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Dalton + MichaelDalton + Michael

Stop Obsessing Over Fundraising Announcements

How does reading funding announcements make you feel? In this episode of Dalton + Michael discuss startup fundraising announcements and the strong reaction people have to them, particularly when it doesn't seem "fair." Dalton + Michael is brought to you by @Standard_Cap You can find Dalton Caldwell on X here: https://x.com/daltonc and Michael Seibel here: https://x.com/mwseibel

Dalton CaldwellhostMichael Seibelhost
Nov 6, 202516mWatch on YouTube ↗

EVERY SPOKEN WORD

  1. 0:00 – 0:02

    Intro

    1. DC

      [gentle music]

  2. 0:02 – 1:12

    Why fundraising announcements trigger founder spirals

    1. DC

      This is Dalton + Michael. Today we're gonna talk about is startup funding fair?

    2. MS

      [laughs]

    3. DC

      So I'll set this up. Instead of working on your company, you're browsing Twitter, 'cause that's what all good founders do, and you see company bullshit has just raised a $10 million round from A, C, T, and Z. And you checked out their product last week, and you're like, "Th- that product sucks." And you see all these people being like, "Oh my God, this company's so great. They're gonna win the space." And you are starting to think, "Is this all a joke? I was told this was meritocratic, and da, da, da, da, da, but, like, these folks suck, and they're raising all the money, and they look like they're cool." What's going on? [laughs]

    4. MS

      Yeah, I mean, look, think about how many office hours that we do-

    5. DC

      Yes

    6. MS

      ... where, you know, there's some other topic, but when you get right down to it-

    7. DC

      [laughs]

    8. MS

      ... what's actually going on is that someone read a fundraising announcement, and somehow that caused them to go through a, like a total spiral.

    9. DC

      Yes.

    10. MS

      Like, the founders I'm talking to are spiraling.

    11. DC

      Yes.

    12. MS

      Sometimes it's because they're sad-

    13. DC

      Yes

    14. MS

      ... because, um, it's-

    15. DC

      They're competitive

    16. MS

      ... a competitor.

    17. DC

      Yes.

  3. 1:12 – 2:10

    The three unhealthy reactions: outrage, despair, and copycat pivots

    1. MS

      Sometimes it's they're enraged-

    2. DC

      Yeah

    3. MS

      ... because how dare-

    4. DC

      Yes

    5. MS

      ... this dumb thing that's so bad-

    6. DC

      Yes

    7. MS

      ... that we're better than them raise money.

    8. DC

      Yes.

    9. MS

      Time for revolution.

    10. DC

      [laughs] Yeah. Time for a revolution. [laughs]

    11. MS

      We ne- we need to destroy the venture capital industry.

    12. DC

      Yeah. [laughs]

    13. MS

      I'm so mad.

    14. DC

      Yes. [laughs]

    15. MS

      Sometimes it's out of magical thinking, where it's like, "Hey, I saw someone raise this money for this voice AI thing. I think we should do voice AI." And so they sort of like-

    16. DC

      Yes

    17. MS

      ... draw parallels-

    18. DC

      Yes

    19. MS

      ... to what they're doing.

    20. DC

      Well, no, I would call that the pivot.

    21. MS

      [laughs]

    22. DC

      Like, we should pivot to that, right? I think the parallel one is, like, a voice AI r- company raised a billion dollars. That means we can be worth a billion dollars, too. Like-

    23. MS

      Yeah

    24. DC

      ... that means this space-

    25. MS

      Sure, yeah

    26. DC

      ... is a new game, right? Like, there's a tailor-

    27. MS

      No, good, good

    28. DC

      ... it's all good. Yeah.

    29. MS

      Good news, Dalton. My startup's working. Someone raised money.

    30. DC

      Yes. Yes, these other, these other people.

  4. 2:10 – 2:19

    Is startup funding fair? (Blunt answer + why obsession is self-defeating)

    1. MS

      No.

    2. DC

      [laughs]

    3. MS

      End of video. All right, that's it.

    4. DC

      [laughs]

    5. MS

      It's not fair. Sorry.

    6. DC

      Yeah.

    7. MS

      And so-

    8. DC

      You're right. [laughs]

    9. MS

      [laughs] It's an injustice.

  5. 2:19 – 4:10

    Why outsiders obsess—and why investors don’t care about the internet’s approval

    1. DC

      So again, what's funny is that, for whatever reason, startup culture is heavily centered around fundraising announcements and reaction to fundraising announcements.

    2. MS

      Especially early stage.

    3. DC

      Totally.

    4. MS

      Yes.

    5. DC

      And this is, like, one of the cool things to talk about with other founders or with your employees, and it just-

    6. MS

      It's a goal, right?

