Elizabeth Yin, General Partner @ Hustle Fund Management
Startup Grad School Stage
[00:00:02] All right, I will go ahead and get started. Hi, everyone, I’m Elizabeth Yin, and I’m going to talk more about 20 minutes on how to raise a seed round in Silicon Valley. And I think even if you’re not raising exactly a seed round, if you’re raising a precede a pre-K or even a serious day, I think a lot of this talk will be applicable to you. And I think even if you’re not in Silicon Valley but have always aspired to raise from investors in Silicon Valley or thereabouts, this will also be applicable to you. So I’ll go ahead and get started. And I aim to talk for about 20 minutes. So I’ll give you guys a few extra minutes to spare.
[00:00:43] So let’s get going.
[00:00:46] So first, a quick bit about myself, like, why am I even qualified to give this talk? I previously was an entrepreneur. I ran an advertising technology company for many years, and I started that actually during the the financial crisis in late 2008. I left my cushy job at Google to do that. I had no idea what I was doing and I could not raise any money. It was a horrible time, but that turned out to be a good thing because it really forced me to learn how to build a business. And I ended up eventually raising money, but only a few years later and then sold that company in twenty fourteen. And I’ve been an early stage investor ever since then. So for the last six years or so, I now run a VC fund called Hussle Fund. I started this with two friends of mine almost exactly three years ago, and we invest in what I call precede companies and we’ll talk about what that means. And then in a past life, I also previously was a partner at Five Hundred Startups where I helped hundreds of companies with their raises. So I’ve seen a lot both on the doing side, actually building my own startup and raising money, as well as helping a number of companies raise money over the years, either through an accelerator or through now my fund. So first off, let’s set some definitions, and I think actually this is even one of the biggest sticking points. A couple of years ago, a friend of mine who’s actually a very successful serial entrepreneur who’s had two large exits and he was going back to out to the market to raise money for his third startup.
[00:02:20] And he he was actually having a problem raising money, which is quite unusual for successful entrepreneurs. I mean, he’s not particularly famous, but he had these two successful exits and had made a bunch of people money. And those people did put in money. But he was he was trying to raise more money from others and he was struggling. And so he came to me and he said, you know, I just really don’t understand why I’m having this problem. And I and I got more information from him. And it turned out he was raising or he was attempting to raise money from a number of folks who had now raised so much money for their VC firms that they were now doing series and beyond deals.
[00:03:02] And they had kept telling him, well, actually, you’re just way too early. Like our average check size now is ten million dollars and you just have an idea. So he just couldn’t wrap his head around, like, what’s going on? Like they put in my first 50 K and now they’re telling me I’m too early. I don’t get it. And and the reason is this. It’s this slide. Exactly. Which is a lot has happened in the fundraising landscape over the years. In fact, when you think about it, if we go way back into even the 90s when I was, you know, not even actually investing or working back it in the first round that people raise was a series. And now very often the first round people raise a precede round. And then there’s the seed and then there’s the post seed or the pre and then the eight. And so just the nomenclature has changed so much and knowing where you fit in is really important. Are you a precede stage or you seed?
[00:03:58] Are you a post, are you a and then a defining sort of the bumpurs of what makes or series or what makes for a seed company is also really important because three years ago when we didn’t have all these different stages and there was a seed and series, you know, the benchmark for being able to raise a series was much lower than it is today. And so just understanding all of that is really important. So what is going on here? Well, let’s just dig into it. I roughly define the stages here, and this applies this year in twenty twenty, but it may not apply next year like we may see changes next year. But roughly speaking, what we see here is precede is idea stage. Like you just thought of the idea to you have some B one of your products, maybe you have a few customers, but fairly negligible interaction. And roughly speaking, where do you raise money for this stage? Well, it’s friends and family angels precede funds and you can kind of see some of the details of what I’ve just stayed here if you want to read in more detail on the slide. The next stage seed, which used to cover idea stages but no longer does really does have a bit of attraction bar. And that is you have you have generated some level of revenue and that generated some level of revenue that’s actually fairly significant, like maybe ten thousand dollars or twenty thousand dollars per month. And so you can see here you actually done something, not just build a product or thought of an idea, but you’ve also started getting some serious customers. And then lastly, I would say posted is actually where the old series was like I would say a series of benchmarks in our two million run rate and above I had to put a number on it. So posted is certainly a million above, maybe even less than a million run rate and above. So these are the rough areas. Now, of course, there are some caveats here. If you are a notable founder, most of the time you can skip Prexy and just go right to seed or maybe even proceed. And if you are not a notable founder or you’re coming from a geography where there are not many investors or whatever it is, the same may apply where you may have traction for seed, but you may be seeing valuations of precede as an example, like in a geography where there are not that many investors and you’re trying to raise money locally, etc..
