VCs Only Spend 30 Seconds on Your Pitch Deck | Elizabeth Yin, Hustle Fund

Summary

This podcast dives into the world of venture capital (VC) with a focus on early-stage startups, particularly those in the B2B SaaS space. Elizabeth Yin, founder of Hustle Fund, shares her insights on democratizing wealth creation through startups, the power of content marketing for VCs, and the importance of investing in first-time founders with strong product-market fit. The episode explores the challenges and considerations for VCs, including investment theses, market saturation, and deal evaluation criteria. Listeners gain valuable takeaways on navigating the VC landscape and the key factors that influence startup success.

Takeaways

1. Hustle Fund aims to democratize wealth through startups by providing capital, knowledge, and networks to early-stage founders.
2. Content marketing, particularly through platforms like Twitter, can be a powerful tool for attracting deal flow and building a brand.
3. Lessons learned from Elizabeth Yin's startup experience include the importance of validating ideas before building, prioritizing company culture and values, and effective management.
4. For B2B SaaS companies, it may be better to back first-time founders with lower entry point valuations, as the exit potential may not be significantly higher for serial entrepreneurs.
5. Most B2B SaaS companies do not need a large amount of capital and can bootstrap or raise smaller rounds until they reach a revenue stage that justifies larger investments.
6. Investment theses are important for VC firms to differentiate themselves and attract investors, as they help investors understand the fund's focus and expertise.
7. B2B SaaS companies are favored by VCs due to their predictable revenue streams, high retention rates, and stability compared to consumer-focused businesses.
8. The SaaS market is becoming crowded, and investors are looking for differentiated ideas and industries off the beaten path to avoid high customer acquisition costs.
9. VCs spend less than 30 seconds reviewing a pitch deck and focus on the founding team, idea differentiation, and a deep understanding of the problem being solved.
10. The valuation of a startup is influenced by factors such as market size, team expertise, idea differentiation, and the potential for repeatability and scalability.

Chapters

00:00 Trailer
01:25 Introduction and Early Influences
05:27 Why Starting a VC Firm
08:33 Science behind Concept of Hustle Fund
10:12 The Need for More Early Stage Funds
12:10 Deal Flow and VC Strategies
13:50 The Power of Content Marketing
16:50 Why Investing in First-Time Founders / 3 Biggest Lessons I Startup
24:42 Venture Capital Business Model and Funding Challenges
31:35 The Gambling Nature of VC Investments
33:22 The Importance of Investment Theses for VC Firms
34:58 The Appeal of B2B SaaS Companies to VCs
38:00 The Potential SaaS Bubble
40:45 How Deep Tech Investers Makes Money
42:30 VC Evaluation Criteria and Attention Span
47:00 Market Size And Valuation
52:30 Evolution of Investment Acumen
55:35 Post-Money and Pre-Money Safes
59:00 Consequences of Not Tracking Cap Table
01:03:15 PrepStacks and Growth Stage Deals And Impact on Early Stage Investors
01:06:05 Disagreement with Market Sizing Exercises
01:08:28 Ritual Time
01:09:25 Conclusion

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Transcript

Mudassir (00:00.513)
I still get nervous, so sorry about that.

Elizabeth Yin (00:01.45)
Thank you.

Mudassir (00:06.433)
Okay, so recording started. Let me open the questionnaire. That is cool.

And we should be good to go now.

Mudassir (00:19.617)
Alright, please do a clap for me and we are off to good.

Awesome, thank you for that. It's a production tip. So produces the spikes, the moments, so yeah. Yeah, exactly, exactly that. Okay, so we're rolling now. Hey Elizabeth, welcome to the show. How are you doing today?

Elizabeth Yin (00:30.412)
Yeah.

Elizabeth Yin (00:37.486)
Good, good. Thank you so much for having me, sir.

Mudassir (00:40.993)
Oh, it's my pleasure to have you. You're one of the dream guests that I wanted to have. So thank you so much for the time. Yeah. OK. So every single time, and I was just telling you how many episodes we recorded, every single time anybody that comes over the podcast, I start with one particular question. And that is, what's the earliest context you have of your life? And how did you end up here on this podcast, on wherever you are in the world? Yeah. How did you end up here?

Elizabeth Yin (00:46.094)
Thank you.

Elizabeth Yin (01:11.598)
Well, actually, it's entirely because of where I was born and lived, which was completely out of out of my control, of course. But, you know, dating myself here, I grew up in Silicon Valley during the dot com boom in the 1990s. And a number of very serendipitous things happened to me then. I was in freshman year of high school, so the first year of high school. And my best friend from high school,

Mudassir (01:21.185)
Okay.

Elizabeth Yin (01:40.974)
asked me if I wanted to help out her cousin, Tony, with his startup. This was in fall of 1996. And I didn't know what a startup was, of course, but I also didn't have anything really going on. So I said, sure. And during the winter holiday, we took the train up to San Francisco to help out her cousin. And we showed up and there was nobody there. This was about nine o 'clock.

Mudassir (01:52.361)
Yeah.

Elizabeth Yin (02:09.838)
And, but people started trickling in at 10 and 11 as people tend to do at startups. Um, and it was just amazing. You know, it was Tony and all of his friends running around doing all kinds of things. Um, there were pizza boxes everywhere. You could eat all the pizza you wanted. Like it was the dream. And so I knew from that day, I don't think we were any help at all, but that was what I wanted to do when I grew up. Because if you remember like,

Going to work meant in the late 90s or even before that, it was often very stodgy and structured and there was a certain thing you had to wear to work and a certain thing you had to say and dress like everything was just much, much more formalized back then. I mean, nowadays it's much more casual, but so this was very different than anything I had ever seen and I just loved it. I didn't know anything about how their startup made money. I didn't understand any of that at all.

but I just knew that that was what I wanted to do. Fast forward two years later, Tony ended up selling that company to Microsoft for a purported couple hundred million dollars, but his bigger claim to fame is that that same Tony, my best friend's cousin, is the late Tony Hsieh, who was the previous CEO of Zappos. So that kind of set me on my path. He ended up opening a lot of doors for me over the course of my life later on after high school.

Mudassir (03:27.721)
Yep, yep.

Elizabeth Yin (03:37.102)
and with my own startup and even with Hustle Fund, but that was the beginning in high school in 1996.

Mudassir (03:46.401)
Wow. What was San Francisco like back in the dot com bubble and what exactly has happened at that point? Because I was so small to remember that. So I always wanted to know, like, was there like a lot of chaos and people were just like going kind of haywire, kind of crazy. I was like, yeah, I mean, yeah, like, okay, things are shutting down, but that's okay. What was it like there?

Elizabeth Yin (04:08.686)
I think the spirit of startups in the 90s was very similar to the spirit today. Obviously there were some infrastructural differences. Like for example, startups in Silicon Valley in the 90s often still were in office parks, because that's what there were. So, you know, you still had the cubicles in many cases and all of that old stodgy work stuff. Nowadays, obviously many workplaces don't have that.

Mudassir (04:14.561)
Hmm.

Elizabeth Yin (04:37.198)
So those little things. And then the other thing that I might note that people tend to talk about a lot is everyone says, oh, you know, San Francisco is falling apart and that's a recent change. No, actually San Francisco has hit infrastructural issues forever. When I took that train up to San Francisco in high school and got off at 4th and King, if anyone is familiar with the Cal train in San Francisco, at that time, it was actually really dangerous to be walking around that area. And certainly as a teenager.

Nowadays, people get off at 4th and King and there's the Safeway and there's the restaurants and the whatever, and there's the ballpark. So I think people tend to forget that issues that have happened have been there for a long time and continue to stay there. So I think that's my little bit on San Francisco and that's certainly a whole nother can of worms. But many things are the same, but obviously we have modernized over the years.

Mudassir (05:32.481)
OK, that's cool. Thank you for explaining that. So I want to have this entire episode around a couple of things. So one is around the VC, like the entire venture capital thing. Then I want to pivot a little bit towards SaaS industry, because there's a lot of things I want to know about SaaS. And then there's this whole bunch of things around angel squad and how angel investment is a big thing, or it should be a big thing. OK?

So without any further ado, I just want to start with, of all the things, why start a VC firm? Like, why?

Elizabeth Yin (06:09.582)
Yeah. And actually, you know, the question that a lot of people ask me is why do you want to be a VC when you've been a founder for most of your career? Don't you ever want to get back into operating? So actually, if we rewind the clock a little bit, my last startup was an advertising tech company. I sold that in 2014. So it's now been about 10 years. And, you know, after that, actually, I really, you know, that was a relatively modest exit. So I wanted to take another swing at it. I wanted to

Mudassir (06:20.607)
Hmm.

Elizabeth Yin (06:39.214)
try to go for that unicorn as they say. But I also wanted it to be something very impactful, something that was meaningful to me as well. Like something that I felt would be my life's work, ads honestly were not my life's work. So that was what I was trying to think through when I was thinking about my next startup. And I thought for a good two years, you know, I tried experimenting with different ideas, but there were just a number of issues with my experimentation in that.

