Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

How to Convince Investors

paulgraham.com

Post reply on HN
Print view View original

81–90 of 119 posts

Re: How to Convince Investors

#81

Post by mindcrime »

pmarca wrote: post #75
jasonkolb wrote: post #51

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…

Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between. This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it? The advanced way to do market analysis -- which only the most experienced entrepreneurs ever ac…

What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments.

Interestingly enough, that totally jibes with the Customer Development methodology from @sgblank, where he talks about developing and validating your "Problem Hypothesis", "Market Hypothesis", "Channel Hypothesis", etc.

E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing.

This is the approach we're taking at Fogbeam. We've identified a beachhead market we're going to pursue to try and get initial traction, done some simulations based on the number of such customers, potential price points, etc., and come up with some potential revenue numbers and what-not. NOW, the next step is to get out and prove that our numbers actually make sense and hold up in the real world. Of course, they won't really, at least not according to our most optimistic projections. But the hope is that they do hold up well enough to get this thing off the ground...

Re: How to Convince Investors

#82

Post by mhartl »

PG's advice reminds me of a story from Surely You're Joking, Mr. Feynman!. Feynman relates how his first (!) scientific talk (as a graduate student at Princeton) was attended by such luminaries as Eugene Wigner, Wolfgang Pauli, Albert Einstein, and John von Neumann. We was terrifically nervous, but discovered that as soon as he started giving the talk his nervousness melted away—he was too focused on the physics to worry about who was in the audience.

Re: How to Convince Investors

#83

Post by Sealy »

Thanks for the advice Paul. It's very well timed as I have an investor meeting later today!

My biggest takeaway from your essay: the truth prevails. As cliche as it sounds, its apt advice for those aspiring to be the biggest startups of our generation. Its easy to get carried away with our dreams and visions.

Re: How to Convince Investors

#84

Post by jasonkolb »

pmarca wrote: post #75
jasonkolb wrote: post #51

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…

Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between. This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it? The advanced way to do market analysis -- which only the most experienced entrepreneurs ever ac…

This is an awesome answer, thank you.

Re: How to Convince Investors

#85

Post by jasonkolb »

tptacek wrote: post #72
jasonkolb wrote: post #51

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…

One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.

This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?

Re: How to Convince Investors

#86

Post by coffeemug »

michael_nielsen wrote: post #22

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting th…

I think there is a subtlety here where the effect can reenforce itself and become the cause.

When we were raising our first round of capital, we didn't know what we were doing. We weren't good at analyzing markets, managing product, or managing people/dev process. So to raise money we were forced to lift with our back and do it on the strength of the pitch/story telling, rather than the strength of the company.

Working through the pitch and raising capital helped us get good at all the aspects of building a company. Now that the company can stand on its own two feet, it's much easier to just tell our story and simply explain what we're doing without worrying about the pitch too much. It wouldn't have been possible if we didn't do the first round on the strength of the pitch (since we wouldn't have raised money, wouldn't have gotten good, and wouldn't have built a company that speaks for itself).

I guess the moral here is that it takes a while to build enough confidence to spread your wings. It's an iterative process. You fake confidence while you have to, which in turn gets you the resources to get better at what you do. The next time you don't have to fake as much. The time after that you have to fake even less. Until eventually you're knowledgable enough and confident enough that you can just tell your story and not worry about the pitch at all.

Re: How to Convince Investors

#87

Post by ScottBurson »

wellboy wrote: post #42
mathattack wrote: post #38

Earlier quoted context omitted.

"The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction." Very true, but why is this insane? Investors see tons of people with great big ideas who talk about passion. Since you have to winnow the field, why not do it on something that matters (traction) versus something that doesn't (the alma mater of the founder, or how they dressed).

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val. And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the…

Ah, but in order to get that 100x they have to also invest in a larger number of startups, because of all the ones that look promising, they don't know which ones will actually succeed. So their expected return is actually increased -- probably quite substantially -- by requiring traction.

Not insane at all.

Re: How to Convince Investors

#88

Post by hammerzeit »

pmarca wrote: post #78
davemel37 wrote: post #24

The underlying concept I took from this post was a fundamental rule of marketing and sales... Every decision made starts with an emotional trigger, and ends with a defensible position.

Yes -- this is what engineers who refuse about sales never come to understand. The decision is typically emotional; the facts are assembled and interpreted to justify the decision. The reason it isn't insane for VCs to invest money into ambiguous situations even knowing that we are doing this is because the enterpreneur who can't get the a VC to be emotionally positive isn't going to be able to get anyone to be emoti…

Jonathan Haidt said it well -- we think our brain works like a scientist when it actually works more like a lawyer.

Incidentally, your second point echoes one of the more persuasive arguments I've heard for cofounding teams -- if you can't convince a co-founder to join, will you really be able to build a team and acquire customers?

Re: How to Convince Investors

#89

Post by hsuresh »

michael_nielsen wrote: post #22

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting th…

Absolutely. Pitch is a place holder for your understanding about the business you are building - the market, your team, product and your growth strategy. Just like a resume is a placeholder for your skills and experience.

Re: How to Convince Investors

#90

Post by spartango »

kyro wrote: post #73
wellboy wrote: post #17

The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction. If you are a startup that has low scalability, but you have traction, you will get funding If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curt…

Is the traction you're referring to here the type limited to web startups or (if anyone else knows) does this hold true for virtually any startup in any industry? I imagine there are a handful of industries where achieving 'traction' may take several years, eg biomed.

On one hand I'm inclined to come out and say, "No, in some industries you simply cannot get traction before going to investors (repeatedly)", given my experience in the biotech industry. Most biotech companies don't get "traction" until even after IPO, because the capital needs associated with making scientific and medical progress are large.

Yet, the reality is that even in these companies there's a notion of traction, and it's absolutely critical. It's not measured in terms of users, but instead manifest in scientific milestones. Every time you demonstrate the scientific validity of a piece of your tech, you are de-risked in the eyes of investors. That mirrors traction, even if it's less direct.

Another way that biotech companies can achieve notions of traction comparable to tech companies is through intermediate business models, such as operating as a contract research organization or reference laboratory.

Despite those parallels, I'd say that biotech traction is still difficult to achieve because most science lacks determinism in the rate of progress.

Post reply on HN