Q: What’s the Brutal Truth About Fundraising for Startups?
The brutal truths are:
- Everyone wants to fund the same thing. The earlier stage you are, the more different folks will come to different conclusions based on very limited data. E.g., just the team. Or just a few customers. But almost everyone is still looking for the same thing. Unicorns. They just may roll the dice differently in the early days based on whatever tiny signs of pre-success you may have. More on that here.
- Pattern matching is rampant. If you are really going to “meet” with 1,000+ founders a year, that’s really too much to process. There are good types of pattern matching, and bad types. Bad types create huge hurdles to founders that do not look, act and talk like privileged founders. “Stripe for _____” or “3 great young engineers from Stanford.”
- You are just a product. And so are VCs themselves. You may just 1 shot at it, but investors need to make 20–40 per fund. So each start-up they invest in is a bet, and really, a product. And their own investors (the LPs) literally view VC firms as different financial products to potential pick from. Like Vanguard funds, almost.
- Most successful start-ups are new versions of existing categories and existing products. Yes, you can create a category. But since most software companies are improvements on large markets, it’s hard to get anyone’s attention if you are doing something truly novel. More on that here: About 70% of SaaS Unicorns Are New Versions of Existing Categories of Software | SaaStr
- Folks invest in who they know — if they can. It’s just less risky. Investing in start-ups is a bit scary. The money could disappear. You often only have a tiny bit of time to get to know someone you’ll be economically “married” to for a decade. It’s just easier to invest in people you know and already trust. And that creates barriers to folks that don’t know anyone with money to invest. Big ones.
- You have to go much, much further without privilege and credentials. Get into YC if you can. Get the best warm intro you can. Get 1 angel to invest in you with a brand, if you can. Almost everyone is looking for signals. Signals you might be the next Zoom or Uber or Slack. Without any signals, it is much much harder. This is not fair. It is a reality today.
Some of this can’t be changed quickly, or maybe at all. But the privilege parts, we need to do a lot more, now. Taking more meetings, and giving more folks a shot without that privilege, is at least a start.
(note: an updated SaaStr Classic answer)