How we tripled our first VC fund to raise a $33.6M Fund 2

I cannot be more excited to officially announce Hustle Fund 2.

So many of the tactics we used to raise our first VC fund we applied to Fund 2. I won’t rehash what I wrote in How I raised my $11.5m VC fund. In this post, I’ll just cover our new learnings and new tactics that we used in our Fund 2 process. Onwards!

Raising a Fund 2 took longer

If I thought raising Fund 1 was daunting, I braced myself for raising Fund 2. Many emerging fund managers ahead of me warned me that Fund 2 would be one of the hardest raises because you’ve already exhausted your closest contacts for Fund 1 and still have no real results to show for Fund 2. 

In addition, like many other emerging managers, we also wanted to raise a larger fund than our first, which was $11.5m. Because VC funds are only allowed 99 accredited investors, the average check size for Fund 2 needed also to be MUCH BIGGER. 

This meant that even if people wanted to invest, we would not be able to accept as many small investors unlike in our Fund 1, which further added to the challenge. 

In the end, we turned down A LOT of $100k-$250k checks from MANY wonderful people, and I am so bummed that we had to do that. Let that sink in for a moment. We were not able to accept all 6 figure checks, because they were not large enough!?!

Here are some new tactics that we used for this fundraise.

1) We started raising right after Fund 1

Knowing that this raise would be harder or at least a longer process, we started raising our Fund 2 about 3 months after we raised our Fund 1. While we didn’t get the paperwork started right away, we started building relationships with new potential LPs right away. 

In fact, we timed our Fund 1 announcement in Sept 2018 to help us build momentum while we were actively engaging potential LPs for Fund 2. We started pulling together the legal paperwork for our Fund 2 in Q1 2019 and did our first close in Q2 2019. 

Fund 2 is essentially a continuation of the fundraise process from Fund 1. Even if there is nothing to sign, you are always raising.

2) We used scarcity as a forcing function

Although I am opposed to the SEC’s 99 investor slot limit / rule, we turned this into a forcing function. We used it to generate momentum with smaller investors. We told all of our smaller investor friends / acquaintances that we would only take a certain number of small checks, so if people were sure they wanted to invest, they had to move quickly. 

This worked really well. This encouraged smaller investors to decide within days instead of weeks or months. People often overlook small checks, but I’ve personally found over the years that my smallest check writers (angels) have tended to be really helpful beyond money (connections / advice / etc) and help generate momentum on a raise. Often it’s the smaller checks that create momentum to encourage larger investors to prioritize your fundraise. 

The combination of these smaller checks plus our anchors from Fund 1 (Thank you LINE and Shanda for your continued support!) was what drove our first close in Q2 2019. 

The flip side to all of this is that if people are considering becoming a small LP in a fund, the best time to broach this is at the beginning or even before a fundraise happens, because that’s when a fund has the most number of investor slots available. If you approach a fund manager when 70 slots are already accounted for, then you are literally competing for a slot against larger check writers. 

3) We expanded our investor search into Asia

I am so grateful to SO MANY people who helped connect us with potential investors. Raising these funds really does take a village. But, I’m particularly grateful to my friend Cjin Cheng who agreed to join our Hustle Fund team after we had raised Fund 1. 

One of the things that we had noticed in raising our Fund 1 was that we were able to bring in a lot of amazing US entrepreneur-investors as LPs into our fund. But the appetite for venture in Asia was 10x stronger, because a lot of potential investors there wanted access into the US startup scene. Cjin had been both a past successful founder and had previously done fundraising in Asia for a VC fund and was the perfect complement to our team in helping us expand our network there. 

This also made a lot of sense strategically, as we expanded our fund’s mandate to include Southeast Asian investments as well.  

We were able to raise a good chunk of our Fund 2 from amazing investors – including our anchor for Fund 2 – we would never have met without Cjin. Taking a page from the Strength of Weak Ties, adding people to your team with a different network from yours can help a lot. 

4) We continued to build brand

One of my biggest takeaways from raising Fund 1 is that LPs don’t really care about your past track record (unless you are coming from a Sequoia or someplace like that). They *do* want to know how you’ll pick well, and even more importantly, why founders will come to you first. 