You know, you can get excited about an idea for a couple of days or a couple of weeks. It's hard to stay excited about something for a couple of decades, unless you really love that or love the problem or the people you're trying to serve. And so while I was experimenting with all these ideas, at the same time, I was also mentoring startups, investing in startups and in, you know, basically this startup world. Um, and it dawned on me one day that actually what I really loved was startup founders.

That was the audience I wanted to work with. And the problems that that startup founders have, I understand completely because I have faced them myself. Like I've faced so many startup problems over the years and certainly have many friends who are also founders who have faced all of these problems. And essentially the problems boil down to three categories, capital, knowledge, and networks. Founders have issues with all three of those. Like how do you level up with knowledge, right? You're going from

individual contributor to CEO. Many people haven't managed people before. Lots of things to learn as you grow as a CEO. Capital, of course, don't need to really belabor that one. And then networks, of course, you know, how do you expand your network at business partners, customers, et cetera. So, so those are the three things that I identified as issues that startup founders have, and certainly I faced them. And so I wanted to start a company that could help with these problems for the earliest stages in particular.

And so that's actually the mission for Hustle Fund. We are trying to democratize wealth through startups, but what does that mean specifically? We're trying to really push things on all three of these fronts, capital, knowledge, and networks. So yes, we are a VC fund. We do deploy capital to that first point, but we also have a lot of other business lines and initiatives that help with capital and or some permutation of knowledge and networks.

Mudassir (08:58.369)
Okay, so it's a funny name. I grew up in that hustle culture. It's just like hustle, you just have to grind all the time. You're working somewhere, you just have to have a side gig or whatever. Why did you guys name it Hustle Fund? Why hustle? Could have named anything. Could have named it Hippo Fund. Why not Hippo Fund?

Elizabeth Yin (09:22.322)
Yeah, I think that, you know, hustle certainly gets a bad rap as a name and certainly plenty of people have different definitions for it. But our definition of hustle is actually very specific. And that is, you know, honestly, the best indicator of success to us is what we call hustle. And what does that mean exactly? It means actually focusing typically on one thing and pushing that with speed. So it's like about

speed and execution in a direction of just on one thing. What is the one thing that matters? Hustle to me does not mean like burning the midnight oil all the time or constantly grinding. I don't think that's hustle. It is like, what is the one thing you are going to execute on with speed? That's hustle. And so that's why we picked Hustle Fun because we think that that has the most important thing over smarts, over whatever else you can think of.

Mudassir (10:18.913)
Okay, so I read a blog post.

Mudassir (10:24.001)
skim through things but I read a blog post that you wrote.

And then I think if I remember correctly, you took 345 meetings in total in that timeframe and then you just, you know, launch a friend. How difficult is it to...

Elizabeth Yin (10:39.234)
700. 700 across two of us though. So about three, three, four, five. Yeah, yeah.

Mudassir (10:43.713)
Okay, across two of us, okay. About 345, okay. Because I was like, oh, 345 was like blowing my mind. 700 would have been crazy. So a couple of questions on that. How difficult is it to start a fund? And can anybody, not can anybody, do you think like we need more early stage funds compared to more brand name funds?

Elizabeth Yin (11:08.43)
Yes, I think the short answer for me is yes, on we need more funds. I know a lot of VCs complain about, oh, there's so many funds. And of course, many fund to funds complain about how there's so many funds. And while it's true, the number of funds has grown over the years, I actually see that as a good thing. I also think that we still have a shortage of funds. And I think specifically, it becomes very obvious, like when you look at, you know, geography.

There are certain emerging markets where there are literally no funds. Now you could make the case that there are too many funds in Silicon Valley chasing the same deals and that may not be the most productive use of capital. But on the net, I think globally we do need more early stage funds. There are very, very few funds in the world that are willing to invest in startups at what I call the earliest stages, like pre -revenue or less than $10 ,000 a month in revenue.

somewhere in that range, I think there are a few funds willing to take that risk. Most funds are willing to come in if it's fairly clear that you have some traction. That I don't think we need more funds for. You're either executing or not at that point. But I think at the earliest stages where a company just needs to get started and not everyone has a rich uncle to get started, I think that stage still needs more capital. And then,

Mudassir (12:03.829)
Okay.

Mudassir (12:30.625)
Okay, and how... yeah, please continue.

Elizabeth Yin (12:32.558)
Yeah. And then to your other question, can anybody start a fund or how hard is it to start a fund? I actually think starting a fund in many ways is harder than starting a company. And this is a pretty controversial statement, but having done both, I think where, where I'm coming from is starting a fund is entirely about fundraising. So the kind of people who want to start a fund should love fundraising and be really good at fundraising. Otherwise you're just not going to get anywhere.

In contrast, if you are building a product startup and you're not good at fundraising, or you raise like, let's say $10 ,000, you can probably make it work. You just start building something and selling. And even if you can't raise anything, you can start selling some services and make some money to start building, right? We've seen plenty of examples where that works, but you can, it's very, very hard unless you're rich to bootstrap a fund.

Mudassir (13:23.297)
Yeah. Yeah, absolutely. Absolutely. So, you know, thank you for just saying that. But one question that I want to ask is one of the things that you mentioned is there's a lot of VC firm chasing the same deals in the Valley. The question that I want to ask you, what exactly is it like on the VC side of the business? So on the founder side of the business, I can pretty much tell, like you would agree to that, is that there's like thousands and thousands of people looking for funding, right? Like I had somebody on the podcast and she was telling,

Elizabeth Yin (13:42.382)
you

Mudassir (13:52.801)
They review more than 5 ,000 pitch decks every year. 5 ,000, that's a lot of pitch decks. But it's a good thing that so many people are thinking of building something new, something crazy. But on the VC side of the things, do VCs actually chase these deals? Or is it like, no, we just don't need to chase anything. Is it like the next Facebook is arriving, like anytime in the inbox, like the next Uber is coming, the next Airbnb is coming. How exactly does that business model, the demand supply side works?

from the VC's perspective.

Elizabeth Yin (14:25.486)
It's fascinating because every VC has its niche or its strike zone, I like to call it. I'll give you an example. Another VC firm, Not Hustle Fund, their strategy may be to chase serial entrepreneurs who've had success before. And if that's your strategy, then what you're doing is you're hobnobbing with successful serial entrepreneurs. It's just a different game.

Um, for us actually our strategy is almost the opposite. Most of our founders are first time founders. We do certainly have, you know, some, we certainly, we do certainly have some investments in serial entrepreneurs. They tend to be friends of ours or people we've backed before who became successful, but the vast majority of our portfolio is first time entrepreneurs. So in that game, um, you know, people play different things. One is, you know, there are funds that just hang out at Stanford all day.

That's not us. Our game is we hang out on Twitter, Twitter, we produce a lot of content and people who are not well networked per se read our content. And then that's how they hear about us. Right. So people are playing different games on where to find your deal flow for us. It's the content strategy and just trying to, you know, provide content that we hope is useful to people. And if people read that and find it useful and think, Oh, maybe I should apply with hustle fund.

then that's a win for us. And so everybody's got a different strategy and based on your strategy, then that's how you allocate your time. So for us, we actually have a whole marketing team. The original content still comes from the investment team, primarily actually Eric, Sheehan and me, and also Haley, who is our newer investment professional on our team. But we have a marketing team to help us write it, to help us...

Mudassir (16:14.433)
Yeah.

Elizabeth Yin (16:20.586)
you know, repurpose it to help us promote it, et cetera, because that's our game.

Mudassir (16:27.265)
Okay, and is that a powerful game? You know, producing content and then, you know, just, because I know you're very popular on Twitter, you're very popular on LinkedIn, and then you guys have the YouTube and all that stuff going on, and I'm sure you guys are on Instagram because I think we did see on Instagram as well. But yeah, you guys like on everywhere. So are these platforms actually powerful enough to have that level of deal flow?

Elizabeth Yin (16:52.782)
Yes, we see over a thousand deals per month. So about 12 ,000 across the year.

Mudassir (17:00.609)
Okay, go ahead please.

Elizabeth Yin (17:00.814)
Um, and a lot of it is inbound. So it is interesting. Actually prior to Hustle Fund, I had never really used Twitter before. I had an account, but I never really used it. And then I had started doing a little bit of tweeting, not a whole lot when I started Hustle Fund, mostly to push out my own blog posts that I had been writing. And honestly, the initial blog posts were just reflections on all the things that I had done wrong with my startup.

Mudassir (17:13.683)
Okay.

Elizabeth Yin (17:29.422)
It was more cathartic than anything. And if anybody read it, it was to help other people avoid the same mistakes I made. That was the initial genesis for content. It wasn't for marketing purposes, but eventually it started to take on a life of its own. And I stopped having time to write a blog. So I felt like, well, the next best thing is to write these tweet threads. It's like a shorter version of a blog post and people started resonating with it.

And then all of a sudden we noticed when people would apply on our site with their company, over half the people said that they heard about us on Twitter, which was crazy because we were not even really using Twitter that much. And so we felt like, well, we should be doubling down on Twitter then. So that was how this all got started. It wasn't a concerted plan. I mean, some of our concerted plans literally went nowhere. Like we tried running a clubhouse channel, we tried TikTok and we were not successful at either of those.

