This Week in Startups - E1055: Hustle Fund Co-Founder & General Partner Elizabeth Yin on her unique portfolio strategy, attracting first-time LPs, optimism for post-COVID fundraising, dealing with pro rata as a smaller fund & more!

Episode Date: May 8, 2020

0:50 Jason opens the show with some thoughts on livelihood, getting back to work as a lose-lose situation and approaching the situation with kindness and empathy 5:47 Jason intros Hustle Fund's Elizabeth Yin and they discuss the process of raising Hustle Fund I and targeting first-time LPs 10:25 Why high net worth individuals would look to become venture LPs 14:26 What's the deal with Elizabeth & hippos? Where can you find Jason as his alter-ego "CyberSurfer" 15:49 What is Hustle Fund's portfolio strategy? 18:55 When do you know if you have a 100x outlier? Why roll prior angel investments into the fund? 24:15 Thinking of venture funds from a gambling perspective 28:24 What is Hustle Fund's approach to pro-rata as a smaller fund? 34:49 Founders ability to "game" investors increasing in last 5 years 37:47 How does Elizabeth decide to make the follow-on second bet in a company? 42:01 How does Elizabeth advise her startups to raise from downstream Seed/Series A investors, importance of positive unit economics 47:41 Challenges of fundraising in today's climate 50:34 Reasons for optimism/pessimism, lockdown creating a necessity for innovation 56:55 What will COVID's permanent ramifications be on startups?

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And Dell for entrepreneurs. Level up your hardware today and save up to 43% by going to Dell.com slash twist. Hey, everybody, welcome to this weekend startups. I'm your host Jason Kalakanis. I'm recording this on May 5th, so not may the 4th be with you. but May 5th the day after Star Wars Day. And we're in the middle of the global pandemic. But things feel like they're getting better in some ways.

There's still a lot of concern out there. People are still scared. And we carry on here on the podcast. In fact, we're doing more than ever. And I think that this is the big lesson for all of us, not take for granted what we had before this pandemic. And maybe appreciate what this new world is going to be. There's going to be a lot of problems.

It's going to be a lot of challenges, but it's going to be a lot of opportunities. And it feels like we've got a pretty good handle on how to save people's lives. And the human tragedy of this is just shocking to a level that, you know, if you just obsess on that, I think you don't get out of bed in the morning. When New York City hit 900 people a day, I just had this moment in this flashback to 9-11 when I watched, you know, 3,000 people or so died that day. and I just thought, wow, it's a 9-11 every three days. And when you start thinking about it that way, and you start thinking about the number of people who have died, it really is staggering.

But we will get through it, and we're making great progress. And I think optimism and hope is the only thing that you have right now. And so you've got to lean into that, as well as social distancing, wearing masks, and generally being intelligent about that and those issues. We've talked a lot about people's lives, obviously, but we also need to talk about people's livelihoods. And the startup community is what creates jobs in the world, right?

And that's important too. And we're starting to already see with 30 million people unemployed or some number around there at this time, who knows how high that gets. And who knows how quickly those people get their jobs back. And it's created a lot of tension. A lot of people are on tilt, a lot of arguments on Twitter in Slack rooms, on my I message threads with my group. messaging with friends from New York, we're friends from the Valley, with friends from

L.A. Everybody's got a different take on this. And that is expected because we've never been through this before. This is a global pandemic that seems like something that happens once every 100 years or so. And hopefully that is the case that we don't have this happen every 10 years. So give a little space to people who have a difference of opinion from you. There are people who work behind keyboards like us, many of us on this podcast, who are not

impacted. And then there's 25% of Airbnb employees who have lost their jobs today and their hopes, their dreams. Many of them probably had shares of that company hoping it would IPO. And, you know, they're not the frontline workers. They're not the folks that we first thought about, waiters, people working at the Warriors Arena, people at Disneyland. Now we're starting to see a second way of the people. We're starting to see white collar workers because these big companies, and listen, I'm on these boards, I'm on these phone calls every day. and boy has my life gotten surreal where literally every day there's two or three board phone calls,

two or three founders calling in addition to that where I'm not on the board and they're just cutting staff and the cuts are getting deep and the cuts in some cases people are being let go out of an abundance of caution from CEOs who are just not sure about the future and these are not insignificant jobs in the world these are jobs that are six-figure jobs in some cases which then create multiple jobs thereafter, the trickle-down theory, which is much maligned, but there is a reality to that, which is somebody who makes $150,000 a year as some executive at Airbnb or another company, you know, they might have a nanny, they might have a tutor, and they might be cutting those now. And so the fallout from this is going to be greater than I think some people imagine.

And we need to really start thinking about employment, getting back to work, and doing it safely. It's a lose-lose situation. And I don't know that in our lifetime we've been faced with a lose-lose situation where you're just picking, you know, people losing their livelihoods, people potentially losing their lives, and it puts everybody in an extraordinarily painful decision-making process. And so, again, I'd be kind to each other, right? And everybody's trying to figure this out for the first time. And I have great sympathy for people on all sides of this.

Obviously, you have to. There are employers who are making these cuts. There are people who've had their jobs cut. And there are people who want to go back to work. And then there are doctors and nurses and public health experts who are like, this is a job that will not be safe. It will lead to people dying in some large amount. It's a lose-lose situation. And this is humbling, I think, for all of us.

So with that disclaimer, on to the program. I've been looking forward to having Elizabeth Yin back on the pod. You've been on the pod before, yeah? No, first time. Oh, you've spoken out all of our events, basically. Oh, yeah. Yeah, thank you. Yes.

And Elizabeth, I first met, I think, when you were at 500 startups, and since then you've done the hustle fund. And we'll talk about that today because you raised your own fund and you finished this initial fundraising or this fund is $11.5 million. fund right before coronavirus hit. And that is, it got to be exceptional timing, yes? Actually, we finished raising last May in 2019. Yeah.