    7. DC

      I... Sure. They-

    8. MS

      [laughs]

    9. DC

      Um, s- for some reason, this is just, like, the, the latent, uh, background radiation of, of, uh-

    10. MS

      Yeah

    11. DC

      ... working in this space, and what I would say is when you get over-rotated on this stuff, you are beating yourself.

    12. MS

      Yes. Yes.

    13. DC

      You... That is self-defeating behavior-

    14. MS

      Yes

    15. DC

      ... if you let yourself have tons of emotions as a result of some stranger raising money from some stranger, right? Like, that's-

    16. MS

      More often than not, it doesn't change as s- your chance of success at all.

    17. DC

      No.

    18. MS

      [laughs]

    19. DC

      And then, and then you, like, having whatever feelings you have about it-

    20. MS

      No

    21. DC

      ... again, you're, you know, everyone's feelings are valid, but you wanna learn to quiet that part of your mind-

    22. MS

      Yes

    23. DC

      ... and to realize that that doesn't really affect you too much.

    24. MS

      No.

    25. DC

      And think about how much over the years, um, have people on Hacker News or just on Twitter in general spent-

    26. MS

      Oh, God

    27. DC

      ... more time worrying about what stuff you and I have funded than we worry about.

    28. MS

      Yes. Yeah. [laughs]

    29. DC

      [laughs]

    30. MS

      I can't believe YC funded... Da, da, da.

  6. 4:10 – 5:05

    Fundraising isn’t a stock-price pop: it’s an illiquid bet with low odds

    1. MS

      No. A funding event has become... Like, I think the only equivalent that I can imagine in today's day and age is a strong quarter for a company where the stock price went up. 'Cause it's like I think founders truly believe fundraising events are, like, value-creating moments. What's interesting is, like, when that stock price went up, that, like, that is a value create- Like, literally everyone's stock is worth more. They could sell it right now and make more money than they could sell it two days ago. A funding announcement is the announcement of a illiquid bet, and almost every single fundraising announcement you will read is an announcement of an illiquid bet that has a probably less than 50% likelihood of paying off.

    2. DC

      Yeah.

    3. MS

      All the way down to, I mean, we've joked about 0%, but, like, all the way down to seed rounds, which, like, very low expected of it working out.

  7. 5:05 – 6:07

    When fundraising announcements are actually useful (customers, hiring, awareness)

    1. DC

      So Standard Capital-

    2. MS

      Yes

    3. DC

      ... my new firm, is operating. We made a number of investments.

    4. MS

      Yes.

    5. DC

      We are going to announce those investments soon.

    6. MS

      Yes.

    7. DC

      And so insofar as, like, if you just believe fund- all fundraising announcements are bad, I guess I'm part of the problem.

    8. MS

      You are.

    9. DC

      But-

    10. MS

      And you're an investor, but so, yeah. [laughs]

    11. DC

      I'm, yeah, I'm, that's not great. Um, and I'm not do- holding a vote-

    12. MS

      No

    13. DC

      ... on the internet for who we should fund.

    14. MS

      You're the reason-

    15. DC

      So that's why I'm ma-

    16. MS

      You're the reason why it's not fair. [laughs]

    17. DC

      Yeah. Dang it. I'm holding a vote. Um.

    18. MS

      [laughs]

    19. DC

      But the reason funding is, announcements are good-

    20. MS

      Yes

    21. DC

      ... is I want people to check out the products-

    22. MS

      Yes

    23. DC

      ... of the companies that we invest in-

    24. MS

      Boom

    25. DC

      ... and be curious about them.

    26. MS

      Yes.

    27. DC

      I want potential job candidates-

    28. MS

      Yes

    29. DC

      ... to be more interested in taking a job at the company.

    30. MS

      Yeah.

  8. 6:07 – 7:13

    A healthier way to read a round: evaluate the product and assign probabilities

    1. DC

      And so in my mind, the healthy way to view a fundraising announcement is to take an opportunity to look at the product-

    2. MS

      Yes

    3. DC

      ... to check out the founders, to see if there's cool jobs there, if you're in the job market-

    4. MS

      To have an opinion

    5. DC

      ... to have an opinion.

    6. MS

      Yeah.

    7. DC

      And not really have a lot of emotions about it, you know? [laughs]

    8. MS

      Yeah. Yeah, yes.

    9. DC

      Like, you're just kinda like, "Oh, cool."

    10. MS

      A sober opinion.

    11. DC

      "This is a thing."

    12. MS

      Yeah.

    13. DC

      Like, neat. I should go check out their product.

    14. MS

      Yeah.

    15. DC

      And I have noticed a lot of founders get good customers this way.

    16. MS

      Yes.

    17. DC

      Like, this is why we do all the, the announcements at YC-

    18. MS

      Yeah

    19. DC

      ... is it drives customers.

