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5 Reasons An Angel Investor Will Walk From Your Deal

Posted by Dharmesh Shah on Mon, Jul 25, 2011


The following is a guest post by Ty Danco. Ty is an angel investor and startup mentor. Read more of his thoughts at

You’ve got a killer idea, a good prototype, a terrific market opportunity, and maybe even some funding already. But you still may lose potential investors that have nothing to do with your deal, and everything to do with you. Here are 5 of my non-negotiable hot buttons that will make me turn down an investment, no matter how good the financial prospects appear.hand stop

1. You knowingly mislead people. If you’re not trustworthy, it’s over. Full stop. It can be as simple as pretending to know answers when you don’t, implying that you have investors or contracts that aren’t real, or giving half answers to questions that conveniently leave out non-flattering but significant information. Note that I’m not going to dump you simply for painting the rosiest plausible picture and showing hockey stick revenue numbers that seem ridiculously ambitious. Investors expect some amount of hype, and we can put up with that. But you have to be honest.

Worst is a coverup: An entrepreneur presenting to an angel group was discussing his record as a "successful repeat entrepreneur", but didn’t give particulars other than "the last company he founded went IPO." When upon questioning he told us the name of that company, it only took a few minutes on Google to discover that 1) the company was now defunct, having been in the middle of a penny-stock trading scam, with multiple lawsuits still ongoing; and 2) that the founder/CEO had a different name than the man presenting. He responded to the first fact that he had been the victim of those scams, and to the second that he had decided to change his name. Needless to say, no checks were written to that company. His new company actually had acquired rights to some interesting technology, but the integrity question made it a total no-brainer pass.

2. You haven’t done your homework. Unfortunately it’s not the norm that an angel will have deep knowledge of the sector you are in, so we’re going to ask questions, and lots of them. But imagine what our reaction will be if you don’t know the answers to our basic questions about your own markets, your competitors, or worse, haven’t even considered an obvious question. At best you’re too green to invest in, shown by your chase of angel investments before you are ready. The good news is that this is easily correctible. Do your homework before you pitch angels; when you practice your pitch dozens of times before mentors and other entrepreneurs, chances are you will have had a chance to think about and respond to almost all of the obvious questions. But until you get to that point, don’t burn your bridges pitching to investors too early. Work on your business model and your pitch until they are shining jewels.

3. Your projected expenses are unreasonable. As mentioned above, I don’t really mind—and come to expect—entrepreneurs showing revenue projections that go straight to the moon. However, I will scrutinize projected expenses, hard. If they are unreasonably low—for instance, having a model that depends on external sales without any meaningful salaries or commissions, not budgeting in legal expenses, etc.--that marks you as a greenhorn that needs to go back to school. Worse than the greenhorn is the greedy entrepreneur who is looking to raise money to immediately go back into his or her pocket. This is especially true when the entrepreneur has been on the beach, or an "independent consultant" for a period of time. It’s no sin to need or get a paycheck, but if you are looking to angels to fund your six-figure package, that’s a telltale sign of greed. Down the road, a me-first priority will manifest itself in losing employees, creating lousy margins, and other bad scenarios. The CEO needs to take the lead in all aspects—including demonstrated hunger, commitment, and sacrifice. If you’re focused on the short-term rewards, there won’t be any long-term rewards around for us investors.

4. You don’t follow through. This is another "tell", as poker players say. This won’t be evident at a first meeting, but in the follow-up. Dharmesh and many other angels are correct in saying that diligence can be quick, given that startups will change directions. I too believe due diligence needn’t take more than a week or two, but I still think that in most cases there needs to be several interactions between entrepreneur and potential investors. Why? With the biggest risk for startups being execution risk, we need to assess whether you will do what you say you’ll do. If you call us when you say you will, if you follow-up on our questions quickly and efficiently, those are all positive indicators that you are accountable and will deliver on promises. There’s no shame in putting a reasonable but later date on some deliverable because you’re busy—I hope and want you to be busy, and maybe even you’ll earn bonus points if you turn something around earlier than promised.

5. You’re dogmatic. It’s easy to say no to someone who is a jerk. But assuming that you’re not arrogant, full of yourself, and "getting high on your own supply", you can still turn us off by not considering alternative viewpoints. When you answer questions before we finish asking them, when you don’t take the time to really listen to what people are talking about, when you assume you know every answer cold even before it’s clear where a comment is coming from, that’s another telltale sign of too much hubris and not enough coachability. There are plenty of people who are uncompromising—Steve Jobs is just one example—but Steve Jobs are few and far between, and I’m willing to bet that he listens before he rules.