Mudassir (18:19.405)
How did TikTok go? I was like, I'm always interested to see like how did TikTok go?

Elizabeth Yin (18:25.742)
It didn't go well for us. I think we're not gen Z enough.

Mudassir (18:33.177)
Okay, there's a I run a company on the side which is a media production studio, but we primarily work with VCs and there's a VC firm out of Canada that happens to be our client. And one of the key person in the executive team was pushing us, hey, why don't you guys push us with the short form on TikTok? I was like, yeah, sure, if you guys can dance on, I don't know, cap tables. But happy to just put it out there. So yeah, it's just.

Elizabeth Yin (18:58.508)
Ha ha!

Mudassir (19:02.369)
It's a very funny platform. Two questions I want to ask you on this particular thing. So one is, if you can just rewind the clock back, what were the three biggest lessons? I don't want to say mistakes. What are the three biggest lessons that you have learned from your own startup, from LaunchBit? And I saw there's quite a few that you did not name. There was a lot of projects, a lot of learnings. So what were the three biggest mistakes? And on the front side,

Why just invest in first time founders? A lot of people would just want to stay away from those. It's like, oh, these are the people who probably don't know how to start a company, so probably gonna be bigger risk. Early stages, already a risk. So yeah, just two questions on that.

Elizabeth Yin (19:45.934)
Yeah. Wow. So many lessons learned from the startup journey side of things. I mean, I think one thing to remember is that there's actually been a big change in how people start companies. And I would say that change is the development of the lean startup methodology. So with Eric Ries and Steve Blank coming out with the lean startup methodology, I actually think that has had a huge impact on startups because every startup I meet now,

Mudassir (19:56.289)
you

Elizabeth Yin (20:15.182)
has a much better framework of what they need to do. Like people prioritize customers, they prioritize learning, they prioritize figuring out like do I have product market fit, things like that. Where else before all of this, nobody prioritized that. People prioritize building and then after we build, then we'll go and find customers. That was how people did in the old days. And I started my first company in late 2008.

Mudassir (20:20.897)
Hmm.

Elizabeth Yin (20:43.52)
before Lean Startup came about. And I did exactly that mistake. So I don't really see this mistake very much anymore, but it is a big mistake that I made for sure, which is like building too much and not having any customers. And then, so by the time we actually started LaunchBit, this is after many side projects that failed, at that point, Eric Ries had already started blogging. So he hadn't come out with the book yet, but he already started talking about Lean Startup and it just clicked.

it dawned on me that we had been doing it all wrong and that we really just needed to validate things first before building. So actually our very first iteration of LaunchBit had really no technology. It was just emailing people, trying to get them to buy and sending them a link to my PayPal and people would send me money. That was the first iteration of LaunchBit and that was the right way to do it. And later, even as we iterated on LaunchBit and we were deciding whether or not to have a...

cost per click bidding system like Google and Facebook do with their ad systems, it takes a lot of time to build out something like that. And so we put up just a very simple input form of what price you would want to bid, but it would go nowhere. It would just send us an email. And so we had people changing their bid every two seconds and it would send us these emails of like new prices that they wanted. And we would just manually adjust the allocations of ads based on what people put into that input box.

Mudassir (21:53.623)
Yeah.

Elizabeth Yin (22:09.518)
to determine whether this was a good idea to build or not. So these, this is a way of thinking that is relatively new. And I think that has leveled everybody up. So that's one big mistake. I mean, certainly I've made others and you know, this is actually a conversation itself, but probably the other two I would say are around spending time on company culture and values. I think a lot of startups don't do that early enough because everyone thinks, oh, that's too floofy and not important. And I need my business to survive.

Mudassir (22:32.031)
Yep.

Yeah.

Elizabeth Yin (22:39.086)
And that is true, but I think once you get to a certain level at call it seed, even, I think that's when you have to really think very carefully and deeply about culture and values and really, you know, even write down what your values are, because I think one thing that happens is people will never fully agree on your team. You and your co -founder will never fully agree, but if you have values listed, you can argue with your values of, well, we...

Mudassir (22:57.217)
you

Elizabeth Yin (23:06.51)
We said we prioritize these things in our values. And so I think we should do X because it fits this. And so it makes it less personal and makes it a good framework for making decisions as well. And so that's a second bucket that I think people don't think about. And then I think the third is around many lessons in management. I had never managed people before starting my own company. So I made all the classic management mistakes of not firing fast enough.

Mudassir (23:11.379)
you

Mudassir (23:17.395)
you

Elizabeth Yin (23:36.282)
Probably not interviewing enough people for hiring as well. I think honestly you have to interview or even if it's not a formal interview, talk with a lot, a lot of people because ultimately good is a comparison game. You know, one person always looks good in isolation, but now all of a sudden if you have to decide amongst five people, then you really can stack rank them. So, so management I think is a big bucket of issues that has many issues in them and that's a whole book.

Mudassir (23:58.849)
you

Mudassir (24:05.697)
Okay, and the other question was, why you guys are focused on first time founders, like as a fund, why just back first time founders, or primarily back first time.

Elizabeth Yin (24:15.918)
It is true that serial founders, especially successful serial founders, when they get money, they tend to just immediately right out of the gate, start running. Like they tend to hustle faster because they know exactly what to do. Like even simple things, like they know how to incorporate the company. They know what they need for their benefits and all those are simple things, but.

Mudassir (24:17.281)
you

Mudassir (24:22.465)
you

Mudassir (24:33.153)
you

Elizabeth Yin (24:41.966)
You know, as a first time founder, I didn't know anything about any of that. So you have to spend your time learning about these things just to get your business up and running. But a second time founder or successful founder knows that. And then a successful founder has had learnings on all the things I just mentioned, management, hiring, firing, et cetera. So they know what good looks like and the mistakes that they made before, and they can correct those. So they can just move with greater speed. So I agree with you on that. Like actually, the founders do level up when they're successful.

Mudassir (24:51.105)
you

Mudassir (25:02.689)
you

Elizabeth Yin (25:10.318)
That being said, I think as an investor, what you have to weigh are two things. One is product market fit honestly is a lot of luck. Whether you land on an idea that people are willing to pay for is a lot of luck and pay for at scale. And even successful serial founders don't always get that. This is why successful serial founders, while they do have a slight edge in getting success again, it is not as big of an edge as you would expect.

Mudassir (25:12.275)
Hmm.

Mudassir (25:32.545)
you

Elizabeth Yin (25:40.014)
And I attribute that a lot to product market fits a lot of luck. So, so on that sense, there, I actually think the playing field is relatively equal. The second thing is the valuation. And this is what I think a lot of investors don't think about enough. It is not enough to invest in a successful company. Ultimately, investors are trying to make money. And the way you make money is the spread of your entry point and your exit point. What valuation did you enter in at?

Mudassir (25:50.369)
you

Elizabeth Yin (26:09.358)
and what is the exit price of this company, whether it's through an acquisition or IPO or secondary sale or whatever. That spread, that multiple is where you make your money, right? And the higher the spread, the more money you make. And so with a successful serial entrepreneur, because they don't need your money because they were successful, they could probably bootstrap the first round themselves. Then that valuation on the entry point is almost by definition going to be a lot higher than for a first time founder.

Mudassir (26:12.775)
Thank you.

Elizabeth Yin (26:38.414)
And so, you know, then you think about, okay, the exit price, I can't control that. Will a successful serial entrepreneur get a higher exit? And I think on one hand, you can argue, well, they want to shoot for the moon more because, you know, otherwise it's not worth doing for them. But probability wise, like the number of $10 billion companies that are on the public stock markets is very small in today's market. And so,

Mudassir (26:45.569)
you

Mudassir (27:07.251)
you

Elizabeth Yin (27:08.3)
you know, what does that spread between the higher valuation and what their exit could be? Is that spread higher than backing a first -time founder? And very often the answer is no, the entry point is just so high and the exit potential is not high enough that maybe it is better to back a first -time founder because their valuation, their entry point valuation is going to be lower. And if product market fit is a big factor in your exit price, then you know, they're on a fairly level playing field in that regard. So that's

Mudassir (27:17.665)
So that's it.

Elizabeth Yin (27:38.03)
That's what we weigh at least. And like I said, we've backed both, but the vast majority of our investments are in first time founders.

Mudassir (27:44.103)
Okay, great. So I want to ask you a question on how this entire venture capital works, but I'll give you some context. And there's another follow -up question on exactly the thing that you mentioned. So there's a lot of thoughts that comes to my mind, you know, with every single answer. So most of the founders that I meet, and since I started this particular podcast, people have, in a wrong way, they have sort of a notion that I can write half a million dollar check, like right or left, like I just don't know.

but gave that away. But anyhow, I get a lot of people submitting a lot of pitch decks, sending out the emails, sending out LinkedIn. And I don't fund any VC from anything like that. What I see is a lot of people kind of complain this thing, like, hey, we have an amazing product. Most of the time it's a SaaS company. It's a B2B or B2C. We're just building this thing. One big mistake that gives away is we have no competition, which obviously tells every second thing. But anyhow.