So, and if you had raised in this May, there would be no chance of raising any money. No, that would be really tough. I spoke to an LP and they said no new funds, no LPs, limited partners, people who give venture capitalists and investors like us money to invest in startups. They said no new funds will be funded. The whole idea of new funds being created is now over for the next five years or so while the venture industry works through it. Tell us, what was the process of raising your first fund, the hustle fund?

I think, you know, having been a founder before, I knew that fundraising was all about a numbers game. So just to give you some context on our fund one for hustle fund, we pitched over 700 people. and we just knew that there would be some percentage that would hopefully close, and that was the case. 700 pitches. That's right. And do the majority of these occur online or in person? I'm curious. Mostly in person, so a very different world than what people are going through now to pitch. And this sent you all over the country and or world, I would take it.

We mostly pitched people in the San Francisco Bay area. we did actually have some luck converting some people online who were not in the San Francisco Bay Area. In fact, we did not actually travel very much to do our fundraise. And of 700 meetings, how many, just ballpark, would become an LP? In other words, you have 150 LPs and it wound up being 20% of people or 5% of people, 10% of people, what number of people? Yeah. So I think, you know, per SEC rules, you can't have more than 99 investors, which is, frankly speaking, a real pain in the butt. But so to that end, we have fewer than 99 LPs, and it's actually very close to that number. So roughly 10%. Got it. And you can do 250, but you have to cap it at 10 million. Did you consider that option? That wasn't around back then. Ah, right, when you started. So the fund formation rules now have changed. Now that that's come out, and you beat the 10 million by a million five, would you have done 250 and a lower check size per person knowing that is now the case? Yeah, it's actually a good question. We might have considered it. And now that I think about it, actually, we closed that fund in May of 2018, not 2019. So it was a while ago. Yeah. But I do think that that would have worked well per our strategy because this was. a strategy of going after high net worth individuals, mostly. We didn't approach institutionals. We pitched a handful of fund of funds, but mostly we felt like it was relationship building.

We didn't actually think anybody would close from that group of people. So if you're going after individuals, then trying to go after more individuals seems like a faster strategy. When you pitch an individual to be an adventure fund, of the individuals you pitched out of a hundred, how many had been in a venture fund already and how many had never invested? in a venture fund. And then how does the process change with those two groups of people? Almost all of our individual LPs, our investors, had never invested in a fund before. Wow. So you're not only educating them on what you're doing, you're educating them on what it means to be an LP and a venture fund. That's right. And, you know, that works both ways.

It's both opportunity. You're opening up a new pool of would-be investors, but, But because of the education piece, to a certain extent, it could be a little bit scary, right? Like, what if they don't really fully understand what they're getting into after, you know, all of our explanations around just how risky this is, they could lose all their money, et cetera. What is the expectation for somebody who's putting money in? And in your case, it's an average tech size of 100K. This is a high net worth individual. That means they likely have millions of dollars in net worth.

So this is a small percentage of it. why do you think they're doing it? Is this something new for them that they want to explore? And this is a great way to make a small bet and get an education. Is it because they want to support you and the vision for the fund? What do you, when you look into why they made the decision, what did they tell you and what are you infer? Yeah. So I think our strategy for fundraising is very similar to how I think about B2B sales. Every customer has a persona and each persona has a particular day in a life and what it is they're trying to accomplish and do in life. And so if I were to dissect our LPs, they have slightly different personas.

There are the people who are like, you know, I've invested in stocks and I've gotten some alpha there, but I'm now rich enough where I can allocate a small amount of my wealth towards something really risky, but it could go 100x or something. So that's certainly one group of people. There's the other group of people where they're very mission-driven, where it's like, I've done pretty well in my life, but I want to help some other people. and, you know, per our fund model, we actually invest quite a lot. We're a high-frequency investor shop, so we invest across geographies and demographics.

And so for people who wanted to invest more in underrepresented minorities and women, like our story really resonated as well for another group of people. And then there were other people yet who wanted to network with other LPs, people who didn't have a network in Silicon Valley or didn't know tech investors, but were really strong in real estate or whatnot. So there are just many different customer personas, and we really just tried to understand when we met people for the first time which category they kind of felt in,

because that really dictated the messaging and the story that we drove home. All right. When we get back from this quick break, I want to try to understand when you're doing one of these funds, which used to be called, I guess, microvc, or a seed fund or an angel fund, I guess they use all different words for this. Probably angel and microfund would be the typical.

name of it. And interestingly, my first two funds were 10 and 11 million. I want to understand what is the betting strategy with this size fund. Do you make 30 bets of 300K each or so? Or do you try to make 100 bets of 100K each? Do you follow on? What's the portfolio strategy? What's the betting strategy with an 11.5 million dollar fund when we get back on this week and startups? All right, in uncertain times supporting your community and growing relationships with your customers is going to be appreciated. It's going to be remembered. It's going to be shared. In good times and bad, open and empathetic communication with your customers is key.

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Let alone navigate these trying times. And it's hard right now out there for our founders. If you're feeling overwhelmed with growing your business, especially in this climate, you're not alone. Clavio is here to help brands build relationships across any distance. Create meaningful, memorable email marketing moments that last a lifetime with Clavio. That's K-L-A-V-I-O-O-com slash twist. Start a free trial today. K-L-A-V-I-O-O-com slash twist. K-L-A-V-I-O-O-D-com slash twist. Thanks, Clavio for making an awesome product and supporting independent media like this week in startups. All right, Elizabeth Yinn is with us. She is Dunk Hippo 33 on the Twitter.