Translation: they want to know how you will build up your new brand with your new fund. Anything you’ve accomplished before gets discounted, because whatever you were doing before was with a different brand. 

This was a mind-blowing revelation to me during our Fund 1 process. But it makes sense. AKA how will you market your new firm? 

For this reason, between Fund 1 and Fund 2, I continued to blog and tweet like crazy about how I think and also about who we are. LPs want to make sure they are fully aligned with a firm — everything from how a firm treats people to how they think. 

And in doing all this tweeting and blogging, we received cold emails from potential LPs and messages from people I hadn’t heard from in years asking to invest. In fact, so many of our LPs read every tweet of ours. Blogging and tweeting really does work. 

In addition, all this writing helped build rapport with a lot of people. One of our LPs mentioned that she saw me in a photo and noticed that I wasn’t wearing any makeup. She said that she knew she wanted to invest in Hustle Fund, because she felt that since I didn’t spend any time on my appearance that I’d spend more time stewarding her money well. 🙂 

Another LP I met told me in the first meeting that she was an avid reader of my blog and she, too, didn’t fold her laundry (which she learned that I do not do in one of my blog posts!). I remember thinking “Wow, here is someone I’m meeting for the first time who lives 5000 miles away from me, and we can bond over not folding our clothes. Cool!” 

What you read in my/our tweets and blog posts is real – it is a true reflection (for better or worse – I guess everyone now knows that I don’t fold my clothes) of who we are. And that helps people decide whether they want to join our journey. 

5) Your Fund 1 sets the stage for Fund 2

One of the temptations in setting up a Fund 1 is to agree to a number of things just to raise your fund. Things like sharing GP carry. I feel fortunate that we didn’t do anything non-standard in our Fund 1 (though we thought about it!), because by Fund 2, investors primarily just look at the redline changes between your Fund 1 and Fund 2 legal docs. So if you try to edit things in your docs for Fund 2, investors will ask about them and may want them back. You set a precedent in your Fund 1. 

6) We increased the number of LP-founders

It gives me absolute joy in bringing in past founders whom we’ve backed into our LP community. It’s not a strategy that scales, but to me, it’s one of the best validations that we’ve received. And we were so lucky to be able to do that as soon as Fund 2 with founders we backed in Fund 1 as well past founders we’ve backed through other vehicles is a pretty awesome feeling.

We wrapped up our fundraise when COVID-19 hit…or so we thought.

My last fundraising trips were in Jan / Feb of 2020. We were just completing our final paperwork to wrap everything up with our last potential LP conversations in mid March 2020. We all know what happened after that. Some very warm potential LPs had decided they needed to pause and see what was happening in the world and couldn’t commit to this fund. And everything in the San Francisco Bay Area had shut down. 

And, it turns out sometimes, wet signatures and notarization are still required for paperwork. And so we needed to mail paperwork to Japan in order to finalize one of our anchor LPs during this time. DHL and UPS branches had limited hours during this time period and very few of their planes were flying to Asia at the time. The stock market had been tanking. It felt the whole world had just shut down. 

I felt a mix of emotions — relief that we had closed most of the fund already even if we couldn’t get the last investors over the line. Disbelief around the state of the world. Confusion of what was yet to come. 

And then we received an email from our Japanese counsel stating that we had completed our paperwork incorrectly putting the date in a place where we shouldn’t have and that we would need to do this all over again – wet signature, notarization, and rush shipping. We spent over $400 on this process alone, and we were able to submit our paperwork just 1 day before Tokyo implemented its stay-at-home policy. It’s hard to describe the level of urgency we had in trying to push this over the line in a global transaction during the uncertainty of the pandemic. It felt like such doom and gloom — it was unclear to me whether mail was even working at that time. We take so many systems we rely on for granted, and that was a big test for us. 

We did it – we had raised a $30m fund! And we were done! (or so we thought) 

A no isn’t a no forever – Our first institutional investor

Throughout our Fund 1 and Fund 2 fundraises, we didn’t spend a lot of time speaking with institutional investors. We had heard from emerging managers ahead of us that no institution would be interested in coming into an emerging managers’ fund, so we primarily focused on working with angel-operators and family offices. 