So they'll just go, we have this thing and that thing, and we have traction, we have this thing. But there's nobody just investing in us. There's just nobody investing in us. So a lot of people just kind of complain in a way that they complain like VCs are not valuing their idea higher than they should have. So that's the context of this particular question. The question I want to ask you is, for the audience especially, because we have a lot of first time founders getting into the ecosystem.

Can you please explain how the basic venture capital business model works and why good ideas don't get funding?

Elizabeth Yin (29:22.03)
Yeah. Well, so how does it work? I think it's really important to follow the money. I think founders and certainly myself included, don't think about the VC side. And, you know, I'm not asking people to think about my day in the life and all of my problems, but I think it is actually helpful to follow the money and understand everybody's incentives because that explains a lot. So VCs are ultimately a middle man or middle woman business. We raise money ourselves.

Mudassir (29:40.929)
you

Elizabeth Yin (29:50.606)
Actually, a lot of people don't think about that at all, but that says a lot. I raise money from other people. So part of what I'm thinking is what do those other people want? Right? That matters a lot because those are the people I'm raising money from. So there's that. So I raise money from rich people, institutions, universities, nonprofits, basically people with money, anybody. There are lots of different groups and that's a whole nother topic.

Mudassir (30:03.293)
Yeah, exactly. Yeah. Mm

Elizabeth Yin (30:20.156)
then now have this pool of money, my fund, and now I go and invest in startups. And that pool of money is limited. And for an emerging fund manager, it's especially limited. Like there are a lot of emerging fund managers who are deploying, you know, a fund of say, $3 million. That's like a seed round for some startups, right? But they're deploying whatever limited amount of money they could raise. So the interesting thing about this industry is,

Mudassir (30:33.537)
Yeah. Hmm.

Elizabeth Yin (30:49.724)
The people who tend to take more risk actually tend to be the smaller funds. And the reason is they have less money to deploy. So they can't really compete at the series a like no one would want to take my $10 ,000 check at the series. It doesn't make any sense. So now I like if I raised, let's say a $2 million fund, I now am almost forced to play at this earliest stage, uh, pre revenue where there's.

Mudassir (31:03.265)
Yeah. Yeah.

Elizabeth Yin (31:14.94)
very few VCs, less competition and my check size that I can write because of the limited pools that I have make sense for this stage. So I can write a 25K check into the pre -seed and people will take it. And so where am I going with this? Like in terms of the risks and how people think about whether or not to invest, like I said, a lot of investors are very risk averse and wanna see more than less, but for people who are writing the smaller checks, they may be forced to take on more risk because of their fund size.

And so what happens here is now let's say I have my limited pool of money because I raised $2 million and I'm going to deploy it across even say two years, which would be a fast deployment. So I'm deploying a million a year and now I'm looking at all of these companies. And like I just said, and your other guests also had thousands of pitches. I'm not going to fund most of those. I just can't. Even if most of them are great, I would actually go out and say for Hustle Fund,

Mudassir (32:05.385)
Exactly.

Elizabeth Yin (32:14.49)
You know, roughly speaking, if we see 10 companies, I think there's probably three that are great, but I probably only have capital to do one. That means two of the 10 are great and I'm just going to miss. So if you think about that for a moment, that goes back to my statement of, I don't think there's enough capital. I just literally cannot fund all the great deals out there. And so it then ultimately comes down to the small things.

Mudassir (32:29.761)
Okay.

Mudassir (32:38.401)
Yeah.

Elizabeth Yin (32:43.9)
And at the earliest stages, honestly, the small things are kind of dumb, but you have to do something to make a decision because there's not enough capital to fund those three. So the small thing come out and come down to, oh, they didn't respond to my email fast enough. That may or may not be a sign or they, their valuation just a tinge higher than I would have liked. But if I hadn't seen this other company, I might've funded it. Yeah. So these are.

Mudassir (32:49.953)
Yeah. Yeah.

Mudassir (33:05.545)
So you have to find the reasons to say no. Yeah, so you have to find the reason to say no.

Elizabeth Yin (33:12.356)
Yeah, these are all the reasons that VCs say no, but honestly, it's because it is really hard to know and there's limited capital. And so when people say, oh, you know, I have this great company, but nobody's funding it. Yeah, I can definitely empathize with that. Like, and but I think, you know, what are we going to do about it? There just isn't that level of capital in the ecosystem. I think what people don't realize is.

I think where we are with the private markets is where we were with the public markets when Warren Buffett started his career. The public markets, everybody and their mother invest in the public markets today. You know, you can go in Robin Hood and buy a share of any stock you want, but that's not the case with the private markets at all. There's just not that many investors in the private markets, largely because it's a very closed industry and there are a lot of rules and regulations as to who can get into it.

Mudassir (34:02.677)
Okay.

Elizabeth Yin (34:04.86)
So I'll pause there, but that is, I think, the root cause of why there are more great startups still out there than funding.

Mudassir (34:10.205)
Do you think that most people should think about bootstrapping more so than going down the venture route? Yeah.

Elizabeth Yin (34:22.972)
I think the answer is yes for most companies, but there are a lot of nuances. So certainly for your typical B2B SaaS company, I think it makes the most sense to bootstrap or pseudo bootstrap. So what I mean by that is I think the best path actually for a B2B SaaS company is bootstrap a bit until you get the first few customers. So hopefully you can hold your day job and do this on the side to get that or...

Mudassir (34:31.969)
And then race.

Elizabeth Yin (34:51.356)
If you have a little bit of savings or a small check from a relative, then you can get there with that because B2B SaaS companies can make money pretty quickly. And then once you get there, then maybe you raise a seed round. But I actually think for most B2B companies, you probably don't need more than a couple of million bucks in your lifetime. So then you get that and then that allows you to kind of grow and you can grow into series A and series B stage from a revenue perspective.

And then maybe at that point, if you really have all these plans for expansion that seem like a slam dunk, then maybe you raise an expansion round. Or at that point, actually a lot of B2B SaaS companies can underwrite their recurring revenue through some level of debt to get capital that way. But I don't actually think most B2B SaaS companies need a lot of capital. I think people tend to raise more capital than they need. And we certainly saw that in 2021. I think this is different though for a marketplace because in a marketplace, where you...

Mudassir (35:41.833)
Yeah.

Elizabeth Yin (35:47.836)
where you see that there are economies of scale and network effects. Like for example, take Uber. The more drivers you have, the more riders wanna ride. The more riders you have, the more drivers wanna drive. So there's an advantage in building out that network and that network takes money to build when you won't be profitable anytime soon. And so I think network effect businesses almost by definition need to raise money and those are much, much harder or impossible to bootstrap. So it really kind of depends a lot on the kind of business you have.

But I do think that, you know, what people should think about is be honest with yourself. Like how easy or hard do I think it will be to raise money and take that in as a factor on the business that you start. Because if your company is entirely reliant on raising money from other people, then I think that is incredibly risky. And most people are not in it to raise money. Most people are in it to build a business. Ultimately, the goal is not fundraising. The goal is to build a successful company.

Mudassir (36:36.349)
Yeah. Okay. Yeah, that's very helpful. Okay. So another question that I want to ask you, and it's a very innocent question without any offense. So what I think is, yeah, you mentioned like very little companies get funded, right? Like very little companies get funded. And for early stage, the goal is to

find that one fund returner, so to call, like 100x exit or 150x exit, probably going to be more than that. At some point, isn't that looks like gambling? Like you're just making these small little bets and then you don't know which one of them is going to take off. It's like, oh, all of a sudden, oh, wow, my god. That one takes off. Because suppose you make 1 ,000 bets in a year. Suppose that's the arbitrary number. And then you probably have the same set of.

Ideas like okay, so all of these startups that I'm investing in they all pass a certain criteria They all pass the same layer of filters that I have so at to a distant to it some degree They all have the same level playing field and one of them takes off. So you're looking for that one. Isn't that just like gambling?

Elizabeth Yin (37:55.164)
Yes, I think of myself as a professional gambler and that is why I don't gamble as a hobby. No, I do think there's a lot of truth to that, but hopefully this gambling game is a lot more akin to poker than it is to roulette. So, you know, I think if for people who've studied the game of poker, like there are pretty consistent winners there. So while there's certainly luck, you tend to see the same people in the top places, right? And so there's some level of skill. And I think that is

Mudassir (38:12.941)
Yeah.

Elizabeth Yin (38:23.012)
pretty akin to that. What you're doing is you're playing the probabilities and you play the probabilities, they're a combination of really two levers, your deal flow and your portfolio construction. I think that obviously deal flow is really important, but a lot of people think too much about which particular winners am I picking, but I really think if you have great deal flow, your portfolio construction is what matters most and that is going to determine whether you win or not.

Mudassir (38:52.097)
Okay, okay, so this is on the different side. Okay, makes sense. All right, so the next question that I want to ask you is, so a lot of these are on the VC side of things, so I hope you don't mind me asking a lot of these things. So I actually want to learn about all the dumb things that I'm asking, so yeah. Most of the VCs from, by most I would say like 99 % of the VCs from that I meet, everybody have a thesis. I just met one the other day, and they're gonna be on the podcast sometime in April or May.

