Lecture 9 - How to Raise Money (Marc Andreessen, Ron Conway, Parker Conrad)

1. SASam Altman0:00

   Um, so I wanna start with, uh, a question for, for Mark and Ron, which is by far the number one question. Probably gonna be a lengthy answer. Um, what makes you guys decide to invest in a founder or a company? Either of you can start.

2. RCRon Conway0:16

   Go ahead.

3. MAMarc Andreessen0:16

   No, no, no, no, no.

4. RCRon Conway0:17

   You go ahead.

5. MAMarc Andreessen0:17

   [laughs] You first.

6. RCRon Conway0:18

   Um, well, we have a slide on that. [laughs] We have, we have an app for that.

7. SASam Altman0:23

   They're bringing some-

8. RCRon Conway0:24

   Um-

9. SASam Altman0:26

   Mark can start while we try to get your slide up.

10. RCRon Conway0:28

    Okay.

11. MAMarc Andreessen0:29

    [laughs]

12. SASam Altman0:30

    Yeah.

13. RCRon Conway0:30

    All right.

14. SASam Altman0:30

    We're bringing in AV guys, so...

15. RCRon Conway0:35

    So s- say the question again.

16. MAMarc Andreessen0:36

    Go ahead.

17. SASam Altman0:36

    What makes you decide to invest in a founder or a company?

18. RCRon Conway0:39

    So what, what makes us invest in a company is based on a whole bunch of characteristics. I've been doing this, uh, since 1994, right before Mark got out of, uh, the University of Illinois. So SV Angel and its entities have invested in over 700 companies. So to invest in 700 companies, that means we've physically talked to thousands of entrepreneurs, and there's a whole bunch of things that just go through my head when I meet an entrepreneur, and I'm just gonna talk about what some of those are. Um, and literally, while you're talking to me in the first minute, I'm saying, "Is this person a leader?" You know, is this person rifle focused and obsessed by the product? Um, I'm hoping, 'cause usually the first question I ask is, "What inspired you to invent this product?" I'm hoping that it's based on a personal problem that that founder had, and this product is the solution to that personal problem. Um, then I'm looking for communication skills because if you're gonna be a leader and hire a team, assuming your product is successful, you've gotta be a really good communicator, and you, you have to be a born leader. Um, now some of that, you might have to learn those traits of leadership, but, but you better, you better take charge and be able to, to, to be a leader. Uh, I'll switch back to the slide, but let's let Mark...

19. MAMarc Andreessen2:18

    Yeah, I, I agree with all that. I guess, and there's a lot of detail to this question that we could talk about, um, and we may be even a little bit different than Ron in that-- W- where we are different than Ron, that we actually invest across stages. So we invest at the seed stage, venture stage, growth stage, um, and then we invest in a variety of different business models, consumer, enterprise, and a bunch of other variations. So there are kind of fine-grained answers, you know, that we could get into, uh, if there are specific questions. Uh, two general concepts that I would share. Um, so one is the venture capital business is 100% a game of outliers. It's extreme exceptions. Uh, right? So the conventional statistics, uh, are, you know, on the order-- is on the order of 4,000 venture fundable, uh, companies a year that wanna raise venture capital. Uh, about, you know, about 200 of those will get funded by what's considered a top-tier VC. Um, about 15 of those will someday get to $100 million in revenue, um, and those 15 from that year, uh, will generate something on the order of 97% of all the returns, uh, for the entire, uh, category of venture capital in that year. Um, and so venture capital is such an extreme feast or famine business. You're either in one of the 15 or you're not, uh, or you're in one of the 200 or you're not. Um, and so y- the, the big thing that you're just looking for, no matter, you know, which sort of particular kind of criteria we talk about, they all have the characteristic of you're looking for the extreme outlier. Um, the other thing I'd highlight that we think about a lot internally is we have this concept, invest in strength, um, versus lack of weakness. Um, and at first, that sounds obvious, but it's actually fairly subtle. Um, which is sort of the, the default way to do venture capital is to kinda check boxes, right? So, you know, really good founder, really good idea, you know, really good, uh, you know, uh, products, uh, really good initial customers. Check, check, check, check. Okay, this is reasonable. I'll put money in it. Um, but what you find with those, those sorta checkbox deals, and they get, they get done all the time, but what you find is they often don't have something that really makes them really remarkable and special, right? They don't have an extreme strength that makes them an outlier. On the other side of that, the companies that have the really extreme strengths often have serious flaws. Um, and so, uh, so one of the cautionary lessons of venture capital is, if you in-- if you don't invest on the basis of serious flaws, you don't invest in most of the big winners, and we could go through example after example after example of that. Uh, but that would have ruled out almost all the big winners over time. Um, and so at least what we aspire to do is to invest in the one-- in, in the, in the startups that have a really, really extreme strength, uh, along an important dimension, and then be willing to tolerate some other, uh, you know, set of weaknesses.

