Don't Raise Money Unless You Want It and It Wants You

Paul Graham emphasizes that raising money is not a defining quality of a successful company; rather, rapid growth is. Most companies that are well-positioned for rapid growth find that outside money can accelerate this growth, and their potential attracts investors. While fundraising is common for successful startups, it's not always necessary, and companies should only seek investment when they are truly ready and when their potential aligns with investors' interests.

Be in Fundraising Mode or Not

Fundraising can be very distracting for a company. It can consume a significant amount of time and take up mental space, hindering the focus on core business activities. Therefore, Graham advocates for a clear distinction between "fundraising mode" and "company building mode." Startups should be in one or the other, and fundraising should be a focused and dedicated period, allowing for a swift return to building the company.

• Don't entertain casual conversations with investors when you're not in fundraising mode.
• Only accept money from investors who don't require convincing and agree to terms without negotiation, such as convertible notes with standard paperwork.

Get Introductions to Investors

To secure meetings with investors, introductions are critical in phase 2 fundraising. The best introductions come from reputable investors who have already invested in your company, followed by introductions from founders of companies the investors have funded.

• Websites like AngelList, FundersClub, and WeFunder can be supplementary sources of funding, but prioritize leads obtained through your own network and connections.

Hear No Till You Hear Yes

Investors often use tactics that create the impression of commitment without truly committing to the investment. This can be misleading for inexperienced founders who are eager for funding. Graham emphasizes that you should assume that investors are saying "no" until you receive a concrete offer with no contingencies.

• To avoid being misled, get confirmation of any supposed commitments in writing.
• Treat investors as saying "no" until you get an explicit "yes" with no contingencies.

Do Breadth-First Search Weighted by Expected Value

When engaging with potential investors, apply a breadth-first search approach, meaning you should talk to multiple investors in parallel rather than sequentially. This creates a sense of competition and pressure for investors to act more quickly. However, not all investors are equally promising, so prioritize your interactions with those who are more likely to invest and whose investment amount would be significant.

• Calculate expected value by multiplying the likelihood of an investor saying "yes" by the potential benefit of their investment.
• Focus on investors who are likely to make a sizable investment and who have shown a genuine interest in your company.
• Meet with less promising investors later in the process or not at all.

Know Where You Stand

To gauge the progress of your interactions with investors, focus on their actions rather than their words. Every investor has a specific process they follow, and you should understand what those steps are, where you are in the process, and how fast you're moving forward.

• Always ask investors about the next steps in their process after each meeting.
• Don't be afraid to inquire about their internal procedures and timelines.

Get the First Commitment

Securing the first substantial investment from a well-regarded investor is often the most challenging part of fundraising. This initial commitment can significantly impact the momentum of your fundraising efforts, as other investors tend to be more receptive once they see that others have confidence in your company.

Close Committed Money

Fundraising can be a volatile market. Don't assume a deal is done until the money is in the bank. Investors can easily experience buyer's remorse, and unexpected events can influence their decisions. Once you have a commitment, move swiftly to finalize the transaction and secure the funds.

Avoid Investors Who Don't "Lead"

Some investors, often described as "valuation sensitive," prefer to follow other investors' leads. They are hesitant to invest until others have shown interest. These investors are not valuable in the early stages of fundraising, as their decision depends entirely on other investors' actions.

• Be cautious about approaching investors who insist on "leads" or contingent investment.
• These investors are essentially stating that they're not convinced of your company's potential unless others have already invested.

Have Multiple Plans

When investors ask how much you plan to raise, they are not seeking a fixed amount. Rather, they're trying to understand your ambitions, your financial needs, and where you are in the fundraising process. Don't give a precise figure; instead, have a range of plans, each tailored to different funding scenarios.

• Develop a plan for making it to profitability without any additional fundraising.
• Outline plans for growth based on different investment amounts, including hiring plans and potential milestones.
• Match your plans with the investment styles of the investors you are talking to.

