Key Moments
How to Raise Money with Marc Andreessen, Ron Conway, and Parker Conrad (HtSaS 2014: 9)
Y CombinatorKey Moments
Founders should focus on building exceptional companies, as 'being so good they can't be ignored' attracts investors more than any pitch. However, even the best companies face risks, and savvy fundraising involves strategically peeling away these layers of risk with each funding round.
Key Insights
Venture capital returns are driven by outliers, with ~15 out of thousands of funded companies generating ~97% of all returns in a given year.
Invest in 'strength versus lack of weakness' by identifying extreme strengths in a startup, even if it has flaws, as this often leads to the biggest winners.
Founders should bootstrap as long as possible, as businesses that can operate with minimal external funding are highly attractive to investors.
Raising capital strategically involves 'peeling away layers of risk' (e.g., founding team, product, market acceptance) with each funding round, with milestones validating further investment.
SV Angel invests in one company for every 30 they review, processing ~500 companies annually with their team of 13, prioritizing network referrals.
The choice of seed investors is crucial, as strong introductions from trusted VCs significantly increase a startup's chances of securing future funding rounds.
The outlier-driven nature of tech investing
The venture capital ecosystem is fundamentally a game of extremes, where immense returns are generated by a tiny fraction of companies. Marc Andreessen highlights that out of approximately 4,000 venture-fundable companies seeking capital annually, only about 200 receive funding from top-tier VCs. Of these, a mere 15 are projected to reach $100 million in revenue, and crucially, these 15 companies account for roughly 97% of all returns for the entire VC category in that year. This stark reality underscores the necessity for VCs to seek out 'extreme exceptions' or outliers, as conventional or average-performing companies do not drive the sector's profitability. Ron Conway echoes this by emphasizing that even when meeting thousands of entrepreneurs, he is constantly discerning leadership potential from the outset, often asking about the personal problem that inspired the product.
Investing in strength and embracing flaws
A key philosophy for investors like Andreessen Horowitz is to 'invest in strength versus lack of weakness.' This approach contrasts with the more traditional 'checklist' method of evaluating startups, where founders, product, and initial customers are ticked off as satisfactory. While checkbox deals are common, they often lack the extreme strength that makes a company truly remarkable and an outlier. Conversely, companies with significant strengths often come with notable flaws. Andreessen argues that adhering strictly to a 'no flaws' policy would mean missing out on many of the biggest winners in venture capital history. The emphasis is therefore on identifying a startup's core, exceptional strength along a critical dimension and being willing to tolerate other weaknesses. This requires a nuanced understanding of a company's potential beyond superficial metrics.
The power of being 'so good they can't ignore you'
Both Ron Conway and Marc Andreessen, along with Parker Conrad, emphasize that the most effective strategy for fundraising isn't perfecting a pitch, but rather building an exceptional company. Citing comedian Steve Martin's advice, 'be so good they can't ignore you,' they posit that if a business is poised for gigantic success, investors will actively pursue it. Parker Conrad's experience with Zenefits illustrates this: he aimed to build a business that could potentially bootstrap, thus assuring investors of its inherent strength and cash-flow potential. This is what made it 'incredibly easy' to raise funds. Essentially, an investor's capital is a consequence of substantial progress and proven value, which is far more impactful than a persuasive presentation alone. This philosophy suggests that founders should prioritize business development over fundraising tactics.
Strategic risk reduction through funding rounds
Marc Andreessen introduces the 'onion theory of risk,' conceptualizing a startup as having numerous risks from day one, including founding team, product, technical, launch, market acceptance, revenue, and cost of sale risks. Fundraising, in this framework, is a process of systematically peeling away these layers of risk as the company progresses. Seed funding is typically used to address initial risks like team and product validation. Series A rounds aim to de-risk further aspects, such as scaling the engineering team or acquiring early customers. Each funding round should be justified by achieving specific milestones that have demonstrably reduced previous risks and prepared the company for the next stage. This provides a clear narrative for investors, showing how capital has been deployed effectively to de-risk the venture and create value.
The importance of seed funding and strong introductions
Ron Conway's SV Angel focuses on seed-stage investments, aiming to be the first institutional investor, typically with checks of $250,000 to $2 million. His firm reviews about 500 companies annually and invests in roughly one per week, with a strong reliance on its network, investing in only one out of every 30 reviewed. He stresses the importance of a compelling, concise one-sentence pitch that clearly explains the product. For founders, securing the right seed investors is paramount, as highlighted by Parker Conrad. These initial investors lay the groundwork for future funding rounds by making crucial introductions. A 'really good introduction' from a venture capitalist who the target investor trusts and respects dramatically increases the likelihood of a positive outcome, far more than a lukewarm referral.
