Fundraising Advice at YC Demo Day
How companies should think about this round.
I just went to YC Alumni Demo Day, and the quality of companies is incredibly high, as usual. There are more robotics companies, which gets me even more excited.
I end up sharing the same advice to many YC companies, so here I want to write it down for everyone.
Raise more money
The obvious incentive for VCs is to tell companies to raise more money. It gives them more options and costs nothing to say. Let’s explore the tradeoffs.
First, the more money you raise, the less of the company you own. Founders should model this out by getting good at the basic spreadsheet math to show exactly how many shares will exist under different scenarios. If you raise on SAFEs, don’t forget to model raising a priced round lower than your SAFE cap.
Demo Day is by far the easiest round you’ll raise. The FOMO is real among investors, who need to act fast. You’ve got a great coach helping refine your pitch. That same coach has been pushing you to grow faster, and your graphs look great so far. Future rounds will be harder.
Specifically, goal posts can change. I invested in a few companies in 2020 and 2021 at the seed stage who had clear plans for hitting targets for Series A. Some targets for hard tech aren’t as clear as ARR for SaaS. They executed well and hit those targets. But in between ZIRP ended, LPs pulled back from VC, and the amount of money available to invest went down. This meant that the performance needed to earn the next round went way up. Founders who couldn’t raise sometimes shut down their company. Sometimes they raised a bridge round at a bad price but kept the company alive. You can’t just model the rosy scenario of hitting all your goals, macro conditions remaining excellent, and your competition failing to execute. Founders should think about downside scenarios.
Bridge rounds are harder than you think. You raised a round saying “we need $X to do Y”, then you failed to hit Y, and are now saying “We need $Z to do Y+m”. But you already got it wrong before, so there is just less trust that you are correct that Z will be enough to win. Plus first time founders don’t appreciate how favorable Demo Day is for raising, and think it’ll be easy to dip back in.
On the margin, this means raising more money on Demo Day. But what about the marginal price?
Uncapped with no discount is an objectively bad deal for investors.
Some founders that raise extra money do so on SAFEs that have no cap or discount on the next round. This means when the next round comes, investments will convert that price. This is all the risk of the current round but at the next round terms, which makes it an exceptionally bad deal for investors. On the one hand, you guarantee allocation, which can be valuable. But the idea that you deserve all the risk with none of the benefit isn’t fair. Instead add any cap, and specifically:
Raise the cap for the marginal investor.
Paul Graham already wrote a great blog post about this called “high resolution fund raising”. The idea is that as you bring on new investors, you raise on higher and higher SAFE caps. This previously wasn’t tenable to manage with priced rounds (compared to convertible notes) and got even easier with SAFEs.
This is a fine deal for investors because the existing money committed has lowered the risk for the company. The incentive to act fast is very real.
Have a plan to turn more money into faster progress.
The whole idea of raising VC is that it’s a good deal for both investors and founders because investors will get disproportionately more back from the growth in enterprise value than they invest and companies can execute on that plan without requiring cash from traction. The quality of your model of what you could do with more money matters.
This means you have a target of $X to generate Y but raising 2X would let you hit 4Y. These plans can get very specific. Maybe you build more than one product to attack another customer segment sooner. Maybe you do the tooling for injection molded plastic instead of 3D printing for prototypes. Maybe you’re just buying growth, spending more on user acquisition with a longer payback period.
Separate from the high level categories, I think companies should actually have an explicit model for their growth. Many seed stage companies don’t! If you don’t know that spending $X will reliably get you to hit milestone Y, how do you know that X is enough to raise? Or way too much? That plan will often look like modeling your marketing and sales, understanding the input costs, understanding the engineering time and cost to deliver products, and understanding what customers will pay for them. Some models are definitely wrong (eg please never assume customer acquisition cost decreases over time), but not having a model is dangerous.
For intelligent systems specifically, you should understand how the product gets better with feedback. Then you might spend more to scale faster, get more feedback, and then have a better product. Autonomy is a spectrum, and you can speed run moving along forward full autonomy.
Questions to ask your investors
You can ask investors questions to make sure they are a good fit for your company. Even with all these, I highly recommend talking to founders at companies the VC backed where the company didn’t work out. This is especially true for VCs that lead a round and join a board.
What’s your check size?
What fund are you investing out of?
How big is it? How much dry powder do you have?
Do you follow-on?
Do you have a target ownership?
Do you join boards?
Have you ever pushed to remove a founder as CEO?
What’s your typical process from now till you close?
How long does that take?
Do you invest by thesis?
What do you think of this market?
Have you made investments in this space?
How do you support companies after investing?
How do you split your time?
This post answers most of these questions for my fund Tango.vc.
Make different types of decks
When you’re working on your Demo Day pitch, you have just a minute to explain what you do. That is very short and synchronous. Consider that there are other decks you probably want to put together, with the other combinations.
Very short & synchronous: demo day, just a few slides
Short & Asynchronous: the type of deck you can email that is enough to set the meeting.
Deep & Asynchronous: varies from a memo to a full data room.
Moderate & synchronous: the live pitch deck. Have appendix slides prepared for live questions.
Deep & synchronous: probably not needed because this mode doesn’t match how most investors decide.
Also consider the goal for each stage. Demo Day is about starting a conversation. The deck you email before a meeting can help prepare the most incisive questions. And what you share afterwards should complete diligence and get to a close.
As much as I’d like to see all the materials as an investor right away, you can gate access by interest. That means saying no you can’t see the full data room until we meet. The middle ground is that sometimes a memo is better at explaining something than slides in a deck. I usually prefer memos to slides because writing refines your ideas.