Expert Startup Funding Tips, Part 2

Venture capital tips from Y Combinator Partner Michael Seibel.

Every start-up needs access to capital. The seed stage, where entrepreneurs seek funding to develop their product and prove that it works, is where cash infusion is crucial. While many investors typically won’t fund a first-time entrepreneur at this stage, Michael Seibel will.

Seibel is a full-time partner at Y Combinator (Opens in a new tab), a Mountain View, California-based incubator that funds early stage start-ups. Twice a year, it invests $120,000 in businesses. Companies such as Airbnb, Dropbox, Stripe and WePay are all alumni of YC.

Before becoming a partner, Seibel was a successful entrepreneur himself. He co-founded Justin.tv and Socialcam with his Yale University college buddies. Socialcam was later sold to Autodesk Inc. for $60 million.

We caught up with Seibel who shared confidence-building tips for raising your first round and understanding what investors are really looking for.

What are the biggest lessons that you learned from your experience as a co-founder with Justin.tv and Socialcam?

You need to measure and experiment. I don’t believe in trusting experts when it comes to business strategy or tactics. I believe in measuring what your users are doing and then running experiments to see if you can get them to do what you want them to do.

I also learned that as a CEO your job isn’t to order people around, it’s to find great people, give them a lot of responsibility, and make sure the environment is motivating and the goals are clear.

What is the biggest challenge that most start-ups face?

Raising money is one of the hardest things. Founders have to worry about executing their company, but they’re negotiating against investors who all they think about is fund-raising negotiations. We try to balance that out so that founders can fund raise effectively and quickly and then get back to work.

How does a start-up determine which accelerator they should approach for funding?

You’ve got to judge the results. What’s the evidence? What big companies come out of this? What are the alumni telling [you] in terms of the value? If you look at the real evidence and map the number of accelerators [this way], those that you would choose to apply to shrinks to a very, very small number.

How can a start-up set itself up to be more appealing to a seed accelerator?

They need to be able to demonstrate that they have a strong founding team. A team of two to four people who’ve known each other at least professionally or personally for longer than six months, who are all working full-time on the start-up, who have some active technical talent on the team — so they’re creating their own technology and not outsourcing it — and who are splitting equity equally or close to equal.

The second thing we look at is market. How many people have the problem that you’re trying to solve, and how much are they willing to pay for it? If you’re trying to create a new product or a new category, you have to think about who all of the potential customers are who really have this problem and how much would they pay per year to solve it. A founder shows good critical thinking when they can walk us through in a couple of sentences who the customer is, why they have that problem and how much they’re willing to pay to solve it per year.

How can founders differentiate themselves from other businesses competing for funding?

We judge a company by what they’ve done since they’ve started the company. What have you done, what’s the ratio of time spent in the company to work accomplished? What we’re grading is progress to building the MVP, progress to launching the MVP, roads to the MVP, [and] just what can you show us you can do.

Founders overemphasize the pitch and the talk and the ideas and the pizazz and the passion. The way you really differentiate yourselves from other people is you do it. Never put the investor in the position where they have to invest in order for you to do what you want to do. You need to create a plan that doesn’t require their money to get started. It might require money later, but to get the first customer, the first MVP, it’s far better if you don’t need an investor. And honestly, booming technology nowadays makes it ridiculously cheap.