This morning, Y Combinator is publishing a 70-page Series A guide based on its work with 190 YC companies over the last couple of years.
Its part of an initiative launched in 2018 to help these alums understand how Series A rounds work and how to make them work to their advantage.The program is led by YC partner Aaron Harris, with whom we talked at the programs launch and who we caught up with again earlier this week to find out whats in the guide, and why given the many related posts that YC publishes on a regular basis the outfit felt the need to put something so massive together.
Excerpts from that chat follow.TC: Youve been working expressly with companies on their Series A rounds for a couple of years.
What are some of the misconceptions around how to land these financings?AH: I had this idea that Series A rounds were understood on the investor side that they are looking for ARR, plus profit, then comes funding.
But the metrics that people like to talk about, theyre really meaningless.
Weve seen companies funded with $200,000 in ARR and companies funded with $9 million in ARR.
Its really fundamentally a bet on what the investor thinks the future looks like based on the founder and what the business is doing at that point.
Its entirely possible to raise on a great story and no metrics, versus great metrics and no story.TC: If you dont need to reach a certain financial threshold, then how do you know when its time to reach out to Series A investors?AH: Theres a lot of preparation required [before doing this]; we advise against companies going out to market because of a false signal.
Sometimes, an investor wants to give a team a term sheet and they misinterpret this interest and kick off the fundraising process before theyre ready.TC: How many investors do founders have to meet with on average?AH: They meet with 30 on average to produce a single term sheet.TC: Are these preemptive offers then good news?AH: They arent as good as they seem.
If an investor preempts your round, you might think youve won.
But looking at dozens of preemptive rounds versus non-preemptive rounds, weve seen that companies wind up giving up 1.4% more in dilution for nearly $1 million less in funding when they do this, and thats quite a lot of your company.
Also, if people want to preempt you, theres a good chance others will like your company.TC: This guide is very detailed.
For TC readers wondering what theyll find in it, whats one example of the advice it includes?AH: We explain how to work through a diligence request by an investor.
Someone might say, Hey, can you give me a month-by-month breakdown of major customers? And weve seen founders give them a full list of their customers, then the VC calls them, and if the customer is having a bad day or [the VC] reaches the wrong person, that bad reference check can sink a round.
Its really important that founders ask instead about what the VC is trying to learn from the diligence request, then call those customers so theyre ready, You also want to make sure that 15 investors arent calling the same customer so that [that person or company] isnt overwhelmed.TC: Why make your findings available to everyone if youre trying to give YC companies an edge?AH: Were happy weve helped our companies do better at raising A rounds, but we want to help as many founders as we possibly can.
It goes back to [Paul Grahams] online essays for founders to our Startup School, through which were helping founders all over the world at no cost.
This guide is another step designed to solve that information asymmetry between what founders and investors know.If YC can help companies build bigger companies and level the playing field, thats just overall good for the rate of innovation in the world.TC: A lot of this advice assumes that the economy wont change.
Its based on two years of findings in a market where things have been clicking along nicely.
Have you considered the impact of this coronavirus slowing things down including the money flow to the Bay Area and making it harder for startups to get funded?AH: I dont think startups are killed by macro trends, unlike tech giants; theyre too small.
[PitchBook recently estimated] that there is $100 billion in dry powder [waiting to be invested in startups], but that sounds way too low to me.
In 2007, 2008, I was at Bridgewater Associates, and we saw the amount of money sitting on the sidelines in sovereign wealth funds, and various of these have trillions of dollars.
And some are investing directly in startups.