217. Crisis Coverage w/ Elizabeth Yin – Investing After 1 Zoom Meeting, 2nd & 3rd Order Effects of The Virus, and Why “Market Pull” is Critical

217. Crisis Coverage w/ Elizabeth Yin - Investing After 1 Zoom Meeting, 2nd & 3rd Order Effects of The Virus, and Why "Market Pull" is Critical
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Elizabeth Yin of Hustle Fund joins Nick on a special Crisis Coverage installment to discuss Investing after 1 Zoom Meeting, 2nd & 3rd Order Effects of the Virus, and Why “Market Pull” is Critical. In this episode, we cover:

  • Tell us a bit about your background and path to venture
  • Why’d you leave 500 and start Hustle Fund?
  • What is the thesis at Hustle Fund?
  • From a macro standpoint, how do you think the pandemic effects the venture landscape?
  • What were some trends you were following, prior to the virus, that have accelerated in this environment?
  • What are some that have regressed?
  • What are some non-obvious sectors or business types that you’re bullish on?
  • Due to maybe second and third order effects of the virus, what are some sectors you are bearish on?
  • You’ve said that you can make a decision after one Zoom conversation in 48 hours. Without much time to conduct diligence on the company and its founders, how are you able to get conviction so quickly?
  • Many of us are trying to figure out how to invest w/o meeting founders in-person… what are some of the key things you’re listening that help you make a quick decision w/o having met the founder?
  • NFX’s launched a new application process where startups can apply for funding, give up 15% equity and receive a funding decision in 9 days? What are your thoughts?
  • You’ve stated that long term success for you is in changing the way that early stage VCs invest and think about investing. What’s wrong w/ early stage investing and how do you see it changing over the next decade?
  • I appreciate your contrarian belief that the best startups will be founded outside the Bay Area. Why do you think this is the case?
  • Are there specific areas/geos you’re focused on?
  • I want to talk about this concept of “market pull”… Can you define “market pull” for the listeners and how you assess whether a startup has it or not?
  • What advice do you have for investors/fund managers as we proceed amidst a very uncertain future?

Guest Links:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

0:23
Elizabeth Yin joins us today from San Francisco. Elizabeth is co founder and general partner of hustle fund, an early stage VC fund that invests in pre seed software startups. Prior to co founding hustle fund. Elizabeth was a product marketing manager at Google, a startup founder and spent nearly three years at 500 startups where she was a partner. Elizabeth is an active blogger and has been vocal about the effects of the crisis on the startup ecosystem. Elizabeth, welcome to the show. Thanks, Nick. Thanks

0:51
for having me. Yeah. So

0:52
I gave kind of the high points on your background. But can you talk us through your your path and your journey to venture?

0:57
All the low points? Yeah, well, actually, I would say, it actually never crossed my mind to go into VC or investing or anything like that until more recently, I’m actually from the San Francisco Bay Area born here, raised here. And then after meandering about in the world ended up back here over 10 years, five years ago. And now. And, you know, I think from my perspective, I’ve always been an entrepreneur at heart, because I’m from here, I grew up during the.com, boom. And so I knew nothing about investing never crossed my mind. And I would say that I’ve had a lot of meanderings and failings, I left my cushy job in Google in late 2008, during the last recession, to start a business. And I would say, I really didn’t figure things out for a good two years, and obviously could raise no money during that time. And I struggled with some side gigs here and there. And then finally, you know, built out launch bid and grew that over the next several years. So mostly a lot of failure, and really no thought about investing at all.

2:05
But you found your way to 500. And even before that, you were doing some investing, is that right?

2:12
I, so I sold my company in 2014. And I had actually gone through 500 startups, their accelerator program, in the very early days with with my company. And so as I was trying to figure out what to do next, they said, Well, why don’t you come here and mentor a bit? And I was actually thinking, great, I’ll do that. And I’ll think about what startup I want to do next. And it was in working there that I was trying to see what people were working on what are some of the cool new areas that existed because I was so heads down in the ads world with my startup, I just didn’t even know what problems were out there and what people were thinking about. And so anyway, the long and the short of it is actually well being at 500, I realized that the problem that I wanted to solve was in investing. I saw all these founders in our batches, and none of them could really get funding very easily. And there’s a whole slew of reasons why that we can dig into but I decided that the problem I wanted to solve was like if you are actually a hustler, someone who was scrappy and can get stuff done, you should be able to get access to funding. And so my startup is actually hustle fund.

