11/10/28, 9:39 AM “The Hacker's Gude to Investors archive.today S#ved tom fipipaugaham-conigiasionvesirrimt sarc 11 Mar 2017 0022:18 UTC tie eat napshots fom host pauahm.con One Se We an Dsante Fngetnaemae Osuna THE HACKER'S GUIDE TO INVESTORS ‘it 2007 (his essay is derived trom a keynote talk at the 2007 ASES ‘Summit a Stanford.) “The wore of investors is foreign one to most hackers—pertly| because investors are so une hackers, sha partly because they fend to operate in sccret. Te been dealing wit tls word for ‘many years, bot asa founder and an investor, ana sll don't fully uneerstand it In this essay 1m going to st some of the more surprising things Te learned about investors. Some I ony learned inthe past year Teaching hackers how to éeal with investors is probably the second most important thing we do at ¥ Combinator, The most Important thing for 9 startup is to make something goas. But everyone knows that's impartant. The dangerous thing about Investors is that hackers don't know now ite trey know about this strange wor 1, The investors are what make a startup hub, [About a year ago I ted to igure out what you'd need to ‘reproduce scan Valley. deeded the citeal ingredients were Fich people and nerds—investors and founders. People ae all You ‘eed to make tecmnology, and all the other people will move, IFT had to narrow that down, 1 say investors are the ling factor. Not because they contribute mare tothe startup, but simply Because thay'e least willng to move. Theyre nich. Theyre rot going to move to Albuquerque Just because there are some Smart nackers there they could invest in. Whereas hackers wil ‘ave tothe Bay Area to find investors. 2, Angel investors are the most critical “There are several types of investors, The two main categories are angels ond Vos! VCs Invest other people's mony, and angels Invest tele own. ‘Touch they're less well known, the angel investors are probably the more erica ingredient n creating asllcon valley. Most companies that VCs invest in would never have made fe that fri ‘angels had’ vested fist VCs say between hal an three {Quarters of companies that raise Sees A rounds have taken some ‘outside investment already. [3] Angels are willing to fund rskier projects than VCS. They also give ‘eluable advice, because (une VCs) many have been startup ‘ounders themselves. Google's story shows the key rle angels ply. A lot of people ‘know Goosle raised money ror Klsner and Sequoia. What most Gon't realize is how late. That VC round was a series B round; the bremoney valuation was $75 milion. Google was already 3 Successful company at that point. Realy, Google was funded with angel money 1 may seem od that the canonical Sicon Valley startup was fundee by angels, But this is not so surprising. Rsk is always proportionate to reward. So the most successful startup of lis likely to nave seemed an extremely rleky bt at fst, and that ‘exactly the kina VCs won' touch Where do angel investors come from? From other startups, So startup hubs Ike sileon Valey benert from something like the ‘marketplace effect, bul shited in time: startups are there Decause startups were there. htps:farchivesHUKBH 1019/10/28, 9:39 AM “The Hacker's Gude to Investors 13. Angels don’t like publicity. It angels are so important, why do we hear more about VCs? Because VCs lke publicty. They need to market themselves to the Investors who are their “castomers’—the endowments and bension funds and rich families whose money they invest—anc Sls to Founders who might come to ther fo Runng, [Angels don't need to market themselves to investors because they invest their own money. Nr do they want to market themstves to feunders: thay don’t want random pooale pestering them with business plars. Actually, nelther do Ves. Beth angels, ‘nd VCs get deals almost exclusively through personal Introdvetions [2] ‘The reason Vs want a strong brand isnot to draw in more business plans over the transom, But so ty win deats when competing against otter VCs, Whereas angels are rare in direct competition, because (2) they 60 fewer deals, (0) theyre Nappy forsplie them, and (e) they invest at @polat where the stream Is broader 4. Most investors, especially VCs, are not lke founders, Some angels are, or were, hackers. But most UCS area liferent type of people: they're cealmakers. It you're @ hacker, here's a thought experiment you can run to Understand why there ae basicaly no hacker Ves: Mow would you Tike 8 Jod where you never got to make anything, but instead pent sl your time tatening to otner people leh (mostly trib) Drojects, deeding whether to fund them, an sting on their boards if you did? That would nat be fun for most hackers Fackers Ike to make things. Ths would be lie being an ‘sdministrator, ‘because mest VCs are a diferent species of people from funders shard te know what they're tinking. If you're 2 hacker, the las ime you had to deal wth these guys was high school: Maybe in ealege you walked