This is not to say that the investor is going to be right or that you are wrong. I especially like it when an entrepreneur has considered an option I just proposed and educates me why they have decided not to go down that route…as long as they have taken the time to listen. But an absolute black and white dogmatic approach that leaves an impression of "my way or the highway" raises the likelihood of an inflexibility that will most likely doom your company. Pivots happen…and you have to be open-minded along the way as you build your company.

For a good entrepreneur, it shouldn’t be hard to avoid these potholes: you do your homework, you don’t lie, you follow through, you’re not short-sightedly greedy, and you’re open to hear what others think about your strategy and prospects. Miss any of those, and you become a bad bet—low odds that can’t be papered over by any amount of experience, social proof, traction or the other building blocks that attract an angel’s attention. When our due diligence shows that you’re not going to let us down in those five areas—now you’re a whole lot closer to being bankable.

What do you think?  What else should entrepreneurs keep in mind to keep angels from walking from their deal?

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Y Combinator Finally Gets Some Kick-Butt Competition With Y Permutator

Posted by Dharmesh Shah on Thu, Apr 01, 2010

I’ve been following Y Combinator for several years and have a (sometimes grudging) admiration for them.  The “grudging” comes from the fact that they abandoned Boston and are now exclusively running their program in the Bay area.

onstartups ypermutator

Given YC’s success, several organizations in the past have tried to replicate or improve on Y Combinator’s revolutionary micro-funding model for startups.  Most of these have not really accomplished the objective.  The reasons for their failure have been varied, but the primary one was that unlike Y Combinator, they aren’t revolutionary.  Nobody sat down and said “how do we really take what YC has done and turn it on it’s head.”

Until now.  I just read about Y Permutator.  There’s a lot I don’t like about YP — one of which is it seems to be backed by some old school venture capitalists.  Not that there’s anything wrong with them, I just have a hard time believing that those that made all of their money in the 1990s and maybe even the 1980s (gasp!) are really going to understand what it takes to start a new kind of investment vehicle.  But, I have to give credit where credit is due.  It’s different

It goes back to the basics and brings back some of the same things that made VCs so successful across the decades — but adds some new twists.

I'm going to be particularlly interested in seeing what folks like Brad Feld, Davic Cohen, Dave McClure, Eric Ries, Fred Wilson and Michael Arrington think of this.  But, somehow, I don't think the top-tier VCs are going to be shaking in their boots.

If you’re in the market for some micro-funding, check out Y Permutator and let me know what you think.  Is this the future of micro-investing?  What do you think?

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Scalable Funding: Can Venture Capital Be More Like Amazon EC2?

Posted by Dharmesh Shah on Sun, May 11, 2008

I'm becoming an increasingly big fan of infrastructure services like Amazon's EC2 and S3. The reason is simple: You pay for what you need at around the time that you need it. This is the point I made when recently interviewed by Erica Naoone of MIT Technology Review in an article aptly and succinctly titled "Cheap Infrastructure".

In the interview I was my usual, highly opinionated self, but this particular statement that made it into the article jumped out at me: "There's no correlation between the amount of money an entrepreneur actually needs and the money a venture capitalist puts into the business." Of course, there are some qualifiers here: I'm talking about software companies and I'm talking about the Series A investment (first institutional money). Also, if I had done the interview in writing, I likely would have said there's little correlation instead of no correlation. But, my larger point still stands. The way the system works, you often don't raise what you need, you raise what you can.

But lets shift gears just a little bit, before we get deeper into the VC funding stuff.

In the early stages of an internet startup, one thing that's always difficult is predicting the level of infrastructure that is needed to support the volume of users/customers. Entrepreneurs often overestimate how popular their software is going to be. There's also the notion that too much infrastructure is better than to little because "you only have one chance to make a first impression." Finally, there's that whole nagging thing about reliability and uptime.

The net result, before EC2/S3 and similar services, there were few options. Costs were relatively high and somewhat "spiky" (you bought a few servers, threw them into a co-lo, bought more servers, etc.). There wasn't a good way to handle this common situation: "Hey, we only have X users right now, and we expect to grow by Y%, but we need to make sure we can handle Z users just in case we get written up on TechCrunch or get on the front page of digg." You ended up compromising somewhere. Either you spent little (and dealt with spikes if/when they came as best you could) or spent too much, resulting in a fair amount of "unused capacity".

Now, back to the VC funding part. When my co-founder, Brian Halligan first kicked off HubSpot, we thought a lot about the capital needs of the company. I funded the seed round. We later successfully raised some angel funding -- about $1 million. We felt that was enough to get us to the next "milestone" (product launch). The rationale we had was reasonable: Raise a little money early, raise more money later. By raising money "closer to when we needed it", we felt we could continue to reduce the risk, increase the value of the company, and ultimately dilute less. And in fact, this is how the VC process sort of works. You raise a Series A, Series B, etc. and each round is targeted at getting a company to the next "milestone". The problem is, it's awfully "spiky" . This led us to ponder the other side of this spectrum. In theory, the "optimal" path would be for us to sell just enough shares every month based on the cash needs of the company at whatever the right "price" is at that time.