They said investment thesis is just a fluke, like yeah, whatever. It's just there. It doesn't do all that good. So do you think that investment thesis actually play an important role into making all these investments? Yeah, so the question is, so yeah, let me rephrase the question. Does every VC firm need to have a different thesis, or they all can have one thesis?

Elizabeth Yin (39:40.476)
What do you mean by that?

Mudassir (39:52.129)
Okay.

Elizabeth Yin (39:53.852)
I think it is possible for VC funds if everybody were to say, hey, we're a generalist and we invest in pretty much anything. I think that would be fine. I think it would be very hard to articulate to their investors, their LPs, because then their LPs, you know, when you think about my investors, they're looking at tons of pitch decks from funds. So now how are they going to decide who to invest in? Right. Like I just told you about my problem of if I see 10 companies and three of them are great, I can only fund one.

Mudassir (40:09.193)
Thank you.

Mudassir (40:17.365)
Yeah.

Elizabeth Yin (40:24.186)
You know, now all of a sudden they're seeing 10 generalist funds. How are they even going to know who is, who are the three great ones? They're not. And so actually one of the reasons why VCs have theses in the first place is to differentiate themselves for their investors, right? It's like, oh, I specialize in this thing, cybersecurity or whatever, or I specialize in that thing. And so then when a funder of VC funds looks at it, then they think, oh, this cybersecurity fund looks really interesting and I don't have any cybersecurity in my portfolio. So I'm going to pick them.

Because actually this goes back to the point of, I actually think it is really hard or much harder to raise money as a VC fund because ultimately we all have the same product, which is money. My money is as good as anybody else's money. So why should a funder fund me? Because they're looking at so many other pitch decks of other VCs who also their same product is money. So I think actually the theses really is more to help VCs fundraise from their funders than anything.

Mudassir (41:06.305)
Yeah.

Mudassir (41:26.337)
OK, so why SAS is so like a beloved child of all the VCs? Why everybody just want to focus on SAS, especially B2B SAS? Why is that so?

Elizabeth Yin (41:38.5)
Yeah, I think it comes back to the business dynamics. So when you think about, let's just say getting acquired. So let's say that we want to acquire a company and we look at two companies, a B2B SaaS company and I don't know, an e -commerce company that sells widgets. We, both of them are making the same amount of revenue. But the difference is with the B2B SaaS company, we look and we notice that their retention is really strong. Let's just say hypothetically, all their customers come back every year.

And they also pay more every year because their companies are growing bigger versus the widget company. I don't know if those people are going to come back and buy widgets next year. They're not on any recurring plan. So it's risky for me because I'm paying a price based on past historical data of how many widgets they sold. But I have a lot of uncertainty as to how many widgets they'll sell next year once I own the business, right? If I were to buy that one. So I would definitely...

by the B2B SaaS company, assuming all other things equal, because I have some level of certainty of the revenue coming in next year. So that I think is the fundamental starting point. The other thing is between consumer and business subscription services like Netflix, people may have read about all the churn that happens at Netflix and Disney Plus and all those, is because consumers are much more fickle, right? Like paying $8 a month for a service is a lot of money for many people and...

Mudassir (42:37.057)
Yep.

Elizabeth Yin (43:03.9)
It's not a need to have, it's a nice to have. So, but businesses, it's like, if I sell them Salesforce, they're probably going to stick with Salesforce for a really long time. So it's just much more stable. So that's why people love B2B SaaS. And then once you have those business dynamics, let's talk about pricing. If I see that, you know, a B2B SaaS company is able to retain their customers for years on end, then I can price into it like, all right, I have some level of predictability of what things will look like.

Mudassir (43:06.849)
you

Elizabeth Yin (43:33.756)
three to five years out. And so I'm willing to pay some level of multiple for the revenue, right? For example, if this company I'm looking at is making 50 million a year, but I noticed that they have strong retention and all their customers are doubling how much they pay every year, I may be willing to certainly pay more than 50 million for it, which is one year of revenue, because I know that next year, all those customers will contribute a hundred million in revenue, right? So maybe my price point on that is,

Mudassir (44:02.101)
Yeah.

Elizabeth Yin (44:03.77)
you know, 10X, 20X during a frothy period, it was 20X, but it might be 10X. And so now I'm willing to pay $500 million for this company that's generating 50 million a year. In contrast, the widgets company, since I have no idea how much money I'm going to make next year, I might not even be willing to pay 50 million for it because I don't know if I'll get all those people to come back next year. So it's a lot easier than to say to a startup, if you get to this mark, 50 million a year with a B2B SaaS company,

We know there's gonna be some multiple on top of that and it's easier for you to get to a billion dollar exit than it is for a widgets company. So that's where that comes from.

Mudassir (44:44.417)
Okay, that makes sense. That makes a lot of sense. Okay, so two questions on top of that. I always have like two thoughts on everything. So just two questions on that. So one is, do you think we're approaching this SaaS bubble? Like bubble SaaS investment? Like is there a bubble? Do you think we're approaching that? So that is one. And two is, will we ever see Hustle Fund investing into Deep Tech?

Elizabeth Yin (45:06.876)
I think that a lot of things in SaaS are crowded. Yes. I think 10 years ago, that was not the case. And that's when you saw every VC and their mother jump into B2B SaaS. But now a lot of investors are in B2B SaaS and it's starting to get crowded. And I think in particular, the way I think about it is again, you know, everything is about entry points and exit points in terms of how you make money. So if you have more investors investing in the same companies that drives up the price, the entry points,

drives at the entry point and then there's this question of what is the cap on the exit point and you don't really see there are not many b2b SaaS companies worth a hundred billion or even 10 billion so so that is sort of your cap like somewhere in the billions if everything went well and so so i do think then that spread starts to shrink because of the entry point going higher

So that is a consideration. We're certainly still investing a lot in B2B SaaS, but I think that forces you to look into industries that are off the beaten path. So not marketing tech, not sales tech, not HR tech, but maybe for older industries like waste management or something like that. I also think it forces you to look at international where there may not be as many investors, but there are a lot of great B2B SaaS companies.

Mudassir (46:27.873)
Mm -hmm. Yeah.

Elizabeth Yin (46:33.276)
coming out of India comes to mind, that's a huge thriving market. Actually literally everywhere in the world, everyone is kind of developing their B2B SaaS ecosystem. So there's that. But I think the other thing is whether there are other industries with similar factors that affect these prices in B2B SaaS. So what do I mean by that? Well, really what...

Mudassir (46:48.031)
Yeah.

Elizabeth Yin (47:02.46)
drives the mechanics of the exit price that I just described is the repeatability. Well, there are plenty of other industries that don't have a subscription plan that have strong repeatability. This is why you see people get into fintech. For example, if you have a, you know, Mercury bank account and they now have a whole series of various products and maybe they're taking a percentage here and there from their different products. When you leave your money in there.

Well, you're probably gonna leave your money in there for years on end. So they're gonna collect on these fees every year. And that has repeatability as well, even though it's not a subscription model, it may be less predictable as to how much they make, but there's repeatability. And so that is interesting as well. Like, are there other businesses where you can get that repeatability, unlike the widget business, and create that dynamic, then it looks more B2B SaaS like.

Mudassir (47:58.367)
Makes sense, okay. So again, a very innocent slash dumb question. How do investors of companies like Nvidia makes a lot of money? Because one of the things that I have picked is VCs are generally interested in, in this repeatability of a system like subscription or like whatever that is, like exactly the same you said, which is repeatability. So how does companies like Nvidia and all these, like their investors make a lot of money? Like what is...

so interesting to those investors who invest in companies like these. Because there's no, nobody's just buying a new, I don't know, hardware or something every other month or something like that. So how does that model work?

Elizabeth Yin (48:41.98)
Well, for Nvidia and I would say actually broadly speaking, a lot of the chip companies, I was floored to learn that, for example, TSMC, their margins on their chips is like 50%, maybe more. So they actually have very high margins, mostly because there is a very high demand for this and actually not that many people have the same specs. So that's thought number one. Thought number two is actually many of these,

Mudassir (48:48.801)
Yeah, yeah, yeah.

Elizabeth Yin (49:12.288)
you know, hardware companies, they actually do sell on software as well. So they do have subscription packages as well that people can pay for. But I think with regard to Nvidia specifically, what is driving their stock price is actually every single startup in my portfolio is clamoring for their GPUs that they can't make enough of. So I would say that the demand overall has increased for everything just because of AI, just being so compute intensive.

Mudassir (49:33.791)
Yeah.

Mudassir (49:38.559)
Hmm.

Elizabeth Yin (49:41.308)
And so whether that party lasts forever, I don't know, but for the time being, it doesn't seem like it's going to stop. And so I think the Nvidia, I mean, this is not stock advice, but I think the Nvidia is going to continue to have a shortage of GPUs, which may continue to drive up their stock price.

Mudassir (49:51.817)
Yeah.

Mudassir (49:59.553)
Okay, people should take note. All right, okay. They should take note, yeah. Okay. All right, cool. So the next thing that I want to ask you is regarding how you evaluate the ideas, how you guys evaluate the pitch decks and stuff like that, because a lot of people create a lot of funny pitch decks, amazing pitch decks, and you have seen, I think, all kinds of things. So when you...

