After the educational whirlwind that we passed through in weeks #5 and #6, we’re now headed into the fourth learning session of the YC’s Startup School online massive course.

Fundraising is a topic that is very close to us at the moment. Not only that we’re actively talking with both angel investors and venture capital funds but we’re also trying to learn the nuts and bolts of establishing a proper strategic relationship with investors.

It turns out that – based on our experience so far – talking with investors is more art than science. Meaning that there’s nothing complicated to learn how a founder should introduce himself, his company, his product, and his vision. This is not a rocket science and in order to execute it right, a mechanical engineering degree from MIT is not a requirement (although this pre-requisite might only help you if you know how to use it).

On the contrary, fundraising is hard and reading a few blog posts and watching celebrity-starred lecture videos on the matter will not be enough. A lot of practice is required in order to master the art of pitching, communicating, negotiating, and closing a deal.

This is what we’ll be focusing on this week’s YC SUS learning session. So, if you are a startup founder and you wonder where to start from in gaining knowledge about fundraising fundamentals, you’re at the right spot.

Learning Session #4:

Week #7: Startup Technology – Technical Founder Advice + Fundraising Fundamentals + A Conversation on Hard Tech with Eric Migicovsky:

While fundraising, you’re going to hear “NO” a lot. You will hear reasons why your startup will NOT succeed, why your product is NOT a good one, why the opportunity you talk about is NOT real. Sometimes, that will be right, too. But you should NEVER believe that!”

              – Geoff Ralston, Partner @ Y Combinator

I. Lecturers: Jared Friedman, Lilian Chou, Diana Hu, Calvin French-Owen, Ralph Gootee, Eric MigicovskyGeoff Ralston.

II. What was discussed this week:

This week started off a little different than all the previous ones.
A panel discussion, led by Jared Friedman, a partner at Y Combinator, with technical startup co-founders was something that has not been initiated in the course by now. There were 4 CTOs that took part in this week’s panel. A total of 4 topics were discussed in depth by the tech savvies:

– Technical founder advice: what development stack was used in every single company when they started up building their product’s first version at the beginning. Everybody told their short story of how their product looked like and what technologies did they use back in a day to build it and introduce it to their first customers.

– Various software development methodologies that were or are still being used in founders’ companies, such as agile development, lean startup, test-driven development, extreme programming, etc.

–  The right way to work with non-technical founders: in particular, a special attention was paid to dealing with deadlines and timeframes.

– The right way to structure an early engineering team.

The second part of this week continued on with Geoff Ralston, also a partner at YC, providing a high-level overview of fundraising fundamentals.

His lecture was a short one and after he provided a complete overview of what every startup founder needs to know about raising initial capital, he then spent almost half of the time answering audience questions.

It’s hard to summarize the entire lecture because literally, every sentence Geoff said consisted a lot of wisdom in it (see some of the most important ones in the “key takeaways” section below). However, if there was 1 thing that should be emphasized is that your startup story (pitch to investors) has to illustrate:

– A large (market) opportunity that you’re going to capture. You should make sure that you can articulate that you’re going to become a billion-dollar company in due time;

– Compelling product/traction: not necessarily for early-stage startup;

– A great product team: a MUST-HAVE!

We strongly advise that if you’re a founder who is willing to learn more about dealing with technical founders and raising money, to watch both the lectures and learn first-hand.

The topic of fundraising will also be discussed next week, so the best is yet to come.

The third lecture was an interview with the Co-founder and CEO of Pebble, Eric Migicovsky led by Adora Cheung. This lecture resonated quite a lot on us simply because Eric discussed topics that we’re diving into on a daily basis – that being, hardware startups and hard/deep tech theme. Eric shared that while he was part of the Pebble team, the hardest part of the whole journey was that it actually took a lot of time from the initial idea development to finding product-market fit. That struck us immediately simply because our case is exactly the same; presumably, it will take us longer than expected to find a market niche in which our product will be properly applied.
Eric continued then talking about challenges hardware startups usually face, what do hardware startups actually do while taking part in the Y Combinator, and many more. Seriously, that guy knows what he’s talking about.