In a way, the Y Combinator folks do this as the first step. They give founders just enough to get through the first few months and build a prototype. Many of the YC startups then go on to raise follow-on funding from VCs. But at that point, the funding process looks like the usual -- it becomes "spiky" again. We don't have a pure incrementally scaling model for startup funding anywhere.

Of course this scalable funding model probably only works in theory -- and even then, it's a stretch. There are lots of reasons why this doesn't work in practice. Here are just a few:

1. There's no efficient way to appropriately "price" the shares that frequently.

2. Entrepreneurs don't want to worry about whether they'll have the cash they need next month.

3. There's likely not going to be agreement on how much cash should be burned month-to-month.

4. There'd likely be some friction and transaction costs.

There are ways to mitigate some of these challenges, but I still don't think it's practical and would work. My VC friends (and yes, I do have those), would likely agree.

But, the geeky and analytical side of me still finds the purity of this model appealing for the same reason I like Amazon's EC2. You get what you need and grow incrementally instead of spikily (yeah, I made the word up).

What do you think? Yes, the idea is crazy and wouldn't work, but just how crazy is it?

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Why Startups Fail: Run Out Of Cash, Run Out Of Commitment

Posted by Dharmesh Shah on Thu, Feb 28, 2008


One thing I've been pondering this weekend is figuring out why startups fail.  But, in order to figure that out, I had to first decide what constitutes failure.  The more I thought about it, the more I realized that a definitive failure is when the startup simply stops trying.  And, the only reasons to stop trying are that you run out of cash, or you run out of commitment -- or both.

Let me elaborate a bit.  Lets say your startup had an unlimited amount of cash (hypothetically).  Whenever you needed money, you'd go to the money tree, pick some more cash, and go back to your business.  If this were the case, it's likely the number of startup "failures" would be vanishingly small.  Why?  Because you haven't failed yet, you simply haven't figured out the model that works.  As long as you still had commitment, you could keep going indefinitely.  Of course, there's no such thing as unlimited cash. 

Similarly, lets say you had a day job, and your startup didn't really require any cash.  And, you were fanatically committed to your vision or idea.    In theory, you could run your startup for decades and still never really "fail".  You'd just keep going and rather than being a failure, you'd be a startup that hadn't succeeded yet.  As long as you were committed, you could just keep going.

So, with that set of abstract concepts in place, let's dig in a little deeper.

Constraints On Cash and The Paradox of Venture Funding

Given that you have a finite amount of cash, how long your startup can survive is a function of how much cash you put in (revenues + funding) and how much you take out (expenses).  You'd think that a venture-funded startup would be more likely to succeed, because it has longer to "figure it out" (i.e. more time to get to success).  But, I'm not sure that's true.  What ends up happening is that VC-funded startups tend to increase their expense-base such that their time horizon is actually pretty short (about 1.5-2 years on a Series A funding).  On the flip-side, a bootstrapped startup might not have a large influx of cash, but might actually have more time to figure things out.

As an example, my first startup was bootstrapped.  No VC funding.  We did things the old-fashioned way.  We charged people money, and spent less than we made.  We were profitable from our first year of existence (and remained that way for 9+ straight years).  We were profitable, because we had no choice.  How much we spent was always a function of how much we made.  In the long run, we didn't grow as fast as we might have otherwise, but overall we succeeded

Contrast this to a couple of venture-backed competitors of this bootstrapped startup.  They had each raised $25MM+ in venture funding.  Of course, this was in the midst of the bubble, but the lesson is still similar (it's an issue of magnitude).  These companies ran through their cash, and couldn't get funding to keep going.  They failed.

This is just one data point, and it would be silly to try and generate any conclusions from it.  But, it does generate an interesting idea:  Perhaps startups should simply be trying to give themselves enough time to figure out what will work.  And, the time available is not a function of the amount of cash raised, but the amount of cash being consumed.  Profitable startups don't consume cash -- they generate it.  Hence, they've got more time.

For the record, my current startup, HubSpot, is venture-funded.  This means I have some work to do to figure out how to get to the point of having an infinite amount of time to figure things out (otherwise known as becoming profitable).  The good news is that profitability is something we actually talk about (which you would think would be a common conversation in startups, but it's not).

In a follow-up article, I'll discuss the tradeoffs between bootstrapping and venture funding a startup.  Having seen it from both sides, I'm beginning to form an opinion (always a dangerous thing). 