And I have to. I'm obligated to ask for the audience, what is the obsession with hippos? I see you have a hippo land behind you as your stunning virtual background on Zoom. And your Twitter handle is Dunk Hippo 33. What is this about? Oh, it's just a fun little thing from when I was a kid. Nothing really that interesting. But many years ago when I was a teenager, a friend told me I should really get the email

address drunk Hippo 33. So I have that persona as well on a bunch of different, you know, channels. Got it. So it was your online handle, basically. I was the cyber surfer because back in the day we liked Silver Surfer, the comic book, and then Cyberpunk

came out and I became the CyberSurf. That was my online handle back in the day. But you don't use it anymore? I don't use it in professional context. But if you go to Burning Man or to the EDM tent at Coachella, you might see the CyberSher. actually appear briefly. Briefly, briefly. He's kind of like a flash. It's very hard to spot him,

but the cybersurfers sometimes does show up at the Sahara tent. I've been told. I've been told. So when we left for commercial break there, thanks to our sponsors and supporters, tell me what the portfolio strategy is. How do you explain it to the folks who are investing? And then how do you think about it yourself and how has it evolved since you've started investing? Yeah, sure. So I would say that actually our portfolio construction is a hybrid between high-frequency investing or spray and prey, as many people like to loosely call it, and concentrated traditional VC portfolios. So we write a lot of small checks, $25,000.

If we've never met you before, we are willing to take that risk. We're willing to take that risk early. We go in at pre-seed. We do not care about traction. we work with you for several weeks on something we call a growth project, more as a sounding board around marketing experiments and whatnot. And, you know, where we're bullish and where the founder thinks there's a good fit here, we will invest more money.

And so we may write a $250,000 check weeks, months, or even over a year later. Got it. So in terms of the total number of names in the portfolio, the logos, as we say in the business, what do you think the number of names or logos will be? What is it trending towards? You mean, what is the number of companies that will become well known? Or no, no, just number of companies total in the fund. So will you have 100 names in the fund or 50 names in the fund? Yep. A hundred and one. A hundred and one. That's literally where it's going to wind up.

Yep. Wait, is that by design or is that just being facetious? We actually have finished our fund one. And we're already investing out of fund too. Got it. And so 1001 names. Now, what would somebody expect would be the mortality rate of a fund like this without, let's call it 100 names? What percentage would you, what percentage did you expect to go to zero and what do you think it ultimately will be?

Because you're investing so early that people don't have product market fit. They don't even have the product in market, so they can't be product market fit. That's right. Yeah. So we model between 60 and 70% mortality, just in general, not necessarily within the first year per se, but in total throughout the life of the fund. And, you know, where we are right now, we've had fewer than 10 that have failed on the 101. You know, we're now, whatever, two and a half years into the fund. Now, of course, not everybody was a company we invested in on day one.

So some of these companies are a lot newer. but I think we'll find out in the next year or two, whether it starts to approach 60 or 70. That being said, as you know, Jason, very well, that it's not about the number of failures. It's about how many companies do you have that go on to be huge hits, like 100x or more,

a thousand X would be wonderful, but the number of those is really what drives the returns of fun, not who survives. Surviving, of course, is the first step to becoming one of those, but that's not what drives the returns. Which is where I was sort of going next, When do you know if you have an outlier? When do you know if you have 100x?

And just so people who are listening understand what we're talking about here, we're not talking about 100% gain in value. We're talking about turning that $25,000, not into $50,000 or not into $250,000, but going 100x, now we're talking about hitting $2.5 million on that investment. When will you know if you have any of those? Do you have any of those? Is it too early to tell? Well, I think that there's to some extent some cheating where we rolled in our angel investments at cost into Fund 1.

Oh, prior angel investments. I'm sorry? You took your prior angel investments and rolled in me. That's right. Oh, such a smart strategy. Well, I mean, we also gave up some good gains, right? So, for example, my business partner, Eric Bonn wrote one of the very first angel checks into Webflow. And I know you've had Vlad on your show before.

Oh, wow. Yum, yum. So, you know, that he gave up personally a lot of money that is now being shared with our LPs, right? But it does then show some credibility. So we're taking results from, let's call it, you know, 2013, 2014 and moving them into our fund one essentially. I got asked to do that too with like my Uber investment and, you know, some of the other investments, thumbtack, where the people said, hey, if you're going to start a fund, why don't you put your Uber shares? and this when you were based at 10 billion. And they're like, yeah, put the Uber shares in there.

Then whatever the gains are from 10 billion forward to 50, 60 billion, wherever it is today, we would get to participate in that. And I declined to do that. But I said, you know, if a person could hit those. But I think that's actually a really great strategy. Now that did you lead with that? We led with that. Yeah.

Nobody asked us to do it. We led with it. But we have some good ones in there. So there's Webflow, which I think, you know, anybody who's watched your show is familiar with. but we also have nerd wallet in there. Very nice. And there's a company called the Pill Club. Oh, that's very well.

Boom Supersonics. So all of those are in there as well. Boom Supersonics and interesting when I met with them and I passed on investing and actually had them on the podcast as well. Explain to people what Boom Supersonic is. It's basically a new kind of airplane, a supersonic plane. And I think unlike many of the others, which have much more market or customer acquisition risk, In the case of them, there's a market for sure if they can make the plane, right?

Like, who doesn't want to go faster to Japan, like cut the time in half? But the risk is technical, like, can they do it? Can you ship product, et cetera? So there's like a high execution risk on that one. But if it does work, oh, my lord. And it's just fascinating when I got that pitch from them that when you think about it, people gave up on trying to make flights faster. because, you know, let's burn less jet fuel.

That's virtuous. Maybe people care more about cost, but there is a segment that actually could use getting to places quicker. And boy, will that be interesting if they actually succeed? Yeah, fingers crossed. Do you know where they're at? I know I follow the founder. I forgot his name right now.

It'll come to me in a moment. Blake, yeah? Yes. Look up what episode Blake was on just so I can shout it out, Blake from Super Sonic, or from Boom. Is it boom? What does the name of it again? Yeah, boom.

See, that was the thing. I don't know if they should have called it boom because they don't want to remind people that you get a sonic boom over land. But I think they're trying to mitigate against that. But still, there's plenty of oceans to be traversed in a fast way. But I think the last time,

I think they have like a prototype. They've been flying, like a small version of it, right? Yeah. Oh, actually, I don't know if it's flying. I know I've seen the smaller versions of it. I don't know. I don't think it's flying,

but yeah, they're in prototype phase. is what I would call it. Yeah, it's episode 683 for those of you, I'm sorry, 638, 638 for those of you looking to see the early days. I saw them. They were at the Y Combinator at some point. And so in this portfolio strategy, if you had one go 200x and you had put in 100K bet size, that's 20 million in returns or so. And you need only one to double everybody's money. Is that the basic math that people should expect? You just got to hit one to double money. And if you were to put that money into the stock market in the same period of time, the likely scenario is double.

