I’ve noticed something slightly strange…

While there is no shortage of fundraising advice online, most of it seems to be written by investors.

While there is nothing inherently wrong with that, startup investors have completely different incentives as founders!

So I decided to publish this guide which consolidates the best fundraising advice I have… from one founder to another:

It takes really, really large exits to make most venture capital funds a lot of money.

An easy rule of thumb to understand what motivates your investors:

Their ideal outcome is to return their entire fund with any given investment.

So, if they have a $1B fund and own 20% of your company, they would love to have a $5B exit.

If they have a $100M fund, it could be as little as $500M. If they own more or less of your company, you can see how the numbers may change.

There is a whole spectrum of outcomes that could end up making you a lot of money that do not meaningfully move the dial for your investors.

Consider two scenarios:

Scenario 1 - You own 50% of a company that ends up exiting for $100M

Scenario 2 - You own 5% of a company that sells a few years later, for $1B.

In both scenarios, you would make $50M — but Scenario 1 would likely be a lot less stressful and faster to get to.

However, your investors likely do not care much for Scenario 1, and will implicitly push you to strive for Scenario 2.

Ironically, their business model allows for lots of investments to go to zero — so they are totally fine with you gambling everything in pursuit of a truly large outcome.

Remember, they have many shots on goal, while you have only one company.

What does this mean for you?

While raising money, ensure you are raising appropriately for your business model, versus being dragged into trying to fit your investors business model.

An early fundraising lesson I learned while raising the seed round for Teachable in 2014:

Instead of pitching exactly what your startup does, it pays off to instead pitch the largest possible vision of what the company could be.

As a founder, you are used to keeping the level of B.S. low and speaking directly about what your product does.

However, investors are trying to work backwards from why this company could be worth many billions of dollars in the future.

Without changing a single thing about your product, it’s worth iterating on your framing to talk about the grandest version of the idea.

Here’s what it looked like in the case of my startup, Teachable in 2014:

Original pitch: Teachable is a “white-labeled Udemy” to help people sell courses on their website

Improved pitch: The first wave of e-commerce was selling physical goods, the next (and bigger) wave will be selling digital goods, and Teachable will power this economy

Shopify was already worth close to $100B+ powering the first wave of e-commerce, so this pitch worked substantially better at getting investors excited.

And it required making zero changes to what we actually do!

I’m stealing this from Immad Akhund, the founder of Mercury:

I strongly recommend reading the entire thread to read about the idea in his words.

But, my interpretation is that you should be smart about leaving open exit scenarios that are life changing for you and your team, even if you don’t crush every single goal.

This means:

Immad also recommends raising from brand name investors to reduce the downside case — my views are less straightforward than his on this topic, but I’ll share more soon.

The most important lesson here is to never raise a “Ricky Williams round” where you need everything to go exceptionally well in order to make money from your company.

In the early days, the most likely scenario is that your startup will end up being worth absolutely nothing.

Consequently, it makes sense to focus on raising money from people that increase the probability that your startup will be worth anything at all.

It does NOT make a ton of sense to focus too much on the price of the fundraising round at this stage.

Instead, try and land investors that give you the best shot of building a company that ends up being worth anything at all.

A few years later though, the script will start to flip if you make it that long.

You reach a point when your company will absolutely be worth something.

And while you still may need to raise money to make it worth even more, it’s very unlikely that it ends up being a complete zero.

At this point, it starts to make sense to optimize towards raising money at the best possible terms you can.

The further along your startup journey you get, the more commoditized capital becomes.

When cash is a commodity, optimize for the terms that allow you to own as much of the company as you can, while protecting yourself from ever losing control of the business.

A lot of startups inadvertently find themselves in a shitty place:

The business constantly needs the next round of venture funding to survive.

As a result, the company is caught in an endless cycle of optimizing for the next funding round, instead of what is best for the business.

If your business model supports it, see if you can build a startup in a way where you do not need venture funding after the first 1 or 2 rounds.

If this happens, you will only ever raise money from a position of strength. This will allow you to own more of the business at exit, retain control of your board and cap table and never suffer the most painful parts of being a founder.

At my last startup Teachable, we were fortunate to always keep our burn in check and rarely ever burnt more than $100K in a month.

We were always ~3-6 months of pausing hiring from being profitable, and this allowed me to always raise money from a position of not needing to.

As a result, I personally owned more than 50% of the startup at exit, fully controlled our board and never once got into a position of being concerned about our runway.

You are building a company for at least a decade.

The quality of the people you bring on your cap table and particularly your board will greatly influence the quality of your life.

If you play your cards right, these relationships will morph into becoming some of the most significant of your life.

Here’s what this means for you:

In my experience, it has also been incredibly worth it to send reliable investor updates to keep yourself top of mind for your investors, and build a one-to-many relationship that scales with time.

I’m so incredibly grateful to most of my early investors at Teachable — they will basically have a call option to invest in anything I build for the rest of my life.

Did I miss any other fundraising advice you would give a founder friend of yours? Reply to this email or leave a comment below.

And stay tuned — next week, we’re back to regularly scheduled programming on personal finance and taxes.