3:24
Yeah, it’s a startup. It’s it’s an investment firm. So But Why leave 500 You had kind of a good position, they’re really active running the accelerator for a bit, you know, why? Why leave to start hustle fund.

3:39
There are a lot of reasons kind of baked into that, that are unrelated to my own career, but more related to what happened at 500 startups. But I had some disagreements with the with the management team on some things. And I think, separately, I had been thinking about trying to start an investment firm that would go really, really early and 500 startups, we were looking at companies that had not a lot of traction, but some traction. And I felt like there ought to be an entity that would fund companies even earlier yet, like maybe at the product stage where you actually have no revenue at all or no traction. And so that’s what we’ve set out to do with hustle fund. Yeah.

4:22
Tell us more about the thesis. So what what are you investing in? You know, what’s your cheque size? What’s your, your approach to deploying capital? Yeah,

4:32
so hustle fund is what I would call a quote, pre seed fund. And the nomenclature is kind of all over the place as to what precede or seed or Mango Seed means, right? But what I mean by it is, we’re writing small checks really small 25k Like angel like checks. At the very early stages, maybe you have some basic product, but not much else. And, you know, no traction zero revenue and And the thesis is that we write these checks in many companies. So we have a diverse portfolio. I’m a big believer in diverse portfolio theory. And I think that’s kind of per my background from, from being at an accelerator. And then in some cases, we may double down at the seed stage and write a larger check after working with our companies. And so we’re very Angel, like, we provide a small amount of money just to help people get going. And then a small bit of help, usually on a growth project or customer acquisition project of sorts, and open up our network a little bit for a few weeks. So we’re not a we’re not a true accelerator program. But we were like an angel investor except an institutional fund.

5:42
Yeah. So how far are you, you know, into the fund? How many different portfolio companies do you have? How many of these precede checks? Have you cut?

5:51
Yeah, so we have 135 portfolio? Oh, and we’ve been around since late September 2017. So at this point, today, we’re tracking at about doing one deal per week. Wow. The partnership? Wow. Yeah.

6:09
That’s amazing. Your lawyer must be busy.

6:15
Well, I mean, I think this is why I say we’re not a true accelerator program. Like, we do not work with our companies for months on end, we don’t take board seats, we don’t, you know, we don’t we don’t continue this activeness for a year or more, whatever, it’s just for a few weeks, when we can give you sort of the the biggest boost in help, whether it’s network or in, you know, introductions or some light guidance around sales or, or lead gen. And then we’re mostly out of the picture. At that point, you can certainly contact me if you want as a founder. And we’re very open to that. But we are not in the weeds at that point. And that’s the only way that that kind of scales. You

6:53
know, by chance, did you come across the news today, on TechCrunch, about YC, changing their policy, I think they’re moving their equity stake down from 7% to four. And they’re also reducing volume of pro rata is that they participate in in follow ons? Did you come across that? And if so, what’s your take?

7:14
I did come across that. So just to be clear, I think my read on it was they’re not changing their terms. They’re changing their pro rata term. So in other words, they won’t, they won’t talk back up to 7%. They’ll talk back up to 4%. Ah, okay. So the deal is still the same. But this news actually doesn’t surprise me at all. Because if you have such a great deal, and you have continued great deal flow, you should just be doing that deal all day.

7:39
Got it? Okay, maybe I had it wrong. I, I was under the impression that they’re reducing their initial stake from seven to four, but I’ll have to reread that. Good. Are you a, a proponent of accelerators you participated in in 500, which is a traditional investor as well as an accelerator program. Do you think that’s a good path for most startups?

8:01
Think it’s very case by case, there are accelerators and their accelerators. And then I think even amongst the ones that are what I would call value, add, like they offer different things. So like YC, for example, great brand. And if you have the YC stamp of approval, it is generally easier to raise money. So if that’s your priority, and that’s what you want, then that could be great for you and worth the equity. On the flip side, I would say that not all accelerators can provide that brand, wherever you go through sort of Podunk accelerator that may not actually help you with your fundraising. Now, I think even beyond like, Okay, what is it that they’re offering beyond the money, sometimes you are just in desperate straits, and you need to bring cash in. And that’s a perfectly good reason to go to an accelerator as well, like you need 100k Tomorrow, then, you know, who kind of cares about the deal if your company is going to if the choice is between going under or bringing in the 100k? So I think there are many different reasons I wouldn’t just blanket recommend it. But you know, we certainly have recommended accelerators to some of our portfolio companies, depending on their situation. Wouldn’t

9:10
so to push back on that play devil’s advocate, why aren’t there cheaper sources, cheaper cost of capital out there in the form of angels? For that 100k, you know, instead of going to an accelerator, giving up a significant portion of equity and kicking the can down the road so you can figure things out?

