How should founders handle investor rejections?

Founders should 'believe the no' but not necessarily 'believe the why' behind it, as investors are not always transparent. It's crucial to prepare for many rejections and not let them discourage you from a promising startup.

What are the signs of a good investor?

A good investor is respectful of your time, responds to questions, makes decisions quickly, and doesn't create unnecessary work. Top-tier investors (A+ and A) actively help the business or materially change its direction.

Why is it important to have a designated CEO when raising a Series A?

By the Series A stage, investors want to know who is ultimately in charge. Presenting as co-CEOs without a clear decision-maker can be a red flag, as demonstrated by the Preposterous/Andreessen Horowitz example.

What are common founder mistakes during fundraising?

Founders can make mistakes like having a 'cash crunch' and scrambling for funds without a clear plan, or over-adjusting their product based on investor feedback, leading to a 'Frankenstein idea' that nobody wants.

Should you adjust your startup based on investor feedback?

While it's wise to listen to feedback, founders shouldn't drastically alter their product or strategy solely based on investor suggestions. This can lead to a product that investors like but customers don't want, a common issue during hype cycles.

Can investors test founders during meetings?

Yes, some investors employ tactics to test founders' reactions, such as deliberately making noise with a candy wrapper while the founder is pitching, to gauge their composure under pressure.

What is the core purpose of a startup, beyond raising money?

The ultimate goal of a startup is to create something that solves a real problem and builds an incredible business, not just to raise money or gain status. Fundraising is a tool to achieve this larger objective.

Key Moments

Startup Experts Share Their Investor Horror Stories

Y Combinator

Science & Technology4 min read27 min video

Aug 17, 2023|132,563 views|2,687|135

YC Y Combinator yt:cc=on

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Key Moments

TL;DR

Startup experts share their worst investor meeting stories and offer advice on navigating fundraising.

Key Insights

Investor meetings can go spectacularly wrong, leading to questioning one's own venture.

Bad investor behavior ranges from extreme disrespect to manipulative "tests" of founders.

Founders should believe a 'no' but not necessarily the 'why' an investor gives.

A great investor is respectful of time, responsive, decisive, and supportive.

Founders should have realistic expectations about fundraising timelines and investor value-add.

The YC Investor Database helps founders gather feedback and make informed decisions.

Fundraising is a means to an end (building a business), not the primary goal itself.

Founders' focus should remain on users and product development, not solely on raising capital.

Investors are not necessarily experts in your specific business; you are.

Be professional and prepared, but remember that investor meetings are a two-way street.

EPIC FAILS AND UNPROFESSIONAL CONDUCT

The video opens with a series of alarming anecdotes about disastrous investor meetings. One partner recounts an experience in London where an investor kept founders waiting for hours, only to meet them while eating lunch, barefoot, picking his feet, and smoking a cigarette indoors. This bizarre behavior, a clear power play, resulted in no investment. Such stories highlight how investor ego and status games can overshadow the merit of a business, a practice expected to wane as founders gain more leverage.

THE RISKS OF MISPLACED FOCUS AND CULTURAL BLIND SPOTS

Another founder shared their experience with an investor who spent their pitch time quizzing them in Chinese rather than discussing business. This felt like a waste of valuable time and indicated a potential misalignment. This illustrates a key takeaway: investors may not always understand the founder's perspective or the impact of their process. Founders are advised to recognize these situations as potential red flags indicating a poor fit, emphasizing that every meeting is a mutual interview.

STRATEGIC FUNDRAISING AND EXPECTATION MANAGEMENT

A crucial piece of advice is to 'believe the no, but don't believe the why.' Founders often receive vague or misleading reasons for rejections. The key is to prepare for numerous rejections and to have realistic expectations; fundraising often takes longer and requires more meetings than anticipated. The focus should shift from finding the 'perfect' investor to finding one who is respectful of time, moves quickly, and respects the founder. YC helps founders manage these expectations, guiding them away from common pitfalls.

