{"url": "https://www.youtube.com/watch?v=m43t44WL8-w", "page_url": "https://www.youtube.com/watch?v=m43t44WL8-w", "title": "Sam Altman at Startup School 08", "show_or_channel": "startupschool", "date": "2009-01-29", "duration_s": 1415, "type": "talk", "speakers": ["Sam Altman"], "confidence": "high", "notes": "Startup School 2008 (Loopt era)", "people": ["sam-altman"], "id": "2009-01-29_startupschool-sam-altman-at-startup-school-08", "audio_duration_s": 1415.3375, "worker": "jc-w10", "transcribe_s": 74.0, "model": "large-v3", "segments": [{"start": 0.0, "end": 29.97, "text": "So good morning and thank you for getting up early. I'm going to talk about how to raise money since it seems to be a popular question. So the big takeaway point for me, if you only remember one thing here, would be that technical founders that also understand products. So if you can understand what the product should be and how to build it, you are forced to be reckoned with. And I think in Silicon Valley, that's appreciated more than anywhere else in the world. And so when you think about raising money and when you talk to investors and think about whether you should raise money,"}, {"start": 29.97, "end": 59.82, "text": "Keep that in mind that you don't need them and you have a fair amount of leverage in the situation, more than you usually realize. First question is, should you raise money at all? If you can avoid it, probably not. If you can self-fund, the guy that asked the question earlier, or if you can wait, it is hugely to your advantage. Raising lots of money can work really well, but it can also slow you down and it comes with a whole set of other issues."}, {"start": 59.82, "end": 84.54, "text": "Good reasons to raise money are you have the company to a point where you really need a lot of money to execute. It'll help you get sales or partnerships by convincing partners that you're going to be around for a while. It'll help scale the business or other things. But again, the longer you can wait, the more likely you are to have figured out the product that'll work. The more likely you are to have things running well and you'll get a better valuation. So raising money..."}, {"start": 84.54, "end": 112.67, "text": "I think some companies are focused on raising money on day one, and that is almost always a mistake. Bad reasons, and unfortunately these are the reasons that I'm hearing more and more that companies raise money, are it will legitimize us as a company. The founders want a VC behind them just so they feel like they're real. We'll get great PR from the funding. It's what startups and values do, and funding will make me successful. Funding does not make you successful. Raising a VC is sort of the beginning of a very long process."}, {"start": 112.67, "end": 142.77, "text": "But it can be really good. So assuming you have built a company up to the stage where you do need money, or you've decided you have one of the rare companies that does need to raise professional money out of the gate, that's what the rest of the talk is about. So the first question people talk about is to raise Angel or VC, or to raise Angel and NBC. VCs will almost always do more work for you than Angels will, no matter what the Angels tell you, because this is a VC's full-time job. And they often have a large network of connections. You get the entire partnership."}, {"start": 142.77, "end": 171.57, "text": "Working together to help you. An angel round leaves the sell early option open in a way that a VC round doesn't. And so basically you and your co-founders just have to decide, do we want to really sort of build something up big or do we want to flip this quickly? And if you want an early exit as a strategy, you would be disinclined to do a VC round. And then angels will usually but not always invest faster and do it on slightly more favorable terms."}, {"start": 172.27, "end": 197.9, "text": "So this is a, if you want to raise VC money, that's what Luke did. So we did a series A, actually probably earlier than we should have, from NEA and Sequoia Capital. And this was kind of the process we went through and some tweaks we would have made if we did it again. So really what you need to start with is a one-page executive summary and a 10 to 15 slide deck. You'll basically take this executive summary and you will get intros to the firms."}, {"start": 197.9, "end": 218.66, "text": "I would really focus on the good firms. If you have a good company, those are rare in Silicon Valley, and so you will have an easy time raising money. Good team doing something interesting, like you're in a good position. And then six to eight firms seems to be the number that works most often for most people. This is a big thing. Run the process in parallel."}, {"start": 218.66, "end": 242.03, "text": "For two reasons. One, the only way you ever have any leverage from investors as a company is if they feel like they're going to lose the deal to other investors. Actually, that's sort of true for all deal making. The more alternatives you have, the better. But more importantly, if you don't run the process in parallel, which is most people's default approach, is to talk to their first choice firm first, go through a month of process, then their second term, and third, and then..."}, {"start": 242.03, "end": 270.24, "text": "If the first three firms pass, you've been raising money for three months. Never mind the fact that your competitors have probably blown past you because speed is the key to a startup. You now have a shop goods reputation. And so any VC you try and talk to past this point will say, oh, these other three good firms passed. I'm not going to bother looking. And so you really want the process in parallel for both reasons. The number of times you have to meet with a firm varies a lot. I think we actually met Sequoia 10 times before they funded us."