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VentureHacks: Peeking Inside The Blackbox Of Venture Capital

Posted by Dharmesh Shah on Mon, May 07, 2007

For those of you that are regular readers, you know that as a policy, I don't often do site reviews of other startup-related websites -- let alone pour gushing praise on a single one.  But, every know and then, I feel compelled to make an exception.
If you're a startup entrepreneur, head on over to Venture Hacks, read their content and subscribe to their RSS feed.  You'll be glad you did.
Disclaimer:  I don't know Nivi and Naval (the guys behind the site) and I have no personal bias or conflict.  I simply love the content on the site.
The reason I like the site so much is that it provides a rare glimpse into the black box of venture capital (and venture capitalists).  For the most part, the industry is pretty closed and very few (except insiders) really get a glimpse into the details of the process.  The reason is simple:  For those that know enough to write about it, there' s rarely an incentive to do so.  For those that don't know the innards of the business, you're not going to learn much that you couldn't pick up on your own through other sources.  VentureHacks is the rare case where the authors know what they're talking about and are brave enough to actually do it.  As an added bonus, they're witty and edgy too.
5 Reasons to Read VentureHacks
1.  VC Negotiation Is An Art Form:  As an entrepreneur, there are few things more "nuanced" that you'll deal with than raising institutional capital.  Even if you decide not to raise venture capital, a lot of these skills and deal-terms will likely show up in other dealings you have (strategic partners, M&A transactions, etc.). 
2.  The Devil's In The Details:  Most entrepreneurs focus too much energy on the "obvious" things like valuation.  Fact is, there are other, non-valuation terms in the VC deal (vesting, stock option pool, liquidity preferences, etc.) that have a significant impact on the economics of your deal.  It's easy to lure yourself into thinking you should solve for the highest valuation.  But, in most cases, that's sub-optimal.
3.  Great Advice Is Hard To Find:  As it turns out, good advice in the VC business is hard to find.  I would define good advice as a combination of competency (i.e. well informed) and objective (i.e. non-conflicted).  You can get close sometimes (via lawyers, adivsors, etc.) but it's really hard to find great advice.
4.  It's Not Enough To Be Smart: It's importat to remember that regardless of how smart you are, VC negotiation is not just a matter of raw intelligence.  Sure, it helps t have a few brain cells to understand the dynamics of a deal, but a lot is hidden away in the dark corners that you only ever learn by doing it.  It's also important to remember that the VCs do this for a living.  Hopefully, you don't (you're building businessees for a living).  You may be twice as smart as they are, but you're still at a disadvantage.  Try to even the playing field as much as you can.
5.  It's Intellectually Fascinating:  Even if you're not planning on raising funding yourself, I think you might find the whole VC game intellectually interesting.  Further, by getting yourself educated, you can perhaps help someone else that's a total newbie navigate the waters (See #3).
In short, go read VentureHacks.  It's worth the trip.  Nivi/Naval:  If one of you stumbles into this blog article somehow, drop me a line.  As a small token of appreciation, dinner's on me.

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Startup Financing: Questions and Answers From A Recent MIT Panel

Posted by Dharmesh Shah on Fri, Apr 13, 2007


This past week, I was on a panel discussion at MIT on the topic of raising funding for an early stage startup.
Also on the panel was Michael Greeley from IDG Ventures.  Michael was representing the VC perspective whereas I was there speaking primarily from an angel perspective (and alternative sources of capital like friends, family and fools).
Here are some of the questions that came up in the panel.  Since I didn't take notes during the panel myself, this is my best recollection from the two hour session.  Please note that this is not legal advice and if you are raising funding, you should consult counsel on all legal matters.
1.  If I raise capital from friends and family, do they have to be accredited investors?
Generally, yes.  Though there are ways for pool together interests from non-accredited investors, it's usually not advisable as it can get tricky and complicated.
2.  To raise VC funding, do I need to have a complete management team assembled?
Not necessarily.  Many VCs do not mind considering startups that have an incomplete management team.  Some will actually see gaps in the management team as a positive as that is an area that they can help with and bring value to the startup.
3.  How do I negotiate the highest pre-money value for my startup?
Entrepreneurs are often overly obsesssed with the pre-money valuation of their startups.  Though this is an important factor in the negotiations, it is by no means the only one.  Often, non-valuation factors like corporate governance, control and preference issues end up being much more important than the valuation.  Entrepreneurs should look at the deal as a whole and understand the details.
4.  Do investors read business plans?
For the most part, no.  A great business plan will not guarantee funding (or for that matter, even a meeting).  If you find the crafting of the business plan helpful, then you should do it.  But, investors do not generally require a detailed, written business plan. 
5.  Do I need to have formed a legal entity before approaching investors?
It's not required for investors prior to approaching them for funding, but is often a good idea because it is relatively simple and inexpensive to do. 
6.  How do VCs value companies?
This is an imperfect science.  A common approach is that VCs will determine what the company could be worth at the time of an exit (IPO or acquisition).  They then work backwards from there, determining what percentage of equity they need to own to generate the desired returns for their limited partners.  Of course, they apply this approach across a portfolio of investments expecting that a small percentage will generate significant returns.
7.  How do I find angel investors for my startup?
There's no single answer to this.  In major markets like Boston and San Francisco, many angel investors are members of angel groups.  These groups pool together expertise and resources in order to make better investment decisions.  Of course, there are also private investors acting independently.  Generally, you'll want to find investors that have a background in the particular idea you are pursuing -- or, an affinity for it.  Angel investors often invest for reasons beyond just pure financial return.  One common reason is to stay involved in the entrepreneurial process and help entrepreneurs build great companies. 
8.  How do I pick the "right" VC?
There are a number of considerations.  First, you should verify that the VC makes investment in the stage and type of company you are building.  Also, it is important to remember that you are not just picking a firm, you are picking a partner within that firm.  Ideally, you'll find a partner that has made similar investments in the past and has knowledge of your market. 
If you have any other questions, leave a comment and I'll do my best to answer.  Please remember that I'm not a VC, and don't play one on TV.  For content that is much better than this, I strongly recommend Ask The VC by Brad Feld.  It's a great source for information on the VC industry and the process of raising money.

