Ask YC: How do you (or how did you), a start-up, get your first lump sum of cash?
37 comments
Don't get VC.
Save and don't quit your day job. I've been involved with several start-ups, including one I'm working on now. The great thing about tech is for the most part when you're just starting you don't NEED a manufacturing facility, specialized equipment, a huge support or sales or factory staff, etc...
Hardware and bandwidth is commoditized and available month to month for cheap, and can easily scale as your demand grows. Start with free software like Linux, Postgres, Apache, JBoss, etc... even if down the road you want to go with Oracle or something similar. Go small and grassroots with your marketing and see if people like your product/service first, before you decide you need to blow half a million on marketing. Use contractors instead of hiring people like designers, dbas, etc... Maybe you need to hire them after you get 10 clients or 100,000 users or whatever, but start off paying for the hours you need.
So what do you really need? You need a few hundred dollars to incorporate, setup a business bank account, and consult an accountant and/or attorney. You'll probably need some servers w/bandwidth for a month or two or six. A few grand here. And you need a product/service.
Start off building/writing it in the evenings, weekends, and make take a week of vacation and just work on it. See how you can do without quitting your day job. Sure it takes a little longer, but honestly that's a small price to pay to keep control of your enterprise, and often is less time than you'd spend prepping for and applying for VC, and getting turned down, and trying again....
All this applies only to soft-tech startups (web sites, software, online services, etc...) but I've dealt with many folks who were convinced we'd need $250,000 to get things going, and were shocked with a month or two later I had nice five figure checks rolling in off of a total outlay of just under $10,000. The company has no debt, and no one controls it but we the founders.
You should be able to scrape together $10,000 with a couple of partners. And in the end you're in control and you owe nothing to anyone.
Save and don't quit your day job. I've been involved with several start-ups, including one I'm working on now. The great thing about tech is for the most part when you're just starting you don't NEED a manufacturing facility, specialized equipment, a huge support or sales or factory staff, etc...
Hardware and bandwidth is commoditized and available month to month for cheap, and can easily scale as your demand grows. Start with free software like Linux, Postgres, Apache, JBoss, etc... even if down the road you want to go with Oracle or something similar. Go small and grassroots with your marketing and see if people like your product/service first, before you decide you need to blow half a million on marketing. Use contractors instead of hiring people like designers, dbas, etc... Maybe you need to hire them after you get 10 clients or 100,000 users or whatever, but start off paying for the hours you need.
So what do you really need? You need a few hundred dollars to incorporate, setup a business bank account, and consult an accountant and/or attorney. You'll probably need some servers w/bandwidth for a month or two or six. A few grand here. And you need a product/service.
Start off building/writing it in the evenings, weekends, and make take a week of vacation and just work on it. See how you can do without quitting your day job. Sure it takes a little longer, but honestly that's a small price to pay to keep control of your enterprise, and often is less time than you'd spend prepping for and applying for VC, and getting turned down, and trying again....
All this applies only to soft-tech startups (web sites, software, online services, etc...) but I've dealt with many folks who were convinced we'd need $250,000 to get things going, and were shocked with a month or two later I had nice five figure checks rolling in off of a total outlay of just under $10,000. The company has no debt, and no one controls it but we the founders.
You should be able to scrape together $10,000 with a couple of partners. And in the end you're in control and you owe nothing to anyone.
This to me is a much more common path to success. You avoid debt, determine if there is a market, and stay flexible on your objectives. Once you take 500K or more you can become committed to a path of action just because of the funding and not wanting to appear wrong--I must be smart these guys gave me $500K. If you are willing to listen, you can learn much more from 30 prospects than 30 VC interviews. And it's often much easier to talk to 30 prospects (some of whom may even become customers). To me the time to start talking to VC's is when you have clearly identified a market opportunity that will benefit from additional investment because you are consistently exceeding your plans.
We foresook the quest for VC funding 2 years ago, and think it's one of the best decisions we made. But having said that, I've held key roles at 3 VC-funded startups, and at none of them was $1MM in revenue a predicate.
