YC Partners: What preparations do startups need to make when raising funds?
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YC Partners: What preparations do startups need to make when raising funds?
Fundraising is not the goal; creating great products is the key.
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Note: This article is part of the TechFlow series "YC Startup School Chinese Notes" (updated daily), dedicated to collecting and organizing Chinese translations of YC courses. The fifteenth installment features Geoff Ralston, YC Partner, and his online lecture "Fundraising Basics."
Preparation
We plan to deliver two fundraising lectures. The first, led by me, will be a high-level overview. Next week, my colleague Kirstie will dive deeper into fundraising mechanics and share her insights.
Before we begin, I recommend checking out library resources on fundraising, including Paul Graham’s essays on startup funding. While somewhat outdated, these materials can help you understand the fundamentals of fundraising.
Additionally, I’ve written a guide on seed fundraising—feel free to reference it if interested. There are many other useful resources, such as videos from last year’s school launch and guides on starting new companies.
The Challenge of Fundraising
Starting a company is extremely difficult. Among its many challenges, fundraising may be one of the toughest—even for those who enjoy the process.
In reality, the market isn’t as fair or open as it might seem; often, it feels strange and frustrating. While some founders might say, “Oh, fundraising was easy—I walked up a hill and people just handed me cash,” that’s the exception, not the norm.
When fundraising, you’ll hear “no” repeatedly, and most people won’t support you. They’ll tell you why your startup will fail, why your product won’t work, or why the opportunity you describe isn’t real or viable. Sometimes they’re right—but you can’t let their opinions shake your resolve, because persistence is essential for survival.
The key to successful multi-round fundraising is unwavering perseverance and belief. No matter what you hear, no matter how many times you hear “no,” or how convinced others are that your startup is doomed—you must maintain your conviction.
The Fundraising Process
First, you need to clarify your startup story—why your product or opportunity matters for the future. This may involve adapting to market demand, growth potential, and scalability.
Second, you need to identify the right investors, conduct research, and talk to other founders. Organizations like Y Combinator can offer significant assistance.
Next, create a spreadsheet listing everyone you need to speak with, then reach out directly or seek introductions.
Then, continuously pitch your story and refine your plan into a more compelling version to attract potential investors.
Eventually, you’ll meet the right investors—those who resonate most with your vision or are willing to back you early.
Once terms are agreed upon, deposit the funds and return to building your business.
Why Venture Capital Exists and Why Fundraising Is Necessary
Why does venture capital exist?
First, because there's market demand—most entrepreneurs need capital.
Second, returns can be enormous, though not always. Consider Silicon Valley’s origins: Bill and Dave started Hewlett-Packard around 1957 with just $583 of their own money and never raised venture capital. That’s possible—but in practice, high-growth startups usually require substantial initial funding. Georges Doriot, a Frenchman, invested about $70,000 at roughly the same time in Digital Equipment Corporation, which later became an epic success, turning that $70,000 into $350 million. This outcome helped launch the entire venture capital industry.
Why do you need to raise money?
Because you need funds to pay expenses, hire talent, rent office space, and accelerate growth. As Paul Graham said long ago, startups are defined by growth. To grow, you almost always need startup capital. While alternative support mechanisms exist, relying solely on them is difficult. Moreover, having capital provides a competitive advantage—so most startups choose to raise funds.
Timing Your Fundraising
Timing is a constant consideration for founders. Many believe the best time to fundraise is when you need the money.
But reality often contradicts this. In fact, the best time to raise funds is when you don’t need them. When you’re well-funded and positioned for massive growth, investors see greater opportunity and become more interested.
Of course, this isn’t always feasible. But throughout your entrepreneurial journey, if you reach profitability or demonstrate strong prospects, funding tends to follow naturally.
Conversely, when your company is struggling and urgently needs cash to survive, investors sense desperation, making them more cautious or even unwilling to engage.
Therefore, founders should plan ahead, clearly define funding needs, and seek investment after achieving key milestones or profitability—to secure stronger negotiation leverage and higher fundraising success rates.
How Much Should You Raise?
A useful rule of thumb is to think through this question: assume this is the last time you’ll ever be able to raise money. Therefore, raise enough so you won’t need another round and can achieve profitability.
However, this isn't always possible, depending on your startup’s scale and needs.
At minimum, know your spending requirements and run basic math—such as calculating average employee costs.