}, {"start": 270.24, "end": 299.07, "text": "There were a couple of other firms that we got term sheets from with zero meetings. And the idea is you meet more and more partners, and then you get to a Monday, which is when all VC firms do their big partners meetings. And then they give you a term sheet. Or they don't. And while they're doing this, you can really help them with the due diligence by letting them talk to your users, your customers, give them financial projections, past financials, whatever they need. Help them understand your technology and your product, because that's what they care most about at this stage."}, {"start": 299.07, "end": 324.67, "text": "User adoption charge. Anything you can to sort of help them understand your business. This was such a good term. Someone said this to me this morning that I put it in here. Sandhill buzz. I'll probably offend every VC in the room here, but professional investors are somewhat, I won't say lemming-like, but packish. And, you know, if one firm, if one prominent firm is like, oh, I'm going to do a deal in this space, instantly every other firm"}, {"start": 324.67, "end": 353.04, "text": "wants to do a deal in that space. And so if you can get your company in your space, like talked about at drinks on Friday afternoons at the Four Seasons in Palo Alto, that is a net win. And again, the key to doing deals in general is to make everyone feel like you have a great alternative that you're probably going to take. And that makes them want it more and more likely to act faster. So it's generally four to six weeks into the process that you get your first term sheet. This is after..."}, {"start": 353.04, "end": 378.51, "text": "You've met with a bunch of firms. You've talked about terms. You've shown them a lot about your business. You get a term sheet. And it's a very long process to get there. And then the frustrating thing is the next day, as soon as word leaks out that you have gotten a term sheet, you will get many, many more. And you'll just wonder, if my business is a good deal today, why wasn't it a good deal yesterday? And why wouldn't you give me a term sheet then? Never figured that out."}, {"start": 378.77, "end": 404.46, "text": "But it does tend to be sort of the process like waits and waits and waits, and then it goes really fast. And then so now you have these term sheets, and if you're lucky enough to have multiple offers, then you can use that to sort of negotiate on terms. The valuation and ownership percentages might not move very much, but other terms, which we'll talk about in a second, move a lot. And then you sign the term sheet with the right partner, and you get back to work."}, {"start": 404.46, "end": 431.28, "text": "And getting back to work is an important thing. Some people really get distracted by the fundraising process. I think it's important to have one person in the company focus on it and spend like half their time on it. But I've seen a lot of companies sort of die because all three or four or whatever people in the company spent all of their time antagonizing over the fundraising process. That is not a good thing. Oh, there's a bonus step. So we thought when we did our Series A, and we were slightly more naive than we are now,"}, {"start": 431.28, "end": 452.98, "text": "You sign this term sheet, which is this 10-page official-looking document, and then you get a check. It turns out that that is not the case. This was really a problem for us because when we signed our term sheet, we had done Y Combinator for three or four months. We were sophomores in college, and we were totally out of money at this point. Actually no money in the bank account."}, {"start": 452.98, "end": 477.78, "text": "When you sign your term sheet, it's really four or five or maybe even longer weeks while lawyers on both sides get to definitive documents, which is this stack of paper that big. And we had no idea that such things, definitive documents, exist. And then you close. And the reason we closed is we finally called our lawyers and our investors' lawyers and we're like, we need to eat dinner tomorrow night. We are actually out of money. So just don't forget about that piece of it."}, {"start": 478.19, "end": 507.41, "text": "All right, what does an investor look for? This is probably true of all investors, but it's geared towards VCs. Really three kind of main things. One is a great market. Two is a great team. And three is a product that addresses that. And then a bonus for VCs, they will tell you, and I hear this more and more, that they're seeing a lot more incremental businesses and they really look instead for things that are revolutionary because that's how their model works. But if you can knock out those first three things and have really good answers to those, you are an attractive business."}, {"start": 507.41, "end": 533.65, "text": "You know, the three sort of checklist items in a VC's mind. A big growing market is a big piece of this. One of my investors uses the, you know, you need to surf someone else's wave. Startups certainly cannot create markets and they probably can't even create an opportunity to market. But, you know, for example, if someone has built a really fast internet and, you know, lots of bandwidth around the world and a cool flash codec, you can then build YouTube."}, {"start": 533.65, "end": 562.75, "text": "And so you really want to, you know, startups are little, they can move fast, but they can't kind of like build sort of a swell. And so if you can ride on someone else's wave, that's a good thing. You really do need a big growing market fast for a 10 or 100x return. And so if you don't have that, a VC is, it's probably not a business that makes sense for VCs. Customers with their hair on fire is another, you know, good line. And I think that does sort of capture what a VC is looking for because you can, these customers will overpay."