you build your product and
31:09who won't be a pain later the happier
31:15you hear this again and again you'll
31:17hear Ron say it several times if you
31:18look at that video I mentioned the
31:20important thing the most important thing
31:22about fundraising is to get it done let
31:25me get back to work get back to the real
31:28work on the real goal which is building
31:30your great company good luck I'm done
31:33and I'll take some questions so the
31:57question is about if you're an
31:59international entities in London what
32:01advice would I give to fundraise so
32:04that's always a tough one because it
32:06kind of depends and built into that
32:08question where well should I become a
32:09u.s. entity etc most US based
32:13exclusively us-based
32:15venture capitalists will not invest in
32:18an overseas entity or or they'll do it
32:22with a lot of hesitation
32:24so it's certainly we require that
32:26everyone become a Delaware corporation
32:27at YC it's pretty cheap and easy to do
32:30so if you do intend to raise in Silicon
32:33Valley or elsewhere in the States I
32:35strongly recommend you do create a u.s.
32:37entity if you're building your business
32:39in London or in the UK or overseas there
32:43is a venture community there and a lot
32:45of times they'll understand your
32:46business better than a US market so you
32:49have to make that trade-off as you as
32:51you you know figure out what the right
32:54target investors are it's a complex
32:56equation and a little hard to answer
32:59in too much detail and in this in this
33:02context sure yeah the question is look
33:15for investment and then incorporate or
33:16incorporate incorporation like you can
33:18do an incorporation using Atlas if
33:21you're international from stripe it's
33:24sort of instantly so like but the I
33:27think that's the wrong way to think
33:28about it if you're going to fundraise
33:31you should incorporate because a lot of
33:35you will be LLC's or you are not even
33:37LLC yet people won't invest in that
33:38stuff so incorporate so that's not a
33:40barrier so you don't have to say oh yeah
33:43we're doing this more LLC it just
33:44doesn't seem right a corporation is dead
33:46simple now so I would incorporate yes in
33:50the back there so the question is when
34:00is equity preferable to convertible you
34:05know the there are companies that raise
34:09up to thirty million dollars on
34:11convertibles convertibles are fast and
34:14simple so when fast and simple is your
34:16priority convertibles are great from an
34:20investor perspective equity is often
34:23preferable because like I said you're
34:25just buying this promise and you have no
34:27rights and usually when you raise larger
34:32equity works better all around because
34:35there's a little more fiduciary
34:37management you if you raise five to ten
34:39million dollars you tend to form a board
34:41and you have people who have to talk to
34:44about how you're spending that money and
34:46hopefully they're experienced and can
34:47help you through a lot of the issues
34:49that you'll run into because they've
34:51seen it a lot of times so so generally
34:54when you're raising seed you want to go
34:56fast and you're just building and trying
34:57to get product market fit and you don't
34:59have time and you don't want to spend
35:00twenty five thousand dollars with
35:01lawyers convertibles but when you're
35:04raising a huge amount and the company is
35:07usually equity is preferable all around
35:13yeah so I'm undecided to talk about
35:15exaggeration do not exaggerate right so
35:18I was trying to understand how do we
35:20draw a line to be not exaggerating but
35:22still shading our vision so it's
35:26actually a good question one of my sites
35:28that don't exaggerate and and the
35:32question is but what about your vision
35:34well a vision my definition is an
35:37exaggeration I wouldn't even look at it
35:41don't exaggerate the facts on the ground
35:44don't try to hide something that's a
35:48problem by either lying about or or
35:51obscuring the data however when you're
35:57telling your story about how you're
35:58gonna take over the world tell your
35:59story take over the world the caveat
36:03there is don't tell something stupid
36:05don't you know though don't tell a story
36:08that's that beggars belief because
36:11remember in the end it has to be
36:12so tell a story that is credible yet
36:17impressive yeah so the question is if
36:35you're putting your own money into a
36:37company what's the right way to do that
36:38so I'm not a lawyer or an accountant so
36:44you might want to if you're here save
36:46that question for Kirstie but generally
36:50I will say that you should just buy
36:52equity in your company and there's a lot
36:54of ways to do that you can you can use
36:58it you can do a convertible you can just
36:59buy the equity you can you probably in
37:02the beginning especially because you
37:05don't need a lawyer to negotiate with
37:06yourself and if you do that's a separate
37:07issue you can probably just buy the
37:11stock in the company at the right price
37:14and just you might want to get a little
37:16legal advice to get that right or at
37:17least do your research
37:21I've seen people do that it works oh how
37:26you do it is you just rate the safe and
37:28give yourself the money right like
37:33that's the thing about this you guys are