THE FOUNDER'S DELUSION AND THE 'CASH CRUNCH' MISTAKE

One founder recounted a "cash crunch" email sent to seed investors that backfired. Driven by founder optimism, the email framed the situation as a problem for investors to solve, leading to an expensive, unproductive trip to meet associates instead of decision-makers. This highlights the importance of a clear game plan and organized communication during fundraising. Investors need to see a strategic fit, not just a founder scrambling to solve an immediate cash shortage.

DEFINING A GREAT INVESTOR AND THE YC ADVANTAGE

A great investor is defined by criteria such as respecting time, responding promptly, making quick decisions, and generally staying out of the way (an A-minus investor). An 'A' investor actively helps the business, and an 'A+' investor materially changes its direction for the better. The inverse, dealing with 'C' or 'D' tier investors who are distracting or negative, is far worse. Y Combinator provides tools like an investor database, allowing founders to leverage community feedback to vet potential investors.

THE TWO-WAY STREET OF INVESTOR RELATIONS

Investor meetings are presented as a two-way street, akin to auditions where both parties must present professionally. Founders should avoid showboating or treating fundraising as the ultimate goal. The primary objective remains building a valuable business. Investors are not infallible experts; founders are the authorities on their own businesses. Being challenged respectfully is good, but being demeaned or having personal lines crossed is unacceptable, indicating a lack of fit between founder and investor.

THE DANGER OF SHAPING THE PRODUCT TO INVESTOR WHIMS

A significant risk for founders is over-adjusting their product based on investor feedback, especially during hype cycles. While incorporating feedback is important, creating a 'Frankenstein' product that appeals to investors but lacks user traction is a recipe for disaster. Sophisticated founders know how to play up currently popular aspects of their startup without fundamentally altering their core product strategy, separating the 'game' of fundraising from the actual execution of building a wanted business.

BALANCING THE FUNDRAISING GAME WITH CORE BUSINESS OBJECTIVES

Raising money is described as a necessary 'game' that founders must learn, but it should not overshadow the core mission of building a great company. Instead of seeking validation solely from investor reception, founders should prepare for negative feedback and focus on user needs and product development. The ultimate goal is to create something people want, with fundraising serving as a tool to achieve that objective, not as an end in itself.

KEY TAKEAWAYS FOR FOUNDERS

The overarching message is to approach investor meetings with preparation, realistic expectations, and a clear understanding of who you are and what you are building. Avoid the ego-driven games, recognize red flags, and remember that investor meetings are a mutual evaluation. Professionalism from both sides is key. The focus must remain on building a sustainable, valuable business, using funding as a means to that end, rather than a measure of success.

Mentioned in This Episode

●Companies

●Concepts

●People Referenced

Investor Meeting Best Practices: Dos and Don'ts

Practical takeaways from this episode

Do This

Prepare for the worst-case scenario in investor meetings.

Research your investors and understand their beliefs and writings.

Have a clear game plan for fundraising, especially when asking for more money.

Focus on your users and building your product; fundraising is a means, not an end.

Be professional in your communication and scheduling.

Remember that investor meetings are a two-way street; interview them as they interview you.

Keep investors updated, especially if they are A+ investors.

Prepare your mind for potential 'no's or negative feedback.

Avoid This

Don't be shaken by difficult or unprofessional investors.

Don't assume investors understand your business better than you do.

Don't fall into the trap of adjusting your product solely based on investor feedback.

Don't make investors wait excessively long.

Don't make assumptions or ask inappropriate personal questions.

Don't show up late or no-show for meetings.

Don't let investor feedback be the sole barometer of your startup's potential.

Don't get discouraged by initial rejections; prepare for rough times.

Investor Quality Scale

Data extracted from this episode

Rating	Description
A-	Makes a decision quickly, signs docs quickly, wires money quickly, and you never hear from them again.
A	Does anything to help the business.
A+	Does something to materially change the direction of the company.
C, D, E, F	Distracting, creates busy work, argues, and can be a net negative.

Common Questions

A terrible investor meeting can involve extreme waiting times, unprofessional behavior from the investor (like eating with their hands while picking their feet), or personal/inappropriate questions that make founders uncomfortable.