past thelr Fraternity on your ‘aay tothe lob, But don't underestimate ther, Theyre as expert Inthe wore 3s you ae n yauts. What they'"e good at is reading Deope, and making deals work o thar advantage. Think twice Before you try to beat them at that. '5, Most investors are momentum investors, ‘Because most investors are dealmakers rather than technology people, they ganeraly don uncerscand wnat you're coing. new a 2 founger that most VCs didn't ge technology, {ao knew some made aot of money. And yet it never occurred to me Ul recently to put those two Was togetner ond ask "How can VCs ‘make money by investing In stff they dont understand?” ‘The answer is that theyre ke momentum investors. You can (or «ould once) make alot of money by noticing sudgen changes in Stock pries, When a stock jumps Upward, You buy, and when Suddenly drops, you sell In effect you're insider trading, without ‘knowing wnat you know. You just know someone knows something, and that's making the stock move. This is how most venture investors operate. They dont try to look at something ene preci whether i il take of They win BY ‘otiing thet something is taxing of @ Ite sooner than everyone ls. That generates almost as good returns as actualy belng able to pick winners. They may have to pay aisle more than they would irthey got m atthe very Beginning, but only a litle, Investors always say what they really care about is the team, ‘Actually what trey care most about 6 your trac, then what bother Investor tink, than the team, Ifyou don ya have any trafic, they fallback on number 2, what other investors tink ‘Ad this, as you ean imagine, produces wild escilations in the “stock price” of @ startup, One week everyone wants you, and they're begging not to be cutout ofthe deal But all tas for fone big Investor to cool an you, and the next week no ane wil ‘Fetur your phone cals. We regularly neve startups go from ot {cold or cold to hota matter of Gays, and IReally nothing has changed, ‘Tete are two ways to deal with ths phenomenon. If you're feeling really confident, you can ty 0 ide t-You can start by asking a comparatively lonly VC for a small amount of money, and then after generating interest there, ask more prestigious Ves for larger amounts string up 2 crescendo of buzz, and then htps:farchivesHUKBH 21011/10/28, 9:39 AM “The Hacke’'s Guide to Investors "el at the top. This Is extremely risky, and takes months even if you succeed. Twouldn' try ie mysell. My advice isto er” on the ice of safety: when someone offers you 2 decent deal, Just take ‘and get on with buling the company. Sartups win of lose based on the quality o thelr product, net the qualty of their funding deals, 6. Most investors are king for big hits. Venture investors lke companies that could go public. That's vinere the big returns are, They know the odds ef any inaiviual ‘tortup going public are small, but they want to invest in those {hat atleast have 2 chance af going publ ‘Currently the way VCs seem to operate i to invest ina bunch of companies, mest af which fal, and one of whichis Google, Those few big wins compensate for losses on ther other investment, Wihot this mean is Unat most VCs wil ony invest in You i You're 4 potential Google. They don't care about companies that are 8 Safe bet to be acquired for §20 milan. There needs tobe a chance, however small of the company becoming realy 1 Angels are diferent inthis respect, They're happy to invest in 8 company where the most likely outcome fs 8 $20 milion ‘cauistlon i they can do eat a fow enough valuation. But of Course they lke Companies that could go public too, Se naving an Ambitous long-term plan pleases everyone. IT you take VC money, you have to mean ty because the structure of VC deals prevents early acqusitans. I you take VC money, they wont let you sll ey 7. Ves want to Invest large amounts “The fact that they're running investment funds makes VCs want te invest large amounts” A typleal VC fund is now hundreds of| millon of colas. If $400 millon has tobe invested by 10, partners, they have to invest §40 millon each. VCS usualy sit on fhe boards of compares they und Ifthe average deal size was 1 millon, each partner would have to sit on 40 boaras, which ‘would aot be fun. So they prefer bigger deals, where they can put 3 Tot of money to work a once Ves dont regard you as a bargain if you don't need a lot of, ‘money. That may even make you less attractive, because it ‘reans ther investment creates less ofa Dorie to erty for compettors. ‘Angals are ina alferent position because theyre investing thar ‘own maney. They're happy to invest small amourts--sometimes 83s Title as 520,000—as long as tne potential returns look good ‘enough, So if you're doing something inexpensive, go to angels £8, Valuations are fiction. cs admit that valuations are an artifact. They decide how much ‘money You need and how much ofthe company they want, and those two constraints Yield valuation. Valuations