Stop Obsessing Over Fundraising Announcements transcript

This is Dalton plus Michael. Today we're going to talk about is startup funding fair. So I'll set this up. Instead of working on your company, you're browsing Twitter because that's what all good founders do. And you see company has just raised a $10 million round from A6Z and you checked out their product last week and you're like that product sucks. And you see all these people being like, "Oh my god, this company's so great.

They're going to win the space." And you are starting to think, "Is this all a joke? I was told this was meritocratic and d But like these folks suck and they're raising all the money and they look like they're cool. What's going on?" >> Yeah. [laughter] I mean, look, think about how many office hours that we do. >> Yes. where you know there's some other topic. But when you get right down to it, what's actually going on is that someone read a fundraising announcement and somehow that caused them to go through a like a total spiral.

Like the founders I'm talking to are spiraling. >> Yes. >> Sometimes it's because they're sad. >> Yes. >> Because um >> they're Yes. Sometimes it's they're enraged because how dare this dumb thing that's so bad that we're better than them raise money. >> Yes. >> Time for revolution. [laughter] >> Time for revolution. >> We we need to destroy the venture capital industry. I'm so mad. >> Yes. >> Sometimes it's out of magical thinking where it's like, hey, I saw someone raise this money for this voice AI thing.

I think we should do voice AI. And so they sort of like draw parallels Yes. >> to what they're doing. No, I would call that the pivot. Like we should pivot to that, right? I think the parallel one is like a voice AI company raised a billion dollars. That means we can be worth a billion dollars, too. Like >> that means this is working, right? Like there's a t good news. My startup's working. Someone raised money. >> Yes.

Yes. These other these other people these other guys raised money. I'm going my startup's been great. >> The number of times I've seen a founder basically be this is a good space because there exist n unicorns in the space. I'm like what does that even what do these things have to do with each other? >> So is it fair? No. [laughter] End of video. All right. That's not fair. Sorry. >> Yeah. >> And so >> you're right. [laughter] It's an injustice. >> Again, what's funny is that for whatever reason, startup culture is heavily centered around fundraising announcements and reaction to fundraising announcements, >> especially early stage. >> Totally. >> Yes.

And this is like one of the cool things to talk about with other founders or with your employees. And it's >> the goal, right? >> Sure. They [laughter] um for some reason this is just like the the latent uh background radiation of of working in the space. And what I would say is when you get over rotated on this stuff, you are beating yourself. >> Yes. >> Yes. you. That is selfdefeating behavior. Yes. >> If you let yourself have tons of emotions as a result of some stranger raising money from some stranger, right?

Like that's >> more often than not, it doesn't change your chance of success at all. >> No. [laughter] And then and then you like having whatever feelings you have about it. No. >> Again, everyone's feelings are valid, but you want to learn to quiet that part of your mind. >> Yes. And to realize that that doesn't really affect you too much. No. And think about how much over the years um have people on Hacker News or just on Twitter in general spend >> Oh god. >> more time worrying about what stuff you and I have funded than we worry about. >> Yes.

[laughter] Yeah. >> I can't believe YC fund duh. Like it's obviously over. Like >> And so [laughter] the good news is we don't care. Like I never once cared what people on social media would say when we chose to accept a company. >> No. >> And so we weren't looking for the approval of people on the internet. >> What if that was the meritocracy is we we we had to have a vote on the internet [laughter] >> about whether we're allowed to fund a company or not. >> No. a funding event has become like I think the only equivalent that I can imagine in today's day and age is a strong quarter for a company where the stock price went up cuz it's like I think founders truly believe fundraising events are like valuecreating moments.

What's interesting is like when that stock price went up that like that is a value creat like literally everyone's stock is worth more. They could sell it right now and make more money than they could sell it two days ago. A funding announcement is the announcement of a illquid bet. And almost every single fundraising announcement you will read is an announcement of an illlquid bet that has a probably less than 50% likelihood of paying off. >> Yeah. >> All the way down to I mean we've joked about 0% but like all the way down to seed rounds which like very low expected of working out. >> Standard capital my new firm is operating.

We made a number of investments. Yes, >> we are going to announce those investments soon. >> And so in so far as like if you just believe all fundraising announcements are bad, I guess I'm part of the problem. >> You are. And you're an investor, right? So >> yeah, I suck, right? Um and I'm not do holding a vote. >> No, you don't get for who we should fund. So the reason why it's not fair. >> Yeah. [laughter] Holding a vote.