For example, engineers might cost $15,000 per month. Another common rule: seed funding typically lasts about 18 months. Regardless of your timeline, you’ll need to raise again within that window. During this period, you must hit compelling milestones or reach profitability before hiring additional staff.
How to Increase Fundraising Success Odds?
As a founder, ask yourself: if you were an investor, would you invest in yourself? Are you capable of turning ideas into reality and building a successful company? This matters because investors bet on *you*—not just your product or service.
Investors also evaluate whether your story is credible and resonant. Your narrative must represent a massive opportunity—because VCs care about returns. If your product lacks appeal or your story fails to persuade, revisit both to increase investment likelihood.
Spend time defining the core of your story and build a compelling pitch around it. As a founder, you must become a salesperson—pitching to investors, partners, and customers alike.
Even with a strong story and attractive product, funding isn’t guaranteed. Choosing the right valuation increases success odds—too high a valuation risks failed rounds; too low leads to excessive dilution.
Finally, once funds are secured, deposit the money and get back to work. Don’t over-optimize fundraising—it can harm company development and long-term success.
Fundraising Mechanisms
Convertible securities are indeed a common fundraising method, especially for early-stage startups.
Investors may prefer this structure because they believe in your company’s future but don’t want immediate equity. Additionally, convertible notes are simpler and faster than direct equity issuance, requiring fewer documents and lower legal costs.
Still, when using convertibles, carefully review all documentation to understand rights and obligations—avoiding potential risks and disputes.
*TechFlow Note: Convertibles are financial instruments also known as convertible bonds or convertible notes. They are hybrid securities combining features of debt and equity. Typically issued as debt, they give holders the option to convert into common stock under certain conditions and within specific timeframes. Convertibles usually offer higher yields than pure bonds due to the conversion option. If the stock rises, holders gain from appreciation; if it falls, they retain the bond’s principal value, offering downside protection.
Dilution
Dilution occurs when selling part of your company reduces your ownership percentage. For example, selling 20% of your company cuts your stake by 20%. If you raise $1M at a $4M post-money valuation, you've sold 20% of the company ($1M / $5M total = 20%).
However, convertible notes make actual dilution hard to calculate since no shares have been sold yet. There are illustrative dilution scenarios, but these aren’t real dilution. With convertibles, true dilution depends on multiple factors: additional funding, existing capital, and option pools. The more complex your convertible financing, the harder it becomes to assess real dilution.
To address this, we developed a tool called AngelCalc to help calculate actual dilution. It reveals your effective price after conversion—including hidden factors like future option pools. Dilution is complex; with convertibles, careful analysis is crucial to avoid unintended risks and losses.
Alternative Fundraising Methods
Beyond traditional routes, other fundraising methods include crowdfunding platforms like Kickstarter, AngelList, and WeFunder. These often serve as supplementary tools to close a round or fill funding gaps.
Angel investors and venture capitalists differ. Angels are typically wealthy individuals investing personal funds. Their motivations resemble VCs’, but they may also invest based on passion. Conversations with self-funded investors differ in tone and decision-making processes.
Besides angels and VCs, numerous alternatives exist—Kickstarter, AngelList, WeFunder, etc.—often playing supporting roles in funding rounds.
You may also encounter ICOs (Initial Coin Offerings), a highly complex fundraising method requiring blockchain infrastructure, cryptocurrency expertise, and compliance with evolving regulations. Thorough research is essential before pursuing an ICO.
Fundraising typically happens in stages: starting with credit cards or friends/family, followed by seed rounds, convertible notes, equity financing—and eventually, if successful and not acquired, an IPO (Initial Public Offering). Each stage meets different capital needs and comes with increasing complexity and regulatory demands.
How to Meet Investors?
Let’s discuss how to meet investors and conduct fundraising effectively.
First, do your homework. Research which companies an investor has backed and understand what they care about. Without this, you’ll enter negotiations at a disadvantage.
Second, simplify your pitch and capture attention quickly. Crafting a compelling narrative from the start is one of the best strategies. Bring a prototype or demo if possible.
Also, listen actively. This isn’t a monologue. Investor feedback is invaluable.
You may face setbacks early in investor conversations. Practice is critical. Most VCs have internal review processes—don’t expect funding after the first meeting.
Before fundraising, decide whether you need a pitch deck. It’s not mandatory, but some investors prefer it. Build your story around your mission, product, and vision—not around slides.