[00:06:28] So so there are certainly caveats here. But roughly speaking, these are the general constraints. And I would say especially for this conference in this audience where I imagine a lot of you are B2B, SACE entrepreneurs, this definitely applies a little bit more in a cookie cutter way than other companies where there’s a lot more variation around business models. I think B2B is something that people generally understand. There’s some level of repeatability, some level of consistency of how much you’re making per per customer per month and some level of benchmarks around what good retention and up sales look like. So that’s why these roughly apply, I think, to this audience.
[00:07:09] All right, so now I understand that you know who to go to, like, it’s really important that you’re going to the right investors and you’re able to do that. Now, what do you do? Well, I think it’s really important to actually have a strong fundraising plan. And most founders say, well, I’ve got a plan, I’m going to raise a million dollars or whatever, but that’s not really a plan. And what I mean by that.
[00:07:29] Well, I think, first of all, it’s important to have many plans. You don’t have to go crazy and have nine plans. But I would have at least two, maybe even three plans. And one of those plans might be, what if I cannot raise any money at all or what happens if I don’t raise any money at all? Like I’m already going into this talk with the assumption that you’re thinking about raising money, but you should probably even just take a look at what happens if I don’t raise money. There are many alternative financing sources that we’re not going to go into in this talk that you can access today, especially if you’re in seed and you have some level of funding or some level of revenue. So, for example, revenue based financing models, you know, we add wholesale funding, certainly have a separate revenue based financing fund. And if you email me later, I’m happy to put you in touch with that fund manager. And we strictly invest out of that fund just based on your revenues and essentially as an entrepreneur friendly loan. And so if you already have some level repeatability around your customer acquisition, maybe you don’t need to raise equity money at all. And there certainly many others who do something similar type is an example that doesn’t specifically force ask companies. You have earnest capital and NBC who are also doing financing models that are very similar, clear bank, lighter capital. So you have a lot of different options these days besides VC money and and maybe raising money is just not actually even the best thing for your company. Why take the dilution? So that’s that’s plan number one. Plan number two is OK, well, let’s have a rich plan and let’s have sort of a little bit more of a realistic plan.
[00:09:02] So let’s say for hypothetical reasons, your your realistic plan is, OK, let’s raise five hundred to seven hundred fifty K and most founders say, OK, I’m raising X to have a runway of 18 months or 24 months. That is not a good way to think about things. And investors are not looking to invest in your company so that you’ll survive for the next two years. Investors want to know what is it that you think you can achieve with this money? Now, of course, they’re not going to hold you to it. You know, who knows what happens in the next two years? Things never go according to plan anyway. But if you have some assumptions around what you can do with the money and assuming that everything goes well, what can that money get you? So as you can see here, the wrong way to think about things is, hey, we we want to raise for 18 months of runway the right way to think about things as well. Based on what we’ve been getting from our ad spend or whatever customer acquisition channel you’re using, we put a dollar in and we get a dollar and fifty out within a day. Then we rinse and repeat and if we have half a million dollars to do it, then actually, you know, thinking that through we will be at five hundred K run rate by June.
[00:10:20] So being able to paint a picture like that, it doesn’t mean draw out a whole financial model, but being able to paint a picture like that is the type of thing that investors like to see. They like to know that your money is going to be put towards growth. And I understand that a lot of people are going to be using their fundraising dollars towards things like engineering and design, but to the extent that you can paint the picture of your money is actually going to be used not just for product development, but also for growing your business the better.