III. What were the key takeaways:

1. Before building the first version (V1) of your product, you have to figure out what is it that you’re building first.

2. Speed is paramount. Nobody is going to pay you for excellent test coverage.

3. Startups are hard and fundraising can be one of the hardest parts. It’s really not that fun or easy as some founders proclaim.

4. Investors invest in you. So, ask yourself if you were an investor, would you invest in you.

5. Fundraising is important because having money in the bank can be a competitive advantage.

6. How much money should it be raised? Raise enough money as if it were that you’re never going to need to raise again.

7. When to raise money? Raise capital when you don’t need it.

8. Figure out the story of your startup. This means, figuring out why you’re going to matter in the future. What is it about your product, your opportunity that’s gonna tell a story about the future that the VCs will care about. This might mean different things for different startups (product-market fit, growth, etc.).

9. The way you survive from hearing a lot of “NOs” from investors is by being tough and resilient and above all by believing no matter what you hear, you’ll succeed.

10. When you get a “NO”, don’t take it personally. All the investors are saying is that their vision of the future is different than yous.

11. Fundraising is not the goal. You’re building a business, you’re building a product that people want, you’re trying to build something that’s sustainable over the long term. Fundraising is just one small step on the way to that.

12. The most important thing about fundraising is to get it DONE and get back to work on the real goal which is building a great company.

13. Fundraising is not winning. The company that raises the most at the highest valuation will NOT necessarily or even usually be the biggest successful company at the end of the day.

14. If you have customers that love your product, it doesn’t mean anything! If you have customers that love your product and are paying for it, then that’s a different story!

15. Traction = USAGE! Any kind of usage that you can accumulate over a period of time (free usage, paid customers, growth, a speed of growth, etc.).

16. If you’re in a situation and you’re building something that’s mind-blowingly cool and revolutionary but you’re finding that customers don’t want to buy it, pivot your company so you’re actually doing what your customers would have done and just use your pioneering technology to do what they do faster, better, cheaper.

17. The best investor will want to see a small market because small market at the beginning means you can identify who’s in that market very cheaply. 80% of this one group is better than 2% of all the people in the world. Moreover, the small group of people will tell you quickly whether you have a good product or not.

18. Hardware startups need funding for two reasons: a) inventory, b) R&D activities.

19. People get really creative when they don’t have money.

20. Hits-driven market = you realize a consumer product that is a hit (find a product-market fit easily and fastly) so that people start ripping it out of your hands.

21. The concept of business model-company fit = where you can actually have product-market fit but if you have the wrong business model, you’re not going to be able to fund and grow your company over the long term.

22. Crowdfunding is useful for the following two things:

– at the very early stage when you have an idea and need to raise $25-50K to help you get the prototype making (at this stage, people are honestly saying that they need a little bit of money to get this idea off the ground);

– at the later stage for marketing-sales channel usage.

IV. What we liked and what we think could be improved:

Two things we believed should be mentioned in this section:

1. The CTO-based panel was a great idea. We believe that the same can be done with CEOs, CMO, etc. in order to dig deeper into a specific topic.

2. We quite liked the think that the topic of fundraising is divided by two and it will be discussed next week as well. This gives us more time to go through all the information and to think of questions and obstacles that are ahead of our way and share them with the YC SUS community to seek additional assistance.

V. Additional resources to this topic:

1. Y Combinator’s additional resources:

The CTO Journey at a Small Startup by Bryan Helming;

How my role as CTO has changed as we’ve grown to 100 engineers by Edward Kim;

A Guide to Seed Fundraising by Geoff Ralston;

A Fundraising Survival Guide by Paul Graham;

How to Raise Money by Paul Graham.