Finally, if negotiation arises, understand who you're dealing with and stay selective. Delay negotiations when needed and avoid going head-to-head with seasoned professionals.
Fundraising Isn’t the Goal—Building Great Products Is
Your top priority should be building a great product that customers love—fundraising is secondary.
Chasing fundraising success for its own sake is increasingly meaningless and often counterproductive.
There are now professional fundraisers who claim to have raised impressive sums like $400K.
Yet most founders shouldn’t emulate them. Focus instead on identifying the right investors and securing sound deals. Avoid being disingenuous—don’t ruin trust. When you receive funding, act responsibly. Be clear about your story. Speak honestly—don’t exaggerate or pretend to know things you don’t.
Fundraising is merely a small step toward your company’s goals. Yes, you need money—but choosing the right investors matters more. Seek those who help build your product, expand networks, and reduce risk.
Ultimately, closing a round is just the beginning. The real goal is building a great company.
Fundraising for International Entities
If you’re an international entity raising funds in London or the U.S., advice varies by context. Most U.S.-based VCs hesitate to invest in overseas entities. Therefore, if targeting Silicon Valley or other U.S. regions, strongly consider forming a U.S. entity—it simplifies and reduces the cost of fundraising. Conversely, if operating in London, the UK, or elsewhere, local VC communities may better understand your business than American investors. Targeting the right investors is crucial. Overall, this is a complex equation without simple answers.
Why Incorporation Before Fundraising Isn’t Always Necessary
Many believe incorporation must precede fundraising. This mindset is flawed. If you intend to raise funds, you should first become an LLC or restructure your company accordingly—otherwise, investors won’t commit. Once incorporated as an LLC, formal incorporation isn’t necessary unless required. Today, incorporation is straightforward—only pursue it when truly needed.
When Equity Is Preferable to Convertible Notes
Some companies have successfully raised up to $30M via convertible notes. Notes are fast and simple—ideal when speed and convenience are priorities.
From an investor perspective, however, equity is more appealing. Buying stock means owning part of the company and gaining profit-sharing rights. Bonds, by contrast, only represent a promise—no ownership or rights.
As you raise larger amounts, equity becomes more valuable—signaling greater assets under management. With $5M–$10M raised, consider forming a board to guide capital allocation.
At this stage, experienced advisors become essential—they’ve seen similar situations before. If you’re still in seed phase and entering the market, convertible notes may be better—you lack time and bandwidth for legal complexities, and notes offer streamlined solutions.
In short, as your company scales and formalizes, equity is usually the better choice.
How to Share Information with Investors
Be truthful—never exaggerate or mislead. Avoid hiding problems through deception. Yet when presenting your growth plan, craft a compelling and believable narrative.
Only sell company stock if you fully understand your role as a fiduciary. Once you accept funds, remember: that money belongs to the company.
Traction means attracting users—without users, you have no traction. Growth velocity is key. The best way to connect with investors is through warm introductions from existing backers. Otherwise, cold emails and outreach to other founders—with a credible, impressive story—can work.
When raising seed capital, clearly explain how you’ll use the funds—mention achieved milestones, revenue levels, and hiring plans. Above all, provide clear, accurate, and trustworthy information to attract more investors.
How to Discuss Financial Projections with Investors
Regarding financial projections, if an investor asks for five-year forecasts, they’re likely inexperienced—who can accurately predict five years ahead? Better to present 12- to 18-month plans and outline solid strategies for Series A and B rounds.
Don’t make completely fabricated long-term projections. If investors demand them, they may lack judgment—or not be good investors. That said, you can still discuss your opportunity: share customer demand and addressable market size. Don’t frame it as a forecast—instead, help investors imagine: if you capture a meaningful share of this market, how big could revenues become? Could this be a billion-dollar company?
How to Manage Company Dilution?
Consider dilution at each company stage. 10%–20% dilution in seed rounds is reasonable; beyond 30% becomes concerning. Series B dilution is typically 20% or less, depending on company performance.
How to Handle Blockchain-Related Investments?
When seeking blockchain-related investments, talk extensively with experienced founders and study investors’ portfolios to understand their focus. Traditional VCs wary of blockchain and non-traditional crypto-native investors require different approaches. Craft a compelling narrative explaining why your company’s unique structure makes strategic sense.
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