20. SASam Altman4:38

    Ron, we got your slide up.

21. RCRon Conway4:40

    Okay. I, I don't wanna over-dwell on, on the, uh, the slide, but, um, when you first meet an investor, you've gotta be able to say in one compelling sentence that you should practice like crazy what your product does, so that the investor that you're talking to immediately can picture the product in their own mind. Probably 25% of the entrepreneurs I talk to today still, after the first sentence, I don't know what they do. And as I get older and less patient, I say, "Back up. I don't even know what you do yet." Um, but so try and get that perfect. And then I wanna skip to the second column. You have to be decisive. The, the only way to make progress is make decisions. Uh, procrastination is the devil in startups. So no matter what you do, you gotta keep that ship moving. If it's, uh, decisions to hire, decisions to fire, y- you gotta make those, uh, quickly. Uh, all about building, uh, a great team. Once you have a great product, then it's all about execution and building a great team.

22. SASam Altman5:55

    Parker, could you talk about your seed round and how that went and what you wish you had done differently as a founder raising money?

23. MAMarc Andreessen6:02

    [clears throat] Sure. So, um-

24. PCParker Conrad6:04

    Um, y- um, actually, I think m- my, my seed round, uh, most of the stuff with my current company felt like, uh, from a fundraising perspective, felt like it came together relatively quickly. Um, but actually one of the experiences that I had, I, I started a company before this that I was at for about six years, and my co-founder and I pitched, um, [clears throat] almost every VC firm in Silicon Valley. I mean, we literally went to, like, 60 different firms, and they all told us no. And we were constantly trying to figure out, you know, how do we, how should we adjust our pitch, and how should, you know, how should we do the slides differently, and [clears throat] how do we tweak the story, and that sort of thing. And at one point, there was this sort of key insight that, um, someone gave me when I was pitching, actually someone at Coastal Ventures. Um, and, um, the, this VC said, "Guys," you know, he was looking for some very particular kind of analysis [clears throat] that we didn't have on hand, and he was like, "Guys, you don't get it." He was like, "You know, if you guys were the Twitter guys, you guys could come in and you could just be like, 'Blah, blah, blah, blah, blah,' and like, you know, put whatever up here, and, like, we would invest in you. But, like, you guys aren't the Twitter guys, so you need to make this really easy and have, like, all this stuff ready for us and all this kind of stuff." And I, I took, like, the exactly opposite lesson of what he, I think, wanted me to take away from that with, which was like, "Geez," like, "I should really just figure out a way to be the Twitter guys." [laughs]

25. MAMarc Andreessen7:18

    [laughs]

26. PCParker Conrad7:19

    And, like, that's, that's the way to do this. Um, and so, so actually, like, one of the reasons I, I started my current company, or one of the things I, I found very attractive about Zenefits is [clears throat] as I was, as I was thinking about it, it seemed like a business. I was so frustrated from this experience of having tried, you know, for, like, two years to raise money from, from VCs, and then sort of decided, like, to hell with it. You can't count on there being capital available to you. Um, and so this s- the business that I started seemed like one that, like, it, like, actually just maybe I could do it without raising money at all. Like, there might be a path [clears throat] to kind of, you know, there was enough cash flow, it seemed compelling enough that I could, like, do that. And it turns out that those are exactly the kinds of businesses that, that, that investors love to invest in. Um, and, and it made it incredibly easy. Um, so I, I actually think, like, I mean, Sam was very kind and said I was an expert fundraiser. The reality is, like, I don't actually even think I'm very good at fundraising. Um, [clears throat] it's probably something I'm, like, less good at than, than, you know, sort of other parts of my job. Um, but I think if you can, if you can build a business that's, you know, where everything is, like, moving in the right direction, if you can, like, be the Twitter guys, like, nothing else matters. [clears throat] And if you can't, like, you know, be the Twitter guys, it's very hard for anything else to make a difference, um, for things to kind of come together for you.

27. MAMarc Andreessen8:39

    So-

28. RCRon Conway8:39

    Why, why did that VC say be like the Twitter guys when the fail whale dominated the site for two years?

29. PCParker Conrad8:45

    [laughs]

30. MAMarc Andreessen8:46

    'Cause it kept growing anyway.

Episode duration: 50:10