Y-Combinator: Startups’ Unfair Advantage Should be Related to Growth. | VC Jobs
Vertical Apps are the next thing & Talking about valuation number when investors ask...
👋Hey Sahil here! Welcome to this bi-weekly venture curator newsletter. Each week, I tackle questions about building products, startups, growth, and venture capital! In today’s newsletter, we dive into -
Deep Dive: How to Talk About Valuation Numbers When Investors Ask?
Quick Dive:
a16z Partner’s View on the Future of Consumer Startups - Vertical Apps are the next thing…
Startups’ Unfair Advantage should be related to growth.
How to Ask Your Investors For Customer Intros?
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TODAY’S DEEP DIVE
What Expectations Do You Have About Valuation?
(The other day, I was speaking with a GP of a VC fund managing a $100 million fund. We discussed how founders can approach the topic of valuation when investors ask. So I thought to share some of the key points with you!)
One of the hardest things about the fund-raising process for entrepreneurs is that you’re trying to raise money from people who have “asymmetric information.”
VC firms see thousands of deals and have a refined sense of how the market is valuing deals because they get price signals across all of these deals.
As an entrepreneur, it can feel as intimidating as going to buy a car where the dealer knows the price of every make & model of a car and you’re guessing at how much to pay.
Of course, unlike cars, there is no direct comparison across each startup so these are just a few points to try and even the information field.
One slide that almost every founder gets wrong is 'the ask' slide, where most founders include the terms of an investment or the valuation. Don’t do this -
If you put 'raising $5 million at a $20 million valuation' on the slide before you have a lead investor, you’re making a mistake. You may have an idea of the valuation you’re hoping for, but that will come out as part of the negotiation later on. The amount of money you need is somewhat fixed, but what you’re willing to give up to raise those funds is not.
In the best-case scenario, you find two or three lead investors who end up in a bidding war for the privilege of investing in you. The levers they have available aren’t just the valuation of the company, of course — there are plenty of other clauses that are up for negotiation in a funding process.
The one exception to this is if you already have a lead investor and you’re just looking to close out the round. In that case, your “ask” slide can include the name of the lead investor and the terms agreed upon. “Raising $5 million at a $20 million valuation, and Investor X has committed $3 million of the round” can work.
Having said that, if you’re that far into your funding round, there’s probably enough inertia to close out the round; it’s unlikely to be necessary to update this slide once you have a signed term sheet in hand.
Also Many founders failed to answer the question: "What expectations do you have about valuation?
It is not uncommon for a VC to ask about your price expectations in this fundraising process. It’s a legitimate question as the VC is in “price discovery” mode and wants a sense of whether you’re in his or her valuation range.
It’s a tough dance but, here is what Investor-A suggest:
In most cases don’t name an actual price
Your job is to “anchor” by giving the VC a general range without saying it. Call this “price signalling.”
Turn the tables on the VC by politely saying, “Given you must have a sense of our general valuation, how do you feel the market is pricing rounds like ours these days? After all — we only raise once every 1–2 years!”
Why shouldn’t most founders just name a price? For starters, it’s the job of the “buyer” to name a price and you don’t want to name your valuation if it ends up being lower than the VC would have paid or a price too high that the VC simply pulls out of the process.
So Then Why Anchor?
If you don’t give signals to a VC of what your general expectations are it’s hard for them to know whether you have realistic expectations relative to their perceived value of you and whether you want to keep them in the process rather than just having them pull out based on what they THINK you might want on valuation.
Any great negotiation starts by anchoring the other party’s expectations and then testing their reaction.
How you talk about valuation will of course depend on how well your business is performing and how much demand you have from other investors. If I leave out the immediate “up and to the right” companies and talk about most others who have made good progress since the last funding but the next round isn’t a slam dunk, you might consider something like if asked about your expectations:
We closed our last round at a $17 million post-money valuation and we had raised $3.5 million.