Um but the reason funding is announcements are good. >> Yes. is I want people to check out the products >> of the companies that we invest in >> and be curious about them. >> I want potential job candidates >> to be more interested in taking a job at the company. >> Yeah. >> Basically, it's a good way to remind people that a company exists. And as you know from our other videos, friends, the natural state of startups is no one cares about your startup.

Yes. >> So, this is a way to get people to like >> Yes. >> Look at, hey, look at this thing. it raised money and you take that attention and try to transfer it to something good. Yes. >> And so in my mind, the healthy way to view a fundraising announcement is to take an opportunity to look at the product >> to check out the founders >> to see if there's cool jobs there if you're in the job market. >> Have an opinion. >> To have an opinion and not really have a lot of emotions about it, you know, >> like you're just kind of like, oh, cool opinion. >> This is a thing like neat.

I should go check out their product. And I have noticed a lot of founders get good customers this way. >> Yes. Like this is why we do all the the announcements at YC >> is it drives customers. >> I think this is a really healthy way of thinking about it. I think that like when you see a startup announcement, I think that like an interesting thought would be check out the product, check out some of the case studies, spend 5 10 minutes, make a procon argument in your head and assign a percentage.

And and I think that as long as you're assigning a percentage, the startup will will seem more fair. I think that when you're assuming that every investor thinks that every investment has a 100% chance of success, the bets look stupid. I mean, people invested in Elon building rockets. It might have been a high conviction bet, but like no one could basically say that was like a high percentage likelihood to work out. Look, this was literally in my in my Twitter exions today. >> Yeah. >> So, I founded a company called Whatnot in Winter 20. >> Yep. >> And it just announced it's a decacorn.

They just raised money at 11 billion valuation. Okay. Why why is that cool? It's like, hey, you >> check that out and you know, if you know someone that wants a job, if you know someone wants a job, they're hiring. You know, so that's there's actually pro-social reasons to to talk about that. But what's funny is a lot of the the comments were people being like, I would never invest in this. How did YC pick this? Why would this Pokemon trading card site?

Like there's people being like, I don't like cool that this is worth so much. Like how on earth >> did you see it? >> Did they decide to fund this thing? >> Yeah. >> Cuz in the moment, can you imagine what the like >> how it was perceived? Oh, Pokemon >> uh Funko Pop Yeah. >> trading website raises venture capital. >> It was a low percentage bet. >> Well, well, and it would be like infuriating to people. How dare this company raise money when my startup is, which is so much better.

Yeah. >> They're funding this crap. Yeah. Well, this is how again, this is an instructive moment. This is why I'm bringing him up. Well, that worked. >> Yeah, >> that bet worked out and created a lot of jobs and there's a lot of sellers on whatnot. And so, if you look at the economic impact of that bet, it was really good. >> Yep. Yep. Someone should have made it. >> Yeah. >> Well, and and I also think you make a good point, which is that like you might think you can tell the future when you're reading a Twitter funding announcement. >> Yep. >> And you might think if you tried a product, you know, whether it can be good or not in the future, but like you might be wrong.

You might be wrong. I'll say this is the last version of this that always frustrated me which is um this happened in my company, this happened with other founders that I've advised where like you see somebody fund raise and then you say if they can fundraise why can't we fund raise and you know none of the supporting facts or materials. Like we saw this in one situation. Some company we're competing against raised a whole bunch of money and we were just like we've pitched these people like they know us like we have more traffic like what's going on?

It's crazy. Years later I found out that that founder made the firm who invested in them like a billion dollars. >> I know you're talking about >> and it was like well you know like if someone makes you a billion dollars you'll do their series A for the next time, [laughter] right? like how much money are you handing them back after they handed you a billion dollars, right? And it had nothing to do with the core fundamentals or any like but reading the announcement, I didn't know that.

And so thinking that announcement has all the supporting materials that would actually make you understand whether this a good investment is that that's not the purpose of a fundraising announcement. So that's another reason why you can maybe classify something as unfair is like you just don't have the facts. And then the last one you bring up which is like when people announce their fundraising round that means they raised the money that day right that's that's how that works right >> yeah often it happened in the past often they're sort of >> hopefully not in the future [laughter] >> often they're um some creative accounting for how they're discussing the amount raised or the valuation like there's all these like slight of hand things that happen >> and again the point is to not worry about it too much it's not real yes it's [laughter] just a It's just well and that's why this is what I love about it's like it's like a sports bet, right?