2. What we believe could be of help:

Startups Pitch Decks Collection by Dconstrct;

Q&A With Frontline Ventures’ Carolina Kung;

How to Write Better Cold Emails to VCs by Joseph Flaherty;

Want to raise a Series A? Be smarter at Seed by David Frankel;

Early-Stage Investing: The Qualcomm Way Ventures Way;

Cruise: From a cold e-mail to a $1B+ exit by Varun Jain;

50 Big Companies that Started with Little or No Money by Joseph Flaherty;

Don’t Waste Your First Slide by Joseph Flaherty;

For Fundraising, Seed is No Longer a Round, It’s a Phase by Hunter Walk;

In Defence of the Deck by Bill Curley;

How to raise money (from me) in 2017 by Paul Singh;

How to Cold-Pitch a VC over E-mail (and Actually Get a Response) by Patrick Mathieson;

Surviving Your First Phone Screen with a VC Firm by Patrick Mathieson.

VI. Evaluation of the week:

The engagement level in the forum suddenly went up. The diversity of topics being posted in it is incredible. Because we see a lot of value in interacting with the community, we’ve got a few more materials and ideas that we want to share with the rest of the most active participants. We actually managed to connect with a few startup founders as well who sought advice from us about finding an appropriate industrial design firm and fundraising. This made us feel valuable and helpful.

Our dedication, motivation, and engagement towards completing the course continue to be as high as they were at the beginning of the course. Although we struggle with finding an appropriate investor at the moment, we’re definitely sure that we’ll manage to raise our pre-seed round of investment by the end of the year.

Week #8: Understanding SAFEs and Priced Equity Rounds + How to Get Meetings with Investors and Raise Money + A Conversation with Elad Gil:

The number of accelerators (investors that have education programs attached to them) is proliferating faster than the number of startups. This terrifies me because most of the people who are advising companies in acclerators have no idea what they’re doing! They’ve never worked at a startup, they’ve never started a startup, they’ve never funded a startup outside of the accelerator. So, you have to ask yourself “why, on Earth, should I take advice from this person who’s neved done any of the things that are telling me that I should do, never seeing this things actually work.” Actually, what you notice is that most accelerators hurt companies! So, be very careful about going to an accelerator. None of you need an accelerator to succeed as a company.”

              

– Aaron Harris, Partner @ Y Combinator

 

I. Lecturers: Kirsty Nathoo, Aaron Harris, Elad Gil.

II. What was discussed this week:

As the start of this week’s learning session, YC CFO and partner Kirsty Nathoo gave probably the most engaging, interesting, and math-oriented lecture so far. Her presentation gave a lowdown on several different ways to capitalize a startup and how those impact founder equity and cap tables overall. Her presentation was on the topic of “Understanding SAFEs and priced equity rounds” where she focused on diving deeply into three main sections:

– The SAFE: Kirsty thoroughly explained and defined what SAFE stands for, what is it used for primarily, how is it used, sections that it includes, how is the percentage of ownership is calculated when founders usually raise using this tool in the early days.

– Dilution: the following topics were practically explained via drawing an exemplified cap table: incorporation basics, founders shares issuance, priced round raised, SAFEs conversion, founders dilution, option pool stock issuance, capitalization, total ownership of the company by both founders and investors.

– Top Tips: why is SAFE a preferable method of raising early-stage startup capital rather than using a convertible note, the difference between pre- and post-money valuation SAFEs, and more were discussed by Kirsty in this section of her presentation.

Since the entire lecture is basically an algebra 101 short course, we seriously advise every founder who is considering using SAFE as a tool of raising capital to grab some pen and paper and watch the lecture with a high level of attention and focus.

The second lecture was a bit more informal, though, in terms of calculations being made. However, it was also very interesting to watch how Arron Harris provided advice for how to most effectively, strategically, and successfully meet with investors. While no pen and paper were required to enjoy watching and learning from it (unless you take notes), Aaron’s opinion strongly resonated with our experience as well, especially when it comes to dealing with accelerator programs which it turns out that are not quite shiny as they describe themselves (please pay special attention to this week’s quote!).

Aaron provided a thorough overview of different kind of investors, when do you need to interact with them (if at all), and how to best introduce yourself to them. It was also very important to note that not every startup will waste time and resources on arranging meetings with investors since raising money might not be necessarily needed at any given moment.

Later on, Aaron explained what every startup needs to have in terms of prepared materials in accordance with the different investor expectations and different stage of an investment-readiness level. In a nutshell, startups need to showcase how they progress throughout the entire fundraising cycle, from the moment founders introduce themselves to investors, through follow-up, decision-making, due diligence, to closing.

