Should startups focus on investors or customers during fundraising?

Startups should prioritize customers above all else. Focusing on pleasing investors like they are teachers to get an 'A' is a common mistake; instead, dedicate waking hours to solving customer problems, which truly drives success.

How much money should a startup raise?

Founders should raise only what they critically need and nothing more. Raising excess cash can lead to inefficiency and reduced innovation, unlike revenue from customers which fuels organic growth.

Is it better to fundraise early or wait for revenue?

While some believe fundraising before metrics provides leverage, having a growing metric or MVP with customers provides significantly more leverage. It's better to build traction and demonstrate demand first.

Why is customer obsession important for fundraising?

Customer obsession is crucial because it aligns the startup's efforts with market demand. When 80-90% of a founder's time is spent talking to customers and building product, the company is likely on the right track.

What is the analogy for money in a startup context?

Instead of thinking of money as 'oxygen' needed to survive, consider it like 'food'. While necessary, too much food can be detrimental, similar to how excessive raised capital can stifle innovation and lead to waste.

Which companies should early-stage founders emulate?

Founders should emulate companies with at least $100 million, and preferably $1 billion, in revenue. Learning from these large-scale successes provides more valuable insights than looking at local peers or recent unicorn valuations.

How did Facebook and Google founders retain control?

Founders like Mark Zuckerberg and Google's founders retained significant control because their companies were often profitable early on or had massive traction before significant funding. This gave them leverage to raise on favorable terms.

Key Moments

YC Founders Made These Fundraising Mistakes

Y Combinator

Science & Technology5 min read8 min video

Nov 29, 2021|90,308 views|2,114|49

YC Y Combinator yt:cc=on Fundraising Startups VC

Save to Pod

Key Moments

TL;DR

Founders often fundraise out of fear before product-market fit, but this diminishes leverage and company ownership, a mistake even giants like Google and Facebook avoided by prioritizing customer traction first.

Key Insights

Fundraising is easiest when a company has strong, growing metrics; one founder spoke to 140 investors before securing angel checks when their startup wasn't growing, but raised their seed round in a week when it was.

Fear-based fundraising, driven by a belief a product will fail, leads founders to seek investment before facing customer rejection, but this often results in a harder sell and less favorable terms.

Focusing on investors as the primary audience (like seeking an 'A' from a teacher) rather than customers is a common pitfall, as early-stage success hinges on deeply understanding and solving customer problems.

Successful companies often don't view money as oxygen but more like food – necessary for survival, but too much can be detrimental; customer revenue acts as the true oxygen and growth driver.

Founders who raise only what they need and stay lean tend to own more of their company at exit and are forced to innovate more than those who raise excessively.

Comparing your startup aspirations to multi-billion dollar revenue companies provides more valuable lessons than emulating nearby unicorn valuations or local peer groups.

The leverage advantage of growing metrics

One of the most straightforward ways to fundraise successfully is by demonstrating strong, growing metrics. A YC founder shared that when their startup lacked growth, they approached 140 investors and only secured two angel checks. However, when the company started growing, well-known VCs actively sought them out, and their seed round was raised in just one week. This highlights a critical principle: momentum in key performance indicators significantly shifts power dynamics in favor of the founder. The implication is that early traction and demonstrable growth are far more persuasive to investors than a compelling story without a proven track record.

Fundraising fueled by fear erodes leverage

A prevalent mistake founders make is fundraising out of fear—specifically, the fear that their product is fundamentally flawed and will inevitably fail. This leads them to seek investment before the market has a chance to reject their offering, believing it's safer to secure funds before the 'world realizes' their product isn't wanted. While this might seem rational to an individual founder experiencing doubt, it's a detrimental strategy. Investors can often sense this lack of conviction. Instead of pursuing potential customers and iterating based on feedback, founders enter the fundraising process with less leverage, making it harder to secure favorable terms or even any funding at all. This fear-based approach often backfires, leading to a more difficult and potentially unsuccessful fundraising round.