So they're literally, if you're an LP, the bet you're making is can this person and can this team hit one outlier? Yes and no. So that's absolutely the math. It doesn't account for dilution. If you assume you're going to get diluted down 50% because the company goes on to raise three more rounds of funding after you. then you basically break even on the fund. So I do need more than one to work out to that level, but then for every additional one that you have,

that's basically an extra multiple. And so that is the simple answer to that. And on the 101 initial companies that we invest in, the question is, do we have one in there to break even and that we've identified as one of those? And then do we have any additional ones to bring additional multiples that we can identify? Now, if one goes a thousand X, what happens?

Then it doesn't really matter. If one goes a thousand X. Then we're Jason Calcanus with Uber. Yeah, or Chrysaca, right. And it's a very interesting approach. I think when you think about it as a gambler, and there is a lot of risk here. You've brought that up, and you do need to have that conversation with LPs, only invest what you can afford to lose. Really, when you think about it, the likely scenario, or it seems like a likely scenario that a person could,

return the fund. That does not seem for an investor here in Silicon Valley to be an outrageous claim, hey, we're going to return the fund. So then, and this is what I, you know, I kind of wrote in my book and kind of push people towards this, I kind of feel like if you're an investor here in the valley, given the deal flow that we see and the network you can build here, if you have a really solid chance of returning the money, then you're almost getting like a free lottery ticket that, but what if, right? That's right. And that's the way I look at this is, listen, I'm pretty confident in my ability to return

the money. And what if, what if you hit something? Oh, my Lord. And that's why I'm in 11 other funds, I think, that are not mine because, oh, my Lord, if one hits, it just could be. an incredible outcome. It's interesting because I think at this point in time, there's enough data floating around. Like, people have invested in enough startups as a population to show a couple of things.

One is what you mentioned is in Silicon Valley, there are certainly a lot of these big hits. And I think part of it is a mindset and part of it is early investors do not try to pull their money out early because they know if a company's onto something, they should let it ride. So I think that's one thing. And then the second thing is you have to be in enough companies to be able to get enough shots on goal. I think traditionally when people previously were either angel investing or funds were only investing in 10 companies, then that's a really, you know, very luck dependent activity. But if you have 30 and you have decent deal flow, if you have 50 in decent deal floor or 100, then your chances of hitting something get a lot, lot better.

All right. We'll get back from this quick break. I want to know your strategy when you have a small fund like this, you don't have massive cash reserves. So if you do hit a winner and you do have what most people here will understand, pro rata, the ability to maintain your percentage ownership, how does one with a microfund actually execute on pro rata or do you let it go? We'll make it back on the sweet concerns. With SendPro online from Pitney Bowes, you can simply print postage stamps and shipping labels even when you're working remotely. Yes, for as low as $4.99. That's $4.99 a month. You'll get access to special discounts and save up to 40% off USPS priority now. Plus, for being a this week and startup's listener, you'll receive a free 30-day

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You can visit Hustlefund.v.V.C. They like to put in 25K and then maybe put in a little bit more. I hate the term spray and prey. I think this is a portfolio and a funnel approach is what I've come to call it as a funnel approach. We should trade Dax and to a little LP swapping maybe at some point. That's a good phrase too. What's that?

Funnel approach. A funnel, it really is a funnel approach. I think spray and prey was a derogatory statement because people looked at Ron Conway who had such amazing deal flow and was so willing to make a lot of 25. 50, 100K bets back in the day that they said he was spraying and praying. But in truth, what you and I are, and I don't know what his follow on investment thesis was, I don't know if there was one. But, you know, my thesis is to keep that pro rata and go super pro rata. So I'm curious if you, what your approach is to pro rata. Yeah. So I think our approaches are actually

fairly similar because you get a lot of information presumably from your accelerators, you know, how people work, et cetera. and even what the other mentors think of your companies, too. Right. So I think from the perspective of pro rata, this is really tricky, honestly, for a small fund. And we don't have a syndicate of angels like you do to go to. So I think, frankly speaking,

we probably don't manage it very well in the sense that we don't have a lot of extra reserves to be writing much larger checks, and also we don't have an audience to go to and kind of manage syndicates, et cetera. So I think for the most part, we pretty much just let it go. I think as part of the strategy, though, you know, I've thought a lot about pro rata and whether it even makes sense. You know, certainly when I was at 500 startups, it didn't necessarily make sense because you're getting in at such a great

valuation in the first place. And then you're thinking about do you keep your stake and pay up 5x in price? Or do you invest in five new accelerator companies? And in most cases, if you're running accelerator and you have generally good deal flow, it is much better to invest in five new accelerator companies because you are more likely to get a big hit within those five shots on goal than it is to follow on in this company that's still relatively early and you're paying up for. So that's kind of my general thinking. We don't get in an accelerator terms in the way that you do or 500 or YC or tech stars or any of these, but we do try to go in quite early. You get in a Three, four, five million dollar valuations.

I would suppose if you are getting in when the startup has, is prior to launch, correct? Yep. Average three, four, five, something like that? Yep, three, four, five. Perfect. Yeah. And then if you look at the implied valuation for an accelerator getting five, six, five, six or seven percent is typically what accelerators ask for if we're for, 100 to 150. You're implying about a two million.

So it's not really that far off. but I think what you said there that was very interesting, and I want to unpack two of these points. One is, should you get five more shots on goal, that could potentially pay off 100 to 1,000 X, or should you do the prorata? And so people understand, well, you know, your prorata might, if the company did go 5X, it might be $500,000 to maintain that position versus simply putting 100K into five more companies. That really does make sense. But the other piece that you said that was very interesting, I think, is getting to know the company and having that inside information.