It's like soon the game will be over and like most of the bats [laughter] will have made no money and some will like we'll know the answer soon. Before it's just a bet. Y >> don't get all worked up over a bet. Sometimes founders think the fundraising game is skewed against them because they make some simple mistakes where it's harder to fund them. I think that like, you know, for two kids who are CS majors at MIT, the fundraising game might seem real fun, right?

Like it might seem super fair. Like, how how do you think about kind of your starting conditions impacting whether you think the game is fair? If I'm two MBAs from the University of Phoenix, this game might not seem so fair. I think some folks want to believe that the way capital is allocated is like super efficient and that it is like there's some kind of stock market. >> Yeah, >> you can write up a little like report.

It's it's like this like public stocks I guess technically have price to earnings ratios and people are trading them >> technically they're priced accurately actually you actually as you can see in the current stock market [laughter] >> maybe >> but there's a notional sense that you can value a late stage company and that there is some like fair way to do it. >> Yes. >> And I think people expect >> that to scale all the way down Yes.

Yes. >> Startup bets >> and doesn't >> Well, if it did work it that way, >> there'd be people making lots of money investing that way. >> Yes. >> Where are they? >> Yeah. >> Where are the value where the value investors in startups? I'm not trying to maybe they exist. Like, let me know. Um, but from what we have seen, that is a very bad way to invest in startups is to try to find the stuff with the lowest valuation, like the highest revenue, stuff like that.

That stuff doesn't work. and instead it's much more of an art and it's hard to justify every decision that other people are making about this stuff >> and you're always going to have an opinions. Maybe this is a weird aside, but it's almost like looking at who gets drafted every year in a draft or who who get you're like why didn't this guy get signed and you're like why didn't this team sign this player? Like it's easy to be on the sidelines.

Yeah. And to and to feel that you have a perfect view of who did what, but >> you know, ultimately you're just like a person on a comment board. >> Yeah. Yeah. >> And not someone whose job is on the line to make good decisions, right? >> I actually, you know, you said fun is I think start funding is funding is more fair than I I I ever realized. And I think one of the driving factors in that is it's there isn't one big company doing all of it. >> Yeah. like there's just there are so many >> writers basically [laughter] there's very little coordination especially at the seed stage there's no coordination and so having all of these >> there's some coordination >> well like uh it's more likely to raise money if you're an MIT CS major than not >> I'm just trying to say if someone says no >> it doesn't poison the well there's no like secret back channel >> so there's a lot of people yeah there's a lot of money >> and they're all operating autonomously yes that seems pretty fair.

And I would argue that the most basic things they're looking for tend to be publicized. >> Yeah. >> Like YC, we don't hide what we're looking for in a YC application. And so that's also pretty fair. I'd also argue nowadays investors are more accessible than like they ever were before, right? You can tweet at people. You can >> use AI to figure out everyone's email addresses, right? And so they're accessible. They compete with each other.

They don't really coordinate with each other and they generally communicate what they were looking for. You know, it's it's interesting because like if you think about it in a sports analogy, right? It's so like from that perspective, I think the basketball industry is also kind of accessible. Like it doesn't mean you're going to become NBA. >> It's pretty straightforward how you would get signed to the Warriors. >> Yes. >> But that doesn't mean it's easy.

No, no, no. But if you're like the best player on your high school basketball team and you're like 68, you know, like Yeah. If you're seven feet, yeah, like the industry kind of will find [laughter] you. So, no, I I I think though, maybe to wrap up, right, certainly getting angry and discouraged by fundraising announcements and and and by thinking the fundraising environment isn't fair, like that's not going to help you win.

Yep. >> Right. Like I think that like you should trust that if you just put that stuff aside and focus on things that actually might help you win, you might find the fundraising environment more accessible than you than you thought. Most of the rounds that we see from most of the good companies, they're doing something interesting or they've done something interesting and investment came as a result. It wasn't investment just came before they did anything or they like they they had agency.

You had agency. That's a great point. All right. Thanks for the chat. All right. Thanks, Michael.