[00:10:53] And that will make that easier. It is a real clear case as to why you need to raise money now, and that will help you with some putting some pressure or urgency on investors. I think the other thing I would consider in coming up with your fundraising plans is to add some buffer as well. As I kind of alluded to, things never really go to plan. And so if you have some to offer on there, there’s a just in case scenario. So if let’s say it will, we can, in a great scenario, raise two hundred fifty K to get to half a million run rate by next June. Well why don’t we double that number and say we’re raising five hundred K to get to that. So that that’s an example of that and digging into that a bit more. You know, I think when you have, when you set out these two plans, regardless of whether they precede seed or perceived, you’re automatically making some assumptions.
[00:11:44] And these assumptions probably won’t hold that scale. But that is how to kind of backtrack into these two plans. So let’s say in our realistic plan, we’re raising half a million. Well, the way that you would actually come up with a half a million in the first place is let’s say that our acquisition numbers right now are ten dollars acquisition on Facebook ads that we have a two month payback period. We’ve kind of run the numbers there.
[00:12:10] If we raise X, then we can get to Y by June. And we’re not talking about long term estimations of projections. We’re talking about maybe a year out or so. Five year projections make no sense to me. But you are not raising for five years in most cases. I think, you know, from the pitches I hear people are raising for one to two years. So you should be able to make some of these assumptions when you think about the amount you want to raise. Now, what do you do if you’re a pre-season? You don’t actually have these numbers? Well, this is where actually I think it is very important. Even if you’re a PC, even if you don’t have a product that you do need to do some testing and that testing can be based on sales. So can you spend some money or even use organic customer, not organic, but like free concert and marketing methods to to generate leads? Maybe it’s to assign a page, like a waiting list page and then you can make some estimations around. Well, you know, we think that X number X percentage of people will convert. So you start to do something. And a lot of people say to me, well, I don’t have any money to do any marketing. Well, guess what? There are a lot of free ad credits or coupons out there floating around. You can snag one of those, get two or three bucks in credits and try it out and send people to a landing page to either sign up for free or even prepay for your product, even if you don’t have a product ready. And so these are the kinds of things I would start to do even before you have a product. These numbers, like I said, are not going to be accurate by any means. But I think these are the kinds of things that you will use in your argument to explain to an investor like, hey, these are my assumptions, they will likely change. But if all of these things go in this way, we will be able to generate X by June, and that is why we are raising Y. So that’s the kind of argument you’re going to make and that makes you sound like you’ve really put some thought into it. All right, so you’ve done that, you’ve given a thought, you have you’ve kind of mapped out what an ideal scenario looks like. Again, not five year projections. Anybody who asks you for five year projections, I would highly recommend you push back on it. I’ve worked with so many founders over the years, hundreds of founders over the years. And I have never I have never had a single founder who has submitted five year projections ever get funding. And I think the problem is that it’s a it’s a Goldilocks and the three Bears problem. You’re either too hot or you’re too cold. Either your assumptions, like people think your projections are just overly unrealistic or you’re not ambitious enough. So I’ve just never seen people win on that. But I do think one year projections, if investors ask, is fair game, and that basically is an exercise in how would you use the money, what are the levers of the business? And if X event happens, then what what does that lead to? So, so but you should do that exercise for yourself, even if you are not submitting one year projections to investors. There are a lot of investors these days that precede and see to do not ask for projections. We do not ask for projections. But my hope is that a founder, if a founder has been thoughtful enough that he or she would have done that themselves and at least at a rough level. OK, so moving on from that now, how do you actually put this all to use while. Let’s stop for a moment, know, I think as a founder, when I was a founder, I was I was I was always annoyed by why is it that investors take so long? Just everything. They just take so long and and this doesn’t fully answer it. But now that I’m an investor. I understand some of the mentality a lot better, and here here’s an important thing about that mentality, which is let’s just take a step back. It is always if you know, you can get into a deal tomorrow at the same valuation as today, you it is always better to wait. Like, let’s just stop and think about that for a moment. If we are all investors and somebody give you a choice of do you want to invest in this company at this valuation today or do you want to wait for information and make that decision with all the same parameters tomorrow? And the answer is always, wait, there’s no loss in waiting and then extrapolate that out another day. OK, do you want to do that? Do you want to wait another day? The answer’s always yes, and this is why then fundraising processes can be dragged out. OK, but what changes that situation? Well, what changes that situation is if the opportunity is no longer available or seemingly no longer available tomorrow, then that’s a different problem. And investors have to make a decision as to whether they want to write the check today or take the chance or the gamble that they may not be able to write the check tomorrow. And that is what you need to create. You need to create that situation as an entrepreneur. And so this is why it’s very important to create this urgency. Well, how do you create urgency when you don’t have it in the beginning and nobody’s investing in the beginning end?