9:28
Oh, certainly. But there are also trade offs. There’s a trade off of time, the amount of time it takes to fundraise. And I think your ability to raise from angels also is correlated with how well networked you are. For some people, they’re very well networked, and they can just call up their friends and get 100k. But for other people, it might mean a three month gauntlet is it really worth it for 100k? And especially if you’re a solo founder, in the middle of nowhere, and then maybe it’s not and it’s just better to do an accelerator. And so that way you can focus on your business.

9:58
Yeah. 100% So I kind of want to dive in here, you’ve been reading quite a bit, you’ve been tweeting a lot about sort of the pandemic that we’re in. The team actually here at New SEC has been a few of the members have been really enjoying your contributions. But maybe let’s just start macro, you know, how do you think the pandemic affects the venture landscape?

10:20
Oh, first off, thanks for reading. And I think the pandemic affects so many things. I think a lot of people like to compare it to 2008 and 2009. You know, as an entrepreneur from that era, I would say that this is like a whole nother beast. Yeah, because at least in 2009, even though I couldn’t raise any money, although we were in a recession, and people are certainly cheaper and stingy or about, you know, pulling money out of their pockets as customers, you could still get customers in this in this landscape. You may not have any customers, like if you’re in travel, you probably have zero customers worldwide right now. Yeah. So I think it certainly depends case by case on the industry. But in this in this landscape, I think people have to get extra creative. And I think the VC landscape is also affected not only by the fact that they’re you know, VCs are wondering whether their portfolio companies will be able to get customers, but also, VCs are not used to investing from a locked down state either. So VCSELs have to change their workflow. And that just also messes everything up, I think.

11:26
Yet, so you mentioned travel is one of those sectors that is at a standstill, what are some of the others that you’ve seen, with maybe first order effects or second order.

11:36
And first order effects. It’s basically anything that involves people in person. So you know, I’ve seen people pitching me certainly on travel, hospitality, events, things that relate to online events, like college campuses, stuff like that. So, but then there are second order effects as well, as you just mentioned, like, I think that real estate is probably going to take a huge hit, maybe it hasn’t happened quite yet. But I predict that in six months, it will. And, and so I think, you know, even b2b software companies that sell to other b2b software companies, they’ll take a bit of a hit as well, budgets will be slashed. And so even if these people’s workers are able to work from home, and they’re able to conduct business as usual, the general recession will also have an effect. And so that’s sort of a second order effect or third order effect. But we start to think then about, alright, who are in areas that are not only the least affected, but are also really building something that’s a need to have, and not a nice to have sort of productivity software thing?

12:44
What do you think about so you brought up productivity software? I think that’s, that’s interesting. So what do you think about some of the sectors, let’s take real estate, for instance, that are hit really hard by what’s happening? They may go through some contraction on the labor side. What do you think about productivity tools that allow, you know, the, the reps for the coachman’s and the J LLS and the CBR ease of the world to be much more efficient? What do you think of tools like that, you know, considering some of the dynamics of layoffs that may that may come and solutions that can replace, you know, a lot of heavy lifting?

13:30
Yeah, it’s a good question. And actually, for whatever reason, we’ve seen an influx in real estate related startups recently. And that is an argument that a lot of founders have, I personally am kind of on the counter of that. And, and I would extrapolate a little bit more broadly, which is, if, like, these days, the kinds of things I want to be backing are things that will either help people make more money, or it’s like, absolutely a need, like you’re gonna, it’s a life or death thing, like health, for example. So things along those lines are the things that I’m looking at. And so if you’re then building out some tool, maybe it’s a tool to help with virtual sales for homes, or, you know, commercial real estate or whatever, I think my general take is that the market that you’re selling into is still going to take a hit, even though that will actually help people with their sales, they, you know, the overall market of your customers is taking a hit. And so therefore, your customers are going to be less excited about expanding their business or, or things like that. So that’s my general take. I mean, I don’t think it’s so terrible. But if I have the choice between that and I don’t know, I can’t even think of an idea now. But like somebody who is going to be able to 10x their business because now regulations have been removed in like, telemedicine or something like I would pick the latter.

