20VC Why VCs Fundamentally Assess Founders The Wrong Way, Why VC Needs To Innovate On The Scouting Model & Why SAFE's and Convertible Notes Are The Future Of Investing with Elizabeth Yin, Founder & General Partner @ Hustle Fund

In this episode of "20 minutes VC," host Harry Stebbings interviews Elizabeth Yin, co-founder and general partner of Hustle Fund, a venture fund designed for early-stage startups. Yin, who previously co-founded LaunchBit and was a partner at 500 Startups, discusses her unique approach to investing, which emphasizes speed and execution over pedigree and polished pitches. Hustle Fund's investment strategy involves an initial rapid investment followed by coaching and support to help startups optimize their growth metrics. Yin also touches on the importance of diverse portfolio theory and the potential for future fundraising mechanisms like ICOs. The conversation covers Hustle Fund's methodology of flipping the traditional VC funnel, focusing on the founders' ability to move quickly and iterate on their business models, even in highly regulated industries.

• Elizabeth Yin is the founder and general partner at Hustle Fund.
• Hustle Fund is described as the venture fund for "hilariously early hustlers."
• Elizabeth is also the co-founder of Hustlecon, a conference for non-technical entrepreneurs.
• Previously, Elizabeth was a partner at 500 Startups and ran their seed program.
• She has experience as an operator, having co-founded and been the CEO of Launchbit, an ad tech platform.
• Elizabeth's connection to the show was facilitated by Jess Lee at Sequoia.

This is the 20 minutes VC with me, Harry Stebbings at H stepbings with two B's on Snapchat. Now, a lot of people very kindly attribute me with Hustle, but my guest today is so focused on hustle that her and her partner named their fund after it. So, joining us in the hot seat, I'm thrilled to welcome Elizabeth Yin, founder and general partner at Hustle Fund, as they describe the venture fund for hilariously early hustlers. Elizabeth is also the cofounder of Hustlecon, a conference series for non technical entrepreneurs to launch and scale their startups. Prior to hustle Fund, Elizabeth was a partner at 500 startups, where she ran the 500 startup seed program in Mountain View, and where her and her partner saw over 20,000 startup decks. Before that, Elizabeth was a successful operator as the cofounder and CEO of Launchbit, an ad tech platform that was acquired by Buycell ads. I do also want to give a big hand to Jess Lee at Sequoia for the intro to Elizabeth today, without which this episode would not have been possible.

This quote provides a background on Elizabeth Yin's career and her role at Hustle Fund, highlighting her focus on entrepreneurship and early-stage startups.

• Elizabeth Yin transitioned into venture capital (VC) after selling her company, Launchbit.
• She started as a mentor at 500 Startups, which was also her first investor.
• Elizabeth became a partner at 500 Startups and ran their accelerator program.

Well, pretty accidentally, actually. More recently, in another life, I started a company called Launchbit and it was an ad tech company. We sold it to a larger ad tech company on the east coast of the US in 2014. And then after that I started mentoring companies at 500 startups. 500 startups was actually our first investor and we went through their accelerator program. So I went back to the mothership and one thing led to the next, got more and more sucked in and started investing out of the 500 fund, became a partner there and also ran their accelerator for two years. So that's how I got into it.

Elizabeth Yin explains her unexpected journey into VC, starting from selling her company to mentoring at 500 Startups and eventually becoming a partner.

• Elizabeth believes the current model of early-stage investing is flawed.
• VC assessments are often based on meetings and resumes rather than execution.
• Many capable teams are not necessarily good at pitching their ideas.

You'll go into a meeting with a VC and you'll have your meeting and then at the end the VC will say, okay, well, let me think about it, I'll get back to you. Let's try to set up another meeting. And if you can, chase that person down and assuming that you can, which in itself is a challenge, you just have meeting after meeting after meeting. And very often vcs assess people based on those meetings, just basically by how well you talk and also based on your resume, especially at the early stage when you don't have a whole lot to show. Do you have pedigree or do you not have pedigree? Vcs don't actually assess you based on execution, which I always thought was kind of mind boggling to me because at least at 500 startups, I've seen so many teams execute while they were in the accelerator program and very often they were not necessarily the best at pitching.

Elizabeth Yin criticizes the traditional VC approach, which emphasizes meetings and pedigree over actual execution and results.

• Hustle Fund's thesis is centered around speed and execution.
• The fund looks for startups that move quickly on their top priorities.
• Initial assessments involve talking, but follow-on investments are based on execution speed.

So at hustle fund, what we are looking for, well, first off, our thesis is around speed. So we're looking for startups that move very quickly. And by that I mean if you have your one priority, it could be sales, it could be product development, whatever your top priority is at the moment. How fast are you moving? This is something that we noticed. Eric, my business partner and I noticed in many of the portfolio companies we worked with at 500 startups and in our own angel portfolios, the best ones are the ones that execute on that one metric that matters very fast. And so what we're doing at hustle fund is we're basically trying to assess how fast our team is moving. So of course before we invest, our assessment is based on talking, which is what most vcs do today. But then even after that, if we're going to decide to follow on in a company, we will do that assessment based on how fast teams are executing.