increase asthe sze of the investment does. A company that an angels wing 9 put $50,000 nto at 2 ‘aluaton ofa milion can take $6 millon from VCs at that Veluaton, That woulé leave the founders less than a seventh of the company between them (since the option pool would also come out ofthat seventh). Mast VCS woulen't want that, which Is vy you never near of deals where a VC nvests 86 milion ata Dremoney valuation of $1 milion I valuations chenge depending an the amount invested, that shows now far they are from reflecting any kind of value of the company. Since valuations are made up, founders shoule't care too much about them. That's not the pat to focus on. Th fact, 2 Hah ‘Valuation can be bac thing Ifyou take funding at premoney ‘eluaton of $10 millon, you wort be seling the company for 20. Youll nave to sell for over 30 forthe VCs to get even a Sx return, ible i ow to them. ore likely theyll want you to hold aut for 100, But needing to gota high pres decreases the chance of getting Bought ot all many companies can buy You for $10, hillon, but only a hand?l for 100. And since a startup i like a Dass/fall course for the founders, what you want to optimize Is ‘Yur chance of 2 good autcame, nat the percentage ofthe ‘company you keep. htps:farchivesHUKBH 3it011/10/28, 9:39 AM “The Hacke’'s Gude to Investors ‘So why do founders chase high valuations? They've tricked by ‘misplaced ambition. They fel they've achieved more if they get @ Figher valuaton. They usually know ather founders, and if they get a higher valuation they can say "mine is bigger than yours” But funding isnot the real test, The real fst the final autcome for the founder and getting too high a valuation may just make a {0d outeame ise key, ‘The one advantage ofa high valuation is that you get less lution. Sut there is anctrer less sexy way t> achieve that: Just take less money. ‘9. Investors took for founders like the current stars ‘Ten years ago investors were looking forthe next Bil Gates. This| ras 2 matake, because Microsofe was a very snomalous startup ‘They started aimost asa contract programming operation, and the reason they became huge was that IBM happened to drop the PC standare in thee lp. ‘Now all the VCS are looking forthe next Larry and Sergey. Ths is a goed trend, because Larry and Sergey are closer tothe ideal startup founders, Historically Investors thought t was important fr a founder to be an expert In business. So they were will to fund teams of MBAS ‘nine planned to use te money to pay arogrammers te bul ther broduct for them, This slike funding Steve Ballmer in the noe {hat the programmer hel hire Bil Gates-—kind of backward, as the events of the Bubble showed. How most VCs know they should be funcing technical guys. This 's more pronounced among the very top funds; the lamer anes stil want to fund MBAS. If you're = hacker, t's good news that investors are looking for Latry and Sergey. The bad news is the only investors who can do ‘right are the anes who knew them when they were coupte of CS grad students, not the concent media stars ey are today. \Wihat investors stil don’ get s now clueless and tentatve great founders can seem at the very Begining, 10. The contribution of investors tends to be Underestimated Investors do more for startups than give them money. They're helpful in doing deals ane arranging introductions, and some of the smarter ones, paricularly angels, can give good advice about the proguet In fact, 14 say wnat separates the great investors from the ‘madioer ones i te cualty of thelr advice. Most investors ve advice, bul the top ones give good aves Whatever help investors aive a startup tends to be Lndevestimated. It's to everyone's advantage to let the world think the founders thought of everything. The goal of the Investors is for the company to become valuable, and te Company seems more valuable it seems like ai the good eas came from within ‘This trend is compounded by the obsession that the press has vith founders. Ina company founded by two people, 10% of the eas might come from the frst guy the hire Arguably they've Gone a bad Job of hiring otherwise, And yet this guy wil be almost entirely overlooked by the press. | say tis a5 a founder: the contribution of founders s alvays fverestimated. The danger here ls that new founders, king at ‘existing founders, wll think that theyre supermen that one couldnt possibly equal onesel Actlly they have a hundred ‘ferent types of support people Just ofscreen maxing the whole Show possiae. [3] 11. VCs are afraid of looking bad. ‘ve been very surprised to dscaver how tins most VCS are They seem tobe afraid of looking bad to Ce partners, and perhaps also tothe mized parcners~the people wnose money hey Invest. You can measure tis Fear in how much less risk VCs ere wing to {oke. YoU can tell they won't make Investments forthe fund that they might be wiling to make themselves a5 angels. Though i's fot quite accurate to