How investors play the option

Paul Graham put up a new essay, one of his longest, called “How to raise money”. It gives a good glimpse into the mind game that is startup financing.

I thought it was particularly interesting how he documented three different ways in which investors say “no”, without really saying no.

Say nothing: “I mentioned earlier that investors prefer to wait if they can. What’s particularly dangerous for founders is the way they wait. Essentially, they lead you on. They seem like they’re about to invest right up till the moment they say no. If they even say no. Some of the worse ones never actually do say no; they just stop replying to your emails. They hope that way to get a free option on investing.”

Say yes, conditionally: “When an investor tells you ‘I want to invest in you, but I don’t lead,’ translate that in your mind to ‘No, except yes if you turn out to be a hot deal.’ And since that’s the default opinion of any investor about any startup, they’ve essentially just told you nothing.”

Say yes, then no: “Remember the twin fears that torment investors? The fear of missing out that makes them jump early, and the fear of jumping onto a turd that results? This is a market where people are exceptionally prone to buyer’s remorse. And it’s also one that furnishes them plenty of excuses to gratify it.”

This is why in 2010, I wrote the essay “It’s easier to play the option than the bet.” I noticed that when analyzed rationally from an investor’s vantage point, it’s always easier to take an “option” on investing in a company, rather than “pulling the trigger” and actually making the bet.

Coming to this realization was important for‘s founding history. It made me realize the wisest thing we could do as a company is to “ride like hell”, rather than jockeying to position ourselves as someone else’s winning bet. In other words, actual traction beats perceived hotness. Or, as Gabe Weinberg (founder of DuckDuckGo) put it, “Traction trumps everything.” Actual traction gives you more options, as a founder.

Fundraising is extremely confusing for first-time founders, but I think pg’s essay clears things up. So: read it, along with his earlier two in his fundraising series:

One thought on “How investors play the option”

  1. I’ve always loved the story, because you realized what I did not, but know as my one truth now: if you don’t have a plan that gets you to traction that NO investor would turn down that you could at least theoretically get to without investment, you’re playing an awful game.

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