At $1MM/yr (in product revenue), you're already funded.
At $1MM/yr (in product revenue), you're already funded.
For a software startup I don't know that you need a "lump of cash" of more than say $5-10K. You don't have that many capital expenditures compared to other industries (e.g. if you are going to design a chip you need at least $1M for the masks and almost that much for the design tools).
In my experience, VC's are asking "do you have customers" because they want to talk to them and double check that the reasons customers purchased and the benefits that the customers believe that they have gained match what you are telling them.
Also, it matters quite a bit if you are profitable in terms of your negotiating position. If you are unprofitable and tell an investor "we'll be out of money in six months" guess when the serious negotiations often start?
I have never heard of 7 employees being a magic number. Or $1M in revenue.
Also, I would gently disagree with your statement:
"Investors know that the failure of a startup isn't necessarily because of the idea, but in not having enough capital to keep afloat while figuring out how to make money."
I think investors value demonstrated results (e.g. happy customers) a team that can execute well together, and the possibility that they are investing in acceleration of the business, not salaries for folks still trying to figure out how to make money.
Consulting and working on the product in parallel has been one approach I've taken, another is keeping my day job and working nights and weekends with a partner. I think if you conceptualize the problem as how to raise 500K to $4M you overlooking the most important risk: market risk (is there a market for your product). Most teams don't fail because they can't build what they set out to build in my experience, most fail because there wasn't a market and they were not willing to adapt, refine, and improve the product until they found a market.
In my experience, VC's are asking "do you have customers" because they want to talk to them and double check that the reasons customers purchased and the benefits that the customers believe that they have gained match what you are telling them.
Also, it matters quite a bit if you are profitable in terms of your negotiating position. If you are unprofitable and tell an investor "we'll be out of money in six months" guess when the serious negotiations often start?
I have never heard of 7 employees being a magic number. Or $1M in revenue.
Also, I would gently disagree with your statement:
"Investors know that the failure of a startup isn't necessarily because of the idea, but in not having enough capital to keep afloat while figuring out how to make money."
I think investors value demonstrated results (e.g. happy customers) a team that can execute well together, and the possibility that they are investing in acceleration of the business, not salaries for folks still trying to figure out how to make money.
Consulting and working on the product in parallel has been one approach I've taken, another is keeping my day job and working nights and weekends with a partner. I think if you conceptualize the problem as how to raise 500K to $4M you overlooking the most important risk: market risk (is there a market for your product). Most teams don't fail because they can't build what they set out to build in my experience, most fail because there wasn't a market and they were not willing to adapt, refine, and improve the product until they found a market.
digg.com got $50k from the founder of textamerica.com. We did some cross-linking at the time. Before that it was all Kevin's savings.
Our first lump of cash came from angel investors that I got to know working (as an employee, not a founder) in a previous startup.
In general, people who know you already, are more likely to be willing to bet on you.
Biz plan competition, some family and friends, and we work out of a house. We pay for food and servers, haven't even reached the $500K mark yet. You don't need much when you're hacking.
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I don't. I prefer to create content-type websites that require no up front capital (aside from time and hosting coosts) or "investors" and build quality backlinks, focus on SEO, and continue the process until I have 5-10 good websites. From there, the money slowly comes in month after month.
For example?
Everyone is always interested in "which site? which startup?", but quite a few people wish to remain anonymous.
If he doesn't mention it and its not in his profile, he probably doesn't want to say. (sorry if I am answering incorrectly for rob)
If he doesn't mention it and its not in his profile, he probably doesn't want to say. (sorry if I am answering incorrectly for rob)
That's a great point. I bet there are 100 people in the "get sort of rich, slowly" category for every 1 internet millionaire.
That thought had crossed my mind, but I figure he can choose to not answer if he doesn't want to.
Another interesting measure would be of how many deserving startups never did end up getting the initial money together...
Self-financed. Bootstrapped with savings.
From my experience, you are correct when you say VCs rarely are looking to lift a startup off the ground.
