We started YC’s Series A Program two years ago to fix a problem faced by every startup raising an A: VCs understand how Series As work and founders do not. This asymmetry of information puts founders at a significant disadvantage. Much as YC had done for seed stage financings - we decided to resolve that asymmetry in order to help founders.
While we can't work directly with every company in the world trying to raise an A, we think that publicly distributing our learnings would help all founders. Our hope is that the Guide will remove information asymmetry from the Series A process, and help level the playing field between founders and VCs.
I don't know how data driven it was, but an accelerator I was in a few years ago said that they found that their seed stage startups with early revenue actually had a harder time raising a series A in many cases.
Presumably due to the fact that VCs would try to extrapolate future market from that revenue or would wonder why the revenue wasn't higher already.
But if you were "pre-revenue" then they just accepted that you were pre-revenue by choice and everyone's imagination was the limit for future revenues.
As a founder of an SF tech company that now makes tens of millions of dollars a year, our revenue was never enough (or made fast enough) for the investors we talked to when we were raising our early rounds. Sometimes, if we made $X in 6 months, the VC's "no" was "We would have liked to see you make that in 3 months". It's why I have a tough time watching Silicon Valley -- it's too accurate and painful to watch.
The robot business isn't bad... Story for another day. But it's my first startup, the test automation SaaS business that's currently making the big $$. Literally any company with a web site or mobile app needs to test their stuff. It's a huge market.
This is interesting. While I haven't seen any data to suggest this is a generalizable rule, we certainly do see rounds happen for companies that have no revenue.
However, most of the rounds we've seen do have revenue (ex-"hard tech" which is a whole other thing). Whether or not that revenue is material is another question.
This seems counter intuitive but makes a lot of sense. If a VC firm thinks they can help a company learn how to drive revenue, then it is easy to make invalid assumptions based on past success. However if you have 5 years of data without revenue growth, they will assume you already did the right things (unlikely) and there is no real market.
Pachyderm had the good fortune to go through YC's first Series A program, I'm pretty sure we couldn't have raised without them, we'd tried and failed before. As with everything YC does, over time they've gathered more data, refined the methodology, and I think they've probably affected some change on VC's side as well as they're giving companies a better way to communicate with each other while they're raising, and sort of collectively bargain. This should be your go to guide for raising an A.
Thanks for the guide, although as a founder I'd say I have mostly given up on the idea of raising money from VCs. VCs care too much about vanity, and I don't fit the mold most VCs are looking for, thus they'd never invest in someone like me despite my track record of success.
These days I'm bootstrapping a couple small businesses (don't put all your eggs in one basket) and things are going well. It's tough as a solo founder, but I have a good set of friends who are cheering me on from the sidelines, and I make progress every day. I'm pretty skilled at most things, and for the areas I'm weak there's always Craigslist or Upwork.
I will say that the big advantage of not taking outside investment is that I don't feel any pressure to meet other people's expectations, I really enjoy the work I'm doing, and I get to reap 100% of the rewards.
Just to be clear, I intend to apply to YC again, and if a great funding opportunity came along I wouldn't say no, but I've also decided not to actively pursue VC funding anymore. For me, right now, the most sensible thing is to stay focused on building product and acquiring customers.
If you're not doing a business that can plausibly generate billions of dollars in the lifespan of a VC investment, you're probably not a good fit, because most of the returns in VC portfolios come from success on that scale. That's not vanity; it's just mathematics.
I'm with you, in that I'd much rather finance a business on revenue than on speculative investments. But I think too many people blame VC for something that's kind of intrinsic to their business model.
If you want to blame VCs for something, blame them for never giving a straight "no" answer when they know that's what their answer is, thus necessitating the dance described by the first half of this guide. That's not intrinsic to the model; that's just them being dicks.
FWIW, I'm only interested in building businesses that could potentially be very large.