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Why Not All Great Hackepreneurs Get Picked By Y Combinator

Posted by Dharmesh Shah on Thu, Apr 05, 2007

This week (Monday, April 2nd) was the deadline for startup founders to apply to be selected for the upcoming batch of startup companies to join Paul Graham's Y Combinator group.  If this year is like past years, YC will likely have received lots of applications (which means Paul's going to be a busy guy for at least a week).  And, if this year is like years past, then not all great hacker-entrepreneurs will get selected.

If you applied, and didn't get selected, this could be because of one or more of the following reasons:

1.  You lack a co-founder:  YC leans heavily towards startups with at least two co-founders.  It's possible you tried to find a co-founder, but couldn't.  Or that you found one, but it didn't work out.  Or that you just don't believe in co-founders just yet.

2.  The idea doesn't fit the profile:  YC seems to lean towards consumer internet ideas, or ideas for which an early user community can be built quickly and monetization can be done later.  If your idea is to develop enterprise software for the steel industry, chances are, you're not going to get picked. 

3.  Your application didn't stand out:  Paul's an awfully smart guy, but he's still not clairvoyant.  If your brilliance and passion didn't come through in the application, it's possible he just fundamentally missed it.  It happens.

4.  You really don't have what it takes:  It's possible that you simply are not particularly suited for a startup at this time and the smart folks at YC were able to figure this out.

Lets assume for a minute that you didn't make the cut at YC for reasons #1, #2, or #3.  So, what now?

I'm going to make you an interesting offer:  A chance to show off your hackepreneur skills.

Basically, what I'd like to do is find exceptional individuals that are really committed to building cool technology and are determined not to go work for "the man" and want to do something entrepreneurial (if you applied for YC in the first place, chances are, you fit this profile).

Here's a high-level look at what I have in mind:

1.  You don't necessarily have to have a co-founder.

2.  You'd still have to be move to Cambridge (or already be in the vicinity).

3.  I'll give you $15k to work for the summer and impress me with your talent.

4.  You have to be willing to work on an idea that is not your own (we have a few laying around).

It's basically an opportunity to join a small, highly entrepreneurial group working right on the MIT campus and work on an interesting project -- and get paid a bit of money for it.  After the summer is done, either we talk each other into doing something more permanent, you talk me into funding your original idea or we part ways as friends and hopefully had a shared positive experience. 

This is the first time I've done anything like this (but everything worthwhile I've ever done, started as an experiment).  To get  a sense for the kinds of things we're working on, you can visit some of our alpha (in development) projects at,, or learn more about my current startup at

If you're intrigued and think you might fit the profile, send a detailed email to hackepreneur (at)  Ideally, you'd send me the same kind of information you sent in for your YC application (you can get an old YC form here, if you need it).  If you're worried about revealing your idea, leave that part out.  I've got the capacity to accept three or four of you (assuming there is enough interest and we can work out a deal), but chances are, I'll only pick one or two.  I've got really high standards too. 

Hope to hear from some of you.  But in the meantime, I wish you the best of luck with your Y Combinator application. It would be great if you are one of the select few that make it in to Paul Graham's Gang For The Gifted.  But if not, perhaps I can provide an interesting "Plan B".

Void where prohibited, no purchase necessary, your mileage will vary and all the other usual disclaimers.

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Why Combinator? Should You Join Paul Graham's Gang For The Gifted?

Posted by Dharmesh Shah on Fri, Mar 23, 2007

April 2 is a significant date for many early-stage entrepreneurs as this is the deadline for applying to Paul Graham's Y Combinator this summer. If you don't know about Y Combinator, then I encourage you to read up on it as they are one of the few groups doing anything remotely interesting as it relates to very early-stage investment in startups (with an emphasis on software startups).

