Too often, founders approach fundraising as if they are supplicants to the investors. They understand that fundraising features many asymmetries, but the founders mostly see the asymmetries that are tilted towards the investors. Here’s the thing - in today’s market, the asymmetries largely favor the prepared founder.
This is a rough catalogue of the major asymmetries:
Experience - The more fundraises someone sees, the more skilled they are in getting what they want.
Capital - This is what the investor has that the founder wants.
Ownership - This is what the founder has that the investor wants.
Speed - This is the pace at which the investment process moves.
Information - Data on how the business is faring. Particulars about the progress of the fundraise.
Price - How much the business is worth.
Emotion - A key element in any negotiation.
Near as I can tell, there is only one item on this list that is squarely in an individual investor’s column:
Simply put, it is an investor’s job to invest. This means she does it frequently, knows the language, the paths, the places to negotiate and relent. She has a better sense of where the market is and what tactics work on founders. The best investors use their experience at an intellectual level - to evaluate a deal and rapidly make a decision - and at an emotional level - to influence what deal a founder takes and when.
Even founders who have raised multiple rounds have not done as many as a good investor, or as that investor combined with her partners.
Every other item on the list can be tilted to the founder’s advantage. This is what the best and most prepared founders do.
It is true that the point of fundraising is to get capital. Investors have that capital, and founders do not. However, this does not actually mean that the investor has the advantage because the founder has something that the investor wants even more: ownership. This may seem purely psychological, but it is important.
Investors have more access to capital from LPs than they do to equity in great startups. This seems strange to most founders, because they have not internalized how abundant capital is in today’s market.
Founders who see this dynamic for what it is have a psychological advantage when pitching - they know that they are in control, which in turn creates confidence. An investor who believes that the equity she is trying to purchase will be worth 100x what it is today will move mountains of money to get that equity.
Most founders that are new to fundraising allow investors to control their fundraising timelines. They believe the investors who say “we need to meet once a month for six months to evaluate you” or “we only have investment committee meetings on Monday mornings between 9-11am PST.” Neither of these statements are true. In fact, there is no such thing as a required timeline or minimum time spent for an investor to issue a term sheet.
Founders can largely control the pace of their own fundraises by preparing the market of investors ahead of time. This means building the right relationships over the months preceding an active fundraise and executing a tight and coordinated process when the time to raise arrives. This also means that founders should plan fundraising activities around the natural rhythms of their businesses, the calendar, and their runways.
This is even true in the case of a “pre-empted” round - a round in which the investor offers a term sheet before the founder is “ready.” Some founders believe that they need to take a pre-emptive offer, but no one will force them to do so. The most prepared founders are, however, always ready for a term sheet because they have sets of relationships which they can use to check the market at any time. These founders also know whether or not a pre-emptive offer makes sense given the path of the business.
There are three types of information that influence the path of any fundraise:
Information about the company
Information about the process of the fundraise
Information about the market in which the fundraise occurs
I’ve written about how founders can use information to their advantage in a fundraise ( https://www.ycombinator.com/library/3N-process-and-leverage-in-fundraising), so will just summarize the major points.
Founders should assume that all information they share about their company with an investor will be public and that it will always be used to evaluate an investment in the company. With this knowledge, founders can choose who sees what information and when, creating a dynamic where investors are always pressing for more. This is a clear advantage for the founder because it allows him to control the pace of the process and manage the excitement of the investor.
Information about the process works similarly. The only person that actually knows what’s happening in a fundraise is the founder, provided the founder is paying attention. Founders should release information about meeting cadences, offers, term sheets, etc. when they choose to, and not simply when asked.
The final type of information, market data, generally favors the investor. This is relevant because it informs what terms are good/bad. However, founders can significantly decrease this imbalance by talking to other good founders or to advisers who see many rounds at any given time. Price is a subset of this information set.
There are many emotions involved in fundraising. Investors are able to approach a raise with emotional detachment since, for them, the raise is just one in a series of business transactions. Founders generally experience far more emotional range and depth during a raise since their companies are extensions of themselves. While, to some extent, business is business...it isn’t.
Rather than try to balance this one, it is useful to recognize that there are emotional games played on both sides. Founders should be aware that investors work hard to get founders to “fall in love” or to believe that there are (morally) right and wrong decisions on picking a capital provider. This isn’t actually true. Investors who lose deals may be upset, but they move on. Founders who negotiate hard aren’t hurting the feelings of investors - and the same should be true in the other direction.
Some of the emotions investors leverage to win deals:
Guilt: “Look how long we’ve known each other! Look how much I’ve done for you! Isn’t that worth something?
Fear: “If you don’t pick us, we will fund your competitor and grind you into dust.”
Greed: “Don’t you want to be rich? I’ll make you rich.”
Inferiority: “You’d have to be stupid not to work with us. This is an intelligence test. Don’t fail the intelligence test.”
There are more, but this is a reasonable catalogue of the ones I see most often.
The key thing to understand about asymmetries in fundraising is that they most disadvantage founders who are unprepared. I’ve always thought that Sequoia’s focus on the “prepared mind” was a useful model for approaching a consequential decision.
To the investor, a prepared mind means having the right frameworks and knowledge to evaluate an opportunity and most effectively and quickly move to take advantage of it. To the founder, a prepared mind follows the same model, but the opportunity set is different. Founders don’t need to be prepared to evaluate their business, they need to be prepared to run a fundraising process with knowledge of their strengths and weaknesses, of leverage points and norms, of asymmetries and of ways to utilize or mitigate them. There’s never going to be a perfectly even interaction between two people. That’s only a problem if you were expecting it to be.
 For the purposes of this essay, I’m not going to address asymmetries of power resulting from the personal attributes of either founders or investors. These are critically important dimensions of fundraising, but are so nuanced that I only feel comfortable addressing them directly with founders vs. in this fixed essay form.
 This is, admittedly, not true for a brand new investor at a brand new firm putting money into a seasoned founder, but I’m going to ignore that for the sake of argument.
 The way in which a founder releases information - who, when, how much - is a topic for an entire tactical essay.
 This isn’t to say that all investors actually do approach fundraises with emotional detachment, just that they should be able to do so more easily than founders.
 Adora Cheung’s advice here is that founders should find their peak toughness while negotiating with investors. This is a perfect framing - tough doesn’t mean being a jerk or unfair or amoral, it means knowing and pressing your advantages.
Thanks to Adora Cheung and Janelle Tam for helping me write this.