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Today we dive into the following 10 pieces of advice for founders raising venture capital:

1. The vast majority of businesses should not raise venture capital (Dalton Caldwell & Michael Seibel)

2. Practice your 30-second and 2-minute pitch (Michael Seibel)

3. An investor is an employee you can’t fire (Vinod Khosla)

4. Get ramen profitable (Ryan Peterson & Paul Graham)

5. Storytelling is incredibly important (Don Valentine & Ben Horowitz)

6. Don’t optimize solely for valuation (Elon Musk)

7. Three pieces of advice from Marc Andreessen (Marc Andreessen)

8. The best investors understand that most startups fail (Max Levchin)

9. Maximizing valuation is dangerous (Spencer Rascoff)

10. Too much funding before product/market fit can kill a startup (Paul Buchheit)

#1 The vast majority of businesses should not raise venture capital

Dalton Caldwell and Michael Seibel recorded an awesome episode on the Y Combinator Podcast titled “Should Your Startup Bootstrap or Raise Venture Capital?”

The clip below attempts to condense the 14-minute episode into three minutes, but the entire episode is worth listening to.

As Michael explains:

“The vast majority of businesses should not raise venture capital.”

Dalton adds:

“Venture capital as a product is specifically for investing in something where their investment could be worth at least 100x more—if not 1,000x more. And so if you try to put that jet fuel into something that isn’t going to grow to be big, everyone is going to be sad and lose.”

Michael compares starting a VC-backed company to trying to get into the NBA—only a few hundred people are going to make it, and it’s usually not the best way for most people to get rich. There are lots of ways to get rich, and he shares an example of a friend of his who built a bootstrapped company that generates $30k-$50k per month and took about 7-10 hours per month of maintenance.

“If you don’t want to raise [venture capital], don’t do it. It’s also a decision that you can revisit. If you don’t want to start a VC-backed company now, but your bootstrapped product starts doing well and you want to do it in the future, great.”

Venture capital really only makes sense if you need a lot of money up front and you’re trying to build a billion-dollar company. Dalton and Michael use Google as an example—it would’ve been really hard to build Google without venture capital.

As they put it:

“We should think of VC as enabling incremental entrepreneurship that wouldn’t be around otherwise”

#2 Practice your 30-second and 2-minute pitch

In the clip below, former Y Combinator CEO Michael Seibel breaks down the two types of pitches every startup founder needs: a 30-second elevator pitch and a two-minute pitch for investors.

“A lot of people practice 10-minute, 30-minute, hour-long, pitches. I think that’s all garbage. I think you can get all of your points across in two minutes. And one thing I like to tell founders is that the more you talk, the more you have an opportunity to say something that people don’t like.”

30-Second Elevator Pitch:

You should be able to explain to anyone you come across what your company does in 30 seconds.

This should be three sentences:

• What does your company do? Assume the person you’re talking to knows nothing. This should be a 1-sentence explanation that your mom or dad can understand (e.g. “We’re Airbnb and we allow you to rent out the extra room in your house” NOT “We’re Airbnb and we’re a marketplace for space”).

• How big is the market? Do a couple hours of research so that you can give investors a rough approximation of the size of the market you’re in (e.g. Airbnb might give the size of online hotel booking market)

• How much traction do you have? Ideally you can say something like: “We launched in January and we’re growing 30% month over month. We have $X sales and Y users.” If you’re pre-launch, you need to convince investors that you’re moving quickly (e.g. “the team came together in January. By March we launched our beta. By April we launched our product.”).

Two-Minute Pitch:

This pitch is for people you’re actually trying to convince of something (e.g. investors, potential employees, etc.). You basically want to simply explain what you do and then ask for money.

There are 5 key components:

• Clear 30 second pitch (everything mentioned above)

• Unique insight—what do the biggest players in your market not understand? This should be two sentences.

• How do you make money?

• Team. If your team has done something that has made investors money, you should mention that (e.g. “we’re the founders of PayPal”). If you haven’t, don’t go on about the awards you’ve won or PhDs you hold. What investors want to hear is: how many founders? (hopefully 2-4) how many of the founders are technical? (hopefully 50% or more engineers) How long have you known each other? (ideally you’ve known each other either personally or professionally for at least 6 months) Are you all full-time?

• The Big Ask ($$$). You have to know what you’re talking about when you ask for money. Are you raising on a convertible note or a SAFE? What’s the cap of the SAFE? How much money are you raising? What’s the minimum check size? If you don’t know these things, investors won’t think you’re serious or that you haven’t done your homework.

#3 An investor is an employee you can’t fire

In the clip below, Sam Altman asks Vinod Khosla how founders who want to build significant companies that will be around for decades should think about their investors.

Vinod believes that money is the smaller part of what you get from an investor:

“Advice and the right approach is the much more important part.”

He warns that investors who are happy with 3x their money may want to sell before you do. People who care about your vision won’t, and they’ll be much more tolerant when things inevitably go wrong.

To figure out if an investor will care about your vision, you have to talk to other founders—especially founders with a large vision who had hiccups along the way.

“When things go wrong along an ambitious path is when you can actually judge an investor. An investor is an employee you can’t fire, and that’s how you should think about it.”

He continues:

“Most investors are negative value add to a company that’s trying to be ambitious if they’re just trying to get to liquidity as soon as possible.”

When a founder comes to Vinod with an ambitious vision, he tries to help them think through the steps to get there and how to thoughtfully discover the risks on the path to that vision.

Sam Altman adds:

“The only recipe I’ve ever seen work for making really impactful companies is both a giant vision and a good step one, two, and three. You have to have both, and neither without the other will work.”

#4 Get ramen profitable

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