The third and final lesson of the week was in the form of an interview led by Geoff Ralston with Elad Gil, a notable Silicon Valley entrepreneur and investor. He spoke mainly about how to get into investor meetings successfully. He gave three examples from 3 different companies about what the signs of reaching a product-market fit are:

1. If your product is broken and people are still using it very actively (high retention on a broken product), then that’s a sign of a raw market adoption;

2. If you’re a SaaS company and have major brands finding and using your product organically;

3. When you have a strong feedback from a small group of people.

Then, he explained what are his personal 3 top criteria for deciding whether or not to invest in a startup:

1. Market (Product-market fit) = is the team building something that the market needs. Looking for traction as well (growth);

2. Are founders people who can learn quickly;

3. Are founders good, ethical, easy to work with?

Definitely, Elad’s know-how vastly expands beyond traditional knowledge about fundraising since he’s been on both sides of the table. The interview was very insightful and useful to watch since it represents the viewpoint of an entrepreneur turned later on an investor.

III. What were the key takeaways:

1. It’s the founder’s responsibility to understand his startup cap table and to keep track of it. It’s important that the founder understands all stages of the company’s lifecycle, how much of the company he’s sold to investors and how much, therefore, he owns.

2. SAFE (Simple Agreement for Future Equity) is a simple instrument where investors will give the founder money now in an exchange for a promise from the company to give shares to the investor at a future date when a priced round is being raised.

3. SAFEs don’t change the cap table. However, the founders should know that hey sold a certain percentage of the company that will be reflected on the cap table when a priced round is being raised.

4. When raising on a SAFE, founders really need to negotiate only 2 things: how much money will the investor put into the company and at what valuation cap.

5. There is a distinction between SAFEs and Convertible debt (notes). Convertibles have an interest rate attached to it and it has a maturity date where the debt needs to be repaid. SAFEs have neither of those things.

6. Try not to have a combination of SAFEs and convertible notes because it makes things a little bit more complicated in calculations.

7. SAFEs rely on the following common fundraising formula: pre-money valuation + money raised = post-money valuation ($5m + $1m = $6m).

8. Relying on this formula, a founder can calculate how much of the company he’s sold when raising money: amount raised/post-money valuation ($1m/$6m = 16.67%).

9. The latter SAFE investors don’t dilute the earliest SAFE investors. It just dilutes the existing shareholders.

10. Full dilution (fully diluted) = the combination of issued (common + preferred) and set-aside shares in the option pool.

11. Before starting to raise money, answer the questions if you need to raise money at all and if so, then when.

12. It gets easier to raise money if you have each of these things: idea, prototype, users, growth. This is because they’re a demonstration of progress. Investors won’t give you high valuation unless you’ve got something to show them.

13. If you have nothing and no understanding of how you could spend money if you had it, don’t try to raise money. Instead, focus on building your product and company.

14. The earlier you raise money, the more dilutive that capital is.

15. Be careful of angel groups! They like to grill new founders, tear them apart, and typically don’t invest in the end.

16. Before chasing down an angel investor, do some research ahead of time to figure out whether or not they actively invest.

17. Investors are waiting for a company that no one else knows, that is secretly amazing, that nobody else has talked to yet, that has no connections.

18. Vision = what the company could become in 10 to 15 years;

19. Meetings do not equal progress! The only thing that matters is building a big company. Meetings are a waste of time if you don’t need money.

20. Investors hate saying NO because everytime they say it, they lose off the opportunity to invest in something that’s going to make them a lot of money.

21. The best investors are the ones who say no fastest because they’re the ones that understand what it is they’re looking for and how to make decisions quickly.

22. Wealth has absolutely no relationship to morality! If you encounter any form of harassment, this grounds to you leaving the meeting. Nobody should ever be allowed to violate your personal space or make you feel uncomfortable. If it happens, you should walk away from the meeting.