    20. MS

      I think this is a really healthy way of thinking about it. I think that, like-When you see a startup announcement, I think that, like, an interesting thought would be check out the product, check out some of the case studies, spend five, 10 minutes. Make a pro/con argument in your head and assign a percentage. And, and I think that as long as you're assigning a percentage, the startup will, will seem more fair. I think that when you're assuming that every investor thinks that every investment has 100% chance of success, the bets look stupid. I mean, people invested in Elon building rockets. It might have been a high conviction bet, but, like, no one could basically say that was, like, a high percentage likelihood to work out.

  9. 7:13 – 8:34

    Case study: Whatnot—why “dumb” ideas can become huge outcomes

    1. DC

      Look, this was literally in my, in my Twitter X mentions today.

    2. MS

      Yeah.

    3. DC

      So I funded a company called Whatnot-

    4. MS

      Yep

    5. DC

      ... in winter '20.

    6. MS

      Yep.

    7. DC

      And it just announced it's a decacorn. They just raised money at $11 billion valuation.

    8. MS

      Mm-hmm.

    9. DC

      Again, why, why is that cool? It's like, hey, check that out. And, you know, if you know someone that wants a job-

    10. MS

      Yeah, exactly. [laughs]

    11. DC

      If you know someone who wants a job, they're hiring, you know?

    12. MS

      Yeah.

    13. DC

      So that's... There's actually pro-social reasons to, to talk about that. But what's funny is a lot of the, the comments were people being like, "I would never invest in this. How did YC pick this? Why would this Pokemon trading card site... " Like, there's people being like, "I don't... Like, cool that this is worth so much. Like, how on earth-

    14. MS

      Did you see it?

    15. DC

      ... did they decide to fund this thing?"

    16. MS

      Yeah.

    17. DC

      [laughs] 'Cause in the moment, can you imagine what the like-

    18. MS

      Yeah

    19. DC

      ... how it was perceived? Oh, Pokemon, uh, Funko Pop-

    20. MS

      Yeah

    21. DC

      ... trading website raises venture capital.

    22. MS

      It was a low percentage bet. [laughs]

    23. DC

      Well, well, and it would be, like, infuriating to people.

    24. MS

      Yes.

    25. DC

      How dare this company raise money when my startup is s- which is so much better.

    26. MS

      Yeah.

    27. DC

      They're funding this crap.

    28. MS

      Yeah.

    29. DC

      Well, this is how. Again, this is an instructive moment. This is why I'm bringing them up.

    30. MS

      Yeah.

  10. 8:34 – 11:23

    Why you can’t infer the full story from an announcement (missing facts, relationships, timing)

    1. MS

      Well, and, and I also think you make a good point, which is that, like, you might think you can tell the future when you're reading a Twitter funding announcement.

    2. DC

      Yep.

    3. MS

      And you might think if you tried a product, you know whether it can be good or not in the future, but, like, you might be wrong. You might be wrong. I'll say this is the last version of this that always frustrated me, which is, um, this happened in my company, this happened with other founders that I've advised, where, like, you see somebody fundraise, and then you say, "If they can fundraise, why can't we fundraise?" And you know none of the supporting facts or materials. Like, we saw this in one situation. Some company we were competing against raised a whole bunch of money, and we were just like, "We've pitched these people. Like, they know us. Like, we have more traffic. Like, what's going on? It's crazy." Years later, I found out that that founder made the firm who invested in them, like, a billion dollars. [laughs]

    4. DC

      I know who you're talking about. Yeah.

    5. MS

      And it was like, well, you know, like, if someone makes you a billion dollars, you'll do their Series A for the next time. [laughs]

    6. DC

      Yeah.

    7. MS

      Right? Like, how much money are you handing them back after they handed you a billion dollars, right? And it had nothing to do with the core fundamentals or any... Like, but reading the announcement, I didn't know that. And so thinking that announcement has all the supporting materials that would actually make you understand whether this is a good investment, that, is that... That's not the purpose of a fundraising announcement. So yeah, that's another reason why you can maybe classify something as unfair, is like you just don't have the facts. And then the last one you bring up, which is, like, when people announce their fundraising round, that means they've raised the money that day, right?

    8. DC

      [laughs]

    9. MS

      That's, that's how that works, right?

    10. DC

      Yeah. Often it happened in the past.

    11. MS

      [laughs] Yeah.

    12. DC

      Often there's sort of-

    13. MS

      Hopefully not in the future. [laughs]

    14. DC

      [laughs] Often there, um, some creative accounting for how they're discussing the amount raised, the valuation. Like, there's all these, like, slight of hand things that happen.

    15. MS

      Yeah.

    16. DC

      And again, the point is to not worry about it too much. It's not real. [laughs]

    17. MS

      Yes. It's just a bet. It's just... Well, and that's why... Th- this is what I love about it. It's like, it's like a sports bet, right? It's like, soon the game will be over, and, like, most of the bets [laughs] will, will, will have made no money, and some will. Like, we'll know the answer soon. Before, it's just a bet.