Elizabeth Yin (50:03.196)
That is not investment advice.

Mudassir (50:27.585)
When a startup is being pitched to you, what are the three things that you actually look for, like immediately? Because I know you guys are heavily focused on B2B SaaS, so obviously it's gonna be pertaining to that industry, but what are three things that come to your mind? And how long do you actually, how much time do you actually spend looking at a pitch deck? Like what's the VC attention span is? Like I'm always curious to know how much time do you guys spend on that?

Elizabeth Yin (50:52.962)
about less than 30 seconds. Less than 30 seconds. So I don't really care on the pitch deck. Yeah. On the entire pitch deck, like your 10 slides or 15 slides, it's just go bing, bing, bing, bing, bing, and then that's it. I have an opinion about it. So there are three things that I'm looking for. Certainly one is team, but I think everybody, every VC is looking for different things in their team. What I'm looking for in a team is,

Mudassir (50:56.363)
Okay. I'll pitch deck.

Elizabeth Yin (51:21.148)
Do you seem like you're the right team to be solving this problem? So I think there is this very old notion of, oh, these people are great founders, those people are not great founders or whatever. But I think it's very nuanced. I think it's these people are great founders for this idea. Like I can think of a lot of great founders who have had success, but if you put them and have them run whatever company, some other random company, they may be very bad at it because they have zero domain knowledge.

Mudassir (51:49.331)
Hmm.

Elizabeth Yin (51:50.716)
They've never faced the problem. They don't know anything about the regulations, right? Like there are some people who are better at certain ideas than others. And so, especially in B2B, like, do you have domain experience in this field? Like, did you work in it before? Have you faced this problem firsthand before? And if the answer is no, your bar is actually a lot higher for me. It's like, why are you doing this? Will you want to continue doing this five to 10 years from now? And then...

you have to overcome so much more than somebody else who has that experience, meaning you had to have gone down the rabbit hole and learned everything about this problem and day in the life of your buyer and how that industry works, et cetera. And somehow you are so motivated to do so. Why? What was that driving factor? So that's, those are the things I think about on team, like, like why, why this founder sort of market fit. So that's that number one, that's important.

A lot of times I just see random people picking random ideas in all honesty. The second thing that I would say is, is this idea differentiated? This goes back to the problem of there are a lot of great companies that are just not going to get funded because their idea is not differentiated, but they may be growing well, but the idea is not differentiated. And the reason why I think that's important as a VC is number one, in a highly competitive space, how do I know that I'm back in the right horse?

But I think more importantly, in this crowded space that matters because it's going to get very heated and the, by definition, the cost of acquisition is going to go up. Like if everybody's going after the same customer base, because it's the same idea, that customer acquisition cost by definition is going to go up. So that means that in a crowded space, you'll have access to less capital because fewer investors are going to make a bet unless they're sure of the winner.

and you're going to have to pay a lot to acquire a customer. So those dynamics are not good and they're not good for a small fund like mine because I'm never going to be able to write you a million dollar check to go get customers at scale like that. So I tend to prefer the scrappier customer acquisition and that's not going to work. So idea differentiation is a second bucket. I would say that from the founder perspective, if you are the

Elizabeth Yin (54:07.514)
100th CRM that is coming onto the market now, you can make good money and you can sell the company for $20 million and make great money, but VCs may not want to touch it. And that's where the interest between VCs and founders diverge, right? So it's not to say that you shouldn't do it. It's just to say a middleman business can't get involved. So that's the second thing. And then I would say the third thing is understanding the problem really clearly and in a nuanced way.

Mudassir (54:26.737)
Hmm.

Elizabeth Yin (54:37.148)
So I think a lot of founders who haven't thought about their problem very much, they might say, oh yeah, in broad swaths, this is the problem. Somebody who has thought very deeply about the problem knows everything about the day in the life of the customer, like how they buy, what the specific issues are, why existing solutions or alternatives are not working. What, like how the money flow works in this industry, et cetera, being able to articulate the problem really well is, is very indicative of.

know how savvy that founder is in that market. So those are kind of the three things that I look for.

Mudassir (55:14.113)
All right, so again, two questions on top of that. So question number one is, what are your thoughts on the market sizes? Like people put everywhere from like 10 billion to like, okay, so you don't care. All right, cool. So the second question is something that I wanna ask you then. How does the whole valuation math actually work? Like for example, like my dumb idea is like all things equal, my dumb idea is valued at like three million.

Elizabeth Yin (55:25.788)
I don't care.

Mudassir (55:43.733)
somebody else's is valued at like 10 million. So how do you decide that number? So it has to be that much. And you also mentioned a little while ago, if the valuation is just a little bit higher, how do you put that number on any of the idea? What's the math behind that? I don't know if there's a formula, but what's the math?

Elizabeth Yin (56:02.212)
Yeah.

Elizabeth Yin (56:06.108)
Yeah, valuation is interesting because valuation is not about how much your company is valued at. Like actually nobody knows what your company is valued at. Valuation is really a dynamic of supply and demand, supply of your round and demand from investors. So your valuation is going to be lower if investors are not really that interested and your valuation is going to be higher if you have a lot of investors interested and you have limited supply of your round.

Mudassir (56:23.937)
Hmm.

Elizabeth Yin (56:34.908)
That's what drives up the price per share essentially, or the equivalent. That's what the valuation is. So knowing that, we can talk about the bullet list of things that drive up investor interest. Certainly, if you're a successful serial entrepreneur, that will drive up interest. If you're in a geography where a lot of investors invest or want to invest, that will drive up interest like Silicon Valley or San Francisco or New York.

If you are in a space that investors care a lot about and are really excited about, that will drive up interest, like AI maybe, but then that might change like six months from now, right? So those are hard to tell and you can't predict that. And it's probably not a good reason to start a business around that, but certainly as a factor in valuation. If it's a very differentiated idea that will affect whether investors are interested or not. These are probably the main things that drive, that are levers for valuation. The more of those things you have,

Mudassir (57:12.809)
Yeah.

Elizabeth Yin (57:31.29)
The higher your valuation is probably going to be. I think the last thing is how much are you raising? And so, you know, if you're trying to raise a large amount, then that's going to be harder to fill. If you're trying to raise a very small amount and every investor wants to invest, then, you know, some investors are willing to offer you five posts, others, 10 posts, others, 15 posts and others get 20 posts. And it's like a bidding war. So, so those are the drivers of valuation, not how much revenue you're doing, not what we think you will actually be valued at.

Then I think the other thing is, all right, there's a question of at what point do investors think something is quote too high of a valuation? Like, of course I would love to get in lower, but I'm willing to pay up to X. Where does that X come from? That X comes from again, the entry points and exit points. Like I'm going to make money on the spread between the entry point and the exit point. And just roughly speaking, I'm looking for a hundred X at the early stages. Where does the a hundred X come from? Well, I think just the rough math of, you know,

Mudassir (58:09.793)
Hmm.

Elizabeth Yin (58:31.452)
If we take 10 companies and the old adage that, you know, one of them will be really successful in your portfolio and the others will fail, then that one out of 10 has to make a lot of money. But if you invest it equally in all of these companies, all of these 10 companies, that one company, if it only returned 10 X, it's just making the overall portfolio a 1X portfolio, right? Because it had to make up for the nine other losers, roughly. And with fees and everything,

Mudassir (58:56.769)
Yep. Yeah.

Elizabeth Yin (59:00.54)
It's even less than one X. So a 10 X outcome is not good for a VC at my stage because of the high failure rate, because I need my winners to make up for the losers. And then on top of that, if that winning company returns 20 X, that's also still not a win. Because when you think about my investors perspective, they could have invested their money in the public stock market. They could have put their money into index funds. And after 10 years in an index fund.

Roughly speaking, you double your money. So if my winner is returning 20 X and everyone else is losing in the portfolio, then that's an overall roughly two X portfolio, which is no better than the stock market. So why did my investors even invest in my fund? So I guess, you know, that is the rough logic behind where does the a hundred X come from. It's got to be so high such that I can attract investors to my fund. But also still doable. Like I can't.

Mudassir (59:37.665)
to X.

Elizabeth Yin (59:59.036)
expect any of my founders to have a trillion dollar exit. That's just, you know, very, very rare. So, so what that then looks like working backwards is, all right, if somebody is raising at 10 million post -money valuation, they have to be able to exit for a billion dollars. That's what I'm saying. That's the, that's a hundred X spread between those. And also after dilution, uh, after three rounds of dilution, I'm going to be diluted down by half anyway. So that would be more like a, like an equivalent of a $500 million bootstrap exit.

So I think the long and the short of it is where these numbers come from, come from, again, the entry points and the exit points of historical data and also supply and demand of how many investors are interested, et cetera. And if the price goes beyond what I'm willing to pay on evaluation perspective, I'm gonna stop out.