Underestimate How Much You Want

While you should be flexible with your plans and adjust them according to the investment opportunities, err on the side of underestimating the amount you hope to raise initially. This strategy creates the impression of a successful fundraising process, as you'll be further along in your target than expected. It also puts pressure on investors to act quickly as they'll perceive limited availability.

Be Profitable If You Can

A key principle of fundraising is not to appear desperate for money. The best way to achieve this is to reach a position where you don't actually need funding. Strive for profitability, even if it's just "ramen profitability," meaning enough to cover basic living expenses. This demonstrates financial independence and strengthens your negotiating position with investors.

Don't Optimize for Valuation

Focus on the goals of fundraising: securing the needed funds to continue building your company and attracting high-quality investors. Valuation should be a secondary consideration. Don't let pride or competitiveness drive you to chase unrealistically high valuations.

Yes/No Before Valuation

Some investors will ask about your valuation before engaging in any discussion about the investment. If you have a set valuation from a previous round, you can share that number. However, if it's your first fundraising round, don't be pressured into naming a price. Focus on establishing interest before discussing valuation.

Beware "Valuation Sensitive" Investors

Investors who describe themselves as "valuation sensitive" are often compulsive negotiators. They will prioritize driving down the price, which can consume a significant amount of time and energy. Avoid these investors early in the process and only engage with them when you have a solid price established and have secured most of the necessary funds.

Accept Offers Greedily

When you receive an acceptable offer, take it without hesitation. Don't delay or reject offers in hopes of getting a better one in the future. Focus on securing the funds you need and getting back to building your company.

Don't Sell More Than 25% in Phase 2

Avoid selling more than 25% of your company's equity in phase 2, as this could make it difficult to raise a Series A round later. Venture capitalists typically prefer to invest in companies with enough remaining equity to keep founders motivated and involved.

Have One Person Handle Fundraising

If you have multiple founders, designate one person to manage fundraising, allowing others to concentrate on the company's operations. The founder who handles fundraising should be the CEO and should shield the other founders from the details of the process as much as possible.

You'll Need an Executive Summary and (Maybe) a Deck

While traditional phase 2 fundraising involves presenting a slide deck to investors, a comprehensive executive summary is always necessary, but decks are becoming less common. The executive summary should be concise, no more than one page, providing a clear overview of your company, its goals, and progress.

Stop Fundraising When It Stops Working

Stop fundraising when you reach a point where you are no longer getting meaningful leads or when investors are not actively engaging. Don't continue to pursue funding if you're not getting the response you need.

Don't Get Addicted to Fundraising

Fundraising, especially when it's going well, can be exciting. It can feel more glamorous than the day-to-day grind of building a company. Be careful not to become too invested in the fundraising process. Don't let it distract you from your core focus: building a successful company.

Don't Raise Too Much

Raising too much money can lead to unrealistic expectations and excessive spending. It can also set an unmanageably high bar for future fundraising rounds, as you will need to demonstrate significant growth to justify further investment.

Be Nice

Always maintain a professional and respectful demeanor when interacting with investors. Avoid arrogance, even when you are in a strong position. Be gracious, even when investors reject you, as this can open doors for future opportunities.

The Bar Will Be Higher Next Time

Approach your phase 2 fundraising as if it will be your last. Focus on achieving profitability with the funds you secure. Raising money in phase 3 is typically much more challenging, requiring demonstrable success and a clear path to substantial growth.

Don't Make Things Complicated

In essence, Graham's advice for phase 2 fundraising is to keep things simple. Focus on securing the funds you need through a straightforward process, and avoid introducing unnecessary complexities. Don't be afraid to walk away from investors who create roadblocks or attempt to complicate the process.

The key to success is to get fundraising behind you and return to building a thriving company. Focus on your product, your customers, and your business growth, and let the fundraising be a stepping stone on your journey.