}, {"start": 562.75, "end": 590.7, "text": "They'll act fast. They'll take a risk on a company. They don't mind bugs in a first version. And so that's kind of the right customer segment. An unfair advantage, this can take any, well, not any, but this can work in many different ways. But somehow a VC wants to be comfortable that if they fund you, their competitors on the street won't fund someone exactly like you and who will then crush you. So an unfair advantage could be technology no one else has. It could be..."}, {"start": 590.7, "end": 617.97, "text": "A team that is smarter than anyone else. It could be a partnership no one else has. It could be built-up network effects. It is probably not patents, but you could make that case. And then this is the most important. If you have a great team and a great product, that is what gets deals done. And I think a great team can correct for deficiencies in a product probably easier than a product can make up for a team. But you'll hear VCs, most VCs will say one of three things is what we look for first, either team, market, or product."}, {"start": 617.97, "end": 645.62, "text": "And different VCs will say different ones of those are the most important. And it's actually pretty instructive about the VC, which they say is the most important. Demand by proxy. So if you are in a new market, or if you're addressing something new, and they don't have data points on what is currently working, this is what they look for. This is the second best thing. So if you can say demand by proxy, then you've done something. So for example, one of the things Loop does is show you where your friends are on a map."}, {"start": 645.62, "end": 674.82, "text": "And we had the data point that the most common text message in the world sent is, where are you? And so although there was no service like looped out, we could show that this is something that people want. So this is the story that you need to convince an investor of. You can convince them of these four points, they will generally give you money. Number one, this is an exploding market. What we're going after is a big deal, and it's getting big fast. There is nothing currently good that is addressing the customer's needs."}, {"start": 674.82, "end": 704.11, "text": "We currently have the best solution, and we have the best team, so no one will ever pass us. And if you can convince an investor of those four things, you will be most of the way to a term sheet. So quickly, just about terms, because I think this is one area that I don't think is particularly interesting, and you shouldn't spend much time thinking about it, but in general, technical founders don't have a good understanding of this, so we're just going to race through these. You'll hear terms called pre-money, post-money, and option pool. Pre-money is the value that an investor assigns to your company."}, {"start": 704.11, "end": 731.31, "text": "Post money is what it's worth after they invest. The option pool is how much you earmark for employees. It is always in your interest to make the option pool as small as possible because at a funding stage, that comes out of only your share, not new investors. Think in terms of ownership. Investors will try and convince you to think in terms of pre-money valuations, but ownership is really like percentages are what matter here."}, {"start": 731.31, "end": 760.82, "text": "Focus on that. The more money you raise, the higher valuation you'll get. So investors often have some minimum percentage of ownership they need. Professional VC is between 20% and 25% in a Series A. They really can't go below that. But it does mean you can just increase both the pre-money valuation and the size of the investment. They'll still get the same ownership percentage. You'll get more money. And again, I'm totally, totally, totally in support of waiting as long as you can to raise money. But because raising money is a time-consuming process and because things often don't work out quite as you think,"}, {"start": 760.82, "end": 790.22, "text": "When you do raise money, the general guideline that I've heard is raise twice what you think you need. So we're just going to look at one example so these numbers kind of make sense. So if an investor tells you you have a $7 million, they're going to value your company at $7 million pre-money, they're going to invest $3 million, and there's going to be a 25% option pool. You might think you would own 70% of the company after that, but you wouldn't. So the first thing is, investors' ownership percentage comes out of the post money. So whatever they tell you they're going to invest,"}, {"start": 790.22, "end": 819.7, "text": "You add that to the pre-money and then divide investment over post-money. In this case, this is what the percentages will work out to. Fairly self-explanatory. Major term is board composition. The current in vogue things are three-seat or five-seat boards. Three-seat would be something like two founders and an investor. That'd be for a smaller investment. Bigger investment might be a five-seat thing. That'd be two founders, two investor seats, and one outside director. I wouldn't obsess over ownership percentages. If you do a couple of rounds and..."}, {"start": 819.7, "end": 841.84, "text": "That gets you to more than 50% owned outside of the company. It's not such a bad thing. Again, you can have things like founder veto rights where you have to approve a change of control, which you definitely should have. But again, the board kind of runs the company. They make change of control decisions. They decide to go public. They can fire the CEO. And so do pay attention to this term."