VCs do indeed place massive emphasis on vanity because they live and die by reputation and perception. Twitter sentiment matters a lot when you're a VC. Additionally, markets care a lot about perception of success rather than 'real' success (though you could argue they're one in the same). There are plenty of examples of companies who raise massive amounts of investor capital strictly based on hype, without necessarily having the economics to support it. The early investors can win bigly merely by cashing out before the laggards jump on the bandwagon.
> VCs care too much about vanity, and I don't fit the mold most VCs are looking for, thus they'd never invest in someone like me despite my track record of success.
It very akin to a fraternity or sorority, it's great if you fit their mold and they want you part of the club.
This is exceptionally well-written. And it looks like YC's design has stepped up quite a notch too :)
Quick question: how to reconcile these two almost-conflicting views:
1) Raising money is the CEO’s job. If you are the CEO, you should plan for it to be your sole, full-time focus.[...] Do what you can to avoid distracting others with fundraising. Co-founders or other executives are typically only brought in to answer specific questions (e.g. CTOs handle technical diligence), and usually only at the full partnership stage.
Even in the rare case of co-CEOs, it’s best to have a single point of contact. Investors want to see a clear decision-making process, which generally requires a final decision-maker. (https://www.ycombinator.com/resources/prepare-your-company)
2) Signing on with a Series A lead is the beginning of a 10 year relationship. If all goes well, that’s how long your board member will have a say in your company. As such, optimize for your board member, not vanity metrics, like valuation. (https://www.ycombinator.com/resources/how-to-choose-an-inves...)
Given point 2), shouldn't non-CEO founders also be involved in at least some meetings with investors to weigh in on who they want to have as board members?
I don't think these are in contention. It's the CEOs job to focus on fundraising, it's other founders (and key hires) job to focus on doing the thing they are raising money for.
But that doesn't mean it's the CEOs decision alone when it comes to choosing - there is a lot of legwork to be done before you get there though. I'd absolutely expect other founders to be in later meetings, and a sounding board before then.
Good question - the non-CEO founders should have a chance to meet the VC, but that usually happens as a final step to confirm that there's no terrible interactions.
For what it's worth, I haven't personally seen this dynamic derail a deal.
You are right. Design is now a first class citizen thanks to Zain Ali joining YC as designer in December. Lots of more things in the works https://twitter.com/zainali?lang=en
I have a feeling that good portion of startups put emphasis on satisfying investors rather than customers, developing for the investors.
One might say it is the same (good investor knows and follows what the paying customers want), but I think it is not. Customers of a product has very different mindset than an investor and the latter may not 'know' (more like guess) better than any one of us involved or affected.
Investors do what they have to do, trying to find the future big deal (and money cow) or at least protecting their money but when startups adjust approaches for the admiration of investors then I get skeptical. And worry for the investor too a little bit if the path chosen will lead to customer appreciation as well...
Don't mind me, I just ran into several startup entrepreneurs recently who emit the atmosphere of subsistence level actors with sole focus on the money source being the closest. They do not emit an inventor vibe which is ironic as what they speak of and sell is always very inventive or revolutionary, the best so far of course. I asked one of them how he imagines the product in 5 year time for which the answer was: 'sold to someone'. Seems like their heart and proud is somewhere else.
I may have met the wrong crowd.
Has YC come out with any guides on how companies can make employee equity more reasonable?
Things like allowing 10 years to exercise options, not allowing founders to own preferred shares, informing employees if any following rounds include liquidation preferences or guaranteed returns.
Right now I have a hard time trusting employee equity and I'd love to see someone create a checklist companies can either say they follow or specify where they don't.
Is it common for Series A term sheets to state valuation in post-money? I know the YC SAFE docs are [now] post-money. I wonder if that is driving the post-money valuation term in the Series A template, or is it just that this is typical? I've no idea what really happens but from the little I've picked up in casual browsing it seems that you typically raise on pre-money valuation
We were duped by a corporate accelerator on this. We negotiated the valuation of the company, and then when the docs came through, they portrayed that valuation as being inclusive of the money to be invested.
At the time, I investigated this and learned that most valuations are done on pre-money terms. It was just one of several scuzzy things that said corporate VC would do.