Elizabeth Yin describes Hustle Fund's focus on the speed of execution, which is a key factor in their investment decisions.

• Elizabeth assesses hustle in founders by asking detailed questions about their business operations.
• She is interested in the specifics of how founders execute tasks and their speed.
• This approach differs from the high-level questions typically asked by other VCs.

Yeah. So my initial assessment, which is based on talking to be fair, is based on a set of questions that most vcs don't ask. So a lot of vcs will ask you high level questions about the market and your personal background and all that. And of course that is important too. But the questions that I'm most curious about are more in the weeds of your business. Like for example, if you tell me, Harry, that you're doing customer development on some problem, I'll ask you a lot of detailed questions about how you went about it. How quickly did you do these customer development interviews, for example, was it in one day, one week, one month? It gives me a sense of speed in terms of how

Elizabeth Yin highlights her unique approach to assessing founders, focusing on the specifics of their business operations rather than just their background or market potential.## Priority Evaluation in Startups

• Founders must identify and act quickly on their top priorities.
• Regulatory challenges in industries like fintech and health require swift action to obtain necessary licenses.
• The speed of moving through regulatory processes is an indicator of a startup's focus and efficiency.

"So how quickly are you moving against that? If that's your top priority, how quickly are you jumping through these regulatory hoops?"

The quote emphasizes the importance of speed in addressing regulatory requirements, suggesting that the pace at which a startup navigates these challenges reflects its commitment to its priorities.

• Traditional VC funnel involves a lot of discussion before investment, followed by some coaching.
• Elizabeth Yin proposes a flipped model where execution observation comes first.
• Hustle Fund's approach includes a quick first check after minimal discussion, followed by coaching and support for customer acquisition and operations to accelerate growth.

"So what we're proposing here is obviously we'll have to kind of put a stake in the ground. So first we'll do some talking and basically ask questions about executing. Then we'll be really fast to write a first check, a 25k check."

Elizabeth Yin describes the initial step in Hustle Fund's investment process, which involves assessing execution capabilities before quickly proceeding with an initial investment.

• Hustle Fund is comfortable being the first check in and investing early.
• Investments are made using a standard Y Combinator (YC) safe with a side letter for pro rata and information rights.
• Pro rata rights can be a challenge in a landscape of noted rounds with complex cap structures.

"We're investing in a pretty templated way. We're investing essentially on it's a standard YC safe and we have a side letter with a couple of terms that we want around prorata and information rights."

The quote explains Hustle Fund's investment terms, highlighting the use of a standard YC safe and additional terms to secure pro rata and information rights.

• Traditional scouting among VCs has seen little innovation, with many chasing the same high-pedigree founders.
• Hustle Fund targets fast-moving teams, which may include those without strong pedigrees.
• Innovative scouting includes targeting specific niches like college entrepreneurship clubs or underrepresented minorities.

"So I actually see us as going after a different pool of folks."

Elizabeth Yin differentiates Hustle Fund's scouting strategy from traditional VCs, focusing on a broader and potentially less conventional pool of startup teams.

• After investment, Hustle Fund provides growth projects tailored to the company's needs.
• Coaching is offered on top priority items and KPIs, with support in tracking these metrics.
• The technical infrastructure is designed to analyze the startup's progress and iterate quickly.

"So first and foremost, we essentially propose a growth project based on the company's needs."

The quote outlines the post-investment support provided by Hustle Fund, focusing on growth projects that address the specific needs of the startup to facilitate rapid development.## Automation of KPI Tracking

• At 500 Startups, manual tracking of KPIs was a common practice, but now there is a move towards automation.
• Founders often rely on platforms like Mailchimp, CRMs, or Stripe to measure KPIs such as lead generation or sales.
• Code commits on GitHub are also used as KPIs, and APIs from these platforms are utilized to pull data automatically.
• The goal is to create a dashboard for founders to easily monitor their progress and determine if they are "moving the needle."

"What we're trying to do is bring some automation to this."

This quote highlights the intention to streamline the process of tracking KPIs by using automation to assist founders in their monitoring efforts.

• There are two aspects to consider when assessing a company's progress: the speed of the team and reaching product market fit.
• Product market fit can take years to achieve and is typically a concern for post-seed or series A investors.
• The speed at which a team moves can be assessed in a matter of weeks and is crucial for deciding on follow-on investments.
• A follow-on investment decision is based on the rate of change in a key metric, not the current value of the metric.

"And really what we're looking for if we decide to write a follow on check, that criteria in part is based on the speed at which that priority metric is moving."

The quote explains that the decision to invest further in a company is influenced by how quickly a team is improving their key metrics, indicating their momentum and potential for growth.

• Co-founder drama and team morale issues are the top reasons for startup failure, which can also affect the speed of progress.
• Other typical startup issues are also monitored, as they can be indicative of potential problems that may warrant intervention or a decision not to invest further.

"Like, for example, one of the top reasons why founding teams fall apart actually has nothing to do with speed."