23. The singular determinant of a startup success is the market not the strength of the founding team.

IV. What we liked and what we think could be improved:

This week’s content was very practically presented using some basic calculations and algebra (this applies especially about the Kirsty’s lecture). We liked that approach and we think that it should have been used more often throughout the entire course. We recommend that YC issues more lectures explaining how the entire process of raising SAFEs and priced rounds is so that startup founders can pay more attention to their company’s future dilution and basic mechanics that are implemented for ownership calculations.

V. Additional resources to this topic:

1. Y Combinator’s additional resources:

Startup Mechanics (SUS 2017) by Kirsty Nathoo;

How to Talk to Investors by Michael Seibel, Quasar Younis;

Advice on Pitching by Aaron Harris;

The YC Seed Deck Template by Aaron Harris;

How to Design a Better Pitch Deck by Kevin Hale;

How to Present to Investors by Paul Graham;

The Hacker’s Guide to Investors by Paul Graham;

How to Convince Investors by Paul Graham.

2. What we believe could be of help:

The CC Intro by Daniel Gross;

The Beginner’s Guide to VC by Jason Rowley;

Pitch Deck Teardown by Paul Singh;

How to compete with giants with $100 by Baptiste Jamin;

The Surprising Truth About Raising Your Seed Round from VCs by The Quantified VC;

Fundraising Tips for First-Time Startup Founders by Alex Mittal;

How we Successfully Raised Our Series A Online by Ash Rust;

Founders Guide: 7 Tips for Raising Your Seed Round From Angel Investors by Christopher Steiner;

FoundersClub Series A Checklist by Christopher Steiner;

The Best Term Sheets Align Interests of Founders and Investors by Christopher Steiner & Jerrod Engelberg;

What Founders Should Consider When Deciding Whether to Accept an Early Offer by Gwen Schwartz;

With noses pressed against the glass by Kanyi Maqubela;

Liquidation Preference: Your Equity Could be Worth Millions – or Nothing by The AngelList team;

VC Hierarchy of Funding by Devin Dixon;

Why Startup Founders Should be Cautious About Over-Fundraising by Ethan Kurzweil.

VI. Evaluation of the week:

Again, we had a great week during which the time spent interacting with the community was worth it. Most notably, Matija Srbic from Noomly, a monitor system for sneaky toddlers, referred us to a professional hardware/IoT investor fund. He did that even though we didn’t ask for it and we definitely like to express our gratitude to him and his entire team for doing so.

In addition to that, we’re getting significant progress in terms of connecting with new investors and talking with current ones, so definitely, we hope to announce the big news soon enough after we graduate the SUS program officially.

Learning Session #3 Conclusion + What we learned in the previous session + What Follows Next:

As we’re headed on to the final learning session of the Startup School, we’ve come to the idea of doing a retrospect to what we’ve been through in the past 8 weeks.

All the tips and advice on the topic of fundraising (and not only) that have been shared with us by the entire YC community by now have enriched us significantly. We’re glad that we’ve always taken our job as such but also, we’re happy that we’ve never managed to lose ourselves in terms of being too narcissistic and always remembered where we started from. All the lessons that we learned so far made us believe that we’re worth as a team and as a company and that we’ve got all that’s necessary to succeed: determination, motivation, self-discipline, self-awareness, and reason.

In the previous session, we learned about tactics on how to successfully apply to YC and build a sales and engineering teams. Click here to be fast-forwarded to our review and the main takeaways we got during the Learning Session #3.

In the next session, we’ll talk about what happens when a startup manages to reach the point of finding a product-market fit and how does a founder comply with all the tasks and responsibilities at the same time in order to move his company forward.

NOTE: Privacy is the most critical part of the Startup School. All content discussed or shared during the course, office hours, weekly progress, chat, forums, etc. is considered confidential unless otherwise stated. That’s why we’d like to inform that the entire “Startup School Diary” series is based on our experience and point of view that purposefully excludes data and information regarding other participants’ thoughts, views, and opinions.

2nd NOTE: We have no authorship nor we claim any copyrights and/or ownership on any of the additional resources that we recommend to be checked along with the Y Combinator ones. Our goal is to support the reader by providing her with reliable sources of knowledge we believe could be of help for her fast advancement on a particular topic.

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