    18. DC

      Yep.

    19. MS

      Don't get all worked up over a bet. Sometimes founders think the fundraising game is skewed against them because they make some simple mistakes where it's harder to fund them. I think that, like, you know, for two kids who are CS majors at MIT, the fundraising game might seem real fun, right? Like, it might seem super fair. Like, how, how do you think about kind of your starting conditions impacting whether you think the game is fair? If I'm two MBAs from the University of Phoenix, this game might not seem so fair.

  11. 11:23 – 13:10

    Capital allocation isn’t efficient at seed: investing is more art than valuation math

    1. DC

      I think some folks want to believe that the way capital is allocated is, like, super efficient, and that it is... Like, there's some kinda stock market. [laughs]

    2. MS

      Yeah.

    3. DC

      You can write up a little, like, report.

    4. MS

      Yes.

    5. DC

      I- I- I- it's like this, like, public stocks, I guess, technically have price to earnings ratios, and people are trading them.

    6. MS

      Yeah. Technically, they're priced accurately.

    7. DC

      I don't think... Well, actually, I'll give you actually, as you can see in the current stock market.

    8. MS

      [laughs] Maybe. I... You know.

    9. DC

      But there's a notional sense that you can value-

    10. MS

      Yes

    11. DC

      ... a late stage company-

    12. MS

      Yes

    13. DC

      ... and that there is some, like-

    14. MS

      Yes

    15. DC

      ... fair way to do it.

    16. MS

      Yes.

    17. DC

      And I think people expect that to scale all the way down-

    18. MS

      Yes

    19. DC

      ... to startup bets.

    20. MS

      Yeah.

    21. DC

      And-

    22. MS

      It doesn't

    23. DC

      ... well, if it did work it that way, there'd be people making lots of money investing that way.

    24. MS

      Yes.

    25. DC

      Where are they?

    26. MS

      Yeah.

    27. DC

      Where are the value- [laughs]

    28. MS

      Yeah.

    29. DC

      Where are the value investors in startups? I'm not trying to be fa- maybe they exist. Like, let me know. Um, but from what we have seen, that is a very bad way to invest in startups-

    30. MS

      Yes

  12. 13:10 – 15:01

    In some ways it’s fairer than you think: many investors, low coordination, high accessibility

    1. MS

      I actually, you know, you said startup funding is unfair. I think startup funding is prob- funding is more fair than I, I ever realized. And I think one of the driving factors in that is it, it's, there isn't one big company doing all of it.

    2. DC

      Yeah.

    3. MS

      Like, there's just, there are so many startup writers.

    4. DC

      That's probably right. Basically-

    5. MS

      [laughs]

    6. DC

      ... there's very little coordination-

    7. MS

      [laughs]

    8. DC

      ... especially at the seed stage. There's no coordination. And so having all of these p-

    9. MS

      There's some coordination.

    10. DC

      Well-

    11. MS

      Like, uh, it's more likely to raise money if you're an MIT CS major than not.

    12. DC

      I'm just trying to say-

    13. MS

      There's some coordination

    14. DC

      ... if someone says no-

    15. MS

      All right, yeah

    16. DC

      ... it doesn't poison the well.

    17. MS

      No.

    18. DC

      There's no, like, secret back channel.

    19. MS

      No.

    20. DC

      So there's a lot of people.

    21. MS

      Yeah.

    22. DC

      There's a lot of money, and they're all operating autonomously.

    23. MS

      Yes.

    24. DC

      That seems pretty fair.

    25. MS

      And I would argue that the most basic things they're looking for tend to be publicized.

    26. DC

      Yeah.

    27. MS

      At YC, we don't hide what we're looking for-

    28. DC

      Yeah

    29. MS

      ... in a YC application. And so that's also pretty fair. I'd also argue nowadays investors are more accessible than, like-

    30. DC

      Yeah

  13. 15:01 – 16:01

    Closing: stop getting mad—focus on agency and winning

    1. MS

      So no, I, I, I think though, maybe to wrap up, right? Certainly getting angry and discouraged by fundraising announcements and, and, and by thinking the fundraising environment isn't fair, like, that's not gonna help you win.

    2. DC

      Yep.

    3. MS

      Right? Like, I think that, like, you should trust that if you just put that stuff aside and focus on things that actually might help you win, you might find the fundraising environment more accessible than you, than you thought. Most of the rounds that we see from most of the good companies, they're doing something interesting or they've done something interesting, and investment came as a result. It wasn't investment just came before they did anything or they-

    4. DC

      That's right

    5. MS

      ... so, like, they, they had agency. You had agency.

    6. DC

      That's a great point.

    7. MS

      All right. Thanks for the chat.

    8. DC

      All right. Thanks Michael. [outro music]

Episode duration: 16:01

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