37:35managing the money you literally when
37:37you do a safe you rate this thing you
37:39sign it and you give them your bank
37:41account and they way are you the money
37:42right and then you spend it but you
37:47spend it keeping in mind that you are
37:50now a fiduciary for that money you have
37:52responsibilities you're not that's just
37:55not your money it's the company's money
38:02yeah so you said YC invests on a safe
38:22that's true but what's your question
38:27actually in the future our investments
38:30going to be entirely on a post money
38:31safe we just announced our new deal and
38:35that's what we announced $150,000 for 7%
38:38on a post money safe yeah the question
38:48is what's the definition of traction it
38:50indeed for a pre-sales startup well if
38:55no one's using your product you have no
38:56traction the definition of traction is
39:01usage of some kind and it can be any
39:05kind of usage it can be free usage or it
39:09can be paid customers now you might ask
39:13a better question which is what's the
39:15definition of good traction and the
39:18answer is unfortunately is it depends
39:20right usually the one thing to look at
39:24with traction is gross how fast are you
39:27growing because like you know you can go
39:30to a VC and say I have a million dollars
39:33and that might sound really good a
39:35million dollars in annual recurring
39:37revenue if five years ago you had a
39:40million dollars in annual revenue and
39:42now you still have a million dollars in
39:43revenue they would much rather see
39:45someone with a hundred thousand dollars
39:46in revenue they grew that over the past
39:48month so growth yeah one question at a
39:58so ask the most important one the
40:13question is what are the best practices
40:14for connecting with investors I think
40:19you said other a lot of the things I'm
40:20going to say but I'll say them anyway
40:21so clearly the best way to connect with
40:23an investor is via someone who knows
40:25that investor the absolute ultimate best
40:29way to connect with an investor is via
40:31an investor who invested in your company
40:33who will connect you to another investor
40:35that is the best possible introduction
40:38in fact it's a pretty bad introduction
40:41to have an investor and introduce you to
40:42someone if they passed on your company
40:44think about it it doesn't really scan
40:47very well the other way I'd say is find
40:50other founders who have investors and
40:52get them to introduce you and other than
40:54that yeah you have to cold email but
40:55that's what they do they look for cold
40:58emails and you know that you have to you
41:01have to pound the pavement there's no
41:02way of escaping that yeah
41:26so I think the question is how do you
41:29explain the use of funds when you raise
41:32your seed I don't think there's any
41:36formula for that I wouldn't get into the
41:39weeds too much if you're going to raise
41:40a million dollars you say look with a
41:43million dollars we get here we achieve
41:46this milestone we get to this level of
41:49revenue and the way we're going to do
41:51that is by hiring three engineers two
41:53sales persons and you know three support
41:56people that staff is going to cost us
41:59this much money and that's why we're
42:01raising this much money yeah so yeah so
42:34the question is is there an unintended
42:37consequence of the post money safe that
42:40it will force founders to do an equity
42:44round sooner because the definition of a
42:45post money safe is that future equity
42:49feature convertibles also get diluted by
42:53that post money safe because it's post
42:55money and it is what it is so the answer
43:00is no we haven't seen that because we
43:02just launched it so I don't think that's
43:05that likely and here's the reason the
43:07nice thing about a post money safe is
43:09it's clear it's not ambiguous you know
43:13what percentage that was sold so if they
43:15have a percent of the company they have
43:17a percent by the way if you do a post
43:20after all if I invest $50,000 at a five
43:24million dollar valuation I have a
43:26percent if later you invest a hundred
43:29thousand and a ten million dollar safe
43:31after me and it's a post money safe you
43:34own one percent clear so I suspect that
43:39your concern will not become reality
43:42yes what sort of financial projections
43:50should you have if you run into an
43:52investor who is asking for five-year
43:54projections at seed you've run into what
43:57we cloaca Lee call a noob they don't
44:01know whether till who who has five your
44:03production is at this point in fact if
44:07you can tell what you're gonna do about
44:08four twelve or eighteen months that's
44:09great when you raise future rounds
44:12series A's and B's you're going to start
44:14to say like okay so you have 12 months
44:17of revenue or two years of revenue
44:20experience what are the next two or
44:21three years look like you'll be wrong
44:23but at least you can do that now you're
44:25just so guaranteed to have error bars
44:27that are 50 or 100 percent why bother so
44:29I would actually deprioritize any
44:33investor who asked for that sort of
44:35revenue projection so the question is
44:57how effective are customer testimonials
45:01well I would generally say not very one
45:05of the most common slides we get rid of
45:07in demo day is our customers love us you