This quote emphasizes that factors other than the speed of progress, such as co-founder relationships, can significantly impact a startup's success.

• Certain companies, like pure consumer apps (e.g., Twitter, Instagram), are not within the investment focus and thus would not be considered for investment regardless of their metrics.
• A company's inability to move metrics quickly does not necessarily mean it lacks potential; it could pivot and achieve success later.
• Operational VCs aim to support founding teams even if they do not initially meet metric-driven criteria for follow-on investment.
• There is an acknowledgment that some successful companies may succeed through "dumb luck" despite not showing early signs of rapid progress.

"But the vast majority of companies that are doing really well, that I've observed just from all these companies I've seen go through 500 and our own angel portfolios, they do tend to exhibit speed."

This quote suggests that while there are exceptions, the common trend observed is that successful companies usually demonstrate rapid progress early on.

• Ownership and portfolio size are not necessarily conflicting interests in venture capital.
• Y Combinator (YC) is cited as an example where large portfolio theory is applied, with over 100 companies per batch.
• YC's strategy involves small initial investments for significant ownership and subsequent larger investments in successful companies through their continuity fund.

"So they have a lot of ownership right out the gates. And then with their continuity fund, they are pouring into their winners."

The quote describes YC's approach to balancing ownership with a large number of investments, focusing on increasing stakes in their most successful companies.## Early Stage Investment Strategy

• Precede stage investments require a diverse portfolio due to the lack of product-market fit.
• Traditional VC strategy focuses on obtaining significant ownership, but this may not be feasible at the precede level.
• The strategy of writing many checks is to hedge bets and gather information across various companies.
• Follow-on capital should be reserved, but ownership levels will be lower than in later-stage funds.
• Raising a larger fund is necessary to adopt a later-stage fund strategy, but the current focus is on a smaller, first fund.

"But precede when you don't have product market fit or not even near product market fit by any means, you really do need diverse portfolio access."

This quote emphasizes the importance of a diversified investment approach at the precede stage due to the uncertainty of product-market fit.

"But you're not going to get the same level of conviction or same ownership levels as some of the later stage funds."

This quote acknowledges that at the precede stage, the level of conviction and potential ownership in a company is often lower than what might be achieved in later-stage investments.

• The investment landscape is evolving, with new funding mechanisms like ICOs changing traditional strategies.
• The future may see different methods of fundraising, potentially involving new digital tokens.
• The strategy for a larger fund in the future may differ from traditional scaling due to these changes.

"I think if you asked me ten years ago, that would make a lot of sense. With some of the rise in new funding mechanisms, including ICOs, which are very controversial."

This quote reflects on how the rise of new funding mechanisms, such as ICOs, could influence the strategy of scaling a fund size in the future.

• The best time to pitch an investor is right after they've closed their fund.
• A common belief among VCs is the importance of pedigree in deciding which founding teams to back.
• Startup founders commonly lose investor trust by being cagey, which can relate to metrics and other aspects of their business.
• Many investors dislike convertible notes and SAFEs, but Elizabeth Yin favors them, seeing them as part of a new wave of investing.
• Hustle Fund's mission is to level the playing field for entrepreneurs, aiming to provide equal access to resources and opportunities.

"It's when they've just closed their fund."

This quote suggests that the optimal time to pitch to an investor is when they have fresh capital to invest.

"I believe that most VCs around me believe that pedigree is most important in deciding what founding teams to back."

This quote reveals a personal belief that contrasts with the common VC focus on the background of founding teams.

"By being cagey."

This quote identifies a lack of transparency as a critical factor in losing investor trust.

"I like them a lot. I think actually this is the new wave of investing."

This quote expresses support for convertible notes and SAFEs, indicating a shift in investment trends.

• Hustle Fund aims to democratize access to entrepreneurial resources and opportunities.
• The focus is on backing entrepreneurs who move quickly and can navigate regulatory challenges.
• An example of an investment that aligns with this thesis is the Pill Club, which was an early-stage bet for 500 startups.

"So our mission at hustle fund is to level the playing field for entrepreneurs."

This quote outlines the core mission of Hustle Fund, which is to provide equitable access to funding and information for all entrepreneurs.

"It's essentially free birth control and that gets sent to your door."

The quote describes the Pill Club, an example of a company that received investment due to its alignment with Hustle Fund's thesis of supporting fast-moving and regulatory-savvy teams.

• Thanks are given to Elizabeth Yin for her time and insights shared on the show.
• Encouragement to follow Elizabeth and Hustle Fund on social media for more updates.
• A personal recommendation for Raiden's travel cases and Simba's advanced mattresses is shared, highlighting the usefulness of these products for professionals who travel frequently.

"Thanks a lot, Harry. Thanks for having me. It's so exciting to be here."

This quote is a polite acknowledgment of the opportunity to share insights on the podcast.

"I'd like to say a huge thank you to Elizabeth for giving up the time stay to appear on the show."

This quote expresses gratitude to Elizabeth Yin for her participation in the podcast and her contribution to the discussion.