INSUBCONTINENT EXCLUSIVE:
Elizabeth Yin
Contributor
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Elizabeth Yin is a founder and general
partner of Hustle Fund, a pre-seed venture capital fund that invests in hilariously early software startups across the United States ,
Canada and Southeast Asia.
When I was a founder many years ago, I felt like I heard constantly conflicting advice and opinions on
raising money for my startup.
It easy to raise
If it easy to raise, you should raise a LOT of money
You should raise a little money
You should try to go for a high valuation
You should raise at a &normal valuation& so it doesn''t bite you later.
It was hard to understand what was going on and what I should
actually do.
Many years later, now as a VC, it turned out that most of the things you hear people say about fundraising are generally true
and generally good pieces of advice
Even when these ideas conflict
How is that possible?
Because, like anything else, different pieces of advice are apt for different types of companies and founders
Today fundraising landscape is particularly an interesting time of bifurcation that worth laying out in detail.
Hustle Fund Elizabeth Yin
discusses 2020 fundraising landscape
For some founders, it never been an easier time to raise
In the San Francisco Bay Area, if you&re a
founder who has a &well-branded& resume, it a fantastic time to raise money at the earliest stages
It almost doesn''t even matter what company you&re building
You could be leaving Pinterest to start a company
Maybe you went to MIT and then did a 10-year stint at Google
Or maybe you were a former YC founder who is taking a second crack at a company
Or maybe you sold your last business for $10 million
If you did any of these things, it a great time.
For these founders, I&m seeing massive party rounds here in San Francisco — $3 million &
Sometimes $10 million rounds right out of the gates! My friend, a fantastic serial entrepreneur with an exit, raised $8 million recently at
$30 million+ post-money valuation with only a very early version of a product
Investors literally threw money at her and her round was oversubscribed.
SaaS is hot
And then, even if you don''t fit this profile, you can
still generate a lot of heat on your fundraise
In the last few months, VCs have become very concerned about profitability
It not enough to be working on a fast-growth startup anymore
In part, we&ve all seen big-name startups that were once the darlings of Silicon Valley flounder in the late-stage markets because of high
burn rates and being nowhere close to profitability.
And VCs have gotten quite scared
Almost to a fault.
So, I&m seeing companies at the Series A and Series B stages with 30% MoM growth that were popular before now struggle to
raise their next rounds because they are not profitable
The feedback they receive is to &come back when you&re profitable or really close to it.& This mentality change has had a huge impact on
marketplaces and e-commerce companies — companies that don''t have predictable repeat customers or high margins.
On the flip side, SaaS
companies have become the new darlings VCs have gone gaga for
SaaS businesses have repeat customers, strong lifetime values and upsell potentials
They are capital-efficient, high-margin businesses
And if you are growing well as a differentiated (differentiated being a key word) SaaS company, you probably have many VCs knocking on your
door — at all stages early and late even if you are not on the coasts.
For most founders, it still challenging (as always) to raise
money
For everyone else, after reading news stories about such large fundraises, it can be confusing to understand why their own fundraise
Why is it so hard for me to raise money?
It turns out that fundraising is still hard for everyone else
Even in the Bay Area, if you don''t fall into the categories above, it hard
People often erroneously think that just being in San Francisco will miraculously make fundraising easier
There are certainly many people who get funded there, but there are also just many more startups in San Francisco than elsewhere
Outside the SF Bay Area, it even harder to raise
So we have a weird Goldilocks and the Three Bears situation
Some companies are really hot
Most are really cold.
The press mostly writes about the hot deals, like companies that raise $5 million seed rounds and went through YC
After all, no one wants to read about how someone fundraising process is going horribly — that just not a news story that sells
So now, everyone thinks Silicon Valley is littered with gold just by reading the news
The reality is that San Francisco mostly has poop on the ground and a small number of people will find a Benjamin once in a
while.
Valuations are all over the board
I&m seeing valuations well above $10 million post — even $20 million post for hot seed-stage
And then for companies that are cold, the valuations are where they&ve always been — largely anchored based on geography
As low as $1 million post within United States and Canada
And it can even be lower elsewhere globally.
So when people ask me what a fair valuation is, it a really hard question
It depends on where you are, what you&re working on and what your background is
Many people think valuations are based on a company progress
That just not how it works
Valuations are based on supply and demand
Supply of your fundraising round
And investor demand for your fundraising round
Valuations go up when more investors are interested in investing
There no such thing as a ''typical& valuation.
Everyone mental model will be shifting
Friends outside of Silicon Valley often ask me if I
think this time VCs will favor profitable companies over fast growth.
I think the answer is VCs would love to back profitable companies with
fast growth.
(That, of course, begs the question in this day and age with other debt or revenue-based financing options why such a company
would raise a lot of VC money, but that besides the point.)
That said, I do think that in this new era we are entering in 2020, companies
that focus on profitability will separate the winners from the losers in the next few years
Thriftier founders will win.
Now, here the irony
As we go into this new age where frugality is a strength, I think that the startup journey will actually be harder for the founders who are
able to raise their large seed rounds so quickly at high valuations
From past experience, I&ve found that founders who can raise easily in a first raise really struggle later on subsequent raises because they
don''t know just how hard a fundraise can be
Moreover, founders who can raise large amounts in the beginning tend to be less frugal and often burn through too much cash before their
In contrast, overlooked founders who have often found it challenging to raise know that they need to be frugal by default, because it
unclear how hard the next fundraise will be
These founders know they need to make the business work with or without investors.
The ironic twist is that investors throw money at
founders with particular resumes because they believe those founders will be the most likely to succeed with big exits
A strength can quickly turn into a weakness in this market.
My hope for all founders in 2020
My hope for all founders is that they focus on
staying thrifty, watch cashflow and chip away at getting to profitability so they can own their own destiny
By focusing on customers, instead of investors, you can sell more and sell quicker
Ultimately, the end goal for a company is to be able to serve customers sustainably and effect change in our larger society.
And that what I
wish all startups find in 2020, so they don''t have to care about the whims and fancies of investors as they change with the times.
Read our
extended interview with Elizabeth Yin (Extra Crunch membership required).