So you do have the funnel. A 25 get to know you check. And then potentially, I guess, 100 to 250K into let's make this a deeper partnership. Explain to me what you need to see to write that larger check. And then how do you deal with a founder who you don't write the larger check for and the bad feelings that could emerge? Yeah, for sure. So our thinking is, and this is actually very market dependent, so we want to write that second check as soon as we can. Like we want to figure this out as soon as we can, but in practice, we don't always. When we write the second check, historically it's been over a year later, and on occasion it's been a few weeks later. So breaking it down, what is it that we're looking for? Well, there are basically two things in my mind. view that are big risks in startups. There's people at the earliest stages. And then there's what I call market pull. Like, does, does, is this a big problem? Do people want this? Do the unit economics kind of

work? And that's kind of all of that lumped into this one phrase market pull. So for the people, when you work with people, you actually really learn a lot. It's pretty akin to hiring, right? Like, you can hire somebody on a contract basis. And even if it's only for a couple of weeks, you get a lot of information about how somebody works. And do you work well with the person? It's not just is the person smart or competent, but do they work well with you? Do they work well in the way that you would hope that they work well? I think from our view, we're looking for founders who can execute with speed. So learn new things quickly. Can you, you know, be very sales oriented? Those are the kinds of things that we tend to look for in our teams. And it's not to say that other teams who don't do that are

wrong, but those are the kinds of things we look for. So that's on the team. team side. And then on the market pull side, that's a lot harder because obviously where we're investing, nobody has product market fit. Nobody's even close to product market fit. And there is not a repeatable sales process by any means at that point. So that's also a gut feeling around, okay, based on the customer development these people have done, does this feel like a real problem, does their product seem to be a very good solution? We're basically trying to assess, like, do we think that you can put a dollar in and get a dollar and one out later at scale because there's enough of a problem here and because of the initial testing around customer acquisition

channels. So it's still very early, but it is better than no information and is better than looking at people's decks. Because having previously been on the other side of things at an accelerator and helping people create decks that were always up into the right at demo day, I know that that information is not actually what's happening. Yeah. I mean, there is definitely an interesting thing that's happened over the last five to ten years, which is founders have been mentored so well as to what angel investors look for, the pool of angel investors has increased so dramatically that the ability to game investors and get to a small seed round has become, I would say, more often than not, what founders have learned as opposed

to learning how to make a great product that actually has market pull in your, in your parlance. And that is dangerous to me. And I really try to not have my name on products or services where I feel that's happening. And that is a big challenge for me, which is, you know, you make that first investment and you're, you're super happy that you only wrote, in my case, the 100K check to come to the accelerator. In your case, the 25K check to go into the growth hacking kind of mode and the product completion mode. But, oh, my. Lord, what if the person doesn't represent you well and you don't want to be associated with them anymore or your worry that their name and their approach might damage your brand?

I completely understand that, having sat there before. Tell me how you deal with that. That being said, yes. So tell me how you deal with it. How do you deal with giving people to know that I'm not putting more money in, right? So that being said, I think, you know, so we're not an excel. We don't have accelerator terms, but if we did, it is certainly well worthwhile, I think, to hedge a little bit more and put in more than a 25K check.

So that's one thought. Like, I don't think it's a bad thing that accelerators are putting in like 100K. I think that actually is probably the right amount, obviously depending on the fun size. Yeah, well, with two or three founders, you're talking about six months of runway if they keep it, you know, light. Yep. And you have a good slug in there to get that ownership up front. on those nice terms such that, you know, the multiples are easier than to get. So there's that.

But then there's the reputational risk. And I think at this point in time, people realize, and by people, I mean other investors, they realize that, hey, not every company that's either coming out of launch or YC is going to be awesome or amazing. Right. That's just not how it works. Right. But people go because they think maybe one of them or two of them will be awesome or amazing.

Now, of course, who knows which one or two, but when I go, you know, a mentor at your batch, like, I'm trying to look for that one, that batch or whatever it is. And so I think people are educated enough to realize, oh, gosh, they're not going to think, oh, that one company that Jason picked, they're real clowns and losers. They're not going to pin that on you. They know that that's just how accelerators work. Right. They're going to take the opposite approach, which is, hey, they're risk-taking, so which one is going to work. Yep. Unpack for, me how you decide to give to make the second bet yeah so taking those two things team and mark pole essentially we're we're looking for early signal on those two things and frankly speaking there are

no concrete numbers it's not like hey you hit these milestones we're writing the second check i think even in assessing people it's also very subjective right but all three of us in the partnership look at both of those things with our companies. So it's multiple eyes on a company from those two perspectives. And that's how we decide whether or not to write a second check. I mean, now sometimes the other thing is sometimes a company is really good at fundraising. And if we don't have conviction around those two things, the deal can still run away from us because now all of a sudden it's at, you know, 50 million posts or at least maybe last year it was. And so, you know, there's also the last component, which is do we think we can get in a terms such that we can get that 100x? Because

if it's already a 50 million post and we don't have conviction on those two things yet, even by the time we do, the valuation will probably be too high for us to make money. That's a double edge short for you because you got to make that early $3, $5 million valuation bet, but they did so well and you did such a good job and they were so capital efficient, you good job picking them, maybe mentoring them, and they did such a good job executing that now their evaluation is too high for you to make the second bet. Well, I would say in last year's market was more a factor of they hadn't actually proven out necessarily those two things yet.

It's not to say that they wouldn't, but very good of fundraising because last year's market was great. Very different from what we're going into now, though. Great. So let's go over that in the next segment. I want to know what you think of the market today in the middle of the pandemic. Here we are in May of 2020. if you're watching this as a historical document, 10, 20, 50 years from now.

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Okay. Let's get back to this amazing episode. All right, everybody, welcome back to this week in startups. What an amazing guest, Elizabeth, the end is here. Always one of the highest rated speakers at our events. And for some shocking reason, which is not my fault, by the way, this is literally my producers dropping the ball. You have not been on the podcast.