Most people I know and startups I have been involved in start off with cash from friends and family. One of the most difficult leaps you take is quitting a paying job and taking a small sum of money and trying things out. VCs definitely want to take an idea/product and scale it like you mentioned.
The one thing I would suggest is do you need 500k to start a startup? I would suggest the number is closer to 1/10th of that to survive for a year, at least as an Internet startup.
EDIT: To clarify, I meant 1/10th of that to start a company for a year, not to personally survive for a year. There are many necessary costs for a company that shouldn't total more than about that 50k mark, lets call it "servers and shit" costs. I was completely excluding living expenses!
Most people I know and startups I have been involved in start off with cash from friends and family. One of the most difficult leaps you take is quitting a paying job and taking a small sum of money and trying things out. VCs definitely want to take an idea/product and scale it like you mentioned.
The one thing I would suggest is do you need 500k to start a startup? I would suggest the number is closer to 1/10th of that to survive for a year, at least as an Internet startup.
EDIT: To clarify, I meant 1/10th of that to start a company for a year, not to personally survive for a year. There are many necessary costs for a company that shouldn't total more than about that 50k mark, lets call it "servers and shit" costs. I was completely excluding living expenses!
The one thing I would suggest is do you need 500k to start a startup? I would suggest the number is closer to 1/10th of that to survive for a year, at least as an Internet startup.
You need $50k to live for a year? Where are you living?
People often forget about how many of their costs don't exist if they're not earning income: Obviously you don't have to pay income taxes any more, but also the cost of commuting disappears, and the cost of food might drop dramatically (depending on where you would eat lunch if you had a paying job).
I'd say that YC's $5k + $5k/person funding formula is about right -- $5k is likely to cover startup costs for a company (at least, for the sort of companies YC funds), and $5k should be more than enough to live off of for 3 months.
You need $50k to live for a year? Where are you living?
People often forget about how many of their costs don't exist if they're not earning income: Obviously you don't have to pay income taxes any more, but also the cost of commuting disappears, and the cost of food might drop dramatically (depending on where you would eat lunch if you had a paying job).
I'd say that YC's $5k + $5k/person funding formula is about right -- $5k is likely to cover startup costs for a company (at least, for the sort of companies YC funds), and $5k should be more than enough to live off of for 3 months.
If you're accustomed to an undergrad or grad budget, sure $5K might be enough for 3 months.
But not if you have a mortgage, student loans, a car loan, maybe some credit card debt, etc.
And rounds of funding can take months to close, so it is more like $5K for 7 months, not 3.
But not if you have a mortgage, student loans, a car loan, maybe some credit card debt, etc.
And rounds of funding can take months to close, so it is more like $5K for 7 months, not 3.
In this thread, we've been led from 500K/yr to 50K/yr to 20k/yr (5k for 3 months) and now back to 50K. I think most everybody has loans, credit card debt, and a mortgage. But if you're sufficiently young enough and want to have a startup in the next 5 years, don't get a mortgage, get a normal job to pay off the student loans and credit card debt, and save up some money.
I seriously doubt pg actually expects people to do YCombinator with $0 saved up and tons of debt and live on 5k for 3 months. Or worse, with an illness or surgery that needs to be done. Get all that out of the way, pay off your loans and credit card debt, and save up some money by working corporate. Plus you'll have experience, good references, friends, and maybe good contacts from working at a company.
I used to think I was old when I turned 21 and 22, but if you're 25 or 30 when you start a startup, that's fine! But before you work at corporate, make sure you do your own startup with customers and everything in college so when you're hired, you're respected and management wants to hear what you're saying, rather than HR placing you in a "trainee" program like two high school acquintances my age will be at the same company for the next two years. That gives you credibility from your coworkers, experience leading your own project from your startups, and a degree you've been able to pay for. Maybe you could even get a Master's degree in Business or Computer Science that the company will pay for while you work.
This means you won't be a "millionnaire by the time you're age 25" like everybody our age who's heard of Bill Gates during the late 90's has wished for, but getting out of debt by the time you're in mid-twenties is the new "being a millionnaire", with the cost of everything these days.
