Fundraising the Paul Graham Way

The Philadelphia 76er’s are a professional basketball team with a long and proud history. But during the 2015 season, they became notorious for something else. They intentionally tanked, compiling a 9-73 record for third worst season in NBA history.

The general manager at the time, Sam Hinkie, had a plan to rebuild the team through the draft. But in order to access the best prospects, he had to dismantle the current team, get the worst record, and secure top draft picks. His method became known as “Trust the Process”.

Did it work? While the 76er’s have yet to win an NBA Championship, they have a star player known as “The Process”, have not had a losing record since 2016, and have had six straight playoff appearances. Sticking with the process in this case turned a terrible team around.

Raising money is a painful experience for first-time founders. There is the dread of asking for large sums of money from people and process that seems completely opaque, mostly driven by the twin investor anxieties of losing their investments and missing the next big thing.

To navigate this minefield, we took inspiration from Paul Graham, Founder of Y Combinator. He wrote an treatise on fund raising in 2013 while still active with YC and investing in dozens of startups per cohort. He knows what he is talking about.

But do his insights into the fundraising process still hold true in 2024? Yes, for the most part, because the behavior of investors has not changed. However, some of the tactical parts of fund raising have changed with more investors investing in startups and more transparency overall.

You might not have time to read a dense 8,845-word essay though. We condensed it down to the key points to help you focus on what’s important. Just as the 76er’s never strayed from the process, neither should you even though you may be tempted by investor promises. If you stick to these 24 principles, you will eventually find the right investors to back you!

1. Don't raise money unless you want it and it wants you - Fundraising is a huge distraction. Only do it if you need it to accelerate growth and you're at a stage where investors will actually give it to you. Raising too early wastes time and burns bridges.

2. Be in fundraising mode or not - Either be 100% focused on fundraising, or don't do it at all. It's so mentally consuming that it will kill your startup's progress if you try to do it half-heartedly. When you decide to raise, go all in until it's done.

3. Get introductions to investors - Investors rarely invest in startups that approach them cold. Get a warm introduction from a trusted source such as an investor who has just invested in you, then other founders or respected startup community leaders.

4. Hear no till you hear yes - Assume every investor is a no until you get an unequivocal yes with no contingencies. Investors will often lead you on because they want to wait.

5. Do breadth-first search weighted by expected value - Talk to all potential investors in parallel, but prioritize those with the highest expected value (likelihood of saying yes multiplied by how good their yes would be).

6. Know where you stand - Always know exactly where you are in the process with each investor. What concrete next steps remain until they make an investment and when will those steps happen? Don't leave a meeting without knowing this.

7. Get the first commitment - The hardest part of fundraising is the first investor commit. After that, momentum builds as investors look to one another for validation, making subsequent investors exponentially easier to close.

8. Close committed money - The deal isn't done until the money is in your company's bank account. Stay on top of investors until that happens.

9. Avoid investors who don't lead - You need investors who have conviction and will say yes when you need them to. Avoid anyone who talks about needing a lead investor.

10. Have multiple plans - Don't get fixated on a specific fundraising number. Different plans will appeal to different investors, so prepare multiple plans based on raising different amounts.

11. Underestimate how much you want - There is no downside to start with a lower number than you want. Starting lower makes it easier to get initial momentum and create urgency. If there's demand, you can always raise more.

12. Be profitable if you can - You are in a much stronger negotiating position, if you get to profitability without raising money. Investors will have to persuade you to take their money to grow even faster.

13. Don't optimize for valuation - The most important things are raising the money you need to grow and getting good investors that support you. Valuation is at best the third priority.

14. Yes/no before valuation - Don't discuss valuation until investors have decided they want to invest. Get the commitment first, then figure out the price.

15. Beware "valuation sensitive" investors - Some investors try to negotiate down your valuation to get the best deal for themselves. Avoid them and focus on investors who are excited about your company, not the price.

16. Accept offers greedily - If an investor makes an offer you're happy with, take it. Don't hold out for something better that may never materialize.

17. Don't sell more than 25% in seed round - For a seed round, sell no more than 25% of the company so that you have enough equity left to incentivize yourself and investors in future rounds.