Navigating valuation and dilution
When discussing terms, founders should be aware of valuation thresholds. Parker Conrad shares an anecdote where his seed round initially sought a $12-15 million cap but found infinite demand once he lowered it to $9 million, suggesting that certain 'magical' or psychological thresholds significantly impact investor appetite. While the exact valuation might not matter as much as getting the funding, founders must be mindful of dilution. Giving away too much equity, particularly in early rounds, can be demotivating and limit future upside. While 10-15% dilution is often cited for seed rounds, and 20-30% for Series A, investors are ownership-focused. Mark Andreessen advises founders to consider the point at which their own ownership percentage starts to demotivate them. Some companies are passed on by investors due to 'destroyed' cap tables where outside investors already own too much, hindering motivation for the founding team.
The investor-founder relationship: A lifelong commitment
The relationship between founders and investors is often equated to marriage, especially for firms like SV Angel, which views its investments as 'for life.' This long-term perspective emphasizes the importance of trust, mutual respect, and shared goals. Investors look for founders they can learn from and respect, and founders should seek partners who provide significant insight and support, especially during challenging times. Venture capitalists like Andreessen Horowitz have a strict conflict policy, investing in only one company per category to avoid conflicts and preserve future opportunities. The limited capacity of General Partners to sit on boards means that each investment decision has a significant opportunity cost, foreclosing other potential deals. Therefore, selecting the right investors with domain expertise and a strong network is as critical as the funding amount itself.
Operational excellence and strategic financing in capital-intensive businesses
For capital-intensive companies, the 'onion theory of risk' becomes even more critical. Founders must be meticulously precise about future capital requirements, milestones, and risk reduction strategies across multiple funding rounds. Raising exactly what is needed, without excess, is key to avoid future dilution issues. While VCs can help, these companies might also explore venture debt or lease financing, which demand a higher degree of operational excellence and precision to avoid loan covenant breaches. Unlike consumer tech where an MVP might suffice, enterprise software or SaaS companies often require a full product before customers will buy. In such cases, the judgment heavily relies on the founder's track record and the team's execution capabilities, as the idea itself is less proven at the early stage. The quality of the plan and operational acumen are paramount for securing investment.
Mentioned in This Episode
●Software & Apps
●Companies
●Organizations
●Books
●People Referenced
Venture Capital Fundraising: Key Takeaways
Practical takeaways from this episode
Do This
Avoid This
Venture Capital Success Rates (Annual)
Data extracted from this episode
| Category | Number of Companies | Percentage of Returns |
|---|---|---|
| Venture Fundable Companies | ~4,000 | N/A |
| Top Tier VC Funded | ~200 | N/A |
| Companies reaching $100M Revenue | ~15 | ~97% |
Typical Ownership Dilution by Round
Data extracted from this episode
| Round Stage | Typical Dilution Percentage |
|---|---|
| Seed Round | 10-15% |
| Series A | 20-30% |
Common Questions
Investors look for founders who exhibit leadership, are rifle-focused and obsessed with their product, and possess strong communication skills. Ideally, the inspiration for the product comes from a personal problem the founder experienced.
Topics
Mentioned in this video
Founder of SV Angel, shares criteria for investing in founders and companies, emphasizing leadership, focus, communication, and decisiveness.
Founder of Zenefits, shares his experience with seed rounds, the difficulty of fundraising, and the importance of building a strong business over a strong pitch.
Comedian and author whose advice "Be so good they can't ignore you" is highlighted as foundational for startup success.
A Stanford professor and angel investor who introduced Mark Andreessen to Google.
Co-founder of Google, whom Mark Andreessen met to secure an investment.
Co-founder of Google, whom Mark Andreessen met to secure an investment.
Co-founder of Airbnb, whom Andreessen Horowitz was impressed with for his maturity and judgment.
Co-founder of Airbnb, whom Andreessen Horowitz was impressed with for his maturity and judgment.
Co-founder of Airbnb, whom Andreessen Horowitz was impressed with for his maturity and judgment.
Founder of Facebook, cited as an anomaly where one person's vision primarily drives the company's success, unlike the trend of needing strong co-founders.
Mentioned for his analogy of venture capital investing being like a ticket with a limited number of holes to punch, representing limited investment capacity.
An investment firm that invests in seed-stage startups, focusing on being the first investor and typically investing between $1-2 million.
Parker Conrad's current company, which he found attractive because it seemed like a business he could build without raising money initially.
A startup accelerator program known for its advice on identifying the right investors and its 'Demo Day' which helps founders connect with VCs.
Mark Andreessen's most successful investment, made in 1999, which led to significant returns.
A company that was an investor in Google and with whom Google sought an OEM deal.
A highly successful company that Andreessen Horowitz invested in during a growth round at a billion-dollar valuation in 2011.
Mentioned as a company that, despite its success, faced significant challenges along the way, highlighting the importance of a strong team and investor relationships.
Mentioned as an example of a company that Andreessen Horowitz invested in, which subsequently prevented them from investing in a competitor like Facebook due to conflict policy.
Used as a reference point for consumer-focused companies that may require less intensive management compared to capital-intensive enterprises.
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