We closed it 20 months ago and we feel like we’ve made great progress
We’re hoping to raise $5–7 million in this round
We know roughly how VCs price rounds and we think we’ll likely be within the normal range of expectations
But obviously, we’re going to let the market tell us what the right valuation is. We only raise every 2 years so the market will have a better feel for it than we will
We’re optimizing for the best long-term fit for a VC and who we think will help us create the most value. We’re not optimizing for the highest price. But obviously, we want a fair price.
How do you generally think about valuation for a company at our stage? (this is seeking feedback / testing your response)
Here you’ve set a bunch of signals without naming your price. What a VC heard was:
The price has to be higher than $17 million, which was the last round. It was 20 months ago and the founder told me she has made great progress (code words for the higher price expected)
She is raising $5–7 million and knows the range of valuations for this amount. If I assume 20–25% dilution that implies a price of between $20–28 million pre-money valuation ($25-$35m post-money). Maybe she wants slightly higher but she certainly won’t want lower.
She has told me she’s not trying to shop this for the highest price. I’m not so naive as to completely believe that — every entrepreneur will go for the highest reasonable price with a VC they like so I at least need to put my best foot forward. But if I’m in the ballpark of fair she won’t game me and push for the highest price as the only part of her decision.
If you're struggling to calculate your startup's valuation, I've previously shared a simple framework to calculate the startup valuation.
So keep both points in mind when approaching investors for fundraising.
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QUICK DIVES
1. a16z Partner’s View on the Future of Consumer Startups - Vertical Apps are the next thing…
It's been a long time since we built a broadly horizontal consumer app like YouTube, Instagram, Linkedin, or Snapchat. Andrew Chen shared - he is convinced it may not be possible anymore because we're in the final years of the mobile S-curve and 15+ years after the launch of the iPhone, there are major hurdles to apps to broad, billion-user horizontal apps.
Instead, the next generation might be "vertical apps" -- appealing to a vertical segment of the market, like Monopoly Go, Draft Kings, Canva, etc -- that are smaller audience products with higher "whale" monetization (sometimes even workflow/B2B)
First, why these broadly horizontal apps are hard:
Novelty Fatigue: Consumers have seen it all. The obvious permutations of social/communication/photo/video apps have been exhausted.
Retention Challenges: New apps compete against the most addictive products ever created. Without daily value, users quickly revert to TikTok or Instagram.
Ad-Support Dilemma: Building an ad-supported startup is a "two miracle" problem - scaling to millions of users, then building complex ad systems.
Growth Hurdles: Traditional growth channels are less effective. Mobile ads are costly, viral invites have low response rates, and web channels like SEO don't translate well to mobile.
So what's next? Vertical apps with beefier monetization, and different network characteristics seem a likely candidate.
Direct Monetization: Instead of ads, these apps allow big-spending users to enhance their experience. Free-to-play games and betting apps like Draft Kings exemplify "whale monetization."
AI-Driven Innovation: AI advancements are unveiling novel use cases, particularly in productivity. These "prosumer" tools often scale up based on usage or team/enterprise tiers.
Niche Network Effects: Networks can form around specific activities and interests, like dating apps or multiplayer games like Valorant.
Solo Utility Focus: Apps emphasizing single-user utility and game design mechanics (like Duolingo) can create stickiness without relying on extensive user interaction.
So overall - Tomorrow's apps might look more vertical. Higher spending, smaller audiences, focused on interactions that are useful and solo. Some may target productivity/utility use cases, particularly as AI creates novel interactions, at least until the next tech platform emerges.
2. Startups’ Unfair Advantage should be related to growth.
What are the reasons — why this solution is going to work out? What are those insights? All these are down to your unfair advantage. Investors always want to know these things from founders.
Just remember that the unfair advantage should be related to growth. So how can you explain your unfair advantage - there are five different types of unfair advantage
As a startup, You need to have at least one. If you look at successful startups you will find that they have multiple unfair advantages which lead them to achieve that tag. As a founder, just ask yourself about these five unfair advantages,
Founder Advantage: Are you among the top experts in the world in solving this problem? If not, it’s a weak advantage.
Market Advantage: Is your market growing at least 20% a year? This sets a trend for automatic growth.