I've been following Y Combinator for a while now and have known people that have applied and been accepted, applied and not been accepted or consciously chose not to apply at all. In preparation for this article, I contacted several of these people to get a sense of the high-level pros and cons of joining the group. Thanks to all of those that offered their insights and comments.

Disclaimer: I am in no way affiliated with Y Combinator other than having followed the group for a while and having met both Paul Graham and Jessica Livingston. As an early stage investor myself, I guess I compete at some level, but my investment activity is not that significant and my approach is very different.

So without further preamble, here are my thoughts:

Why You Should (Or Shouldn't) Apply To Y Combinator

1. Forced Focus: Lots of early stage entrepreneurs have several ideas in their heads (and sometimes even several semi-working projects too). One of the toughest things to do in this situation is to actually pick one of the ideas and dig into it a little bit deeper. Since it is unlikely that Y Combinator will fund a "portfolio of ideas" from a single founding team, it forces a degree of focus. This is a good thing.

2. Great Network: I must admit that I'm a little envious of the network of exceptional people that are involved with Y Combinator. This extends beyond just Paul Graham and Jessica Livingston and goes to all the great people starting companies and those that are following what Y Combinator is doing and provide their support.

3. Instant Early Adopters: One of the hardest things to do when getting a new project off the ground is finding that early mass of users to actually try it and tell you why it sucks. No doubt it sucks, because all early software projects suck in some ways, you need to know why it sucks. Y Combinator is exceptionally good at delivering some instant users for any project/company that it is involved with.

4. Limited Funding: The amount of capital invested by Y Combinator in any founding team is limited. The amount is $5k base + $5k per founder. So, if you're a two person team, you can expect about $15k in funding. This is not a lot of money, but it seems to be enough for many teams of "capital efficient" founders to get a prototype built over the summer. I think the amount if a bit arbitrary, but I can't fault them for that as trying to make case-specific decisions doesn't scale. As an entrepreneur (even an early stage one), I just don't think that level of capital is interesting enough to make it worth taking outside capital. So, if you're applying to Y Combinator, chances are, you aren't really doing it for the funding – but mostly the other benefits.

5. Follow-On Investments: Y Combinator has a reasonably good reputation for producing "interesting" companies. As such, for those startups that need funding beyond what YC puts in, the fact that they've been one of the chosen few likely gives them an edge over a random startup looking for angel/VC money. Paul's network is also pretty strong and he can "draw in" outside investors. I was invited to the last "Angel Investor Day" the company held whereby each of the YC startups had a chance to present to a group of interested potential investors. What I liked about this particular forum (from the entrepreneur's perspective) is that it is held on their "home turf" and was relatively informal and easy-going. Very different from the unpleasantness that is usually associated with meetings with VCs.

6. Relocation Requirement: If you're accepted, YC requires you to relocate to one of two locations (Cambridge for the summer program and the bay area for the winter program). Whether you want to relocate or not is a personal decision, but I agree with the forced relocation. There is a lot to be gained by being in the physical proximity of both the YC network and being in one of the major centers of startup activity here in the U.S. I think for early-stage software entrepreneurs building web companies, it's particularly important to be in a conducive environment.

7. Projects vs. Businesses: Personally, I think YC is really selecting interesting teams and projects and not really concerned with selecting what may (or may not) become "real" companies. Though there's nothing intrinsically wrong with that – it's simply an investment selection thesis they've formed, I'm not convinced that it's really good for the entrepreneur. Though I like the idea of focusing on users/customers first and letting the details work themselves out later (i.e. projects), I think there's some value to actually thinking about business models earlier in the process. Simply identifying market opportunity (i.e. how do you make money) does not necessarily reduce creativity and your ability to succeed at building a product people will like. I think YC leans a bit too heavily towards the "build it and they will come" model and for inexperienced entrepreneurs (just about all of the YC founders), this can distort reality. It's much for fun to think about the project, and I'm all for being passionate about the right thing – but a little bit of balance is healthy.

8. Teams vs. Individuals: YC leans strongly towards selecting startups that two or more founders. I'm a strong advocate of this myself as I believe that having two or more founders in an early-stage startup significantly improves the chances of success. By explicitly stating this requirement, YC forces early-stage entrepreneurs to find co-founders. This is a good thing as if there's a problem with finding a co-founder, that's an early signal of a problem (either with the founder or the idea or both), and everyone's better off knowing that sooner rather than later.

