How Startup Fundraising Works | Startup School

Intro (00:00:00)

• Brad Flora, a group partner at YC, discusses startup fundraising.

Fundraising resources (00:00:27)

• Fundraising is a common topic at YC due to its difficulty.
• Paul Graham wrote essays such as the Fundraising Survival Guide.
• YC President Jeff Ralston posted a seed round fundraising guide.
• YC produced tactical fundraising guides such as building a seed deck and pitching.

7 fundraising myths (00:02:13)

• Brad Flora is a YC partner with experience as a founder and investor.
• His success includes an ad retargeting startup and investments in companies like OpenAI and Razorpay.
• The talk aims to debunk common misconceptions about fundraising.

Raising money is glamorous (00:04:06)

• Fundraising is perceived as glamorous due to TV shows like Shark Tank.
• Real fundraising is a grind, involving many one-on-one meetings and ranging investments.
• Fresh paint's blog post exemplifies the fundraising process.

The need to raise money before starting a startup (00:06:51)

• Founders often think money is needed before starting a startup.
• Successful founders build a basic product and gain initial users first.
• Startups with some traction are more attractive to investors.
• Solugen, a chemical manufacturing startup, began by building small reactors and securing early sales, raising $4 million initially and later $400 million.

My startup need to be impressive to raise money (00:10:10)

• Investors need to be convinced, not just impressed.
• Successful startups often appear unimpressive initially (e.g., Airbnb, DoorDash, OpenC).
• Convincing investors involves making a product users want and showing the potential for significant growth.
• Plain, simple language and demonstrating value to users are key to convincing investors.
• Example of Retool's fundraising approach, which led to a significant valuation without a fancy pitch or "magic words."

Raising money is complicated, slow, and expensive. (00:13:56)

• Press often highlights big funding rounds, but early rounds are simpler and do not generate headlines.
• Seed rounds can be modest in size, closed quickly, with minimum to no legal fees.
• The SAFE (Simple Agreement for Future Equity), introduced by Y Combinator, has made it easier to raise funds.
• SAFE is a 5-page document outlining investment terms, which often forgo discounts, thus further simplifying the process.
• Efficient fundraising through SAFE allows founders to retain leverage during investor negotiations.
• Example of Astra, a biotech startup, raising initial funding through safes, leading to more leverage in larger funding rounds.

I am going to lose control of my company (00:18:04)

• Seed funding can be raised without relinquishing control due to no board seats or shareholder rights involved with SAFE agreements.
• Founders typically retain 80-90% ownership after seed rounds.
• Examples include Zapier, which went fully remote with initial funding and opted not to raise additional funds, growing to significant revenue.
• Bootstrapping can be precarious and prolong financial challenges, whereas early fundraising allows for focus on customer satisfaction and growth.
• Raised funds give founders more stability and control compared to the constant financial worry inherent to bootstrapping.

I need a fancy network to raise money (00:21:58)

• Investors prioritize startups that create products people want over founder pedigree
• Success doesn't depend on having a network; Podium's co-founders lacked a Silicon Valley network but succeeded due to their sales skills and a profitable business
• Podium, started with customer review management software for tire shops, reached revenue of $100 million/year and raised over $200 million
• Founders should directly engage with investors instead of using intermediaries for fundraising

If investors reject my startup it's a bad startup (00:23:43)

• Rejection by investors doesn't equate to a startup's failure; numerous successful startups experienced initial rejections
• Envision, a cancer detection medical device startup, faced over 50 rejections before securing initial funding and was later acquired for $275 million
• Whatnot, a collectibles marketplace, struggled to raise seed funding but within 2.5 years was valued at $3.7 billion
• Persistence and believing in one's product are crucial as finding a few investors who believe in the startup is often enough for success
• There are many investors with funds looking for promising startups despite the likelihood of facing rejections