[00:17:36] And really, what the way to do that is to generate lots of meetings. So you need to get in front of lots of investors, pitch a lot of investors around the same time, closely packed together, so that when you can credibly say to an investor, well, I don’t know when I’m going to close, but I’m going into five second meetings next week and things seem to be moving along quite quickly with the other people.
[00:17:58] And then you go into those meetings and say the same thing and that moves everybody along. And so that means that it is your job to create you’re missing out. And that also means that in order to tackle these meetings in fundraising is a full time job.
[00:18:14] So what are the steps to do it?
[00:18:17] Well, here are the steps, basically, one, make a long list of investors and by long, I mean long like it could it should be at least a hundred angels and funds. And you may not get through it all, but you should at least have all of that ready to go. Secondly, you should be able to get in touch with those people and get meetings with those people. OK, there are a number of ways to do that. One is you can get warm introductions and good warm introductions to get our other founders who have been backed by those investors. Second best would be other investors or other people who know them, but the best people to get introductions from our other founders of theirs because they generally like their founders and they picked. If you have if you’re not able to get a warm introduction and warm introductions, also take a long time to get. I would also call the email in parallel and never hurts to call email. There are certainly some investors who do not invest based on cold emails, but a lot of investors do. These days, 15 percent of the deals that we do are often cold. We don’t know these people. And so it never hurts to try to do both. It only adds to the support level of you, like where if you pull the email them and then the investors like all get around to that email and they kind of never do. And then somebody warm emails them. That’s great. Nobody ever thinks, oh, gosh, that person so annoying because they got somebody to warm introduce that that never happens. So don’t be shy of having multiple entry points into an investor, but it takes time because you have to do that with all people. And then once you get in touch with all these people, then I would start to book out meetings three weeks in advance. Nobody’s going to meet with you tomorrow. Everyone’s calendars are really busy, so.
[00:20:06] And you want to pack them all in. Ideally, you want to start packing them in when people are free and you have a lot of flexibility and schedules.
[00:20:13] So three weeks in advance, pack in the meetings, get them all sort of back to back these days during covid on Zoome, it’s really easy to do back to back meetings right before you had to drive all around town and you needed to have like an hour just in case things ran over, you ran to traffic or whatever. These days you can actually kind of pack them back to back and it doesn’t even matter the geography. Obviously, I would impact them so tightly together, but. And you would you should have some time before. But the ideal scenario is that you’re actually doing four to five meetings every day, every day. So in a given week then for that very first week where you’re packing your meetings, you’re talking about doing at least 20 meetings and then to start to go through your list of one hundred, then you pack it in for the next week and the next week.
[00:20:56] So you should have packed weeks for at least two weeks, if not all the way through a full month. That is a full time job.
[00:21:03] And then finally, as you go into these meetings and you start to take them, you start to pressure investors saying, hey, we’re going into a lot of meetings with other investors, that’s basically say you don’t need to say, oh, please don’t say who investors may like to collude or whatever it is they do. But just say that we’re going into a lot of meetings, that we’re pretty busy meeting with other investors.
[00:21:24] So we just want to know where we stand and always constantly find the next step and then go into the next meeting and just herd everybody along together.
[00:21:33] So that’s why talk finished in twenty one minutes.
[00:21:37] We have unfortunately no chance for Q&A, but I am happy to answer questions. This is my email address, Elizabeth at Hussle Fund, not VXI. Feel free to email me. Like I said, I do read called emails and actually when called emails do not go to my spam.
[00:21:54] I do respond to everybody. It may not be immediately, but I do try to respond to everybody who writes in my work email certainly within a few days. So feel free to email me can be about anything and it doesn’t have to be about pitching hustle. But of course, if you want to, you can email me about that as well.
[00:22:11] We invest in precede software companies and if you you know, if you fit that stage like we we would absolutely love to take a look. All right. Well, thank you so much for having me. And I hope you guys have a good rest of your day.
Ascent Conference 2020