"I don't know of a single VC investment that began with an associate cold-emailing a startup."

I can vouch from personal knowledge that this has happened a number of times at a number of different European VCs, and at least once with a major US VC in the last year.

I'm guessing it's far less common for YC startups because YC startups have demo day which essentially initiates the process. They also have a strong network because of YC so it's much easier for a VC to get a warm intro to any YC startup.

It may just be a Europe vs US thing but I'd be surprised if it didn't happen frequently in the US as well especially at less well connected startups.

Certainly referrals have significant value but most major VCs will be able to use their network to get references on pretty much any startup in any case.

I read "associate" as the more important part of that sentence than "cold-emailing." So, just to clarify, you're talking about a cold email from an associate vs. a partner?

I interpret it as distinct - the junior employee. He refers to the partners subsequently, though still advising to delay (rather than skip) the meeting.

If you get cold-emailed by an associate at a VC firm, you shouldn't meet even if you are in fundraising mode. Deals don't happen that way. [5] But even if you get an email from a partner you should try to delay meeting till you're in fundraising mode.

And from the footnotes:

[5] Associates at VC firms regularly cold email startups. Naive founders think "Wow, a VC is interested in us!" But an associate is not a VC. They have no decision-making power. And while they may introduce startups they like to partners at their firm, the partners discriminate against deals that come to them this way. I don't know of a single VC investment that began with an associate cold-emailing a startup. If you want to approach a specific firm, get an intro to a partner from someone they respect.

It's ok to talk to an associate if you get an intro to a VC firm or they see you at a Demo Day and they begin by having an associate vet you. That's not a promising lead and should therefore get low priority, but it's not as completely worthless as a cold email.

Because the title "associate" has gotten a bad reputation, a few VC firms have started to give their associates the title "partner," which can make things very confusing. If you're a YC startup you can ask us who's who; otherwise you may have to do some research online. There may be a special title for actual partners. If someone speaks for the firm in the press or a blog on the firm's site, they're probably a real partner. If they're on boards of directors they're probably a real partner.

There are titles between "associate" and "partner," including "principal" and "venture partner." The meanings of these titles vary too much to generalize.

PG - just today, Yesware announced they raised an additional $13.5 million which started with an associate cold-emailing them.

http://www.yesware.com/blog/2013/09/18/just-simple-idea/

For what it's worth, we've also funded great startups where it started with one of our associates sending a cold email.

we need to combine individual experiences and create a curated tabular list of investors classified by different dimensions in pg's great article. such a list combined with this article would be the ultimate cheatsheet for fundraising.

The main problem with such a list is that the experience with an investor is very subjective and you need to get a lot more information about the said situation in order to assess what really happened there.

I imagine people will likely contribute to such a list only if they are anonymous (The bay area is very small and you don't want to upset investors).

It kind of reminds me of thefunded.com where I find little value in the reviews since I have no idea who's behind it and what was the situation that led the entrepreneurs to leave that review.

Where can it be very valuable? When you have a small network of peers who trust each other (an accelerator for example) and are willing to share more details on the interaction with the investor (and could possibly take a call if needed).

I also believe that YC has a secret list of all of the investors with some comments from the staff (I also know that startups are asked to give some feedback on interaction with investors - that list is probably a curation of the feedback given).

When dealing with an investor I always ask them to provide me with 2 references: 1 entrepreneur they backed who is doing well and 1 entrepreneur who is not doing so well (that helps me understand if the investor is helpful when things are not going so well and believe me there will be some point when things will be a train wreck).

Additionally I always end up pinging my network and doing some backchannel references on the investors knowing that the references they are providing me are probably curated.

That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this.

Deal details with investor names attached are not likely to materialize until long after the fact and even then someone is breaking a promise, which professionals with ties to VCs are not going to do. Founders could technically get away with this, especially if a deal fell through but this world operates largely on reputation and such a thing could easily pop up at a moment when you really don't need it later on.

Crunchbase has quite a wealth of info in it, as does duedil.com , those you could use to get an idea of who is on the other side of the table as well as google. The best source of info for a company looking for funding from 'party x' is to go and find out who else 'party x' has invested in and then to see if there are connections that can be sounded out off the record as well as companies that 'party x' was going to invest in but where the deal fell through (this is a lot harder to come by though).