14:48
Right. Right. And I think you make a really good point. I hadn’t thought of this. But there’s a lot of tools out there that are efficiency tools that have unquantifiable benefits. Right. And then there are tools that have significant and immediate, either top line or bottom line expansion. And he Yeah, the the former, I think are gonna have gonna have a tough time for a while. Let’s transition, though, you know, what are some non obvious sectors or maybe business types that that you’re bullish on right now?

15:23
non obvious. You know, it’s so funny. I also think that just in general, this COVID thing aside, we’re at the point in the IT cycle where almost everything is fairly saturated and obvious. And so I think in general, there’s not a whole lot left, just you know, as far as let’s just call it web or mobile software just very generically. I think areas that may be interesting sort of wildcards. You know, there may be interesting things in, for example, Blockchain. Now, blockchain has been batted around a lot. There have been areas that have been great and horrible, but I think mostly what we’ve been talking about is Bitcoin and other tokens. And we haven’t even really seen great use cases yet of blockchain itself other than in the financial markets for speculating on tokens. So this may be its time, who knows? Everyone always says that. And it’s been like that for the last six or seven years. But maybe this time around it actually is,

16:30
what are your thoughts on? So if we think about like platforms that have really changed the dynamic on the way that people work and the way that people live, of course, you’ve got desktop, and the interface of desktop, you’ve got mobile, which is another interface that that really changed things. And now we’ve seen the emergence of voice. And, you know, that’s becoming maybe even more important as people are at home. And using voice assistants more often. Do you think that voice will be a platform that a lot of different entrepreneurs build upon in this next year or two?

17:06
We’ve seen a lot of voice products in the last year, and I think that will continue. In fact, one of our investments is called Voice flow. And they’re basically a platform to help you build voice apps. Oh, cool. And and they’ve done actually quite well, I would say that voice as you know, quick voice is a technology, which sounds weird, but I think there’s still issues with the parsing of voice, and the interactions with voice that’s, that’s separate from all of these apps that are kind of building on top of that, but you know, there’s just a lot of latency in voice apps right now. Because, you know, even simple things like when, when an application is trying to figure out if you’ve finished your sentence, it kind of has to wait. A person may know if you finish your sentence just because of the context of it. So I think I think there are certain things that have yet to be tweaked to make it a really great experience. A

18:05
grid, a grid, it’s funny, because this morning, we woke up and both the my wife and I, we have our mobile phones away from the bed. And so my, my wife asked Alexa, you know, what time is it? And, you know, she gave us the time. And she said, enjoy the snow today. And so at some, I mean, it’s getting, it’s getting interesting how it’s evolved, it’s been in kind of fits and starts, I feel like and there’s been some things that are clunky, but some things that are really delightful. But of course we you know, we we draw the shades and there’s like a good two inches of snow on the ground. We’re both like, oh, wow, now. Cool, um, you know, what, how about specific tactical advice for founders during this pandemic? Can you give us one to three specific things that that you’d recommend to founders?

19:00
I think acting with speed is probably number one. And that’s obviously very generic and broad. But I mean, I think where you see winners and losers is actually around this. So that that sort of covers everything speed to fire if you need to, like really, you know, making some of these tough decisions quickly is better in the long run, even though it obviously is a terrible situation, or even other things like quick to pivot, if you are in an industry that really isn’t going to come back or isn’t going to come back for a long time. And that that’s, I think, of course, the hard dyno and, and that’s where I think founders who can make faster decisions will actually win in this market because regardless of whether you’re right or wrong, like the faster you can react, oftentimes is is actually better like if you you know if you’re wrong and the market does come back at least you may have like moved into something else. that will give you immediate revenue. If you’re right, then you may be able to move quickly back into that, like, you know, having speed and agility is really important. And so that’s probably my number one. And actually my biggest one,

20:12
I think the name of of your firm and your fund hustle fund, I’m sure that speed had some, some relationship and some inspiration for that. Yep. So, Elizabeth, you, you’ve said that you can make a decision after one zoom conversation within 48 hours, without much time to conduct diligence on companies and their founders. You know, how can you get to conviction so quickly, I mean, this just came up on a panel I was on yesterday, there was about 100 founders, there were four different investors, and your name came up, as you know, somebody that can make a really quick decision, when a lot of us are, you know, struggling with that. So I’m curious, you know, how are you able to do so