Product Advantage: Is your product 10x better than the competition? Clear differentiation is crucial.
Acquisition Advantage: Can your startup grow without relying on paid acquisition? Word-of-mouth is a powerful channel.
Many entrepreneurs believe that demonstrating a successful track record in paid advertising through platforms like Facebook, Twitter, or Google Ads, along with presenting detailed metrics such as Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV), can prove the sustainability of their acquisition model. However, it’s crucial to understand that relying solely on paid acquisition can be risky.
If your company’s growth strategy heavily depends on paid advertising, it’s a vulnerable position to be in. As your popularity surges and revenues reach substantial figures, you’ll inevitably attract fierce competition. Think of it as becoming a significant player in a game where newcomers constantly join, making it harder to maintain your edge.
A prime example of this scenario is evident in companies where most of their early growth was fueled by paid acquisitions. Over time, this advantage eroded as the market became saturated, leaving them with limited room for further expansion.
The key is to explore acquisition channels that require little to no financial investment. The most potent and sustainable growth often comes from word-of-mouth referrals. Cultivating a product or service that people naturally want to talk about and share with others can be a game-changer.
In the initial stages of your startup, when funds are tight, focusing on methods that don’t require a significant financial outlay is not just a necessity; it’s a strategic advantage.
This is why startup advisors often stress the importance of doing things that don’t scale at the beginning. It’s about finding creative, low-cost, or preferably, no-cost strategies to grow your business organically.
5. Monopoly Advantage: Does your company become stronger and harder to defeat as it grows? Think network effects or winner-takes-all scenarios.
The concept of having a monopoly in the business world isn’t about the traditional board game with a monocle-wearing tycoon.
It’s about whether, as your company grows, it becomes increasingly challenging for competitors to defeat you. In essence, do you get stronger as you expand?
Companies with network effects in marketplaces exemplify this phenomenon. In these winner-takes-all scenarios, one company tends to dominate. Network effects mean that as my network within the platform grows, so does the strength of my company. The value of the product or service escalates in tandem with the expanding user base.
3. How to ask your investors for customer intros?
Most founders send an investor update at the end of each month with a sentence that reads something like: we’d love potential customer introductions to (buyer at target market).
Then nothing happens. No introductions are made.
Investors, both VC and angel, are a great channel to source new opportunities and customers. But you, the founder, have to be very specific in the ask and make it easy for the investor to make introductions. Here’s how you can do it:
Look at the portfolios of your investors.
Identify companies you think would be good potential customers.
Identify the best person at that company to speak with about your offering.
Send your investor an email for each intro you’re requesting.
If you want intros to 10 companies from a single investor, send 10 emails to that investor. Subject: intro to (person) at (company). Body: write the email you want the investor to forward to their contact at the company. All the investor has to do is forward the email.
Track these intros in a spreadsheet. If you have a VC or angel investor who isn’t helping, follow up and ask them what else they need to make the ask/intro.
At a minimum, your investors should be forwarding every email you send requesting a meeting on your behalf. This process will be far more effective at generating investor referrals than what most founders do today.
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THIS WEEK’S NEWS RECAP
Major News In VC, Startup Funding & Tech
Open AI & Thrive Capital invested $30 Million in Chai Discovery, an artificial intelligence biology startup founded six months ago, to bring AI to drug discovery. (More Here)
Atomico, a major European VC firm, has raised $1.24 billion across two new funds: $485 million for early-stage and $754 million for growth-stage investments. (More Here)
SpaceX's Polaris Dawn mission, set to launch Tuesday, aims to conduct the first-ever private spacewalk and reach the farthest distance from Earth since Apollo. (More Here)
Italian app developer Bending Spoons plans to lay off 75% of WeTransfer's staff, following its acquisition of the file-sharing platform in July. (More Here)
Elon Musk announced that SpaceX plans to launch its first mission to Mars with the Starship rocket in November 2026. (More Here)
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That’s It For Today! Happy Tuesday. Will meet You on Friday!
✍️Written By Sahil R | Venture Crew Team