You should absolutely do this, always speak to founders of companies who've raised money from a given investor before taking money from them. You can also ask investors about other investors (as in "have you co-invested with X before, would you ?").

> That is an excellent idea and barring a pile of non-disclosure agreements I could see a lot of people contributing to this.

The former law student in me sees it as a magnet for defamation lawsuits.

http://thefunded.com comes pretty close to solving that issue already.

Considering that this essay will be read for years, maybe you might like to fix this little typo: "If you're in a wizard at fundraising". Edited: "equity round valuation might me". PS By the way, thank you so much for all this incredibly valuable free advice!

Thanks, fixed.

Hey Paul, I found another small typo:

"but if we raise a few hundred thousand we can hire a one or two smart friends"

Should be:

"but if we raise a few hundred thousand we can hire one or two smart friends"

Thanks again for the article, very useful.

Fixed, thanks.

You're more than welcome

The thanks to Moriarty is a nice touch pg.

It's a real person. We actually had a Professor Moriarty in the last batch: http://techcrunch.com/2013/08/05/y-combinator-startup-7-cups...

That is amazing.

Thank you for posting this advice in a clear cut manner. As someone looking to raise money, but not currently residing in the valley, a thorough map to guide my thoughts and presentation development before venturing out into the West Coast VC waters is amazingly helpful.

> Since phase 2 prices vary at most 10x and the big successes generate returns of at least 100x, investors should pick startups entirely based on their estimate of the probability that the company will be a big success and hardly at all on price.

Can someone explain the reasoning here? Investing at a lower valuation means that for the same money in, the investor gets a higher cut of any payout, right? If an investor judges your company to have a 1% chance of ending up worth $100m and a 99% chance of it ending up at $0m, then they should be willing to invest if the valuation is << $1m and not if the valuation is >> $1m. Or not?

In practice few to zero investors make money that way. All the money in startup investing is in the big hits. Which means the way to make money as a investor is to try to invest in the companies you think will be big hits, and pay whatever the price happens to be.

> Since phase 2 prices vary at most 10x and the big successes generate returns of at least 100x, investors should pick startups entirely based on their estimate of the probability that the company will be a big success and hardly at all on price.

To give concrete numbers to pgs statement:

Pick 2 hypothetical startups: A and B. A will go on to be a 10 billion dollar company and B will be a 100 million dollar company. Now, valuations at round B series vary from say $40 million to $400 million (as pg said 10x). Note: they arent yet worth what they will be worth later. Now, say you take a 20% equity cut for the round and there is no dilution between this and when they go public (just a simplifying assumption). At the end, the 20% equity is worth either 200 million dollars for A or 20 million for B. The difference in profit is 180 million dollars; much more than any additional amount you would have paid to get in on a higher valuation. Therefore, if you believe the company to be of the A type, you will pay that 20% of a higher valuation.

> pay whatever the price happens to be.

This is what pg means: the difference in profit between A and B was 180 million dollars which far exceeds the difference in cost in investing in the two. This makes the investors rather price insensitive IF they think that you are in the A category. The reason that investors have the mental model of assigning to categories rather than guessing the percent chance of success is that they know often they guess wrong. There are simply too many variables to create any sort of accurate chance of success.

> Therefore, if you believe the company to be of the A type ...

That's the problem I have with this line of thinking. An investor doesn't "believe" it to be type A. An investor gambles that it's going to be type A. Reasoning after the fact that you should have been willing to spend more on the winner, without accounting for probabilities, is flawed reasoning. If anyone could see five years ago that the company was certainly going to be worth $10b today, then it would have been worth $10b five years ago (after adjusting for inflation). If no one else could see it but you, and yet you were somehow certain, then sure, but that's not typically the situation.

[Before continuing, let me point out that you flubbed the math: 20% of $10b is $2b, not $200m. The difference between A and B equity is $1.98b, not $180m. This wasn't particularly important to your point, but since I am continuing this example I thought it might avoid confusion to note the error.]

