How to survive the process as a first-time founder.

All of the artwork for this blog post was generated using DALL-E.

A couple of months ago, we closed the seed round for Fixie.ai, a new startup that I am building with three incredible co-founders. (You won’t find anything about what we’re up to on the web just yet — stay tuned.) Over the course of about 3 months, we went from a (very) rough idea to raising $5M in funding. In the process, I learned a lot about how startups get off the ground, how to raise money, how to interact with VCs, and so much more. This being my first time on this particular roller coaster ride, I wanted to share some of the things that I wish I had known going in. Most of this stuff wasn’t to be found in any of the books and blog posts that I read about the startup fundraising process.

How much prep work do you need to do?

Before starting the fundraising process, my first stop was to call up some VC friends of mine and ask them how to get things going. The question was, basically, how much do you need to have done before you start talking to investors? The answer depends on the founding team and the kind of company you’re trying to start. In our case, we had a strong, senior founding team, so “all” we needed was a compelling idea with a plausible story around how we would turn that idea into a viable (and, hopefully, large) company. In the case of more junior founders, it’s more likely that some actual work (e.g., a prototype, demo, or even early customer traction) would be necessary before trying to raise a seed.

I’ve had several friends who have raised multi-million dollar seed rounds with nothing but a PowerPoint deck (and, in at least one case, without even a deck!). I was optimistic that we would be able to do likewise, but it depends greatly on the specific idea you have, as well as the fundraising climate. In our case, we started our fundraise process right when the market downturn started in May 2022, and this had a big impact on our result — more so than I expected. I was told flat-out by several investors that had we tried to raise 2–3 months earlier (before the downturn) we would have been able to raise more money at a higher valuation for the same team and idea. Also, because our company relies heavily on AI, in some sense we’re appealing to magic — it wasn’t immediately clear (to anyone, let alone us!) that one could, in fact, build what we were trying to build. Had we built an early prototype first, or were basing our company on an existing open source project, it would have been much easier.

To Y Combinator or Not To Y Combinator?

Early in our fundraising process, we fired off a (late) submission to Y Combinator for the summer ’22 batch. Much to our delight and surprise, we were accepted, but then we had a conundrum — should we take the check? I called up a few of my aforementioned VC friends and they universally told me that, no, for a founding team like ours (fairly senior and with substantial startup experience), we would likely not gain a lot from the YC experience. They also assured me — keep in mind, this was just prior to the big downturn — that we would have “no problem” raising a seed round without doing YC. In the end we decided to turn down Y Combinator, but it was a tough call. We ended up raising the seed we wanted without YC, though I’m sure some aspects of the YC program would have been beneficial. It’s just unclear if it would have been worth 7% of the company in our case.

VCs are super helpful and have a huge network.

Once I started connecting with a few investors that I knew personally, I was amazed at how quickly my network grew. I figure I met around 100 VCs over the course of the raise, almost all based on intros from other investors, or cold inbound contacts from LinkedIn. They come in all shapes and sizes — junior partners or principals at firms looking to source their first deals, more seasoned vets with billions of dollars of exits under their belts, solo VCs running their own micro-funds, “super angels” writing $1M checks from their own bank account.

At first I did not know how to respond to the many investors contacting me. My mental model was that entrepreneurs are the ones who approach VCs, hat and pitch deck in hand, begging for their patronage. Suddenly I found a bunch of VCs really interested in helping me in various ways — connecting me to other investors, taking time to brainstorm on ideas, helping to fine-tune my pitch deck. I didn’t understand what was happening until I realized that many investors do this in order to build a good relationship with founders — almost like a “free trial” in case you end up taking money from them. And VCs themselves have to hustle to find good deals, so they’re motivated to reach out to, and be helpful to, founders.

VCs’ eyes are often bigger than their stomachs.

What I mean by this is that a VC will often act very excited and engaged with your idea, taking multiple meetings, spending a lot of time with you, but then decline to fund you. There are a couple of reasons for this. I don’t think it’s malicious behavior, and it makes sense when you think of the incentives involved, but understanding this dynamic was helpful for me.

VCs are incentivized to find good companies to invest in. Not every VC has the brand reputation of, say, Sequoia or A16z, so they do a lot of proactive deal sourcing and are willing to meet with founders even if they have no idea what the company is doing or have any sense for how viable it will be. The other dynamic is that investors tend to be really optimistic and upbeat in these meetings, irrespective of how likely they are to be willing to invest in your company. It is easy to interpret a VC’s enthusiasm as higher likelihood of getting an investment from them, but if you think about it, sounding overly skeptical of your idea does not benefit the VC at all, since they want to keep all of their options open. Investors are competing for your time and interest in working with them, should they choose to invest.

Several VCs told me initially that “nothing is too early for us” and then came back and said “you’re too early” (in so many words) when they turned us down.