20:55
it’s really just portfolio construction, you know, most of the time, I’m going to be wrong. But I think that actually, even if I do a lot of due diligence, most of the time, I’m going to be wrong as well, I actually don’t think I could improve my batting average, if I spent more time with the founder, or at least not buy anything significant. And the reason for that is where I’m investing, it’s just super early, like, if I were, you know, investing at the series B level, then yes, of course, we should go through all the numbers, the spreadsheets, what you’ve done, do customer reference calls and all this, but where I’m investing, companies don’t have customers, they don’t really have revenue, they don’t have spreadsheets to look at, it’s just their projections, which is, you know, who knows where that is. And so there’s really not a whole lot there to look at. And so what really is there as well, what the founder tells me, which is what what I get in that conversation, and, and then it’s mostly like my gut feel on the idea, like, do I think that the unit economics on this will work out? Do I think this will be a fast sale cycle, do I think this is a real problem, who really knows, there’s no data that will tell me at this point in time, so it’s a gut feeling on that, and then I have a large portfolio. So where I’m wrong, hopefully I am right sometimes, and and hopefully, that will take care of everything. And, you know, I’ve spent a lot of time looking at the numbers for large portfolio theory. And, I mean, I think the best case example of that is yc. But even for many of the other accelerators, or funds that have very, very large portfolios, even if they are, quote, not great at picking, but generally have decent deal flow, you know, they can still eke out at least a 2x fund. So you know, about index fund returns, but, and nobody would say that that is like spectacular, but at least they’re not losing money either. So there’s the spectrum between basically 2x, and like 50x, which is kind of close to what YC, at least did before and probably is still doing would be my guess,

22:52
is there a percentage of those that go to a second call? Or a third call? Or are you, you know, do draw a line and say, I have to make this decision after one call.

23:04
I, I’ll be upfront with founders if I need to bring it to a second or third call, and the reasons why as well. So in some cases, I’ll just say, You know what, after this, this is this is so either complicated, I can’t really wrap my head around it. And usually I’ll just pass if that’s the case. But in the rare case, it might be like, I need to really, you know, kind of dig into this myself, and then want to have another call with you. Or if it’s in an area where actually the product itself really matters much more than the market. So I’ll give you an example. You know, company that actually my business partner backed as an angel that we were rolled into the fund called Webflow. I don’t know if you’re familiar with it. Sure. Yeah. So you know, a product like that, like you need to really try the product. Like, I think the thesis is good. But if you don’t have a great product for designers, then that business is not going to fly. So in that case, the product is actually more important in the market, which means you need to spend time on the product. And so I can’t make a call after, you know, just chatting with somebody in that case, and I will actually try out a lot of products for companies kind of in that boat where the product matters more.

24:14
I love that example. I think we’ve we’ve seen a lot of examples in different categories have success recently. Maybe Maybe this isn’t the best parallel but you know, Zoom has had enormous success. And there were many different video chat products. But Zoom’s was elegant and beautiful. Just like Yeah, I hate I hate to call out companies but Squarespace. Like they had the promise of being the easy, you know, website creator and it was just painful for me to use. I just did not enjoy it. And when Webflow came out, I was like, This is what I had expected. This is the promise delivered. Yep.

24:53
And so I think that matters certain spaces, but in other spaces, the product actually probably doesn’t matter a whole lot. So it’s very case by case, unfortunately,

25:02
how do you determine whether the product is critical in a space or not? Ah,

25:11
it’s a good question. I mean, I think it depends on like the who the buyer is and how much they would care about that. So I think in the case of Webflow, and why I bring them up is it’s very obvious, like their audiences, designers and designers, above all people on this planet probably care more about usability and good design than anybody else. Right. If you’re selling to designers, you absolutely have to have your design. Great. And but I think, you know, they’re certainly less obvious spaces where that still matters as well. So I tried to think about it from the perspective of if I were their customer, like, how would I think about this product? And that’s kind of a wishy washy answer. But but that is honestly what I tried to do. I

25:54
like that I’m a product manager by training, and I’m super passionate about product. And yet, some of our best investments and our oldest investments, at the time that I invested precede, the products were terrible. And I remember other investors famously passing on these, because they’re like, ah, the product is just not there yet. But you know, I was, you’re able to often talk with the founder and kind of get in their mindset and hear how they’re thinking about the product and thinking about the market and thinking about things moving forward. And just because they don’t have the talent, and the money. And the time, at at the point that I invest. I feel like product is something that, you know, you can make a lot of progress on with some capital and time and talent. And, yeah, anyway, just No,

26:44
totally. And actually, even with hustle fund alone, I think I missed out on two companies that will probably go on to be unicorns, for this reason, brutal, those companies being tandem and around. And I think, you know, I think they will just be amazing. And they’ve obviously made so much progress in their products, like they’re great. So that’s going to be my last. And I can already call it, I can already call it now just seeing the progress that they’ve made since when when I chatted. And today, which you know, I think in the grand scheme of things wasn’t that long ago. We

27:19
all have some of those misses. Elizabeth, we talked about YC before. Also news this week, was NF X launching their application process where startups can apply for funding, give up 15% equity and receive a funding decision within nine days. What are your thoughts on NF X’s new process?

