Hay For Cows
August 2008
Raising money is the second hardest part of starting a startup. The hardest part is making something people want: most startups that die, die because they didn't do that. But the second biggest cause of death is probably the difficulty of raising money. Fundraising is brutal.
One reason it's so brutal is simply the brutality of markets. People who've spent most of their lives in schools or big companies may not have been exposed to that. Professors and bosses usually feel some sense of responsibility toward you; if you make a valiant effort and fail, they'll cut you a break. Markets are less forgiving. Customers don't care how hard you worked, only whether you solved their problems.
Investors evaluate startups the way customers evaluate products, not the way bosses evaluate employees. If you're making a valiant effort and failing, maybe they'll invest in your next startup, but not this one.
But raising money from investors is harder than selling to customers, because there are so few of them. There's nothing like an efficient market. You're unlikely to have more than 10 who are interested; it's difficult to talk to more. So the randomness of any one investor's behavior can really affect you.
Problem number 3: investors are very random. All investors, including us, are by ordinary standards incompetent. We constantly have to make decisions about things we don't understand, and more often than not we're wrong.
And yet a lot is at stake. The amounts invested by different types of investors vary from five thousand dollars to fifty million, but the amount usually seems large for whatever type of investor it is. Investment decisions are big decisions.
That combination—making big decisions about things they don't understand—tends to make investors very skittish. VCs are notorious for leading founders on. Some of the more unscrupulous do it deliberately. But even the most well-intentioned investors can behave in a way that would seem crazy...
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