Waseem Daher started in computer science at MIT. He cofounded two companies that were both acquired prior to cofounding Pilot. Justin Kan is the founder of Atrium. He’s started many companies, one of the biggest successes was Twitch. He was a partner at Y Combinator for a couple years, advising early stage companies. Recently, he has started Atrium. Here, Waseem and Justin discuss how to successfully raise a Series A.
[Justin] For the past 10–15 years in the market, there’s a shift towards larger seed rounds. In 2007, my seed round was $300,000 and the Series A was $2 million. Now seed rounds can be multi-million dollars. And the people investing do very little diligence they just want to see if you have a great idea. The seed round seems easy, so a year or two later, you’re completely unprepared for the diligence and expectations that a professional venture capitalist expects.
[Waseem] Another thing I think contributes to it is in the seed round, the focus is on the narrative about how great you are, how great the vision is. Whereas, when it’s time to raise the Series A, it can be much more metrics focused. Your investors are gonna look at, what traction have you actually achieved, what did you actually do? Which is harder to fake.
[Waseem] For our first company in Boston, it was totally bootstrapped. We didn’t raise any money at all. We applied for an NSF grant; it was a government grant. For that company, we were young and did not know anything about anything, especially fundraising. And this was 2008 where you didn’t really have the robust networks of information on the internet. So I think we had some like bumbling conversations with some Boston VC investors. Because it was during the financial crisis, they just said no.
The next time, it was very nice because we had this track record from the first company. Oracle had acquired us, the team had started to build some cred. So for the second company, raising the seed round was a much more straightforward process. We just called up contacts we had made in the previous company.
[Justin] For Justin.tv, we actually raised a lot over successive rounds. So we raised that $300,000 seed round, which was mostly hitting up random angel investors and once again, repeating that begging process, but this time it was more narrative based. Over the lifecycle of the company, we raised about $45 million total.
[Justin] The entire lifetime of Twitch we felt like it was basically begging. When we got the seed round, that was a little easier as rich people just thought it was a cool idea. There was like all this hype around it, so people were at least willing to talk to us. We went up and down Sand Hill Road and talked to all these investors. Some weren’t interested because they said it was a “hit” business, like a blockbuster movie, which wasn’t what they invested in. Most of them just ghosted.
There were two things we did really badly. One was we were terrible at telling a narrative of what our company was. And the second thing was we ran the entire process linearly instead of in parallel. So it was basically going to one person and asking for money. They’d say no, and then we’d move on to the next person. So the second time, for our Series B, which was the $3.9 million, we ended up talking to like everyone, and we ended up having to go back to our existing investors who gave us another $3 million.
[Waseem] With the first company, again, we really did bootstrap it. We just felt like we should really be raising money because that’s what real companies do, and we want to be a real company. We felt like we need to be talking with investors which is actually not a good strategy.
So we spent a lot of time talking to this one firm. And they had the coolest meetings, and we spent a lot of time talking to them. But we didn’t really know how much we wanted or what terms. So that was frustrating because it was a lot of wasted time.
I think the experience that was more emotionally difficult for me was actually with the second company. Because of the success with the seed round, we thought that we’re going to have no trouble raising a Series A. Hence we went and we had a pretty aggressive ask, and no one was biting. One firm came back and told us, we like you, but we want to see more traction before we scale the money.
[Waseem] At every fundraiser, you’re raising money to get to another milestone. And the milestone is either, being profitable or the ability to raise even more money. So I think the way to do that is to back solve from, what is it going to take to successfully raise an A? What’s required from a metrics perspective? What is required from a traction perspective? What does that imply about how I’m gonna grow the team? Being thoughtful about the right amount of money does matter.
[Justin] I agree. I think a lot of people just make up numbers because that’s what they see other people doing. But you should have a plan that’s based on an operating plan to get to that milestone. If only for yourself. In fact, investors often don’t even ask to see it or it’s kind of a checkbox after the fact. But it’s good for you to have that plan for yourself. Then you can add some buffer.
[Waseem] The thing people say in B2B SasS is a million internal rate of return (IRR). I don’t think that’s a hard and fast rule. I think the calculus is a little bit more complicated, where there’s some premium you’re getting because of the caliber of the team, and there’s some premium you’re getting because of the traction you’ve gained. Depending on how big this column is, this column doesn’t have to be quite as big. Our investors essentially gave us credit because of our exceptional team. Whereas I think if the team were more unknown, I think investors will look instead at what has the company actually achieved.
[Justin] Yeah they don’t plug you into a formula. It’s really more about finding some partner that’s going to fall in love with your company, and you’re really just setting up a process where you think that, after you talk to a certain number of people at the top of the funnel, you’re going to end up with one or more people in love with you. I definitely think at the Series A stage, and then even in later rounds, it’s about the narrative that you’re pitching. Really making sure that you have a tight story for why this is a big problem that you’re attacking.