say that VCs are less wilng to take risks. ‘Theyre less wiling tod things that might look bad. That's not the same thing, htps:farchivesHUKBH 4is019/10/28, 9:39 AM “The Hacker's Gude to Investors For example, mast VCs would be very reluctant to invest ina startup founded by a pair of 18 year old hackers, no matter how brillant, Because if the sterup ‘aed thelr pareners could turn on them and say "What, You invested $x million of our money in 3 Dairof 18 year olds? Whereas fa VC vested in a startup founded by tree former banking executives In thelr 40s Who planned to outsoures thelr product development™which to my ‘ind s actualy alot riskier than investing Ina ptr of realy Smart 18 year olas—ne coulent be faulted, (Ft fled, for making Such an apparently prudent investment, {As a triend of mine said, "Most VCs can't do anything that woule Sound bad tothe xin of doatuses who run pension funds." Angels an take greater risks because tey don't have to answer to anyone 12, Being turned down by Investors doesn’t mean much. ‘Some founders are quite dejected when they get turned down by Investors. They shouldn't take lesa much to heart. To star with, Investors are often wrong. It's hard fo think af a successful startup that wasn't tumed down by investors at some point. Lots Of Vox rejected Google, So ebviouly the reaction of investors is hot a very meaningful test. Investors wil ofan reject you for what seam to be superfcal reasons, Tread of one VC who turned dawn startup simaly Because they'd gven away so many Ite bits of stock that the eal required too many signatures to close. [2] The reason Investors can get away with this Is that tney see so many deals. e-doesn't matter they underestimate you because of some surface imperfection, Because the next best deal willbe almast as Sand, Imagine picking out apples ata grocery store, You grab one With a tle bruise, Maybe I's Just # surface Braise, but why even Bother checking when there are so many other unbruised apples fo choose trom? Investors would be the fist to acmit they're often wrong. So nen you get rejected Dy investors, dont think “we suck,” but Instead sk "do ne suck?” Rejection isa question, nat an answer 413, Investors are emotions 1've been surprised to discover how emotional investors can be, You'd expect them to be cold ond calculating, oF a east Dusinessi¢e, but often they're not. Fm not sure fi’ their postion of power that makes them tis way, ofthe large sums of ‘money invalveg, But investment nagetiations can easly turn Dersona IF you offend Investors, theyll leave n'a hut. [Awhile ago en eminent VC frm offered a series A round to @ Storup we'd seed funded. Then they Reard rival VC rem was aso interested. They were so afraid that they'd be rejected in favor ofthis other frm that they gave the startup what's known as.an "exploding termshaet." They had, I think, 24 hours to say Yes oF no, oF the deal was et, Exploding termsheets are a Somewhat dubious device, but not uncomman. What surprised ‘me was ther reaction when I called to talk about fT askea I {hey stil be Interested inthe startup ithe eval VC dict end Up making an offer, and they said no, What rational bass coule they Rave hae for saying that? If they thought the starup was worth investing in, what eifferenee should it make what some ‘other VC treught? Surely twas ther cuty to tele tied Dartners simply to invest In the best opportunites they found {hey shoula be delighted iftne other VC saié no, because It would ‘mean they'd overlocked a good opportunity. But of course there ‘ras no rational base for ther decision, They just couldnt stand he ies of taking this rival rms rejects, In this case the exploding termsheet was not (or net only) 2 tactic to pressure the startup. Is was mare lke the high school trick of breaking up with someone before they ean break up with you Tp an sashee assay. T said that VCs were alt like high schoo! Gis. A few VCs have joked about that characterization, butane fave asputed 44, The negotiation never stops til the closing. Most deals, for investment ar acquisition, happen in two phases ‘There's an intial phase of negotiation about the big questions. If this succeeds you get a termsheet, so called because I outlines the key terme of 2 deal, A termehest ls not lagaly bincing, butt |S derinte stop. I's supposed to mean that a deal is goin to happen, once tre lawyers work out al the deals In theory these htps:farchivesHUKBH 51011/10/28, 9:39 AM “The Hacker's Gude to Investors etals are minor ones; by definition al the important points are Supposed ta be covered inthe lermsheet Inexperence and wishful thinking combine to make founders feel that wnen they have atermsheet, they have a deal. They want. there to be a deat; everyone acs lke they have a dea, 0 tere ‘must be a deal But there lst and may not befor several ‘ants. A lot can change fr 2 startup In several montns. 