Mudassir (01:00:49.889)
Okay, so off the side, you okay for the next 30 minutes or like you have a time shortage or something like that? Okay, 30 minutes, okay. So I just want to adjust the questions around the side because you're very kind of you to explain all the things in depth. So I just want to make sure that we were just wrapping up in the right time. Okay, all right, cool. Rolling again. All right, so thank you so much Elizabeth for explaining all these things.

Elizabeth Yin (01:00:56.092)
Sure, 30 minutes could work.

Elizabeth Yin (01:01:11.612)
Thank you.

Mudassir (01:01:20.129)
So what we do is we do have a decent amount of an audience. I'm very, very fortunate to have 15 ,000, 20 ,000, whatever people on the list and listening to the podcast, so very kind of them. So what we do is before any guests is coming on the podcast, we just send out this email to quite a few people, like, hey, Elizabeth is coming tomorrow on the podcast, send us all the questions. So they send all kind of questions, like the crappiest of the crappiest and the best of the best. So there are a few that I really want to ask you.

Elizabeth Yin (01:01:44.924)
Ha!

Mudassir (01:01:47.937)
The good ones, not the dumb ones. And some of them you've already answered early on, so I'm just not going to repeat that. So the first one that I want to start you is start us off with, how your investment acumen has evolved since you started investing, now that you're doing it for a longer period of time. So how has that acumen evolved?

Elizabeth Yin (01:02:13.532)
You mean in terms of the overall landscape or founders?

Mudassir (01:02:18.465)
I think both like it's just an open -ended from like whoever that person thought so it's an open -ended so but let you answer whichever way you want to.

Elizabeth Yin (01:02:27.356)
I think technology and I call it infrastructure has evolved a lot certainly since I started my company, but even since I started investing about 10 years ago. When I started my company, I literally ran around trying to get people to sign documents and give me checks, literally. I drove around doing that.

Mudassir (01:02:42.419)
you

Elizabeth Yin (01:02:55.962)
Obviously the world has changed a lot. People use e -signature a lot, especially in the U S and they, you know, wire and people have cap management, uh, cap table management tools, et cetera, to manage a lot of these things. Um, you know, one of our portfolio companies, pulley manages cap tables, for example. So, so there's just a lot that has evolved on infrastructure. Even the safe has become very prevalent when I was a founder, it didn't exist. And you know,

Mudassir (01:03:10.719)
Yep.

Elizabeth Yin (01:03:25.276)
I think even convertible notes were pretty unusual back then. And now that has brought the legal costs down for everybody, VCs and founders. So, so the infrastructure side has changed, which I think also means that it has made it easier to raise money. As funny as that sounds. I know nobody thinks that they have an easy time raising money and that's true. But if I could explain my work, my workflow for when I was a founder raising money, it was just.

literally, when people say drive up and down Sand Hill Road, they mean literally drive up and down Sand Hill Road chasing people. Nobody does that anymore. A lot of things are done over video conference. You can reach out and pitch investors who are not in your local town. So that expands your pool of investors as well. So it has made fundraising actually easier. And then I think as a result of, you people's expectations for how much they should raise has gone up, which I actually think is kind of a bad thing.

Mudassir (01:04:06.463)
Yep.

Elizabeth Yin (01:04:22.798)
You know, in late 2008, when I started my company, it was very, very hard to raise money. People were grateful if they could raise 25 ,000, which is crazy to me because now when I hear people complain about, oh, I can't raise money and I asked them, oh, how much did you raise? People say, oh, I raised only a hundred thousand, a hundred thousand dollars. When you think about it, just like stop to think about is a lot of money to start a company.

Mudassir (01:04:43.489)
Money, yeah. Yeah.

Elizabeth Yin (01:04:45.436)
But I think expectations have gone up around the fundraising side as well because it is easier to raise money. Even in a downturn market like this, people are raising way more money than they did in 2008. So I think it is good to actually just take a step back and not think about what is the norm of what other people are doing, which is where all of this comes from, but think about what do I actually need to make my business successful? Forget about what everyone else is saying. What do I need to make my business successful? And

Mudassir (01:04:52.469)
Hmm.

Elizabeth Yin (01:05:14.556)
I think constraints actually help you think more deeply about what you actually need versus what you want. You don't need to hire five people right out of the gates. Really what you need is just this one thing. And so that's another thing that has changed over the years as well.

Mudassir (01:05:29.857)
Okay, this is not a question that somebody has asked, but I want to take your opinion on. So what's your opinion on, you know, post money and premium post money saves? Especially like, where do you think like these things are like not helpful, more than they're helpful?

Elizabeth Yin (01:05:45.18)
Yeah, it's, it's very, it's a very nuanced thing because they're pros and cons to both. Personally, I like the post money say for several reasons, you know, obviously as an investor, it's a bit more self -serving, I would say, like somebody who's raising at 4 million pre -money valuation. It's, it is different than 4 million post -money valuation. Just as a quick explainer, like, you know, 4 million pre -money valuation means that the valuation is determined.

Mudassir (01:06:06.753)
Yeah.

Elizabeth Yin (01:06:12.572)
by the addition of the 4 million plus how much you raise. So if you raise 2 million, your actual post -money is 6 million, your company's valued at 6 million versus 4 million post -money valuation means that your company's valued at 4 million valuation and think what you're selling is a percentage of that $4 million value. So that is the difference just for this audience to know. So from that perspective, like if you have the same number on both, then the pre -money is quote, worth more because you're gonna raise some money and.

the post money valuations, the additive of that. So I hear the argument all the time from people that, oh, well then by definition, the pre -money safes are better. But then the problem comes from, if you actually end up raising a lot of money on pre -money safes, then you don't really know how much of your company you've sold. And I've seen so many founders, including in my own portfolio, who run into this problem because what ends up happening is, let's say you raise some money on the 4 million pre -money. So there's some addition there and then you...

Mudassir (01:07:00.545)
Yep.

Elizabeth Yin (01:07:10.492)
have another safe that's a pre -money at some other valuation, and then you're raising money on that. And so you have three, let's say three different safes and different amounts that you've raised. Most people could not tell you how much equity they've sold in their company when all is said and done. And that is something that has happened a lot more recently than when the pre -money safe was first introduced by YC. Like the reason YC introduced the pre -money safe in the first place was back then, to this point of people didn't raise that much money back then, it was way less complex.

Mudassir (01:07:27.393)
you

Elizabeth Yin (01:07:40.348)
people might raise half a million and call it a day and that'd be considered a lot. But now people are raising three rounds on safes and it's very complicated. So, you know, I would actually say what is disturbing to me is when the lawyers go to reconcile the safes and compute all of this, I would say that about 50 % of the time there are arithmetic mistakes, which is actually very frightening because...

Mudassir (01:08:05.513)
Wow.

Elizabeth Yin (01:08:06.108)
You know, you don't hire your lawyer to make, to do math, but they have to. And when it gets very complex, they make mistakes, which affects you, but everybody, I would say. And then you have to pay more in lawyer fees to get it fixed if you catch it or you don't catch it. So that's the problem with the pre -money safe. The post -money safe in contrast is very simple to understand. If you have a company and it's a 4 million post -money valuation and, and you know, you raise $400 ,000, you know, you have sold 10 % of the company.

Done. And then let's say you go ahead and have another safe at now a 10 million post -money valuation and you raise a million dollars on that. You've sold another 10%. The two, you know, are separate 10%. They don't dilute each other. They don't affect each other. You know exactly how much you have sold. So then you just adjust your valuations accordingly and how much you're raising.

Mudassir (01:08:44.161)
you

Elizabeth Yin (01:08:58.076)
to fit into what dilution you want as a founder. So that's the advantage of a post -money safe. It is very easy for you to compute and understand, and there are fewer mistakes made in converting those because it is very, very easy math.

Mudassir (01:09:11.265)
Okay, so you already mentioned and this is a question that I had planned originally, but like, I don't know, like I lost it somewhere. What exactly happens when a founder actually don't keep a track of their cap table? Like the one that you exactly mentioned is like people are raising post money sales on top, post money sales on top. Suppose they gave up, I don't know, like 35%, just an arbitrary number, 35 % of the company and they have yet to reach series A. Okay, what exactly has happened?

whatever they have done, like what are the repercussions because they're going to have a difficult time raising a series A now. So what they can actually do, like how do you guys actually help them, help these founders, like is there a way out for them?