[Waseem] Agreed on the narrative. It’s easy to think about VC as a black box or machine that takes in companies and puts out money. But they’re people that have emotions and respond to stories.
[Waseem] It’s not about the firm, it’s about the partner, You’re going to spend a lot of time with this person. So the basic litmus test for me is, is there chemistry there? Do you trust them? Are they excited about your business? If you don’t like them, you probably shouldn’t take their money.
[Justin] Yeah, it’s somebody you can’t fire. So it should be someone that you actually want to see and get the advice of when you do have those board meetings. It’s really important that you do some research beforehand. Figure out who you want to talk to at every firm because they have relevant experience, or they’ve invested in similar companies in the past. The other thing I would do is spend time to get to know them once through the process. Really figure out if you think they can be a value-add to you. Don’t be afraid to call references of people they’ve invested in, or even someone they invested in that didn’t work out.
[Justin] Many provide no value-add or capital. But really good ones can really force you to think about issues that you maybe would choose to ignore if you didn’t have someone you had to report to. Oftentimes you don’t have anyone who’s going to challenge you on your assumptions.
They’ll try to be helpful in all these other ways sometimes, like, helping you find talent and with upstream capital providers. And then brand, actually. You’re kind of borrowing from the brand of the investor in a lot of ways, and that’s for potential customers, potential candidates who’ll join your company.
[Waseem] If you’re not harmful, you’re already doing awesome. I think the challenge with the average venture capitalist is, some of the motions that seem like they’re helpful are actually creating a bunch of work for you or your team, that can be a distraction from like the actual core mission you should be focusing on. I think the ways that our investors have been most helpful for us are the external accountability. It’s just the forcing function like, we have a board meeting, so we have to prepare for a board meeting.
[Waseem] We had one experience where we were talking to a partner at a VC firm, and this person was confident they could get us a term sheet. They said present to the partners and it’ll get signed 15 minutes afterwards. The co-founders and I sat for an hour. So it’s clear that even though this person thought they had the ability to get the deal done, that they didn’t. And I think it’s easy to underestimate these inner-firm dynamics where it is political and there is a ranking order.
[Justin] Some light-hearted ones, I went to pitch a VC and he wanted to talk to me about how he’d learned to speak Chinese for 20 minutes. Even though I am ethnically Chinese, I don’t speak it well. Another time, the guy just wanted to talk about his own achievements with YouTube.
Most commonly though is people who ghost. It’s weird, because they don’t wanna tell you no, because in the future they might want to invest. Somehow ghosting on you is better than telling you no outright because it preserves the option, even though it’s incredibly rude and disheartening to people who really need your capital.
[Justin] At a certain point, you need to actually build your product. But when you’re really fundraising, you’re spending 100% of your time on the process of having meetings, doing pitches, and driving people through a funnel to convert to get to term sheets and then close those term sheets. And you can’t really be doing anything else. Many founders who do a good job at fundraising are building relationships during the time that they’re actually working on their company. Which I do think is a good idea because you are building relationships with someone, and they’re more likely to want to invest if they believe that you’re going to be successful, and they’re more likely to believe that you’re going to be successful if you spend time getting to know someone.
[Waseem] My advice is to spend as little time on fundraising as possible. Any time you’re spending fundraising is time you’re not spending growing your business and successful fundraising is not the same as success with your company. Then piece two is actually from a deal momentum perspective. You declare you’re raising money and then just get it done. The longer the process takes, time is not on your side when you’re raising money.
But to Justin’s point, it is also like a very relationships-based thing. People don’t like this idea that being totally transactional with you showing up for the first time with a deck and terms. I would identify a couple firms or people you want to work with, then meet them for coffee with no deck, and just have a conversation. So later when you need money, they have some context on who you are.
[Justin] Anything that’s not market should be a red flag because it means they’re also trying to do something else, other than just like be a normal VC and get money that way. We’re always wary of random foreign investors who have these weird terms and stuff like that.
[Waseem] It is their job full-time to raise money, so they have a much better grasp on the process than you do. I think the way you come at that or the way you insulate yourself against that is leaning on your advisors, your lawyers, your investors, folks in your network to sanity check if this a reasonable term.
[Justin] Yeah, money is life. If you don’t have money to operate your company, you are going to die. If you have one option, then you should just take that option — if it’s horrible, like if you’re selling yourself into indentured servitude forever or you have to guarantee it with your house, then don’t do that.
[Waseem] Yeah, I would say within reason. If the option is one that totally neuters any of your future upside for you or the team, then it’s actually not better than just shutting the company down or having it be acquired.