1's not Uncommon for invests and acquirers to get buyer's remorse. So You nave to keep pushing, Keea selng all she way to the close Otherwise all the “minor” details left unspecified in the termshect wil be interpreted to your disadvantage. The other side may even Dreak the dea i they do that, theyll usualy seize on some technicality or daim yourmisles them, rater than admitting they changed thelr mings. It can be hard to keep the pressure on an investor or acquirer all the way to the closing, cause the most effective pressure Is competion fom ather investors of acquirers, and these tend to Grop away when you get a termsheet. You should try to stay 25 ‘lose fnende a you can witn these vale, but the most important thing is just to keep up the momentum in your startup. The Investors or acquirers chose you because you seemed hot. Keep Going whatever made you seem hot. Keep releasing new features; keep getting new use’s; keep getting mentioned inthe press and in Boge 15, Investors like to co-invest. 1\e been surprised how wiling investors ar to split deals. You ‘might tink that they found 2 good deal they'd want I alto themselves, out they seem postvely eager to syndleate. This S| Understandable with angels; they investon a smaller scale and Gon't ke to have too much money ted up in any one deal. But Yes also share deals ot. Why? arly I think this ls an artifact ofthe rule 1 quoted earlier: after traf, VCs care most what other VCs think. A ceal that has ‘ule VCs interested in t's more likely to close, 50 of deals that close, more wil have multe investors, “There is one ratonal reason to want multiple VCs in 2 deal: Any Investor who co-ivests with you is one less investor whe could fund a competitor Apparently Kleiner and Sequola didn't tke pling the Googie dea, out did atleast have the acvantage, fom each one's pont of view, tat tere probably wouldnt be a competitor funded by the other. Spiting deals twus has similar ‘advantages to cantusing paterity. ‘But [think the main reason VCs like spiting deals isthe fear of looking bod, If another firm shares the ded, then In the event of failure wil seem to hove been a prudent choice consensus Gecison, rather than Just the whim ofan inlvidal partner 16, Investors colluds Investing isnot covered by antitrust law, At eas, I better not be, because investors regularly do things thet ould be llega cterwlse. I know personaly af cases where one Investor has {alked ancther out of making a competitive offer, using the promise of sharing future deals, In principe investors are all competing forthe same deals, but the spirit of cooperation is stronger than the spit of competition. ‘The reason, agains tat here are so many deals. Though @ professional investor may have a closer relationship with @ founder ne invests in chan with other investors, his relationship with the founder is only going to last a couple years, whereas Ns ‘lationship with other fers wil last Hs whole career There it So much st stake in his interactions with other investors, but there wil be alot of them. Profesional investors are constantly trading lite favors Another reason investor stick together I to preserve the power of investors as a whole So you wil nt, as of this writing, be able fo get investors into an auctlon for your seres A round. They's ‘Father lo the cel than establish a precedent of Ves ompetively blading against one ancther. An efficent startup funding market may be coming n the distant future; things tend tormove in that direction; but i's certainly not here now, 17. Large-seate Investors care about thelr port {any individual company. “The reason startups work so wall is that everyone with power also htps:farchivesHUKBH ei1011/10/28, 9:39 AM “The Hacker's Gude to Investors thas equity. The only way any of them can succeed isi they all Go. Ths makes everyone naturally pul in the same direction, Subject ta alferences of opinion about tacts. ‘The problem is, larger scale investors don't have exactly the same motivation, Close, Sut ot ential. They don't need any given Stortup to succeed, Hike founders 6, jst thelr portfolio os 2 ‘ale to. Som borderline cases the rational thing for them to do |S to sacrifice unpromising startups. Large-scale investors tend to put startups in three categories: successes, fares, and te "ving deed'—companies that are lugging elong but dont seem kely inthe immediate future to {get bought or ge public To the founders, "ving dead" sounes Farsh. These companies may be far from falures By ordinary Stancards, aut they might as well be from a venture investor's Doint of view, and they suck up just as much time and attention 238 the successes, Sof sch 9 company has two possible Strategies, a conservative one thats slghtly more tkely to work Inthe end, ora risky ane that within ashore te wil thar yield 2 giant successor kil the company, VCs wil push forthe kil-or- {ure option. To them the company is already a write-of. Better to have resolution, one way or the other, as soon as possible If startup gets ito