27:41
Yeah, it was very interesting to me. I think my initial reaction was, I would imagine for that speed, they would be able to actually ask for even more favorable terms. And so I was I was surprised by that. But, you know, I’ve, I’ve mean, I’ve known James and effects for a while, and, you know, they, they all are operators and, you know, know, a lot actually more than most PCs, about marketing and things like that. So I think very highly of them. And for them to come out with that in this time, I think is fantastic. Because speed of decision is like, at least when I was an entrepreneur, that’s what I want it. And so I think that that’s a great offering. But I would guess that they could get better terms if they wanted it.

28:33
Better terms, do you think they could get either more than 15% equity are put in more than one to 2 million?

28:38
Put? What I mean by that is they could put in less and still ask for 15%?

28:43
I see. I see. And, you know, out of curiosity, do you guys when you’re making these commitments, you know, one call commitments are? Are those startups? Do they have a lead in place? Or not?

28:55
Most of the time, no, most of the time, we are either alongside some semblance of friends and family, other angels, or we are Lone Ranger’s entirely. And so in both of those cases, we just agree directly with the founders on on a safe, like what that cap will be and, and that sort of thing. So we don’t need a lead. But that being said, I think that we actually kind of prefer to be in that position, because that is like when we have, you know, frankly speaking, the most negotiating power. I think if they’re already you know, 10 investors at the table, then we’re looking at things for the deal at hand. And if the if the valuation is already super high, then I obviously can’t go in there and ask for a lower valuation. So then we’ll we’ll usually just pass

29:47
I should call attention to that because that’s a huge distinction. And I think you deserve a ton of credit for being able to make these decisions when there’s not a lead in place right nine out of 10 Invest stirrers, they just co invest, you know, when there’s a lead, and, and, you know, they apply whatever filter or lens that they have, but they know it’s it’s fundable by an institution and a VC firm that’s done some diligence for you to be able to make a decision without that and to do it quickly. I think that that’s something that’s super unique in the space.

30:26
Yeah, and I think that’s partly why we wanted to build a firm at this stage to be able to do things like that. Because, you know, when I was a founder, I also had these frustrations of going to investors and people telling me well, you know, we would love to do this, if you had a lead, and everyone says that, but then it’s chicken and egg, you can’t get a lead and all this other stuff. So it’s not actually a real commitment is my learning. Like, at first I was excited as an entrepreneur, wow, they want to invest, if I have a lead, I’ll just go and find the lead. But, but that actually is really a no in most cases. And, and so that was super frustrating. And we wanted to be able to try to kind of jumpstart that and solve that problem for entrepreneurs. But at the same time, like when you think about it from a, just from a numbers perspective, you get the best multiples when you are getting in low and exiting high, you obviously can’t control the exit, but you can control the entry point. And if you have control over that entry point, as an investor, that’s the best position to be Now obviously, you know, the founder can decide whether or not they want to take that deal. And you know, we do, we do try to pick valuations that we think are fair per the market and the geography of the entrepreneur. But that’s when you have the most leverage not when 20 other investors are there. Yep.

31:38
Do you guys have hard and fast rules about participating in pro rata and up rounds? Or is it more just, you know, subjective deal by deal?

31:49
It’s deal by deal. But I would say in most cases, we actually don’t participate in pro rata. And the reason is, I think, if you look at the numbers, I think the most extreme numbers are accelerator numbers. And this is where I started looking at these things like at 500. Startups, where if you’re getting in accelerator terms, and usually we’re not admittedly, but let’s just say that, as an investor, you’re getting in an accelerator terms, and then you’re trying to decide on your pro rata usually the decision is, well, I could use this, you know, 500k, to kind of keep my stake in this company, or I can use the 500k to invest in for other companies. And, you know, get the same stake. So, which is better door number one with four companies, or door number two with one company, but you do have information on that one company. And in most cases, just after looking at the numbers, picking door number one, at least for accelerators is usually the better option. Now for us, it’s not as extreme. So the doors are often a little bit closer together. But But that’s kind of how we think about these things. So if the next round has a super high valuation, even if we’re super bullish on the company, we’re just great that we got in early, we’ll take that, you know, that markup or whatever, but that’ll kind of be it. And so it’s not to say that we don’t believe in the company, it’s just it doesn’t make sense to put more money there, it makes more sense to put more money in door number one,

33:19
very, very similar philosophy that we have at newstagged, you might as well grab the ownership upfront when you can get it. You know, Elizabeth, I wanted to talk a bit just about this concept of market poll. Can you define market poll for the listeners here? And how you assess whether startup has it or not?