Elizabeth Yin (01:09:54.684)
If you're in that situation where let's say you have raised a bunch of money on a whole slew of pre -money saves and you didn't realize it and now all of a sudden, one day you do the rough math and you think, oh my gosh, I have sold 70 % of my company. 35 % would be fine. But if you've sold like 70 % of your company, then you're gonna have some trouble because the investors you speak with next will ask you, okay, what does your cap table look like? And we'll see that you have sold 70 % of your company and we'll think, oh gosh,

The founders are no longer incentivized to work on this business. So I'm out. And like I said, when things are so early, even at series a, it's still pretty early and there's great deal flow and you have to decide between investing in this company or that company, a cap table issue is a reason to pass. So, so as a founder, you may find that nobody wants to invest. Now there are kind of two things that may happen here. One is,

Maybe you are a great company and this is fixable. And we can talk about that in a minute, or maybe it's an excuse. Like maybe you're not a great company. And if an investor will say, Oh, your cap table is messy. I'm not investing. But even if you fix it, they still would not invest because there are many other reasons why they're not investing. So you have to figure out which in these two buckets you are now in the first bucket, if you're a great company and this is fixable, then that's a conversation to have with that investor who wants to invest.

you need to get them to really, you know, essentially put in writing that, and ideally actually help you clean up the cap table, do a recap is what they call it. Then you know that they are genuine and they really do want to invest and will kind of help you through this. This is largely the task of new investors wanting to invest rather than old investors. Because when you think about what a recap is,

What it really means is taking the 70 % that investors own and they're going to be crammed down to some much smaller number, maybe half of that or less. And no investor who's already on your cap table wants to on their own, deliberately reduce their share by half or more, right? That's just not our incentives to do so for on your cap table already. So the help will largely come from your new investors and they'll propose recap terms of

Elizabeth Yin (01:12:17.542)
as part of this transaction, everybody gets diluted down by X percent, including the founders, but then we'll do a top off for these people, the founders, maybe some employees, et cetera, and then our investment happens next. So it's a series of transactions as part of that deal.

Mudassir (01:12:36.513)
Okay, great. So the next one is, what are your thoughts on startups raising down -downs?

Elizabeth Yin (01:12:45.34)
It depends on what market we're in. I think the market we're in, I see a lot of down runs because 2021 was so frothy and a lot of the valuations didn't make sense. And again, it goes back to this multiple of investors invested at too high of an entry point without any path to getting to the exit value that they need to make money. So that's what we're seeing happening now where people realize that. I think the other...

Mudassir (01:13:07.263)
Exit.

Elizabeth Yin (01:13:14.492)
that we're seeing is that startups didn't grow into those high valuations. So in this market, they wouldn't be valued that high. A down round is not bad signaling in this market as a result. You could be a great company, but if an investor wants to invest even at a down round, that's a positive sign that somebody wants to invest in your company. I think a negative sign would be that nobody wants to invest in your company, right? So a down round in this market is not a bad thing, even though people say...

Mudassir (01:13:33.953)
So take it.

Elizabeth Yin (01:13:41.25)
Historically, down rounds are bad, et cetera, but I think it really depends a lot on the market we're talking about. I think a down round in 2021 would have been very bad signaling.

Mudassir (01:13:51.553)
Okay, all right, cool. And the next one is, so I wrote a newsletter on PrepStack, you know, this past Thursday, and this is exactly a reply to that newsletter. So I asked her, what is her opinion on PrepStacks and how these deals are structured in the growth stages, and how does that affect, or how does that impact the early stage investors?

Elizabeth Yin (01:14:16.124)
give you an example actually in our own portfolio. One of our companies had an exit somewhat recently and because of the preference stack, which is by definition, you know, every investor invests in some chronological order, right? The pre -seed investors are investing first and the seed investors, et cetera, et cetera, the series A, whatever. Typically the, the latest investors to present the deal terms may structure it such that if there is an exit of some sort, you know, they get

essentially first dibs on the money or whatever it may be. They can decide that and then the founders can decide to take that deal or not. So in a down market, you tend to see preference stacks that are more favorable towards the latest investors because that's what they ask for and founders who are more desperate for money accept those terms. And so we have a portfolio company that had an exit relatively recently. And the way that things were structured is that the later stage investors

would get paid out first and would get paid out a certain multiple liquidation preference before anybody else got paid. And so interestingly enough, we invested in that company at the pre -seed with our fund. And then we ran an SPV with our investors, but outside of the fund in one of the later stages. And that SPV made two X on their money. They made money on the deal and our fund lost money on that deal. So.

That goes to say that early stage investors, while they may have the highest potential multiple, they may not always make money in an outcome.

Mudassir (01:15:54.625)
Okay, so a question that I want to ask on top of that is.

when founders actually accept these sort of terms or deals or whatever you want to call that, aren't they doing somewhat of, like isn't that right for the early stage investors to be involved in that kind of a process? Like, so for example, you invest in pre -seed, right? You wrote the first half a million dollar check and now that XYZ founder is raising, suppose, $50 million, Series B or Series C or something, right? And that, the current investor is getting,

2 .5x or something. And in case of liquidation, he's going to 2 and 1 half x the money that he's put in. That potentially means you're probably not going to end up making anything, exactly in the case that you mentioned. The SPV make a lot of double the money, but you guys didn't make any money. So isn't that like kind of screwing up with the early stage investors, especially angels? Because you run an angel squad, which never get to talk about. But isn't that not fair to?

early stage investors and angels who actually bet on you when there's nobody betting on you and then all of a sudden it's just like you're just wiping the floor under their feet. So what do you think about that?

Elizabeth Yin (01:17:09.852)
Yeah, well, this is why people have to sign off on the deals. So the early stage investors signed off on this deal, just like for a recap that you may want to do. I mean, no founder can just willy nilly cut the cap table in half on their own, right? You have to get people to sign off and agree on it. So why would investors sign off on something like this or even a recap? Well, it's because they believe the situation is so dire that it is worth accepting these terms. Right? Like if the choice is...

Mudassir (01:17:16.769)
Okay.

Mudassir (01:17:23.039)
Yeah.

Mudassir (01:17:36.481)
or they're gonna lose everything.

Elizabeth Yin (01:17:38.684)
The founder takes this money or they go bankrupt tomorrow, we're gonna sign off on it. Because we get to roll the dice again versus, okay, it's definitely gonna fail. But this is why you see more of these deals happening because investors are willing to sign off on it in a down market if there's no other choice.

Mudassir (01:17:45.601)
Yeah.

Mudassir (01:18:01.057)
Okay, so that's the rationale behind doing that. Cool. All right, so the last one is, what is one fundamental belief of venture capital that you personally disagree with?

Elizabeth Yin (01:18:12.334)
market sizing exercises.

Mudassir (01:18:14.633)
Okay, why is that so?

Elizabeth Yin (01:18:16.828)
I think my learnings about market sizing is that it's too silly. Like number one, nobody knows. I think number two, markets that may seem small can either evolve and change and or the founders may expand the business into peripheral markets. So,

Mudassir (01:18:27.889)
Yeah.

Elizabeth Yin (01:18:45.692)
One example of this actually is HubSpot. HubSpot started out as an SEO tool for small businesses, small business owners. And I think if you look at it today, a lot of people would say they're very much an enterprise sales tool. Certainly their price is very high. We pay for HubSpot. I know. Okay. Yeah, great.

Mudassir (01:18:49.185)
Mm -hmm.

Mudassir (01:19:06.049)
Yeah, please note a bit. Yeah, they're our sponsor. So, so, okay. I just have to note along.

Elizabeth Yin (01:19:12.252)
Thank you HubSpot for sponsoring this. But yeah, no, they're an enterprise sale, an enterprise tool, but the way they're able to justify their price or where it's anchored is they have built so much. Like you can do email marketing now, you know, they have essentially a CRM. They just have all of these things that they didn't have on day one. And so they've essentially expanded markets by, you know, they've gone upstream, they've expanded out into the offerings, et cetera. So that's an example of.

Mudassir (01:19:14.305)
Yeah.

Mudassir (01:19:34.017)
Yep.

Elizabeth Yin (01:19:40.508)
of like sort of changing or augmenting your market. And I mean, Airbnb actually is probably the classic example of they're in the hotel market. But people didn't think about that on day one. It's like, oh, well, the market for people wanting to sleep on somebody else's couch is zero. So, but they're in the hotel market. I think people would say it's an alternative to a hotel today.

Mudassir (01:19:48.193)
Yeah.

Mudassir (01:20:01.345)
All right, awesome. All right. Thank you so much, Elizabeth, for all the knowledge, all the candor. I really appreciate it. We do have this one small ritual on the podcast. So what we do is we ask all our guests a question for our next guest without telling who the next guest is going to be. So I got a question for you, and I'm obviously going to take a question from you for the next guest. So the question that the last guest left for you is, all things equal, if you get the same idea pitched by a female founder who has created a...

horrible pitch deck and a male founder who has created a great pitch deck. Who would you invest in and why? It's a dumb question but yeah.

Elizabeth Yin (01:20:38.108)
I don't care about the pitch deck. I care about the thought process in the conversation. So whoever can articulate their thoughts in the most clear and concise manner actually brevity matters that is the founder I would go with all other things equal.

Mudassir (01:20:59.169)
Amazing. So the question for the next guest.

Elizabeth Yin (01:21:04.38)
Who is one person outside of your friends and family who has inspired you the most?

Mudassir (01:21:10.145)
All right, cool. That's a good one. All right, so let me say the bye's and stop the recording. And then please say a for a minute or two so we can finish the uploads. All right, awesome. Thank you so much, this was for the time. This is one of my favorite episode I have ever recorded. So thank you so much again for the candor, for the wisdom, for sharing all the things in detail. I really appreciate it.

Elizabeth Yin (01:21:28.412)
Oh well, thank you.

Elizabeth Yin (01:21:34.428)
Well thank you for having me, and that's very kind of you.

Mudassir (01:21:37.953)
It was my pleasure. Thank you.