real trouble, instead of trying to save it Ves ‘may Just sell ea alow pice to another of thar portfolio. Companies. Pl Greenspun salé In Founders at Work that Ars Digite's VCs di thes to chem, 18. Investors have different risk profiles from founders. Most people would rather a 100% chance of $1 millon tran a 20% chance of $10 millon, Investors are rich enough to be ‘ational and prefer te latter. So theyl aways tend to encourage founders to keep rolling the die. If¢ company is soing wel, Inwestrs will want founders to turn down mast acquisition offers ‘nd indeed, most startups that tun down acquisition offers [Utimately de beter. Su ls stl arerasing forte founders, because they might end up with nething. When someone's ‘offering to buy you for a price a which your stock is worth $5 hilion, saying no is equivalent to Roving $5 milion and betting Sllon ane Spin ofthe roulette whee Investors wil tell you the company is worth more. And they may be right But that doesnt mean fs wrong to sel Any franca ‘advsor who put all is eens assets in the stock ofa single, Drivate company would probably lose his Heense fri More and mere, Investors are letting founders cash out partally. ‘That should correc: the problem. Mest founders have such low standards that they feel rich with 2 sum that doesnt seem huge {oinvestors, But this custom fs spreacing too slowy, because VCs fate affaa of seeming responsible. No one wants to be te fst ‘Ye ta give someane fuck-you money and then actualy get told “fuck you" aut unl tis dose start to hapaen, we know VCs are being too conservative 19. Investors vary greatly. ‘Back when I was a founder {used to think all VCe were the same. ‘din Tact they 20 al lank the same. They're al what hackers ‘all "sults." But since ve been dealing with Vs mare I've Teamed that some suits are smarter then ors ‘They're algo Ina business where winners tend to keep winning and losers to keep losing. When a VC frm nas been successful in the past, everyone wants funding from them, so they get the plex ofa tre new deals, The salereinforcng nature of te venture funding market means thatthe top ten frm lve in 3 completely aferent world from, say, the hundredth. As well 35 beng Smarter, tay tand to be calmer and mare upstanding; they don't ‘heed to do fy things to gat an edge, and don't want to becouse they have mere brand to protect ‘There are only two kinds of Vs you want to take maney from, if you have the luxury of choosing: the "top Uer® VCs, meaning bout the top 20 or so ims, plus a few new ones that are not {mong the top 20 only because they haven't been around long enough. 1s particularly Important to raise money trom a top frm if you're ‘a hacker, because they're more confident. That means theyre Tess likely to stick you with a busineze guy a= CEO, Ike Vee usec te do inthe 90s. Ifyou seem smar: and want fo doit, they let you run the company, htps:farchivesHUKBH 71019/10/28, 9:39 AM “The Hacker's Gude to Investors 20. Investors don't realize how much it costs to raise ‘money from them. Raising money is a huge time suck at just the point where startups can least afford it Tes not unusual for Ito take five or sixmosths to ose a funding ound, Six weeks i Tost, And falsing money i nat Just something you can leave running 3s 2 background process. When you're ralsing money, t's inevably the main focus of the company. Which means Buldig the product Suppose a ¥ Combinator company starts talking to VCs after emo day, ane Is successfl in raking money fom them, casing the deal after a comparatively short 8 wacks. Since demo cay occurs after 20 weaks, the company is now 18 weeks ol. Ralsing ‘money, rather than working onthe product, has been the Company's main focus for 44% of ts existence, And mind yOu, {tis an example where Pings tured ut we When 2 startup does return ta working on the procuct after 2 funding round finally doses i's asi they were returning to work after a montys-ong fines, They've lost most oftheir omentum, Investors have no Idea how much they damage the companles they invest in by taking so long to co t. But companies do. So there iss big opportunty here fora new kind of venture fun thet Invests smaler amounts at lower valuations, but promises to either close or say no very qulkly. If there were sucha fim, 1 Fecormmend Ie to startups In preference to any other, no matter ow prestigious. Startups Ive on speed and momentum. 