BasicsWhat is a seed round?What is the value of an accelerator?When to fundraiseCan I raise money pre-product?What metrics should I hit to raise a round? When should I fundraise?When should I not fundraise?Is it ill-advised to seek VC funding pre-product?The pitchHow do I craft an effective pitch deck? How do I pitch my company?How do you pitch a big mission?How do I build a product moat & communicate it to an investor?What were the pitches that the founders of Figma, Replit and Instagram used to get funding?What are some great Pioneer pitches?Terms of the roundHow do I value my company at the seed stage? How should I think about equity and dilution?Should I optimize for a high valuation over having a particular investor?The fundraising processIs it better to raise from a founder or a VC?How should I allot time between fundraising and building product?How do I logistically go about fundraising?What questions should I ask VCs in the first meeting to gauge their quality?How does a typical seed round look, in terms of total reach outs and timeline?This is my first time talking with a VC. What should I expect?Understanding ventureWhat is the math of venture capital?What is the underlying game of venture capital?
Today, we consider a seed round to be an investment amount typically above $500,000 and below $3,000,000. That's a rough estimate. Each situation is different. In time, those numbers will change as they already have in the last decade.
In seed rounds, companies typically raise using SAFEs as opposed to issuing direct equity via a priced round.
"What people think they're going to get out of not just YC but Pioneer is different from what they're actually going to get... People come thinking they want either money or advice. But the real value you get is a community and a rebalancing of what is acceptable... It changes the norms of what you think of normal. Suddenly, you go from sending 50 emails a week to 5,000. Why? Because that's what everyone around you is doing.
You can, but it can be difficult. Without a product, you're selling the team and the market. For first-time founders convincing investors to give you money might be a tricky sell as it's hard to lean on expertise. Being able to demonstrate founder/market fit or just determination and passion for the problem you're solving is the best way for young founders to raise capital early on in the startup's lifecycle.
"It really depends on the market you're in."
"Here's the thing about Blake Scholl, building Boom. He knew more about supersonic aircraft than probably anyone alive at that point... I do think there's enough options in the world. Pioneer is one, YC is another one, Andreessen Horowitz is one, Sequoia is another one - that if you show expertise and passion you'll get a little bit of funding to get started."
Daniel Gross on the Boom story, office hours (video)
There is no easy answer. It depends on the product, team and market. Some startups with experienced teams (i.e., founders with former exits) can raise their seed with nothing but a deck while others need to already have revenue. The best investment firms (Sequoia, a16z) say $1,000,000 ARR for a Series A, and the standard for consumer companies doing well is 10% WoW growth for months.
One thing is clear: the best predictor of a successful fundraise is your company's rate of growth (measured in usage or revenue). At Pioneer, we're particularly keen to select players who do a lot with a little and in a short amount of time.
Practically speaking, you should time your raise such that you can get a good price for the equity you sell. That price will go up for investors the faster you're growing. So the best time to raise is when you're growing rapidly.
The obvious exception here is when raising initial funds to go full-time and build, which becoming a Pioneer helps you with!
Another way of thinking about this is to raise money when you feel that money is the main blocker for your growth.
"The first question question you should ask is actually "from whom should I be fundraising?"... The best way to fundraise is actually to not fundraise. Have a bunch of people you talk to that you trust that think you're really smart and capable, and you build those relationships over a period of time."
Avichal Garg, AMA (video - restricted to Pioneers)
Don't raise money for any external reasons, like: a) it sounds good, b) someone we admire told us to or c) it'll solve our problems. Raising money does not equal success, despite how some people may perceive it. Neither does it work as a blanket salve for your existing issues. Coincidentally, many companies make the same mistake with hiring – they assume that more people means a faster solution, when the opposite is often the case.
Raising money might also not be what you want for your business. There are plenty of companies that have never raised external capital that grew just from reinvesting money off the balance sheet and growing sustainably. Before you decide to raise funding, make sure that your goals for the company are aligned with your investors.
Some startups make the mistake of deciding to raise lots of money when their growth is still product-constrained in the hopes that they will figure something out. This doesn’t tend to work out. Of course, if you need money to deliver your product (hardware, biotech) this may not apply.
"Anecdotally, based on what I can recall right now, the people who come in there with absolutely nothing and raise giant rounds tend to not do well."