45:15but do they pay you if they love you
45:18enough to pay you that's interesting if
45:20they just love you well you know of
45:23course you're gonna find the customers
45:24that say they love you now it is true
45:26that sometimes what you're doing is so
45:29radical or changes their life so much
45:31that that having customers who are
45:34talk to venture capitalists who serve as
45:36references and venture capitalists less
45:38it's seed more at later ons we'll check
45:41customer references those matter a lot
45:45yes what does that mean dynamic or
45:59static Lee I've never seen this dynamic
46:07thing people should know what they have
46:09like you mean dynamic based on
46:10performance or something oh so you're
46:16sort of vesting into your it's not if
46:18you have vesting schedule that's fine
46:20and you can show them that I don't think
46:22it matters the math is the same in the
46:24end right yes so the question is what
46:33sort of dilution so do you expect at
46:35each stage in the company and there's
46:38just very general rules of thumb for
46:40that we usually say 10% to maybe 20% at
46:45seed if you sell as much as 30% we start
46:48to get a little squirrelly it happens
46:50sometimes 20 25 percent sometimes 30
46:55percent at series a and after that it's
46:57too variable to talk about it depends on
46:59how well the company's going series bees
47:02are usually 20 percent or less but again
47:04it really depends so the question is
47:16what's the best way to research angels
47:19and VCs of course the best ways to get
47:21into YC so you should try because we
47:23have a database there is lots of
47:26information online that you can you can
47:28look up but I would also I think the
47:31very best thing to do is to talk to as
47:32many founders as you can who are
47:33familiar like you can look up what their
47:35portfolio company is and see if you know
47:37anyone in that portfolio company and try
47:38to get connected to someone who has some
47:41knowledge of how that investor was yeah
47:45I don't chain company and how do I
47:48address traditional PCs that are a bit
47:50cautious with the donkey and on the
47:52other hand how do I address dog chain
47:54disease or investors that the currency
47:58and this is a very this is a this is a
48:11an individual question for his company
48:14which is it seems like it's a blockchain
48:15company without crypto and I'm not
48:17really sure I know what that means but
48:21so the question was how do I address
48:24conventional VCS that are afraid of
48:26blockchain and non-conventional
48:29blotching investors who expect him to be
48:31more crypto EE or something and I don't
48:35know you um you have to tell a really
48:37good story to each a lot of conventional
48:40investors just won't go there for good
48:42reason it's there's so much fraud and so
48:45much uncertainty outside of the fraud in
48:48that in the in in that space and the ICO
48:51space especially that a lot of people
48:53run away so I would tend to just stay
48:56with the investors who are familiar with
48:57it and then explain why whatever strange
48:59configuration of your company makes
49:01sense for you the New Deal so the
49:28question is does ycs $150,000 investment
49:34handicap the companies that do YC
49:37because the imputed value of the company
49:40is too low it's not a problem
49:45look the we don't even actually have a
49:48cap on our investment because we we
49:51don't think it's appropriate to think of
49:52it that way we've been investing at this
49:54level for many years now and the vast
49:56majority of companies that go through YC
49:59is seed and the average cap tends to be
50:04over 8 million now so it's clearly not a
50:07handicap the reason you do YC is because
50:10it increases your value and increases
50:13your probability of success and
50:15investors get that so they don't look at
50:18that they look at that as the sort of
50:20the cost of doing business with YC
50:32yes this is gonna be the last question
50:36so hopefully it's a good one I'm not
51:06sure I understand the question is
51:08something to do with how can you square
51:10the fact that we're supposed to be a
51:11billion dollar company yet we don't make
51:12financial projections do I have that
51:14right you shouldn't make long-term
51:19financial projections that are complete
51:21and utter and the vast majority
51:23of you who try to make a long-term
51:25financial projection pre-product or when
51:28you have one or two customers it's a
51:30joke you can't do that and if an
51:32investor asks you to do that they're not
51:35very smart or they're not very good
51:36investors however that doesn't mean you
51:39can't talk about your opportunity you
51:42can't talk about the fact that look this
51:44business opportunity is enormous we have
51:45these customers who have started using
51:49our product in a very fundamental very
51:53deep way and they're gonna be our
51:55customers forever it shows the customer
51:57need and there's many many many
51:58thousands of those customers if I just
52:01get five percent of that customer base
52:02I'll have a hundred million dollars in
52:04revenue and then I'm a billion dollar
52:06company but that's different than making
52:09a financial projection you're not
52:11actually projecting the
52:12framed to get to 5% you're just saying
52:14imagine if we got those customers okay
52:18thanks very much guys we'll see you next