I am shocked. it's only because you've spoken at at least five or ten of our events, right? You're a perennial judge favorite at our events. Well, thank you for having me. Yeah. Gosh. I mean, really, I'm going to have to have a sit down with my team for not having you on the podcast until episode 1050 or something, whatever we're at. Hey, I really want to get into what you think of the moment here and also how you think about downstream investors and what you advise your startups, independent of coronavirus. And let's start with this. What do you think your startups need to show investors? So when you think about downstream investors,

the people who are going to make that seed investment of $1,000, $1.5 million, 3 million, you're thinking about maybe Homebrew or Aileen Lee, both of those folks and funds have been on the podcast many times. What do you think of what they're doing and how do you advise your companies to hit the right notes with them? What do they need to do to get their checks, that million, $3 million check? Yeah. So I think part of it is we do help a lot of our companies with the storytelling. I think we generally have a good idea of what, you know, Aileen or Hunter or any of these other folks are interested in. Like we regularly talk with people about what themes are interested in, what they're looking at, et cetera. But I think even beyond them, like, I mean, let's just play the probability numbers. And I'm sure you see this as well in running accelerator. I certainly saw it at 500. startups and I still see it with hustle fund because we have a large portfolio.

But the reality is not everybody's going to get their money. Like, they do not invest in that many companies. That's not their model. And so there's going to be a whole bunch of companies that won't be able to raise from them. It doesn't mean that they're bad companies. It may mean that's just not in a favorite space or maybe, you know, it's too slow going or whatever it is.

And so I think we kind of head. in a couple of ways. One is we definitely love companies that are more, you know, capital efficient. So we very much swing towards B2B. We don't really do a lot of consumer and higher margins. So SaaS, not really marketplaces. They're, of course, exceptions. But we want to believe that a company can survive and thrive even without further capital, whether it's from them or anybody else. But then the second thing that I've done, which I think you've done really well with your syndicate, is we have also built a lot of relationships with angels. People who invest not with funds,

they may not be relatively well known, they may have specific interests that are very different from VCs, and they're not necessarily looking for 100x either. There are many reasons, as we discussed, in raising my own fund, for why an angel might invest in a company. Same idea. And so we introduce a lot of our companies to angels, often people whom nobody has ever heard of,

but are operators in the Silicon Valley. Yeah, and they're capable of writing a 50 to 250K check because they've made so much money money working at Facebook or Google. And a lot of times, it's non-financial rewards, as you're sort of alluding to there, that drive them. They want to be affiliated with fun projects that they find intellectually stimulating, and they want to be on a winning team. And maybe to them winning is, you know, tripling their money or 10xing their money.

They're not trying to construct the perfect portfolio. this is less than 5% of their net worth, and their net worth is going up every year. So it's almost like their version of going and playing in the World Series of poker, right? And I think the other thing is, you know, and you've written about this before, which is it's really hard to tell.

And there are a lot of companies that don't look like their unicorns in the beginning, but then end up becoming unicorns without having raised so much money. So like Webflow, whom we mentioned before, is actually a great example, where for many, many years, people were not interested in investing. They were selling to basically small designers or small agency, small time folks, and just accumulating revenue with their SaaS model.

But in the beginning, it's always slow when you're selling to smaller customers. That's not really what these is like. You know, you think about Canva. Yeah. You know, selling $10 software, you kind of look silly, you know? It's like, oh, yeah, you're selling $10. Isn't that cute? You know, or Squarespace, oh, you're selling $15 a month.

Like it seems like a little boutique. If you're in a geography that people don't like, like Australia, right? Canva, you mentioned them, right? Yeah. People are less excited about investing outside the Silicon Valley. I think that's changing, but a factor. Yeah. And the name we came up for this with the Pegasus companies because they fly over around

of funding. And boy, for people like us who are investing, there is no better moment than a company that you invested in at $5 million like I did withcom.com. coming back to you and their next round of funding is $250 million. You're like, well, what happened in between there? And they're like, we made money and we didn't dilute the cap table. Yep. I mean, com.com, and they've been public about it, was $5 million valuation, $250 million valuation,

$1 billion valuation. And for those of you out there, I mean, I could be totally honest. I knew that Com was going to be a great company. And I really felt they could get to 100,000 paid subscribers. I did not think that they were going to just rip and get to a million. million paid subscribers. That was a whole different sort of outcome that I actually was not expecting. What do you think

is happening today? And when we look at the third quarter of 2020 and then into the fourth quarter, which I'll call the near term, in the near term, what's happening with your portfolio companies and fundraising today and two quarters forward? Let's call it 2020.

Yeah. So I think just in general with the fundraising landscape right now, As we all know, we're in a lockdown. A lot of VCs are not used to investing over Zoom. And so it's been just really hard, I think, where people don't already have relationships. And that applies to our companies, I think, on our large portfolio,

only one has raised significant money. And, you know, that founder actually knew that VC from before. And also that founder is a successful founder before. So that's just challenging. But we're going to be going out of the lockdown, hopefully in the next month or so. I'm very optimistic about that. So I think there will be a period of time where I wouldn't say it's easy to fundraise,

but we'll be sort of back to normal. Will we be back to normal on valuations? Probably not. I hear murmurings of investors still holding back, especially later stage investors. And so I think that kind of has a trickle down effect to earlier stage investors as well. But there will be activity. So I think for our companies, we're telling everybody to really, you know, have really tight cash management. So reduce burn, as hard as it is.

