Is YC SAFE valuation cap same as valuation?
I am raising $100K to build a product, and then run some GTM strategies (that worked previously). Got 120+ paid users (mostly presales) and around 16K in revenue (~10 months).
Now whenever I am talking to early-stage investors, mostly angels, they are asking - how much in % will I get?
I am trying my best to explain, we are an early-stage company and don't have a valuation. However, we are open to setting up a valuation cap.
The conversation gets difficult at this point. Let's say I am asking for a $1M valuation cap and they are instantly getting confused/furious how is your valuation $1M with $1.6K MRR only?
How to get around this?
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[ 4.5 ms ] story [ 26.3 ms ] threadhttps://www.ycombinator.com/deal/
https://youtube.com/watch?v=otbnC2zE2rw
Disclaimer: I am just a random, with a bit of academic knowledge, and a little experience, but I will share my definitely naive thoughts with you.
YC SAFEs are uncapped, so I think they are irrelevant to your question. https://news.ycombinator.com/item?id=35382355
If you want $100k, then why are you not trying to get into YC? Build your MRR in the meantime. Spend no more than say 16 hours preparing - the YC process is supposed to be very light (and some successful teams do zero prep). On their end they spend 10 minutes reading your application, and 10 minutes if you get an interview. That’s it.
AFAIK a SAFE valuation is the valuation when the shares convert during an A round - after you have built the business. The point of a SAFE is so you don’t have to value the business now. So you present to investors where the business will be in say a year’s time after you have spent their money. If you or your investors don’t understand the instruments you are using, I think that is a very bad signal for you, the investors, and your business.
Note that a rule of thumb is that early investors aim for 30 times return on investment to cover their risks (most businesses fail, and zero return for many years). Also note that the video I linked talks about it being normal for founders to end up with 50% of a company when their Round A occurs - and that 50% is common shares so worth wayyy less than the preferential shares. Common shares suck. Minority shareholding sucks balls.
Did you watch the bootstrap video? Solid advice on how to bootstrap a business. Watch it again. Use annual prepay to get the business marketing engine running. Although I am guessing you are doing B2C at $10/month which is a hard road, and the video doesn’t help you much there (he just says don’t do B2C!).
Meanwhile you are being distracted trying to get investors for a fairly trivial amount for a developed country. We considered trying to get that in New Zealand when we first started ($100k for 10%) but decided it would waste time and bootstrapped instead - wayyyy better outcome. If your business is going to be successful, then concentrating on sales now is usually the right path (even if you do need money later). I love the repetition here: https://medium.com/how-to-start-a-startup/47-quotes-from-sam... - you could read that every day and it would still not hammer home how important their message is - we are deaf to great advice, and too many of our beliefs are based on fictions.
Learning about investing is a huge time sink. The YC model is they aim to be co-operative with founders, so founders risks are lessened, and the deal is great (so it is fairly no-brained to take the deal now and learn the details later, assuming your business matches YC’s model). Other investors tend to be more mercenary - watch out. When our company was in an incubator, it was sad watching other companies chase investment, and get distracted by investors, and the process. Investors might mean well, but their advice or pressures are all-too-often extremely counter-productive (especially so in investment naive countries like mine). Paul Graham talks about the distraction here: http://paulgraham.com/ramenprofitable.html and here: http://paulgraham.com/die.html and about why VCs suck h...
"Learning about investing is a huge time sink. " - honestly found these lines here insightful and helpful.
Here is a secret, YC is highly biased depending on countries. Where I am from, only one company was able to make it into the YC with founders from a US educational background, and in-person meetings with partners. Population-wise this country ranks #8. Not that it matters for me as mine is a product targeted for the internet population globally. But you get the point, YC is not much welcoming to most SE/SEA countries.
So we are left with local angels. Now, these people got their own businesses and believe wholeheartedly they know better when it comes to startup investing.
"AFAIK a SAFE valuation is the valuation when the shares convert during an A round - after you have built the business. The point of a SAFE is so you don’t have to value the business now." - This is exactly what can solve the problem. I don't want to value my business now, in fact, it's even better if we don't put a valuation cap at all. But the angels we talk, like to know their ownership when investing in %.
To simplify, let's imagine I share a valuation cap and this is when things get ugly. For example, "So you have $1.6K MRR and you are looking for a valuation of $1M? You are delusional."
How can I make them read all those YC blogs/conferences when they are familiar with traditional valuations and not willing to correct existing learnings? With revenue multiples, there is no simple way to value my company today. But I need $100K to build now and am ready to offer you 10% in the future. "Nah, this is not for me, I want 50%." - response from angels, wasting both of our time.
Bootstrapping is what favorable at this point and I am doing this already. But that comes with the problem of going too slow - fulfilling the orders manually, charging a higher fee (~$1K/order), finding leads, and running a sales process. Which can be a good lifestyle business for surviving but not enough to get a product developed and grow faster.
Anyway, truly appreciate the valuable advice shared in detail. Likely I have no ways other than bootstrapping at this point.
Sounds like some real time-wasters. I’ve looked at angel funding a little from both sides (founder and investor) in New Zealand, and it is a real shitshow, because there is a lack of money and a huge lack of experience. You will probably run into similar issues with too many crappy Angels and too few worthwhile ones (and fishing for Angels is hard - great Angels test your soft skills by making it difficult e.g. need intro).
> YC is highly biased depending on countries
They really want to fund to other countries, but they find it difficult to find appropriate founders/businesses. Just write a fucking application! Spend an hour on it - your cost is low and your potential return is high. The next application window is open https://www.ycombinator.com/apply/ “remote-friendly options”, “submit your application online by 8 pm PT on April 7”. Ideally convince a developer cofounder to join you for equity (they like that - good litmus test for relevant skills).
Also read one relevant essay a day from here: http://paulgraham.com/articles.html (I suggest you avoid his more philosophical musings - fun but mostly irrelevant). One a day so you can change your own thinking - I would be surprised if you got much value from reading many at once. http://paulgraham.com/convince.html is relevant to your original question, but probably applies most to sophisticated angel investors in the US.
Good luck!