Last week, we had the opportunity to talk to Elizabeth Yin of Hustle Fund. Elizabeth Yin is a co-founder and General Partner at Hustle Fund, a pre-seed fund for software entrepreneurs. Previously, Elizabeth was a partner at 500 Startups where she invested in seed stage companies and ran the Mountain View accelerator. In a prior life, Elizabeth co-founded and ran an adtech company called LaunchBit.
Our CEO, Mike, and Elizabeth chatted about all things related to fundraising. Elizabeth shared what she has seen in the VC market over the past few months and how founders can manage the supply and demand of their round. Check out the video recording or our favorite takeaways below:
Now is Actually a Good Time to Raise
Fundraising in good times and bad times is challenging. Fundraising over the past few months could almost feel impossible. Elizabeth saw her portfolio companies attempt to raise in early April and most struggled as larger firms slowed investment at the start of COVID. However, investors, both large and small, are quite active again. With US states beginning to open and more investors comfortable with making remote decisions investment activity has been picking up pace. With the uncertainty of a future lockdown in the US it may also be a good idea to raise now.
As Elizabeth puts it, “now is actually a good time to raise, especially from local investors.” In fact, Hustle Fund has even increased investment over the past 2 months.
Bifurcation of Terms
As Elizabeth puts it, “terms have been weird.” Elizabeth has been seeing a bifurcation of terms over the last few months. On one side, you have well networked founders raising at very high valuations similar to 2019. On the flip side, you have less networked founders raising at quite low valuations.
Why Invest Now?
When going out to raise it is important to understand how investors think to improve your odds of success. One of the first questions an investor will ask themselves is, “Why should I invest now?” However, most of the time “now” is not a great time for investors to make an investment. Generally, it is most beneficial for an investor to drag their feet as they can get more information and data.
So how do you make investors move faster? You need to make an investor feel like they cannot wait 6 months because the valuation will change and the deal won’t be on the table. As Elizabeth said, “your job is to generate demand on your deal from other investors… you want investors to basically be afraid of each other.” You can do this by running a strong process and talking to a LOT of investors.
Tranches Can Be Useful
When going out to raise a seed round it is difficult to get people to move faster on the deal. You have a large supply of your raise with little demand. At the earliest stages, investors rarely feel motivated to move quickly as the deal may still be on the table in 6 months. To help with this, Elizabeth suggests reducing the “supply of your round” using tranches.
As an example, Elizabeth uses a seed company going out to raise $2M total. This company may go out and raise a smaller tranche to create some demand from investors to move quickly. For example, if the smaller tranche is $500k investors may have a fear they will miss out as it is a smaller size round that is easier to raise. From here, it is a lot easier to go to larger investors as you can create some urgency around the round as you’ve already raised $500k.
While Elizabeth may be a black swan when it comes to her thoughts on tranches, it can certainly be a powerful way to manage the supply and demand of your round.
Customer Discovery… with Investors
If you are struggling to drum up any interest from investors you likely need to improve different aspects of the business. Feedback from investors can be a valuable asset for prioritizing your time. Elizabeth suggests harnessing customer development strategies when it comes to investors. While you may not hear back from most investors, getting feedback and data points from investors that rejected your company can be incredibly valuable. If you start to see a theme in why investors said no, that is a good indicator of where you need to improve your business.
Founders Should Fundraise Full Time
Elizabeth suggests that her founders do fundraising full time (when they set out to raise). This means that you are not working directly on the business. In a good raise, it can take anywhere from a few weeks to a few months to close your round. Juggling this and making sure the needle still moves without you there is challenging. Elizabeth promotes stacking your meetings so you may have 20+ meetings in a week as opposed to a handful. In the beginning, this is a great way to create urgency with investors. If you are taking second meetings and have a docket full of investor meetings, investors may feel the heat and move quicker.
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