18. Have one founder handle fundraising - If you have co-founders, the CEO should lead fundraising so the others can stay focused on building the company.

19. Stop fundraising when it stops working - Raise enough money to hit your next major milestone, and when you can't easily raise any more, stop.

20. Don't get addicted to fundraising - Some founders begin to enjoy fundraising. They think their fundraising prowess will make their startup successful. What really matters is building a great product and business.

21. Don't raise too much - Too much money leads to bad habits, like hiring too many people too quickly and excessive spending.

22. Be nice - The startup world is small and has a long memory. The investors that say no this time might say yes the next time if you make a good impression.

23. The bar will be higher next time - Each time you raise money, the expectations will be higher. With each round after seed, investors will expect you to have produced significantly more progress.

24. Don't make things complicated - Keep fundraising as simple as you can and avoid needless optimizations. Fundraising is not your job, it's simply a means to enabling your startup to scale.

Here are four more points we added to Paul’s already excellent essay to adapt it for how things have changed in the startup world over the past decade.

1. Build relationship now to fundraise later - Be strict about when you are officially in fundraising mode. However, speaking to partners, principals, and even associates beforehand can help when you do begin to fundraise later.

2. You will need a deck and a story - Paul said to have as executive summary, but the most investors these days expect a pitch deck and that you can clearly pitch your story. For investors that want a narrative summary, use Notion or similar tool.

3. Track your fundraising progress - Fundraising is like sales, and easy to lose track of statuses if you do not record everything in one place. Spreadsheets work, but a low-cost CRM with workflow and notifications can be more effective.

4. Automate but personalize your investor outreach - You will contact hundreds of investors, so some founders automate their outreach. Be careful of getting flagged as spam though. Use automation and AI, but make sure to personalize the output.

Fundraising will be one of the hardest things you to do as a founder. If you follow these simple principles though, you will maximize your chances of successfully raising money from the right investors at the right time. What would you add, subtract, or change from the above as you think about your own fundraising journey?

Mark & Basil

What's been going on in the AWS world the past month? Well the short answer is a lot! But for startups building on AWS, which product announcements were potentially the most helpful?

We scoured the news to find the AWS updates that were both super exciting and most relevent for startups covering a range of areas from Generative AI to Activate credit usage to security to the Marketplace!

So here are some of the major announcements and the links to find more details on each release:

• AWS Activate credits now accepted for third-party models on Bedrock

• Meta Llama 3 models are now available in Amazon SageMaker JumpStart

• Tackle complex reasoning tasks with Mistral Large, now on Bedrock

• Secure approach to generative AI with AWS

• Amazon Cognito customers can secure access to APIs using Amazon Verified Permissions

• Introducing AWS Deadline Cloud: Set up a cloud-based render farm in minutes

• AWS Marketplace announces simplified and reduced listing fees for sellers

• Congratulations to the PartyRock generative AI hackathon winners (if you have not tried PartyRock, definitely give it a spin)

We had a big drop this week with the launch of MVP Lab, our YouTube channel launched by Basil and dedicated to sharing advice and tips about building and scaling startups. Check out the first episode of MVP Lab and subscribe!

Meanwhile Mark wrapped up a week in San Francisco to attend Startup Grind Global and Llama Lounge, one of the top AI meetups in the Bay Area! Startup Grind is a community close to our heart having participated in many of their events over the past decade. Hats off to Derek Andersen, the visionary and leader of Startup Grind for creating such a welcoming nad supportive community.

While there are many AI meetups across the Bay Area, few match the star power and quality of Llama Lounge. Many props to Jeremiah Owyang who is one of the best community organizers we know and also a shout out to 500 Global for hosting a pre-event get together. It was amazing to meet so many awesome AI startups and founders in one evening!

Where to next? Mark will be on a webinar "Breaking Down Barriers to Startup Innovation with Ansys and AWS" with AWS partner Ansys to talk about our respective startups programs. Register for the event on April 30, 2024 11:00 AM (EDT) using this link. Then Mark will be in Morocco for the Connect Summit Morocco while Basil will be hunkered down editing a bunch of new MVP Lab videos, so make sure you hit that subscribe button!