[Justin] Because we have this low interest rate environment, there’s been nothing to invest in. And lots of people have seen tech companies grow super fast. So there’s been this massive influx of capital by random people who found it to be easy money. Then there’s this streamlining of the investment process by using convertible securities like safes and convertible notes, which makes it easy for you to raise money incrementally.
[Justin] Sure, you can do anything. Silicon Valley people are obsessed with this path of raising money. There’s a seed round, there’s a Series A, there’s a Series B, there’s a Series C. Eventually, you get off that path and you just try to find capital from whoever will give it to you at that stage, or you’re profitable. There might be negative signals from raising money from random people because people in the market who might become your employees or future investors might think you couldn’t get it from a real investor.
[Waseem] You get a shared Dropbox folder. Then you make a bunch of folders that each have a number and then the description. Like “1” Employee Agreements, “2” Contracts. They should have a schedule of stuff you have to put together and every employment agreement you’ve ever signed and executed by the counter-party. All of the contracts you’ve ever signed, all of the terms of service you’ve ever agreed to, any software product you’ve ever used.
[Justin] There’s legal diligence and business diligence that your investors are going to do. For our first price round, we didn’t have a business at the time, so there was no business diligence. But the legal diligence process took about five weeks because we had to incorporate the company. On the more recent round, we closed pretty quickly because we compiled our business diligence upfront and had a folder we could share with everyone. We also did legal diligence beforehand, we had a terms sheet ready to go. Lots of times founders are more worried about getting terms sheets, so they understandably don’t do any of the pre-work.
[Justin] Well I don’t think we did a good job. If I was to do it again, I would definitely go deeper into explaining what Twitch fulfills for its users. I think we should have spent more time really focusing on that narrative and explaining what the phenomenon was and then, here’s the evidence that we’ve cracked something that’s riding this big wave, which is our numbers and metrics.
[Waseem] There are two types of companies that exist in the world. New market companies that are building a thing that doesn’t currently exist, and there are very solid, existing market companies. For us, the narrative on bookkeeping is that it is the most existing market business possible. The narrative really focused on, how big is the market and answer is, it’s huge. Then, how big of a pain point is it on the nice-to-have, need-to-have spectrum? You want to be as far towards need-to-have as you can possibly be. And I think once you check those boxes, why will our thing be better? The second component of it was, look at the team we’ve assembled. It’s just an amazing team on the engineering, product, design side.
[Waseem] The thing that I have consistently heard from our investors, is that they mostly value warm intros from other founders. And that that’s way more powerful than anything else, even intros from your existing investors, or interest from other people in the ecosystem. So step one is getting connected with other founders, ideally founders that are current portfolio companies in those firms.
[Justin] It’s a bunch of things. When I started, I didn’t know much, so I was bad at even the core skills like programming, managing, fundraising. Now I’m not terrible at these things, I’m actually good at telling a narrative and really selling — whether that be recruiting, or selling to journalists or investors or clients.
Also, the exposure of seeing what attack factors work in the market or what are common mistakes you can avoid. And the last thing I’d say is there’s more purpose. It’s more intentional. When I started the first company, it was just something to do. Now, it’s a lot more goals-based around what’s gonna facilitate my own personal growth and learning. I’ve decided that a company is the best way to do that and so, there’s a little bit more intentionality around it.
[Waseem] The biggest thing for me is just having the two other data points to help us internally prioritize. For example, at the first company, everything seemed like an emergency. That every problem was going to kill the company. It wasn’t a healthy way to live, and it wasn’t productive. So with the second company, we were much more disciplined in finding items that actually mattered. In a given day, if a task isn’t completed we can ask, “Is this urgent? Do we need to do it tonight?” We’re better at work-life balance and that has really paid dividends.
[Justin] If the relative option of what someone in the corporate world is willing to pay for your company is much higher than what you can get from investors. I actually think that big companies, like the finance companies, are much better than investors at understanding what has value in general. For us, we got the $970 million dollar offer when we couldn’t raise money at a $600 million dollar valuation for Twitch, so it was a no-brainer.
[Waseem] There was an investor who was willing to invest less money that we were not as excited about. So we had that in one hand. Then we had the acquisition offer in the other, and I think there was two or three main axes that we tried to evaluate this on.
One is financially. X dollars now or X dollars as per the terms of the deal versus, what do we think the risk-reward trajectory of continuing to operate as a business is? Number two, which I think actually matters more is, is this going to be a good home for the team? Both for us the founders but also the employees? Because if nothing else, you personally are going to be subject to some amount of vesting when your company gets acquired. The actual dollars that go in your pocket are a function of how long you stay there. When we were thinking about committing to Dropbox, they checked the financials, and we thought our team would grow and thrive there.