Like layoffs may have to happen in most of our companies, even if they're doing well. And I think people need to be able to ride this out for not only 24 months, but maybe even 36 months. And so what does it take to get there? And that's hard. Yeah, I mean, it's so hard to know. And I've always taken the approach of, hey, have 18 months of runway, so you have optionality. and you know what it's been like over this last year or two. Founders have had, in many cases, such an easy time raising 500K,

topping off 250, topping off another 500K, and doing five extensions to their seed round that they kind of got used to like this ATM kind of effect. Like, yeah, there's ATMs out there. I can just go to them. They're called Angels and seed funds and syndicates. There's always an ATM like within two or three blocks. And now it's as if like there's an ATM like in Napa.

and then there's one in like, you know, Portland and there's one out in Tahoe and you got to walk like 10 days to get to it. Like it's not going to be easy. You mentioned that you're optimistic. And I think this is a good place for us to meditate on for a moment. I too am optimistic. What makes you optimistic about, and listen, where I don't believe that you're a medical or healthcare expert, but I don't know that. You didn't pivot into this out of medical school, right? just to be clear. But what makes you optimistic? What makes you optimistic right now, Elizabeth?

Well, first, the pessimistic. I mean, we don't have a vaccine yet. So we are probably going to have another wave of this coronavirus thing happening again later this year is my prediction. And we may be back in a lockdown and all these other things and the economy is not doing well and so many people are unemployed because of the lockdowns, right? So that's the, that's the pessimistic side of things. And that's why I say that cash management is really important. But I mean, from an optimistic perspective, you know, look, I built my startup. I started my company during the last recession. I left my cushy job at Google in November of 2008, and I started fundraising in early 2009. Perfect time. I was not able to raise any money. Yeah. I was an ex-gooler, all that stuff, you know, pretty nice resume, but

couldn't raise any money. And I think the reality is, if people go in with the mindset of, I'm just going to build this business, I think there's always many problems to be, solved and money to be made even in recessions or bad times or lockdowns or viruses. As we see, they may be new opportunities people haven't thought of and even better. So if you go in with that attitude and good cash management, then I think there will be a lot of interesting opportunities and we are still actively investing at about one company per week. Yeah, it's very interesting that you actually went through that cycle and you have that scar tissue to know that It's never a bad time to start a great company.

There's never a bad time. And in fact, I was on a board call today. I won't say which company. But they asked me, what do you think we should be doing? And I said, well, the product's selling, right? They're like, yeah, it's actually selling more because this product happens to be countercyclical and people who are at home would use it more. Let's leave it at that.

And I said, well, I heard, I don't know if this is true, if that, Facebook ads are now like 20 or 30% off. He said no. He said no, it's more like 40 or 50. And I said, what? And he said, yeah, it's literally like the early days of Facebook where Facebook ads are like this unbelievable growth hack and Instagram ads and Google ads and YouTube ads. It's all 40, 50% off. And I was like, are you sure it's 40, 50%?

They said, well, that's what our cack is now. It's 40% less. I'm like, well, why are we not hitting the gas? And they're like, well, we wanted to have a board call about that. I'm like, hit the gas. Like, let's get these people into the product now because they also have time on their hands. And I never, my wife would go out and, you know, go to dance classes or exercise classes. And then I never sort of take an online class.

And three or four times I've, you know, walked by and she's taking an exercise class on Zoom. And there's 10 people on there. I'm like, wow, that's amazing. Who are you doing that with? It's like, oh, you're an online site. And you just go there and you book it and then you pay 50 bucks or 20 bucks and you can go to a class. and you can go to a class. And you think about all the founders

who are like, I want to do this thing where people do workouts from home and nobody ever set up their webcam. Nobody ever, you know, figured out how to set up virtual backgrounds or lighting and now everybody's figured it out, right? So all of these things become wide open,

just wide open. And my favorite, my favorite ramen place in San Mateo, Taishoken, with the famous Japanese one opened in San Mateo. And, you know, I was talking to Yoshiro, who's the guy who owns it here.

And I was like, hey, you should do takeout. You know, I was talking to him about Uberi. It's like, you know, only, we really don't want the ramen to be delivered. You know, it's proper to have it here. And we're not sure if it travels. And then he had one, the soupless ramen, then he did the dipping noodle ramen. Now he's got the whole thing. And now he's got a make a ramen kit to make it at home where he suvids the entire kit.

So you can put it in yourself and you can like, basically. And I was like, he would have never gotten to that. if not forced, and there's a $40 pack where you can just make your own ramen party. And I was like, well, I'm ordering that twice a week now, you know? And it's all that creativity now is now on the table. What creativity are you seeing out there in terms of companies really taking advantage of this moment in time? Yeah. I mean, similarly, I think, you know, I read that there was this bakery in L.A.

that also struggled at first because nobody was coming to their bakery anymore to buy bread. And then they started making bread kits and started shipping those out and now they do way more revenue off of the bread kits. Of course, yeah. Makes total sense.

Yeah, I think it's just who's creative in this market, who wants to just go in and do? And I think, you know, how things used to be in the startup world before, let's call it even 2017 or so, like people got a little bit of money, maybe or they bootstrapped a bit and just started getting some results before raising money. I think a lot of entrepreneurs have gotten too used to raising a million, two million,

$3 million for nothing done. Yeah. And that's just, you know, that's just way too frothy. What do you even do with $3 million? It's like giving a first-time director who's never even made a short film their first feature. It's like, well, why don't you make a couple of shorts first? You know, like this is why they have the short program. at Sundance and other film festivals

is so that emerging talent can make a six minute or a 12 minute film, spend $10,000 on it, and then go earn the right to raise $100,000 to make their documentary. And we just went to giving new directors features. And boy, is that like inadvisable? We're going to go back to bootstrapping.

I love that. Back to bootstrapping. And you remember the last time all this stuff hit the ground, living social, Groupon, Woot, all these flashtails all became vaunt privy i guess was one and one king's lane there were like all these very interesting save money kind of sites that came out right and now it's be more independent and do something

at home sites this time it's not about saving money right now it might eventually be but it's more about connecting with people and doing something at home very interesting like you when we look back on this what the legacy of it will be what do you think the what do you think the the the permanent changes will be, assuming we solve this in the next year or so, what do you think, you know, 2022, 2025 in that time frame, the permanent ramifications of this pandemic will be on startups. Yeah. So the top two areas that I'm looking at right now very actively are anything involving working from home, you know, I think that's going to stay for many professional workers. Agreed.