33:37
Yeah, I think Marcopolo is kind of a phrase that I made up. But basically, I think of it as you know, is this going to be an easy sales cycle, like quick sales cycle? Easy, so? And do the unit economics work out like the customers worth more to you than what it costs to get them like all of those things combined in this one word market poll or two words? And that’s kind of what I’m trying to assess, like, is accompany all those things? Or do I believe that the company can be all those things? And the answer is no, then I’ll think twice about it, like enterprise sales cycles generally don’t like like, if it will take you two years to land a customer. That’s going to be tough. Now, we have done a couple of enterprise startup investments. And essentially what I have to believe is that they can sell it quicker, or they are hardy enough to basically not get any cash for two years. And then you know, the other things apply as well. Like if the margins are not going to be as good because the customers you know, if it’s like a marketplace, for example, like the amount of money you’re pulling in, well, like you have very little to work with and your customer acquisition costs may still be high. So these are all the things that I’m trying to assess in one number that I call market poll, but is there’s no it’s not actually a true word.

34:58
Is it? A formula. Do you try and boil it down to a formula?

35:03
No, but maybe I should.

35:06
It probably have to be different for all the different types of startups right marketplaces, other transactional businesses, SAS businesses?

35:13
That is a good idea. Actually.

35:15
That’d be fun. Well, you know, we’ve talked a lot about the startup side, what what advice would you have for the investors out there? As we proceed amidst this uncertain future?

35:29
You know, I, I think one of the things that I’ve noticed is that for every everything, let’s just call it you, VCs tend to fall into two camps, it doesn’t matter what it is like, should you follow on or not follow on? Should you invest in Silicon Valley or not invest in Silicon Valley? Should you invest in serial entrepreneurs, a first time founder, like, whatever it is, like people are very bifurcated on all these things. And I think that there’s just a lot of advice that people kind of follow, because other people have touted that advice before. But I think that every VC has a different model, like different stage and different things they’re looking for in different sectors and different business models, etc. And so I would really encourage, like a lot of new fund managers to just kind of go back to basics, like for what it is that you are trying to do, like the companies you’re trying to go after? Like, what camp do you think makes sense for you on all these things? Versus like, oh, I read that I should always follow on or whatever. Because I do tend to see a lot of new fund managers just saying, Well, I heard you should follow on. So I need to reserve my font for follow on or whatever. And it’s just like, Well, where did you come up with that idea? Like, oh, well, I read a blog post. Yeah. So yeah,

36:48
I mean, I was just talking about this earlier today. But there’s, there’s all these different traps, right? Because there are these polarizing viewpoints. And, you know, some people only invest in the market, you know, everything else doesn’t matter, just what is the market size. But clearly, there’s a lot of other team based filters and other things that require a certain minimum bar before you know, people engage in it even on the pro rata is like you get these very sort of polarizing ends, like you should always take your pro rata is you should never take your pro rata. It’s just get ownership up front. And then like you talk to people, and they’ve always got Well, in this case, I didn’t do that in that case. So exceptions. Right, right. Elizabeth, who if we could cover any topic here on the program? What topic do you think we should address? And who would you like to hear speak about it?

37:36
That’s a good question. Um, so I think a rising star, who more people should know about is this person named Alex Danko. Do you know,

37:51
I know of him? I don’t know him personally.

37:54
So he used to be an investor at social capital. And I think he thinks about a lot of macro trends in really interesting ways. So for example, like, what are changes in cities based on you know, ABC, or what? Like, what are changes in financing based on where we are in the, in the, I guess you could call it it cycle? You know, his prediction is that debt is going to be a bigger player. And I would agree with that. And so yeah, I think that’d be a really fascinating conversation around trends.

38:35
Yeah, I agree with you. He’s got a newsletter called to true send a take. And I’m pretty diligent about cutting my newsletters and cure hitting just a few. And he’s one that I read. Elizabeth, what’s one thing you know, you need to get better at?