}, {"start": 841.97, "end": 870.13, "text": "Vesting of stock. So the standard in the Valley is four-year vesting. Founders, if they've been working on it a while, often get one year of that accelerated. So one year up front and then over three years for the rest of it. You can certainly ask, and you should ask, on a change of control that you get some of that accelerated. Liquidation preference. This is how much the investors get out, how much investors get out before anyone else gets money. So if an investor invests $5 million with a 1x preference, they get the first $5 million when the company gets sold. I think that's fair."}, {"start": 870.13, "end": 897.76, "text": "You occasionally hear of investors asking for a three or four X preference. But again, if you have multiple term sheets, this is the sort of term you should be able to get negotiated down to one. Two types of stock that the investors will take. One is preferred. One is participating preferred. Participating preferred is basically like double dipping. They get their money, whatever the one times five is or two times five at first, and then they share a percentage of the rest. So again, you should be able to push them to preferred."}, {"start": 897.76, "end": 923.04, "text": "And for dilution provisions, this is investors get to maintain their ownership. One little catch term that I've seen screw a couple of people over recently is something called super pro rata. That's when an investor takes a risk in an early stage. They're like, I'm going to invest really early, but I want the ability to buy all of the next round. It's fair for them to maintain their ownership, but if they have that term, it really scares off potential new investors. So I wouldn't go for that."}, {"start": 923.04, "end": 952.45, "text": "It's fair for them to maintain ownership in future rounds, but if everyone knows they have the right to buy all of the next round and you're just using them to get a fair price, they won't even talk to you. This is a controversial one. So one thing that has come slightly in vogue is that founders set up a special class of stock, sometimes known as series FF shares, that they can sell after the founders fund, that they can sell in the B round and mark this off ahead of time. And the idea here is if you set this up right ahead of time, it doesn't mess up the strike price of common stock for the company."}, {"start": 952.45, "end": 982.45, "text": "But asking for this term and really pushing for this sometimes sends a weird message to investors. I've seen investors pass on deals just because founders pushed on this so hard. It creates the mindset that the founder is really here for a quick flip first and to build value for the company second. So if this is important to you, you can get it, but think about how you go about asking for it and think about why you want it. Tons of other terms, but if you just focus on those, you'll be good. And other advice? Let's see what's here. Okay, so..."}, {"start": 982.86, "end": 1009.26, "text": "When raising money, I really wouldn't focus on tenths or hundreds of a percent. It's amazing how many companies do this. A, it's a ton of time, but B, you are so much better off to work with the right partner and give up a little more of the equity and then just get back to work. Again, raising money is not how you become successful. Building a great product and getting it to consumers is how you do that. Agonizing over this or taking a second rate partner, that is a big mistake."}, {"start": 1009.84, "end": 1036.94, "text": "Along those lines, and I mentioned this earlier, it is amazing to me, because raising money is not a fun thing, how many people just really get really into it. Again, I've seen several startups in the past couple of years just essentially close their doors because they got so distracted by this process. I've said this twice, I think, already. You can't really underestimate this, and I certainly didn't coming into it."}, {"start": 1036.94, "end": 1063.71, "text": "We started talking to just one VC. We really didn't have any alternatives. They kind of knew what it dragged. As soon as it got out that we were talking to a few VCs, the whole thing changes. Alternatives are really the name of the game here, and the more of those you have, the better. Two firm deals. We did a two firm deal, and I thought that was really good. We kind of fell into this by accident, but it really has been a wonderful thing for us. You get two firms' worth of connections."}, {"start": 1063.71, "end": 1094.26, "text": "Which is great. You also get two sets of advice. And most importantly, they kind of keep each other in check. So two investors will stop either from behaving badly. And then this is a big one. Investors will do lots of due diligence on you, but if you don't talk to people that that investor has previously worked in, you will do yourself a disservice. And I encourage you, they'll give you some names of really successful CEOs they funded. You should try and find some CEOs they funded that have failed."}, {"start": 1094.26, "end": 1121.65, "text": "And hear what it was like to work with the investor in that case. And then just remember this. This is not actually at all related to my talk, but I think it's worth hearing. I remember the summer that we were doing Y Combinator. I don't think I ever got a good night of sleep. I still don't that often, but more. But things looked like they were going to totally blow up every day. Really badly. It was kind of a joke. What can be the worst thing to happen to us this week? It'll probably happen."