Why go to the office? I think initially people were not good at coordinating with colleagues or whatever, but now that we've had to do it for so long, some people have learned how to do it. So that's one area that I'm really bullish on that will stay. And then the second area is we've done a handful already of like telemedicine investments, but I think there's more to do there, especially now that regulations are starting to lax, you know, across the country. So there's possibility to scale more quickly. And I think as far as like health problems go, this country definitely has a lot of health problems. And so hopefully people can help work on those. Yeah, telemedicines and no brain or somebody pitched me on a veterinarian like remote vet work. And I was like, well, this is brilliant because you can just take out your phone, flip the camera, and show them your dog or your cat and what's happening. And everybody can know how to take the temperature or to do a sample and stuff like that. And you'll just have people giving shots at home, right? Like, yeah. I give my dog shots.

Like they give us the, you know, people can give themselves. Oh, you do? Yeah. I mean, it's not that big of a deal. Like,

we have a, you know, 13 year old bulldog. We have to give some shots for pain and some other stuff and joints and stuff like that. And then we, I give the dog a shot every week.

And it's not a big deal. I learned how to give a shot. Like, this is years ago. And we've been doing it for two years or something. And I think that's going to be everybody's going to learn how to do this stuff. People have pulse, what do they call them pulse oxymeters to get their like percentage oxygen on their finger.

And you have a good. goes under 95. I think a doctor told me if it goes under 95, you got to go right to the hospital because your blood oxygen level is trending towards COVID. And those costs 30 bucks. Now everybody's got one of those at home. And if you don't, you should get one. And I know people who started buying oxygen machines that you would normally have if you had emphysema or something like that. People are buying those proactively. So this is going to be a whole rugged individualist, you know, telemedicine and home. I think that's an incredible observation. and incredible.

And so those are the two big areas, but I'm sure there are plenty of creative things. Like you mentioned, you know, your wife's dance classes online or whatever that people are thinking of that I have not even, you know, thought of.

Yeah, I mean, it's, people were paying a lot of money for, I think it's called mirror or something. There's like a mirror with a cat and you can like do dance classes in it. And I'm like,

well, that sounds really expensive and hard to do. But if you've already invested in a laptop and you know how to use Zoom, You don't need to buy any new hardware. You just pay $10 a month to go to yoga classes. And that yoga instructor could have 100 people online and make $1,000 per class. Yeah, and no overhead, right?

No, and people's expectations. You and I are here. If one of our kids jumped on our laps, we'd be like, oh, how great? Yeah, how are they doing in school? What's it like? You know, like that's the other thing that's been reset in my mind is with the at work, it used to be embarrassing if your kids ran in. And now it's charming and expected, right?

So there's like a whole mental reset of, yeah, you know, we know you might not be wearing pants right now. We know you didn't take a shower. We know, like, we're all in the same boat. Like, we didn't take a shower either. Like, it's totally cool. I did take a shower today, by the way. I just want to put it on record that I did take a shower this week today. And I will take one next week.

Hey, Elizabeth, this has been great. Thanks so much for sharing, you know, all your experiences. And if people want to reach out to you, I assume your first name at hustlefund.vc. Yeah. Elizabeth at Hustlevon.V.V.C. I try to respond to everybody. You can also find me on Twitter. Yeah, you're active on the Twitter. You're active on the Twitter. You're active on VC Twitter. That's right. Have you been VC bragged yet? Have you been VC bragged or VCs congratulating themselves? Have they done that to you yet? They have, but it was for something really odd, like something, I don't remember whether there was something I ate or something bizarre like that.

Got it, got it. And are you blocking them or are you laughing and good fun? Yeah, it's weird. There are all these Twitter handles now that are not like real people or there's a real person behind it, but you have no idea who they are. So like I'm talking to it chicken and I'm talking to like. Yeah, it's all me basically. I've got six or seven instances of windows on AWS and I've just made all these personas and I'm just talking to myself because I'm bored. No, I mean, we had the Golden Sacks elevator back in the day, right? The G.S.

So it just come back. But the thing I find funny about the VC Braggs is that people are blocking it. And I'm like, yeah. How do you not have a sense of humor about making fun of venture capitalists as an venture capitalist or an angel investor? You have to have a sense of humor about it. I don't even understand that at all. It's like, you know, what is the point of that? I don't understand anybody blocking anybody except for like people who are being like violent, racist or harassing you or whatever.

But I mean, anybody who's joking or debating with you, I'm like, bring it. It's Twitter. It's just 140, I know, 280 characters. Like, who is so precious that they need to block people, you know? Like, mix it up. Have fun. You have fun on it. Okay, listen.

Follow not the drunk hippo, but dunk hippo, 33, Patrick Ewing's number. And Elizabeth, thanks so much for doing the pot. And thanks, you know, for coming to all of our events for the last five or six years. I really do appreciate it. I know the founders do. And if you're in the market for a supersonic jet, go ahead and buy a boom. Put a deposit down on a boom super sonic. I think they're only going to be like 90 million.

but go ahead and put one down so that we can return the fund for Hustle Fund. Thanks so much. Appreciate it. Stay safe, okay? Yeah, thanks, Jason. All right. Hey, and just a special thank you to all the partners who make this podcast function and support it. We have six or seven people here working full time on the podcast.

We do 150 or so episodes a year. We've got this week in startups.com slash slack with 25,000 members in it. And I couldn't afford to pay this team if it wasn't for all these great sponsors and partners who have had for over-adjust. decade in some cases. Some of you've been with us two years, some of those 10 years. Thank you so much. I really do appreciate it. I hope we do a good job for you with the ad reads. I always put my heart into it. And I appreciate it. I really do because I know people are getting a lot of value in these scary times and a lot of inspiration to keep going out there and creating jobs that we need

in the economy and create startups that solve problems for people, especially in a challenging time like this. So I just wanted to give a shout out to all of my partners and sponsors who support the podcast. I really do appreciate it from the bottom of my heart on behalf of our team. We'll see you all next time in this week and start us. Bye-bye.