In our case, we were turned down by investors for two main reasons. The most common reason is that we had not built anything yet and the VC wanted to see some proof points that what we were planning to do was viable from both a technical and product perspective. The second reason is that some investors simply didn’t believe that our idea would eventually become a big company. I chalk the latter up to a lack of imagination but it’s also a failure on my part to paint the big picture for them. A bunch of investors just “got it”, but not all of them will.

Note that not all VCs are the same with respect to risk tolerance, investment philosophy, and the kinds of founders they want to work with. In the end, we were fortunate to be in a competitive round with multiple investors vying to invest, and I had to turn down offers from a number of VCs that wanted to write us checks.

Your pitch needs to be confident.

VCs tend to like it when you have a high level of confidence in your direction, your technology, and your team. Any uncertainty or lack of confidence on your part can raise red flags for them. This is why you often hear entrepreneurs talking about what they are doing like it is the beginning of a new era for humanity (“our web-enabled vending machines will revolutionize nutrition delivery!”). If you are too understated or offer too many caveats, the VC can easily interpret these signals as lack of conviction or competence on your part.

(There’s also a cultural difference between Seattle and, say, the Bay Area in this regard. Seattleites tend to be pretty down-to-earth and less grandiose when pitching, I think, at least in my experience. Most VCs I met with are based in the Bay, and were expecting Bay Area style bombast, which I have a hard time pulling off.)

Intellectual honesty is a great trait to have in situations where you are building a reputation for doing solid work that can withstand a high degree of scrutiny. However, this can work against you when pitching investors, since their “baseline” is listening all day to people making outlandish claims about their vision and the size of the opportunity. And there is, of course, a fine line between having conviction and just spewing bullshit. VCs are used to a lot of the latter, and tend to have a de-hype filter on when they listen to pitches. As a result, if you are already prone to being understated, that filter can further suppress the message that the VC hears in your pitch.

I was initially quite low-key about what we were trying to accomplish, and it failed to get the potential investors fired up. When I adjusted my pitch style to be more ambitious and, well, cocky, I got much better results. Even though it was obvious to me that we’re sitting on top of a huge, multi-billion-dollar opportunity here, I had to actually say that to the investors I was pitching.

Your pitch deck will get shared around. A lot.

After my first few VC meetings, I started to get a lot of LinkedIn pings and emails from other investors who had claimed to see our pitch deck and were interested in chatting. This surprised me, as I wasn’t expecting the deck to be shared around with people that I had not yet met. I realized then that our deck needed to be a stand-alone document that could be consumed without my being there to give the live pitch.

A lot of advice about how to write pitch decks is dated, I think, since it assumes that the pitch will be delivered in a live setting (see Guy Kawasaki’s “10/20/30” rule, for example). In the good old days, you would walk into a VC firm’s office and deliver the pitch in person, close up your laptop and walk away with it tucked under your arm. Not any longer. You present the deck over Zoom but often email it beforehand, or at least after the meeting, where it can get shared around to anyone, including people not in the same firm.

I still think that a pitch deck needs to be short and punchy, but it also needs to have enough details so that the person reading it can get some of their key questions answered if you aren’t there to answer them. It also needs to have enough meat that a VC can get excited by it before they get a chance to chat with you.

VCs act like experts, even when they aren’t.

I was surprised how many times I had to educate potential investors about things that I assumed they would know based on their investment history. Going into a pitch, I would assume that the investors were experts in our company’s technology and product landscape, and as such would gloss over important details that were necessary to connect the dots for them. I would only find out later (usually, when they would say no) that they didn’t really get what we were trying to do — and it was my fault for not explaining it to them.

VCs do talk a good game, though, and project a strong command over their areas of interest. And, boy, do they have opinions — that’s what they’re paid for. But those opinions are not always well-informed. It should come as no surprise that there is a stark difference between VCs that are former engineers versus people coming from a pure investment background in this regard. Investors without engineering backgrounds will often reach out to “experts” in their network for a read on what you are doing — but there’s no guarantee that those “experts” know what they’re talking about, either. There’s not a lot you can do about this apart from putting more energy into educating investors yourself.

Being a VC must be a bit like being on a program committee for a conference. Saying no is easy, since you never have to defend a decision to turn down a deal. But saying yes requires a much greater level of conviction and defensibility. Even a powerful partner in a firm might need to get buy-in from other partners to do a deal, so even if the person you’re working with is convinced, they may not have the ammo needed to convince the others on their team. And, just like a program committee, it is almost always universally the case that someone will find something wrong with your ideas. VCs reviewing your company for a potential investment is not unlike the dreaded “reviewer #3” effect in peer review.

Summing up

These last few months have definitely been a crash course in the world of fundraising. A lot of the things I learned were not obvious at all to me from the books, blog posts, and other resources I had consulted before getting started. I especially failed to understand the incentives that VCs have to help founders, even before funding them. My mental model of investors was that they were more like a research funding agency, where you’re begging for money in a highly competitive process and the agency has no real desire to help you. It’s still a competitive process, of course, but learning that the relationship with investors is, in good cases, at least, a collaborative rather than an adversarial one, was a big eye opener for me.

I hope this advice is helpful — comments and questions are definitely welcome!