The best pitches tell a story. We start with a problem and explain why it hasn't been solved yet. How do you know this is a big problem? Why don't current solutions work? Ideally, there's a unique insight that you as the founder have into this problem that may not be immediately obvious. Bonus points if you can explain why you're the right person or team to solve this problem.
Some markets are easily understood—i.e., cloud storage for businesses. For those that require some explanation, educate the audience and show how it's a large market opportunity. For products that start out solving a specific problem that's a small subset of the overall market, paint a logical course of how you could someday occupy more of that market.
Illustrate the pains that people go through today because of this problem and what they've tried to solve it themselves. Anecdotal evidence and data go hand in hand here. What is your solution's core value proposition, and why is it so much better than what exists today?
If you already have a product, the best way to convince someone that your idea is working is to show traction.
"The largest mistake people make – and this is what I'm going to be working with Emma on – is no one can understand what your company does... If there is only one thing you get right it is please describe your product to a layman."
"For two years, I banged my head against the wall. Why does nobody get it. My core conviction was that fundraising should be logical... I learned that that is a complete mischaracterization of what the fundraising process is. Fundamentally, it's an emotional connection between you and the person across the table from you."
Laura Deming, AMA (video - restricted to Pioneers)
Defensibility is a question that comes up when it's not clear that a business makes it difficult for other competitors to enter the market. This is especially common for businesses that rely on some technical innovation that's freely accessible to other people (i.e., a startup using OpenAI's GPT-3 to power their core value proposition).
At the end of the day, what's most important is that you have users that love your product and the rest will follow. However, it's useful to have an answer to this question when pitching as it will be something investors might ask. Some potential answers might be data collection, network effects, system of record, and platform stickiness.
"I always fear that that's not a great way to think about your product."
Dylan Field presents Figma (video)
"Figma was very different in 2012 and 2013 and we didn't figure out where we were going maybe until more like 2014. You'll see some of the trail that was leading to what Figma is today, but you'll also see things that are very different."
Amjad Masad presents Replit (video)
"I'm from Jordan. Grew up there, went to university there. We were writing code on pen and paper."
Mike Krieger presents Instagram (video)
"I found the launch video for Instagram v1. And in a total coincidence, we launched exactly 10 years and a 1 day ago. Could not be more well-timed."
At the seed, it’s predominantly market which will determine valuation. Typical seed valuations today tend to be in the range of $8m-$15m. Hotter companies can go much higher, especially in the case of successful founders.
There are more resources, structure and standardization for later rounds (Series A, B, C, etc.) where ARR multiples tend to be the main framework (for SaaS companies). Strategically, at this stage, we'd advise companies not to say they’re raising at a specific valuation. Rather, it's more useful to say your round size, which somewhat implies valuation but lets the market set the price. In the event the round becomes competitive both round size and valuation will increase.
It's normal at the seed-stage to sell about 10-20% of the company. It's important to retain enough ownership of the company so that your goals are aligned with that of the company so don't over-dilute yourself by raising too much at a low valuation.
Beyond that, we recommend focusing more on the people that you're partnering with over the long run rather than the minutiae of the price and round size. Raise enough for you to accomplish the goals you've set for the company, make sure you partner with someone you're excited to work with, and get back to building your business.
"The value of the partner is much more important than the valuation."
Both parties bring something different to the table. Capital from a VC is intended for companies that have the potential to be billion+ dollar companies. VCs are well-networked and given that they're writing larger checks, can be good long-term partners (on the flip, they can also be a big pain so choose your partner carefully). Founders will typically write smaller checks as angels and can bring some domain-specific expertise.
"Venture capital is a dollar that is meant for stratospheric outcomes, so you will have that pressure cooker."
"Everyone gets stuck raising money for too long, in my opinion. This is especially true for people who are very good at raising money... The better you make your product, the easier fundraising will get."