}, {"start": 1121.65, "end": 1151.81, "text": "And don't let that discourage you, right? Because if you just stay focused on building a great company and a great product and a good team, more often than not, things work out, and it's really easy to get discouraged. All right, so raising money. Good company, we talked about what that was, but big market, big opportunity, great team, product lead. Don't focus on good investors. There are, I think, 450 VC firms in Silicon Valley, and I think only the first 15 or 20 of them actually make a profit."}, {"start": 1151.81, "end": 1180.99, "text": "That's an incredible stat. Tell a big story. These guys don't want to hear something incremental. They want to hear how you are doing something that really will become just a massive deal. Run the process in parallel or you get screwed two ways. Number five. Again, this is a really important thing. Technical founders that can also figure out what a product should be. That is what makes Silicon Valley work. If you look at all the successful companies that have come out of here, that's what it started with. Everyone knows that."}, {"start": 1180.99, "end": 1219.84, "text": "You've got the leverage. Do what you want. Raise money when you want and do it in a way you feel good about. And then have alternatives. That's it. Yeah, I think I have a few minutes if anyone has questions. And I can talk about the looped fundraising process, what it's like working with RPCs or whatever. Yes? You went over the get introductions quick if you're not lucky enough to be able to do Y Combinator. Yeah, sure. How would you go about getting introductions if you have no connections? Sure. So one stat about why that's important. One of our firms,"}, {"start": 1219.84, "end": 1249.95, "text": "NEA, they receive something like 10,000 business plans a year over the wire. They've never funded one of those. Sequoia has done a few, but it's rare. However, the people in this room, you could probably get to any VC firm 10 different ways just by talking to people in this room. So I'd come to events like this. I would just talk to people. The more you talk, the better. And you'd be surprised where they come from. So again, I would chat with people here and just say, hey, I'm looking to get to these investors. This is my idea. If you think it's exciting, could you help me out?"}, {"start": 1249.95, "end": 1277.49, "text": "And again, like people, like VCs, this is the dynamic I never realized. You sort of think of VCs as these people off in this tower you can't get to, and they really need you, right? Because you will have a successful company whether or not you take funding, but if they don't find the company to fund, they don't have a job. And so I talk to people at events like this. That's probably the best way. And, you know, just kind of the network grows really fast. Yes? Hey, I have a question about..."}, {"start": 1277.49, "end": 1305.36, "text": "Basically, when you're acquiring deals with like the wireless carriers like Sprint and Verizon, how did that process work and how did you get them to cut through the red tape and just, you know, go on board? This is like a two-hour talk. It is very difficult. One of the reasons we raised money early and when I don't think most companies should is we needed the legitimacy to the company, not to us as founders of, you know, any Ant Sequoia to say like, this is a real company, they're not going anywhere. And that helped a lot."}, {"start": 1305.36, "end": 1332.34, "text": "The first thing we did with the money was hire an experienced carrier business development guy. It was a salary that I couldn't imagine at the time. Someone who just says, he's been doing this for 20 years, he's awesome, and he can go get these deals. There's really no way not to cut through the red tape. Relationships at a really high level matter. Press matters. These guys read the Wall Street Journal and the New York Times. A compelling product where you do most of the work and they just turn you on and market you is very appealing."}, {"start": 1332.34, "end": 1365.73, "text": "Happy to talk more offline. There is no good answer to that question, unfortunately. Thanks. Cool. Hi. You said you needed to raise as much money as you could. The question is, how do you justify that you need such a large amount of money? Sure. Or a particular amount of money that you need? Do you have to have specifics that you need to spend it on for the VC? Sure. They do want some sort of financial plans, but it can be pretty rough. It can be like, we're going to need this many people, and this is the average it's going to cost, plus these few other things."}, {"start": 1365.73, "end": 1394.61, "text": "The way to raise more money is not to artificially blow up what you need, but just say we want it for a longer time horizon. We don't want to raise money again. We're worried about the economy. And by the way, it is worth pointing out that if you are going to raise money, this would be a good time to do it. But you can just say we want money for the next two, two and a half years. And so we need twice what we would need for one year or more because things ramp up. And so you do need rough financials. But we didn't have financial projections until late in the process. Didn't really know how to use Excel until late in the process."}, {"start": 1394.61, "end": 1413.07, "text": "But if you just say, these are the number of people we need, we're going to have these marketing expenses, or we're going to have this, we need to buy a thousand servers. Really just kind of rough estimates like that are acceptable, as long as you can justify it. And just again, just say we want it for a longer time frame. Thanks. Thank you."}]}