9. Startup Valuations: Early-stage valuations are a black art. There's very little data to go on, so it simply ends up being a combination of market forces (who else is looking to invest) and prior precedence ("…most Series A VC startups are getting between a $4MM - $6MM pre-money valuation…"). Though the valuations that YC provides for early-stage companies is rumored to be low (< $500k in most cases), it's not really fair to call this valuation low. For one, they're not competing with many other early-stage investors. This is the stage I like to invest in (i.e. smart founding teams with a decent idea and the ability to crank out a product people might love), but to be candid, I'm no Paul Graham. So, in the absence ofno multiple potential buyers, there's no real "market" so it'd be wrong to call the valuation low or high. It just is what it is. If it were me, and all the other positive YC forces weren't in play, I'd be bootstrapping in the early days, validating the idea as quickly as possible and then looking for outside investors.

That's all I have for now. Overall, if it were me and I was just out of undergrad and looking to build a software startup, I think I probably would have applied to YC. I started my first company with $10k (so the funding itself is not that important nor necessary), but the other components are extremely helpful.

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4 Quick Tips on Raising Startup Funding Without A Plan Or A PowerPoint

Posted by Dharmesh Shah on Wed, Mar 14, 2007


Before we get too deep into this, let me clarify two things.  When I say without a “plan”, I mean without a formally written business plan – not that you should be clueless about what you want to do.  And, when I say startup funding, I’m talking more about early stage seed funding via angels (though most of these tips should apply to VCs as well).

As a member of the local Boston entrepreneurial community and a part-time angel investor, I come into contact with lots of new startups at various stages of the process.  It continually amazes me how much time some entrepreneurs spend time writing (and rewriting) a business plan.  Though the planning process can often be very useful, the degree of efficiency is often very low because taking your set of thoughts, ideas, brainstorming and research and trying to “capture” it in an externally consumable document is really hard and takes time.  For every 10 minutes you spend “thinking” about things (and actually planning the business), you might spend an hour trying to get it into a form that might make sense to the reader of the document.  And, the real irony is that very few people will ever read the full document.

One of the main reasons I’m not a big fan of business plans is that things change.  Instead of spending time writing a business plan and continually refining it, I’d much rather see an entrepreneur testing the market and refining the approach.  Josh Kopelman posted a great article on his recently titled “Failing Cheaper”.  It’s worth a read.


In any case, here are some thoughts I have on how you can increase your chances of getting funding without going through the misery of writing a formal business plan.  I’m assuming here that you have the ability to at least get an audience with a potential investor or investor group.  If not, then you have a different problem (and a business plan is probably not going to help with that).


Quick Tips On Raising Startup Funding Without A Plan Or A PowerPoint


  1. Have A Story:  People like stories.  Stories are exciting.  They have characters, they have a plot (even a small one).  Your story can be about a use-case (i.e. how will your product be used to solve a problem).  The story can be a description of how you uncovered the opportunity:  “There I was sitting in my office at a big company and we needed a way to do [X].  We were losing customers, hiring consultants and otherwise frustrated because we just couldn’t find a way to get [X] done.  Then I thought, here’s a simple way to solve part of the problem…”.  The story can be about some anticipated “future state”.  Example:  “In 2 years, we believe that those that grew up with the Internet will no longer accept the inefficiency that exists in most doctor’s offices today.”


  1. Demonstrate Leverage:  Different people call this different things (a common phrase is the “unfair advantage”).  Basically, what you need to do is communicate what kind of leverage you have (or are likely to get).  Some of my favorite points of leverage that few early entrepreneurs talk about is their capital efficiency.  Example:  “We’re two college students that have come across this really exciting market opportunity.  We think we can get build this with less than $25,000 while living on red beans and rice and working out of a shared apartment…”  This leverage point basically says you’re going to learn your lessons cheaper than others that may be doing the same or similar things.  [Note:  Everyone is going to have to learn some lessons, the question is how much money are you going to spend learning them?].  Other favorite leverage points of mine are:  access to a group of customers (from a prior job/life), access to a potential partner or distribution channel, access to unique “talent” that can build the product, pre-written IP (you’ve already got a lot of the code you need from a side project you’ve been working on), etc.  Basically, the idea here is to try and explain why you will have a disproportionate chance of not screwing this up completely.  


  1. Accept That Your Baby Is Ugly:  Just like most parents think they have beautiful babies, most entrepreneurs think they have beautiful startups.  In reality, just about all startups are ugly in the early days.  Don’t spend time trying to explain to others why your startup baby is beautiful.  It’s not.  Instead, spend energy explaining why your baby is going to grow up  into something that’s beautiful.  Describe how you’re going to tackle the problem of building the product, finding customers, dealing with support, etc.  


  1. Dream Big, But Plan Small:  In the early stage process, entrepreneurs that can get things done cheaply and efficiently are more likely to get funded.  The reason for this is simple.   Too much cash allows you to delude yourself into a false sense of what the market really wants and how you might deliver it.  The less cash you have, the more quickly you have to deal with the really hard things (like figuring out a way to get people to part with their money and buy your offering).  Most early-stage investors know this.  Even though I know an idea is likely going to take more cash than the entrepreneur things, I prefer backing people that believe they can do it with little cash and try to do so.  As Josh said, learn to fail cheaper.