[Justin] I would make a plan that you want to execute. Maybe that’s based on another company, if you understand what their metrics look like. If you’re building a direct-to-consumer CPG company, you understand what the market looks like, what kinds of proof points you need to deliver to raise the next round. But I would be doing it for yourself more than anyone else.
[Waseem] We looked at what other companies were raising at the time and determined where we thought we fell in the spectrum of these companies, which is actually not the right way to evaluate it. The way you want to do it is to actually back-solve it from subsequent fundraising — to raise the next round, this is where I need to be. This is how long it’s gonna take me. This is how I have to staff up to do it. What does that imply about how much capital I need to raise now?
[Waseem] Mixing business and pleasure has benefits and has downsides. There is a guy that was not an investor in our company that wanted to be an investor, and that has led to a lot of friction between this person and one of my co-founders.
[Justin] When it comes to your company, that’s yours. No one’s owed the ability to invest. I have friends who wanted to invest and it was the wrong timing or whatever. I always put my company first.
[Justin] It’s probably your headcount if you’re here in San Francisco, so you control that. Your plan is probably mostly based around like how many people you’re hiring.
[Justin] I think there’s a temptation from founders to just go with whatever’s easy, which is wrong. It’s easy if someone offers you money to take it because you hate fundraising.
But you’re doing yourself a disservice if you don’t make it into a process. Decide to raise money because you can grow my business faster. And then, maybe you’ll seed this funnel with all the people who have reached out and maybe other people who you think’ll be a value-add to your business, and then run it like a normal process. It’s like recruiting. If you take the first person that walks through your door, what are the odds that’s the perfect candidate?
[Waseem] I’m like an old person, in a sense that I don’t think it’s worth it. It’s not a very widely held opinion, but when it comes to ICOs and bitcoin and crypto, I’m not interested in hearing about it.
[Justin] Last year, lots of people wanted to participate in the market because they saw it as an easy way to get capital. Lots of random companies that couldn’t raise money from traditional capital sources did it successfully. Now I think that’s kind of cooled off a lot. So it’s probably not a good option right now.
[Waseem] To the first point, you have a bunch of associates reaching out. Ideally, you are spending your time with the people that can actually make the decisions, and associates in general, are not the people that can make the decisions. I think there are two pieces that go on here. One is, find as high of a level person as possible and make them your point of contact at the firm.
My feeling on these coffee conversations is again, you want to run it in a very process-oriented way, even if the step of the process you’re in is I’m in “get-to-know-you” mode, I’m not raising money. Their job is to meet with as many companies as possible to understand which companies are good or bad. Just because they’re getting coffee with you, doesn’t mean that they’re actually necessarily potentially interested. The same is true of M&A. Just to be thoughtful about, these are the firms or these are people I’d like to talk to. How do I constrain the time requirement in that process?
[Waseem] For our first company, we had some technology for Linux where we could take a Linux kernel update and apply it on the system without rebooting. We then needed to find the right person who would want to buy it, and we had to figure out how much they would pay for it as it was something that didn’t previously exist. We basically made a cool thing first, and then said how do we make a company with it? Whereas I think it’s easier for us to now find a visceral, painful problem and think we can solve it.
[Justin] I think angels are good. Having those founders who can hopefully give you some feedback about your business, but then also provide you interest in their investors downstream is good. I think at the Series A stage, they don’t care where you got the money for the seed round from. So, it could be your Mom or your Grandma or your friends or loans, whatever. They’re just evaluating, is this a good business? Do I think they’re going to be successful?
[Waseem] I tend to agree. Most of your angels are going to do nothing for you; 10% will be extremely helpful, but you don’t know which 10%. The prerequisite should be if you like and trust the people and want to get them involved. If they passed the test and you do want to raise that amount of capital, I think it’s better to let more people in than fewer people because you don’t know who’s going to be helpful.
For our second company, we had already raised the round but there was one guy who wanted to invest. I didn’t want to let him in, but we eventually did, and he was the best guy. I’m super glad that we let him invest, and we would not have predicted that at the time we were raising the seed round.
[Justin] Yeah, it’s probably different because we were selling to companies, especially lots of start-ups. My strategy for the seed round was to raise money from General Catalyst, but we also included 90 other investors including Thrive, Founders Fund, SV Angel, First Round Capital, Greylock, NEA and the list goes on, under the theory that they would be channel partners for us to sell into. And it’s been a helpful strategy.
[Waseem] Same. We used to do investor updates, where there was a literal leader board that said here’s how many customers investor X referred this month. It did cause more competition so companies would say “I need to refer more to beat that guy.” In the early days it was quite productive, now less so.
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