21. Investors don’t like to say no. ‘The reason funding deals take so long to dase Is mainly that Investors cant make up their minds. VCs ae not big companies; they can do 2 deal in 24 hours if they need to. But they usually Tet the Initial meetings stretch out over a couple weeks, The ‘reason i the selection algorithm mentioned earle. Most don't {ey to preci whether a startup wil win, but to notice Quikly that 1 aleady fs winning. They care what the market thinks of you and what other VCs think of you, and they can' judge tose just from mesting you Because they're investing in things that (2) change fast and (b) they don't understand, 9 1tof investors wil eject you in 8 Way that can later be clalmed not to have been a rejection. Unless you ‘now this world, you may net even realize youve been rejected Here's a VC saying no irre relly excited about your oroject, ane we went to keep in lose touch as you develop i further. ‘Translated into more straightforward language, this means: We're ret Investing in you, but we may chango our mins ii ooks ke You're taking otf Sometimes vey re more cancid and soy ‘xplietly that they ned to “see some tration” They invest in {yout you star to get lots of users. Sut so would any VC. So al heya saying is tat you're stl at square 1 Here's a test for decising whether a VC's response was yes or no {ook dawn at your hands, Are you holding a termshest? 22, You need investors, ‘Some founders say "Who nocds investors?" Empirically the answer seems to be: everyone who wants to succeed, Practcaly ‘very successful startup takes outside investment some poi Why? What the people wn think they don't need investors forget |S that they wil have competitors. The question Is rt whether you need outside investment, but whether it coulé help you at all the answer is yes, and you don't take investment, then compettors who do wil have an advantage aver you. And in the Storup word. Ile advantage can expand into at Mike Morte famously said that he invested in Yahoo because he thought they had a few weeks’ lead over ther competitors, That ‘may not have mattered quite so much as Me thought, because {Google came along tree years later ana Kicked Yanao's 968. Sut there Is something in what he Said. Sometimes a small lead can Grow into the yes haf ofa binary choice Maybe asi gets cheaper to start a startup, wil start to be htps:farchivesHUKBH ano19/10/28, 9:39 AM “The Hacker's Gude to Investors possible to succeed in a competitive market without outside fonding. There are certainly costs to fasing maney. But as ofthis ‘noting the empirical evidence says i's a net win 123. Investors like it when you don't need them. {ot of founders approach investors as if they needed thet Dermissionto start a companyas init were Ike getting into lage. ut you don't need investors fa star most companies they ust make Ie easier ‘And infact, investors greatly prefer tif you don't need them What exces them both consciously and unconsciously, the Sort af startup thet approaches them saying “the trains leaving fhe station; are you mor out?" not the ane saying “please can we have some money to staré a company?” Most investors are “bottoms” inthe sense tht the startups they lice most are tase that are rough with trem. When Gooste stuck kleiner and Sequoia with a $75 millon premorey valuation, their ‘eaction was probaly ‘Ouch! That feels so gave." And they were ‘ight, werent they? That deal probably made them more than any other they ve done, ‘The thing ls, VCs are pretty good at reading people. So don’ try tact ough with them unless you realy are tne next Google, of theyll see through you ina second. Instead of acing tough, what ‘mont startups should do 's simply always have a backup plan Always have some alternative plan for geting started any given Investor says.na. Having one the est insurance against seeding one So you shouldnt start a startup that's expensive to stat, because then youl be atthe mercy of investors I you uiimately want to 0 sometning that wil costa lot, start by doing a cheaper subset fof and expand your ambitions when and i you fase more money. Apparently the most lcely animals tobe lft alive after a nuclear war are cockroacnes, because they're so hard to kil. Thats what You went to be 98 startup, italy, instead of @ beautiful but fragile flower that needs to have its stem in a plaste tude °o Support tse, beter to be small, ugly, and naastrucible Notes [1] I may be underestimating VCs. They may play some behind the scenes role in TPOs, which yau ultimately need if you want to create a sean vay. [2] A few vcs nave an aml adcress you can send your business plan to, but the number of startups tat get funded this way Ts basically zero, You should always get a personal introduction—and toa partner, not an associate [) Several people have told us that the most valuable thing about star scnanl was that they gotta see famous startua funders and realized they were Just ordinary guys. Though welre happy to provide this service, this not generally the way we Ditch startup schoo to potential speakers. [4 Actually this sounds to me like @ VC who gat buyer's remorse, then used a technically to get out f the deal. But is teling that ‘even seemed a plausible excuse, ‘Thanks to Sam Altman, Paul Buchel, Huteh Fishman, and bert Moris fr reacing drafts ofthis, and to Kenneth King of| |ASES for inviting me to speak ‘Comment on this essay hitps:farchivesHUKBH orto11/10/28, 9:39 AM The Hacker's Guide to Investors nitpssarchive sYUKBH 0110