If you’re new to the early-stage fund-raising game, it is easy to fall into the trap of thinking that the only thing standing between you and some angel funding is a pristine business plan with sparkling financial projections and prose that is so compelling that the checkbook practically leaps out of the investor’s pocket.  I’m here to tell you that this is simply not the case.  Most startups today simply don’t know enough about what they’re actually going to eventually become in order to get it down in the form of a business plan. 

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Why It Takes So Long To Raise VC Funding: The Emperor Has No Close

Posted by Dharmesh Shah on Fri, Aug 25, 2006

If you’ve ever attempted to raise VC for a startup, you likely know that it is a long process that takes months.  One thing I’ve found particularly intriguing is that outside of bubble-like times, the average time it takes a deal to get done (and money to exchange hands) doesn’t seem to change a lot.  Though many other industry sectors have shortened the delivery time of their offering in reaction to the fact that we live in a fast-faced society where timeliness trumps other factors, the VC industry doesn’t seem to have changed a whole lot.  Dell can ship you a custom computer faster, FedEx can deliver a package quicker and home loans can be approved more rapidly than what we have ever known before.  But, VCs still will take months to work through a deal and write a check.

My fundamental question is this:  Is the investment return a VC generates for its limited partners correlated somehow with the time spent in due diligence?  The reason I find this question interesting is that there is a sneaking suspicion I have that VCs, like other people, form very quick decisions on whether a startup is or is not funding-worthy.  If this is the case, and they’re forming their decisions early-on anyways, it seems inefficient to spend inordinate amounts of time on due diligence – as it likely will not change the original decision often-enough.  So, I asked VC friends as to why they do this.  Why spend months on due diligence if it is not likely to change the outcome?

The answer, paraphrased from VCs, goes something like this:  “It takes some amount of time to get “comfortable” with a startup before we write a check.  Not all of this time is spent doing deep due diligence.   A lot of the time is just spent letting the deal “bake” in our (the VCs) minds.  Often, it is during that “think” time that we’ll come up with insights into the business and market that we would not have otherwise.  Sometimes, it’s simply a matter of getting educated on the space, educated about the founders, etc.  Often, during this “due diligence” time (where often, not that much due diligence time is being spent), we’ll come up with good reasons not to do the deal.  These reasons would not have occurred to us in the early conversations.”

This actually makes pretty good sense.  If the VCs are not having to invest all that much time/energy in “deep” due diligence in the weeks and months that pass, and they do indeed “discover” things that cause them to filter out opportunities that are later determined not to be of sufficient value, then it seems that VCs should do exactly what they’re doing.  Why close a deal in days or weeks?  You sometimes have a small risk of losing the deal, but since everyone else behaves this way anyways, there’s little that an entrepreneur can do to accelerate the process.

From an entrepreneur’s perspective, the situation looks something like this:  The VC will likely make a spot decision (within a day or two) as to whether you’re worth even investing the time in.  But, you’re not going to get a direct “no” (I’ve written about this phenomenon before).  But, from the time that they make the mental decision to invest, they are looking to leave themselves enough time to talk themselves out of the deal.  If they fail to talk themselves out of the deal, they’ll close it. During this time, where there is no possible way they’re going to reach a “close”, VCs are likely to ask entrepreneurs for deeper, more exhaustive information.  The frustrating part is that not all of these requests are so they can learn more about the company, which will influence their decision.  .  Some of it is simply to ensure there is adequate time for them to talk themselves out of it.  Unfortunately, it’s hard to know the difference, you have to respond to all due diligence requests as if they are somehow going to change the outcome.  Such is the life of an entrepreneur raising money.

Interesting Idea From Left Field:  What if a new VC came along that offered entrepreneurs a quicker, less painful process to raise capital for their startup?  Would this VC be able to attract a better class of entrepreneur?  Entrepreneurs that would rather focus on their business and customers than on raising capital?  Or, would this new VC be doomed to failure because they were not allowing themselves sufficient “bake time”?  Could some of the risk be mitigated by having a “probationary” period for the capital.  For example, in a $4MM round, the VC has the ability to retract up to 90% of the investment within 90-120 days if the deal isn’t what they thought it was?  This kind of approach will likely never occur, but if you look at entrepreneurs as the “customer”, then I’m pretty sure there are a pool of customers out there that would like more rapid “service” than they’re getting now.  Will we see innovation in the VC sector anytime soon, or is it by design immune to the need for change?
If you are a VC, or play one on TV, would love to hear your thoughts on this.  What am I missing?

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