Great guide! Overall, agree with the thoughts on leverage and running an efficient process. However, speaking from experience and having spent time as a principal and associate, I would disagree with the advice that only pitching partners is worthwhile. Depending on the space(my experience is solely in hard tech), associates and principals generally make up the technical core of the team, so getting them excited is a key step in making overall progress. A good rule of thumb is to check LinkedIn. If the person has been there more than a year, assume even lower level folks have an ability to make go/no-go decisions.
That's an interesting point. You're right that, for hard tech deals, the non-partners are often the relied upon experts.
To refine this point a bit - I don't think it's a bad idea to spend time with non-partners, but they're not the ones that you want to pitch in the standard sense. If you're trying to win a technical subject matter expert, your approach and dialogue are tailored for that specific conversation.
Off topic: are $1M/$2M seed rounds realistic during YC demo day?
Even with some traction/users/conversion/revenue, and a grand long-term vision, a suggested 15%-25% dilution [1] gives $4-10M valuation. Outside SV, this is already Series A valuation. Any thoughts ?
These are certainly realistic, and happen quite often during and after demo day.
Fwiw - series A valuations around the world certainly vary, but it is rare to see an A done in the $4-10m range, at least for companies that we've funded.
Yes getting $1M to $2M raised because of demo day is reasonable. Yet closing $2M on demo day without subsequent follow up meetings would be very impressive!
That only pays for the salaries of 5 engineers. And what about rent? That takes one salary itself. Which only leaves you with enough money for 4 engineers.
This is shockingly comprehensive and valuable; thank you. One minor suggestion is to generate a single-page or PDF version. I manually created one although of course this will go stale:
How much of this is relevant for companies based in locations that are NOT particularly venture capital heavy? Is this heavily slanted towards SV / SF investors that are well ahead of the pack?
This is brilliant. Thanks for doing this - it's something we will most certainly be studying.
One thing that would be great to have in much more detail is how to do a dataroom. There's a lot of investor hate around docsend,etc. Not sure what's the socially acceptable way to do data rooms now - time bound, downloadable?, Etc
Will add it to the list for the future. Unfortunately, there's a required balance here between what makes sense for you and what makes sense for the investor.
Dang, mind changing the title here? "Otherwise please use the original title, unless it is misleading or linkbait; don't editorialize."
Feels important for YC's submissions to follow the guidelines, otherwise it tells everyone else - hey why bother following them yourself when the people associated with the site don't follow them.
When the submitter is clearly the author of an article or project, we give some leeway about how they present their work to HN. You can see that most clearly at https://news.ycombinator.com/show. The exception, of course, would be if the title is misleading or baity, but "YC's new guide to Raising a Series A" isn't.
The way to understand the site guidelines is in a 'spirit of the law' way, not a 'letter of the law' way. If you watch closely you'll notice plenty of little deviations, but they should be in keeping with the underlying principles. In the case of the title guideline, the principles are (1) titles should be accurate and neutral (i.e. not misleading or linkbait) and (2) the content should get to speak for itself, and not be replaced by something that the submitter imposes over the author. When the submitter is the author, #2 shifts a bit.
I appreciate your point, though, about needing a higher degree of visible consistency when the content is from YC. I'm happy to change the submission title, but I suggested to Aaron to change the article title instead and I think that's what they are going to do. Will check back in a bit. Thanks! Edit: looks like that's done now.
We learned some interesting things, for instance:
- Founders on average have to meet with 30 investors to produce a single term sheet. (https://www.ycombinator.com/resources/the-series-a-fundraisi...)
- Founders who take pre-emptive offers take 1.4% more dilution for less money than those who run processes. (https://www.ycombinator.com/resources/pre-emptive-offers)
- Benchmarks are almost meaningless. We’ve seen As for SaaS companies with 200k in ARR and with $9m in ARR. (https://www.ycombinator.com/resources/benchmarks)
While we can't work directly with every company in the world trying to raise an A, we think that publicly distributing our learnings would help all founders. Our hope is that the Guide will remove information asymmetry from the Series A process, and help level the playing field between founders and VCs.