Since most people generally prefer frequentist reasoning, here's another try. Suppose you invested in 100 companies, one of which was company A and the other 99 of which failed. If you invested at 20% in all 100 companies valued at $40m each, then you've spent $800m and have $2b in equity. If you invested in those same companies at $400m valuation each, then you spent $8b for that same equity of $2b.

Haha, good catch on the math goof.

> without accounting for probabilities, is flawed reasoning.

This is the problem. It is rather illogical to believe that one can come up with an accurate probability of success for a given company given the multitude of variables both known and unknown. For example, AirBnB was thought to be not only bad, but a terrible idea initially yet it is one of the biggest winners in all of the YC batches. What probability of success did investors give it? Think of it from the point of view of an investor who passed up on AirBnB. How much do you think that these probabilities that you come up with mean when you know how bad you are at deciding whether to invest at all.

Who says the probabilities are going to be accurate? The point is that it's better to guess at probabilities for outcomes and then calculate than it is to blind guess at valuations. Presumably, YC will be in a better position than most to estimate the probabilities.

What do you mean they don't make money that way? Do you just mean that $100m isn't a hit? If that's all you mean, change that number to $1b or $10b or one hundred... billion dollars (pinky to lip). But I think what you mean is that investors make money by finding companies that are grossly undervalued, to the point that an order of magnitude change in valuation shouldn't affect the decision. I'm still skeptical of this claim. How many companies valued at $10m do you think have a 10% chance of ending up at $1b+?

Almost all phase 2 startups will be worth zero, or nearly zero. Some will be worth $BIGNUM. If you invest in the latter, you will be rich irrespective of whether you invested at a valuation of $BIGNUM/100 or $BIGNUM/200. If you invest in the former, you will not be rich.

Moreover, whatever money you make on any startups that do not make $BIGNUM is rounding error by comparison.

Your questions are interesting, because (outside of the startup world) they are based on sound logic. The basic rules of expected value don't apply to startups, because the present value is not a good predictor of future value. Some people are good at predicting the outcome (success vs failure), but nobody can get the number right ($10m vs $1b). Any investor who lets marginal changes in valuation influence his decision is essentially calculating a probability using a random number.

> The basic rules of expected value don't apply to startups

If you'd reword that as "the basic rules of expected value are difficult to apply to startups", there'd be some chance it was true :).

And yet, difficult as it may be to apply, expected value is the framework to rationally make a decision about low probability / high payoff investments. Of course, if YCombinator is already invested at an early stage (note: when the valuation is quite low), I can understand why pg wouldn't care too much about the later stage valuations. If you look at what's best for YC, it's first and foremost that companies get the money they need to succeed (an incentive aligned with the founders and any investors) but probably also that the valuations (after their own investment) be as high as possible so that more of the pie remains for later investments. This latter incentive is clearly not aligned with investors and as an investor I'd take the advice to disregard valuation with a big grain of salt.

Great explanation !

Peter Thiel (via Blake Masters) has a good discussion about this: http://blakemasters.com/post/21869934240/peter-thiels-cs183-...

Excerpt: "To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund." This is the big hit, and VC's are trying to optimize their chances of getting one of these. That's different from trying to precisely calculate expected return. As long as you've found it, it won't matter if you paid a bit too much.

It may be worth pointing out that pg could have some interest in what's being said here, though I don't by any means think that's his motive. Since YC takes equity before stage 2, it's much better for YC if investors over-invest in startups, since that'll improve their chances of winning.

I actually think he's more likely to simply care a lot about making life better for founders, though. He may care about investors too, but I warrant it's less.

Not, because the this framework is for high-growth potential startups, not regular businesses.

The first decision is "Will it work? Does this team good business here?"

If yes, the expectation for high-growth must be "huge". At that point price is less important because 100X or 50x is still a big yes.

[edit: what he said]

Thanks Paul for taking the time to share this wisdom outside the YC Collective. These words will have long lasting, positive effects on the ecosystem. Much appreciated.

I like "We'll succeed no matter what, but raising money will help us do it faster."

I think this is a great universal negotiating technique. It's also useful for job hunting. Once you have time on your side (cash flow) you can afford to walk away from suboptimal deals.