Customer obsession versus investor appeasement

Many early-stage founders mistakenly center their efforts on appeasing potential investors rather than focusing on their customers. This behavior often stems from a lifetime of seeking validation from authority figures, whether in school or previous employment. The mindset shifts to viewing investors as teachers whose approval (an 'A' grade) unlocks capital. However, in the startup world, this approach is counterproductive. The true path to success lies in 'customer obsession'—dedicating the majority of your waking hours to understanding and pleasing your customers by solving their problems. A simple time audit can reveal this imbalance: if 80-90% of your time is spent talking to customers and building product for them, you're likely on the right track. Conversely, if only 20% or less of your time is dedicated to customer-facing activities, it's a strong indicator that your priorities are misaligned for early-stage growth.

Money as food, not oxygen

A common misconception is that money is like oxygen for a startup, essential for survival. However, drawing an analogy from Brian Chesky of Airbnb, money is more accurately likened to food: necessary, but excess can be harmful, leading to unhealthy habits or outcomes, much like how too much food can be detrimental in many parts of the world. The true 'oxygen' for successful companies is revenue generated from customers and the pull created by their demand for the product. Companies driven by customer demand naturally grow and innovate because they have a built-in need to operate efficiently with their resources. This customer-centric 'oxygen' not only fuels growth but also tends to result in founders retaining more ownership and experiencing greater satisfaction.

The benefits of raising only capital needed

Founders are often advised to raise only the capital they absolutely need and no more. The inherent tendency is to find ways to spend any money available, so staying lean and focusing on fundamental business operations is crucial. Companies that avoid raising excessive amounts of money, particularly from a position of desperation or low leverage, tend to retain more equity. This is exemplified by companies like Facebook and Google. Facebook was reportedly profitable even in its early days, avoiding rounds raised on poor terms. Similarly, Google had significant traction as a popular search engine before its first substantial funding, allowing them to raise on very favorable terms. This strategic fundraising, rooted in strong customer traction and avoiding desperation, enabled their founders to maintain substantial control and ownership.

Strategic peer emulation for ambitious founders

When seeking inspiration, founders should compare themselves to those who have achieved significant success, ideally companies with hundreds of millions or even billions in revenue, rather than focusing on a local peer group or the latest unicorn valuation. Emulating the strategies and journeys of multi-billion dollar companies, even if they are older, offers far more valuable lessons than trying to match the perceived success of less established peers or vanity metrics. The choice of who to look up to and emulate is a powerful one for ambitious individuals; by setting sights on proven, large-scale success, founders can learn more effectively and chart a course that leads to comparable achievements.

Mentioned in This Episode

●Companies

●Organizations

●People Referenced

YC Founder Fundraising Best Practices

Practical takeaways from this episode

Do This

Focus on growth metrics to gain fundraising leverage.

Prioritize pleasing customers and solving their problems.

Raise only the amount of money your startup critically needs.

Stay lean and focus on building strong fundamentals.

Emulate successful companies with substantial revenue (100M+ or 1B+).

Compare yourself to industry leaders, not local peers or competitors in pitch competitions.

Avoid This

Do not fundraise out of fear that your product is bad or will fail.

Do not focus on investors as the primary benchmark for success; focus on customers.

Do not treat money like 'oxygen' that you need constantly; it can lead to excess.

Do not raise more money than you need, as it reduces innovation and ownership.

Do not compare your initial progress to unicorn valuations or smaller peer groups.

Common Questions

The best time to fundraise is when your startup has strong, growing metrics, which gives you leverage. Fundraising before having any metrics, or out of fear of product failure, can put founders in a weaker position.

Topics

Mindset & Self-Improvement Business & Entrepreneurship Founder Mindset Venture Capital Lean Startup Customer Acquisition Startup Fundraising Growth Metrics Company Ownership

Mentioned in this video

Companies

Facebook

Cited as an example of a company that was always profitable and raised money on good terms, leading to founder Mark Zuckerberg retaining significant ownership.

Y Combinator

Startup accelerator whose founders' 'rookie mistakes' are shared in the video.

Google

Mentioned as an example of a company whose founders maintained control due to early fundraising leverage and traction.

Airbnb

Mentioned in the context of Brian Chesky's advice on not treating money like oxygen but like food.

People

Mark Zuckerberg

Founder of Facebook, highlighted for retaining significant ownership due to the company's early profitability and smart fundraising.

Brian Chesky

CEO of Airbnb, shared advice with Y Combinator batch about money versus food analogy.

Dalton Caldwell