How to Fund a Startup

Paul Graham’s essay How to Fund a Startup explains startup funding as a process of shifting gears—raising just enough at each stage to reach the next level.

The Five Funding Sources

1. Friends and Family: Most accessible but mixes personal relationships with business. Non-accredited investors can complicate legal matters.

2. Consulting: Maintains revenue but trades financial security for entrepreneurial urgency. Becomes a “weed tree” distraction.

3. Angel Investors: Individual wealthy investors who provide capital and networks. Key leverage: pursue multiple alternatives simultaneously.

4. Seed Funding Firms: Companies investing small amounts early-stage. Focus on people over ideas.

5. Venture Capital: Organized funds managing others’ money. Lower-tier firms are hungrier but potentially less trustworthy.

Critical Insights

Valuation Reality: “In early stage investing, valuations are voodoo.” They’re artificial metrics that become meaningful only as companies mature.

One Shot with VCs: Rejection spreads through networks quickly, making startups “shopworn.” Approach when you can actually convince them.

Deals Fall Through: “Birds fly; fish swim; deals fall through.” Pursue alternatives until money clears.

Cheapness is Power: Low burn rates preserve options and negotiating leverage.

My Takeaway

The funding ladder exists to get you to the next stage—nothing more. Keep costs low, maintain leverage, and never stop pursuing alternatives until the money is in the bank.

What’s been your experience with startup funding? I’d love to hear at persdre@gmail.com.