"It should be somewhat conversational about your company and plans. Ask for feedback and questions while you discuss your work. Specific questions we're always interested in hearing: their target ownership %, size of fund, how much of it is deployed, is the person I'm talking to the one that makes decisions (can be discernible if they're a partner or not), what's their investment process, what areas would they describe as their biggest strengths and value adds (in other words, why should we take your money over another firm's?). We were really surprised that some firms seemed not to have a good answer for that last one... The best VC meetings are a 50/50 conversational split between founder(s) and Partner. One other one that became really relevant for us that we didn't ask early enough (and caused some wasted time) was: what is your firm's policy on conflicts? Are there any other portfolio companies that would need to sign off on an investment in us? Be sure to get references from founders already in the VC's portfolio. This is especially true of companies that didn't work out. And be sure to backchannel these – the VC will only give you references for companies they're confident will be glowing in their recommendation."
Erik Dunteman put together a visual of his seed round in early 2021. Yours will inevitably look different. This is just one data point. But helpful in two ways: a) you shouldn't underestimate the time that it takes to raise money and b) you should prepare a long list of possible investors and expect a low hit rate.
What would be a typical back and fourth from initial emails to close?
- It will vary, but if your first meeting is with a decision-maker, things should wrap up quickly at the pre-seed and seed-stage rounds. Small funds will be able to make a decision within 1-2 meetings. Larger funds might have more process where you meet with someone junior, then there’s a diligence step, followed by a partner meeting; all of this can take 2-3 weeks.
- A typical flow might look something like Emails -> First meeting -> More emails -> Second meeting -> Offer, at which point you can accelerate your other offers (e.g. "Hey I just received a term sheet and I’m looking to wrap this process up, is there anyway we can move faster on your timeline?"). Once one offer comes in, you can drive to a close soon thereafter.
What might be a fast timeline at this stage? A slow timeline?
- A very fast timeline can be as little as a few days, but this is rare. More typical is several weeks to a month. Longer timelines can take several months. Things go a lot faster after you get some yes’s.
Is it typical for founders to reach out, or should I let Demo Livestream interest (and Pioneer’s intros) drive?
- Founders can reach out cold, but if possible it's better to leverage network for warm introductions. Make a list of everyone you want to talk to and find a way in. Set up the meetings you don’t care as much about first so you can get some practice in before pitching to the people you’re more excited about.
What is email etiquette?
- In your initial intro request, include an easily forward-able blurb about what you're doing, followed by a deck if you feel like there’s some interest. You could include the deck in the intro request but it's not necessary.
- Example: “Hi [friend], I’m interested in talking to X from Y VC firm. Here’s a forwardable blurb below: xyz, abc”. The intro-maker then sends an email: “Hi X, hope you’re well. Was fun running into you at the mountain last month, let's hike again sometime! Sending along a company in Pioneer that I think might be a good fit for your fund—blurb below [blurb]”
Should I always attach a deck? Is PDF best? With or without presenter notes?
- PDF is good. Some use Docsend to track who’s opening, which works too. Including it in the intro or once there's interest is up to you – wouldn't have a material difference.
This is probably one of the least understood topics for founders when pitching VCs.
VCs manage the money of several parties (Limited Partners, or LPs). You can think of these parties as very large funds—endowments, pension funds, extremely high net worth individuals, etc. These funds spread their money across different asset classes with varying return profiles—the stock market, index funds, bonds, private equity and venture capital (PE/VC), etc. Of all these assets, PE/VC is considered to be the "highest variance," or the category in which you can make a lot of money or lose a lot of money. Therefore, VCs are looking for investments that can fit this requirement.
VCs aren't looking to invest in "safe" businesses, or companies that can guarantee a low rate of return. Their LPs already have exposure to those kinds of businesses through other investments. Therefore, each individual investment needs to have the potential to make a lot of money. This is why market size is so emphasized by VCs when evaluating a potential investment. A company that has an upper limit on how much it can make doesn't fit the target profile of a high variance investment.
That's why you often hear things like "this company can return the fund." Remember, when a VC invests in a company they don't get 100% ownership, usually only around 10% after further dilution. Further, most of their investments in their portfolio are risky by definition and are likely to cause them to lose their money. Therefore, in order to potentially make lots of money there needs to be a few companies that can become unicorns (valued over $1B), netting the VC the requisite returns they're looking for.
"I'll give you a really concrete example, actually, to help you understand why the math is so hard and how that backs into a portfolio, and why that means European and American investors do very different things."
Avichal Garg, office hours (video - restricted to Pioneers)
"The thing that matters the most at the end of the day is pattern matching. What people do when they invest is they will pattern match on something that checks the boxes for them."