38:52
Oh, so many things. I think I’m saying No, I, you know, I, I started getting better at that as an entrepreneur, but could still do a lot better. I think. And, and that’s just with everything like commitments and whatnot. We obviously end up saying no, a lot with regard to investing. But I think just in general, you know, priorities, activities.

39:21
Elizabeth, what investor has influenced you most?

39:26
I think probably 500 startups. I mean, I was there for almost three years, and learned a lot just about, you know, everything portfolio theory, when the companies would come in, you could watch them work. And I think it was one of the greatest ways to learn about investing, because the cycles were a lot shorter than they normally are. So here’s what I mean. I, before I went to 500 startups, I was doing a little bit of angel investing, and mostly in friends companies. And then so I would, you know, send them my money and that would be that I might get some investor reports. But I didn’t really know what was happening in the companies, and that’s fine. But I didn’t really get to learn then about my investment. Was that a good investment or a bad investment? What? What could I have done better? I didn’t know. And with the accelerator, I was able to invest. And then all these teams would come into my office, and I could actually watch them work and see their progress on a week by week basis. And then really learn oh, gosh, I would learn things like there’s co founders are always, you know, having issues, or this person really cannot learn new skills, or this person is too scared, they’re cold email, or that person is really bad at hiring, like I just learned all these things, the good, the bad, the ugly. And that was like the best crash course in learning how to invest in startups. Like if anybody’s thinking about getting into start investing, I would highly recommend like mentoring at any accelerator doesn’t matter which one? Because you will learn a lot.

40:59
Is there a way aside from just like up rounds, right, and appreciation of the portfolio? Is there a way that you regularly kind of measure progress and and talk with your team about, you know, here’s here are the successful investments versus the the less successful based on, you know, the non objective up round factors?

41:21
Well, we work with all of our teams. And so you know, we write a small check, but we work with all of our teams for four to six weeks, I think that’s so important to be able to really learn what is it that you’re investing in? And so so that that is something that is in our model in what we do? You know, I think, along the lines of follow on what is very interesting is very often follow on rounds are led by other people who actually know less than you do, or in theory, no less than you do about the company. And so to have a model that blindly says, oh, you should follow on seems weird to me, because you’re following on with an investor who actually knows less about the company than you do, you should have the conviction to know whether you should follow on or not based on the information you’ve gotten from working with the company, you should? And if you don’t have that, then it means you haven’t worked with the company enough? Or I don’t know or something else is going on there.

42:19
It what is the nature of the four to six week engagement with the company? You know, are you guys coding or or, you know, what sort of things are you doing to work with them?

42:31
We, I think it’s very case by case we’re not, you know, a set accelerator program. In fact, I wouldn’t even call it a program at all, because it’s very light. Like we, I wouldn’t even say that we are doing any work. It’s more like weekly stand ups or acting as a sounding board, where we’ll provide guidance, usually on customer acquisition experiments. And that will vary, of course, depending on what the company is actively working on. So if it’s trying outbound sales, then it might be like we’ll do a weekly meeting around, okay, you’re experimenting with this, you emailed 100 People with this messaging, this was the response, you got X, number of demos, etc. All right, like how do you think about iterating next week, we come back and see how that does, et cetera. So that’s sort of the nature of our work with our startups. But it’s not a full fledged program. We don’t sell it as such. And I wouldn’t want to oversell it anyway. But at the same time, we’re also not taking additional equity or charging for it in any way. You

43:27
know, 500 used to have a newsletter that I would send out frequently that had like a lot of punchy customer experiment ideas, and I loved it. And I can’t remember what it was called. But it seems to have gone away. District snacks. Yes, that’s it. Yeah. District snacks. Yeah, I don’t I don’t know what happened. But it was it was great.

43:46
I loved it. It was great.

43:49
And then, finally, Elizabeth, what’s the best way for listeners to connect with you?

43:54
Yeah, so I’m pretty active on Twitter. You can follow me at dunk hippo 33. You can read my blog at Elizabeth yen.com. Or even actually, I’m very open about giving out my email address, which is just Elizabeth at hustle fund.vc.

44:11
Well, founders if you want a decision in one call, hustle fund is the firm. She is Elizabeth, the end. Thank you so much for all your contributions, you know, over the past month and even before that, and of course, for joining us today.

44:24
Thank you, Nick. Thanks for having me.

44:31
That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet dot Net and until next time, remember to over prepare, choose carefully and invest competently. Thanks for joining us.