I seriously doubt pg actually expects people to do YCombinator with $0 saved up and tons of debt and live on 5k for 3 months. Or worse, with an illness or surgery that needs to be done. Get all that out of the way, pay off your loans and credit card debt, and save up some money by working corporate. Plus you'll have experience, good references, friends, and maybe good contacts from working at a company.
I used to think I was old when I turned 21 and 22, but if you're 25 or 30 when you start a startup, that's fine! But before you work at corporate, make sure you do your own startup with customers and everything in college so when you're hired, you're respected and management wants to hear what you're saying, rather than HR placing you in a "trainee" program like two high school acquintances my age will be at the same company for the next two years. That gives you credibility from your coworkers, experience leading your own project from your startups, and a degree you've been able to pay for. Maybe you could even get a Master's degree in Business or Computer Science that the company will pay for while you work.
This means you won't be a "millionnaire by the time you're age 25" like everybody our age who's heard of Bill Gates during the late 90's has wished for, but getting out of debt by the time you're in mid-twenties is the new "being a millionnaire", with the cost of everything these days.
"millionaire by the time you're age 25" ?
Is that what the kids are aiming for these days? Back when I was in high school the goal was "millionaire by the time you're age 30". Oh how times change.
Is that what the kids are aiming for these days? Back when I was in high school the goal was "millionaire by the time you're age 30". Oh how times change.
I don't think they think it's enough, but it isn't really about the money. You get in the right mindset when you start asking yourself, "well, how little can I live on?"
That is the right question to ask. People will made due -- not all the money needs to come from YC. Personal savings, credit cards, friends & family (both money and spare bedrooms), etc. make up the difference.
That is the right question to ask. People will made due -- not all the money needs to come from YC. Personal savings, credit cards, friends & family (both money and spare bedrooms), etc. make up the difference.
Spare bedroom can save a tremendous amount of money for you, and it isn't much of a sacrifice if you are a good guest.
An underrated startup technique :)
An underrated startup technique :)
And I can't count the number of startups that have at least one other expense than just their cost of living. It's often not just code and coffee that makes a company.
And rounds of funding can take months to close, so it is more like $5K for 7 months, not 3.
Sure -- I'm a bit skeptical about the YC model of providing funding for only 3 months, too. My point was more that for someone accustomed to an undergrad or grad budget (which is probably most people here), $20k for a year is far more reasonable than $50k.
Sure -- I'm a bit skeptical about the YC model of providing funding for only 3 months, too. My point was more that for someone accustomed to an undergrad or grad budget (which is probably most people here), $20k for a year is far more reasonable than $50k.
$20k? Just after my student loans, that leaves me only $6000 for the year to divide up for food, rent, health related, transportation... Even if I move back to Eastern Europe, there's no way.
You must have some pretty huge student loans if you're paying $14k/year in interest...
Total payment of 1160/mo means $160K at 8% for a 30 year term. I'm sure there are many people in that situation.
Interesting. I had brought up the issue of student debt as being one significant impediment to startups happening at the pace that pg had predicted they would.
Some student loan programs have minimum payments enforced after the interest-free period, similar to some credit card payments. So, I would not assume that the payment is entirely interest.
Actually, it's "only" a little over $100k from 4 years of school. The problem is that it's become a b*tch to get loans under 10% without a co-signer. I couldn't...
Here's what a VC/Angel is looking for when they ask "Do you have customers?" What it really means is, do you have 7-8 employees and $1M in annual sales. It doesn't matter whether a startup is profitable or not, but can that startup grow from 2 founders to 7 employees and get customers. This proves it's worth taking a look at and may be scalable. Hopefully generating a 10x return on investment over the next 5-7 years.
Investors know that the failure of a startup isn't necessarily because of the idea, but in not having enough capital to keep afloat while figuring out how to make money. My VC friend also says raising the $500K that's typically needed is a real conundrum for a start-up.
So my question is, How do or did you, as a start-up, get your first lump sum of cash to get started?