But, we did meet with about a dozen or so institutional investors we had heard amazing things about over the course of the last few years in hopes that maybe someday we could work with them. 

In September 2020, Jaclyn Hester, Partner at Foundry Group emailed my business partner Eric out of the blue asking to catch up. We thought we had closed our fund already, but since we still had time on our fund’s timeline to raise, it was technically still open. Foundry had told us no twice already — for Fund 1 and Fund 2. Despite that, we LOVED Jaclyn and Lindel and team — they just struck us as genuinely kind and wonderful people who are phenomenal at their fund-of-fund craft. 

On the founder side, I often say that a no isn’t forever. At Hustle Fund, there have been something like 10 startups we initially said no to but then later invested in. And this happens time and again. And the same applies to GP/LP relationships as well. In addition to Foundry Group, we were also rejected by potential LPs in our Fund 1 process who came in for Fund 2. 

We caught up with Jaclyn and what I love is that she just leveled with us. They’d already rejected us twice, and she just put that out there, stating something along the lines of we’ve already rejected you twice, and I want to be extra sure that we are definitely going to invest if we ask you for diligence materials, so let me just double check on some things. And this is the process and timeline. I really admire that. Investors – whether it’s on the LP side or the GP side — sometimes tend to dance around things, but Jaclyn was crystal clear and transparent around what was happening. Something that we believe in too and strive to do. We all ended up taking the next step together. I’m grateful to our founders who spent time speaking with Foundry, and I’m so thrilled and honored that Foundry joined our journey on Fund 2

In the end, we also brought in some additional investors in the same close — some angels committed and signed docs all within 24 hours to meet that final close (for reals). 

All-in-all, we applied the same lessons and tactics from Fund 1 to raise our Fund 2 with a few adjustments and surprises in the last year or so. We continue to be open for business looking to invest in pre-seed software startups in the US, Canada, and Southeast Asia.

Like in Fund 1, there were literally hundreds of people who helped us get this thing up and running (and we are still just at the beginning).  And I’m so very thankful to all of them — especially our LPs in both our Fund 1 and Fund 2 for their generosity and kind introductions to their friends and network and for hosting us in your respective cities.

Fundraising is hard.  And it takes a long time.  But don’t give up.  

Thank you, Tony

Coincidentally enough, I had decided that I wanted to write a letter to my mentor Tony this weekend, thanking him for the huge impact he’s had on my life. But I suppose that has now morphed into a more public letter.

Being in a zombie, half blurry-eyed state, it’s a little tough to articulate well what Tony has meant to me. We go through life, and a lot of people have an impact on us, and it’s often hard to say that a particular person caused you to take a particular path. But, Tony is one of the few people whom I can definitely say my life would not at all be what it is without him.

I first met him many years ago in Dec 1996 when I was just starting high school. My best friend Jennifer asked me what I was doing for winter break and if I wanted to help out her cousin Tony with his new internet startup. I had no idea what an internet startup was, but I had nothing going on, so I agreed to go.

On the first day of our holiday break, Jennifer and I hopped on the Caltrain from the peninsula (Silicon Valley) to head to his office in SOMA (San Francisco). It was exciting! We couldn’t drive, but we could go to a startup office all by ourselves! I followed Jennifer to the address. I think their office was actually someone’s apartment. And when we got there, there seemingly was no one there. We hung around for a while, and maybe about 10am or so some people started to trickle in – this was my introduction to startup life.

Tony had more or less just graduated from Harvard, as he had spent a few short months at Oracle after graduation, and then decided to quit to build his own company LinkExchange. Leaving a big employer so quickly was highly unusual back then, and he would go on to do many non-conforming things that he was right about.

LinkExchange was an ad network. If you had a website and hosted LinkExchange ad banners, for every 2 impressions you generated, you received 1 free impression of your banner. Back then because the internet was still new, people paid attention to banners and clicked on them like crazy, so this was incredibly effective in helping generate traffic for people. LinkExchange would then sell the remaining ad impressions. They had launched the service earlier that year, and by that December, they were already growing like crazy.

I definitely was *not helpful*. We put together some tables and chairs. And made ethernet cables from scratch. Yes, from scratch. We had to cut cables, splice the individual wires, and insert them into plastic tips and crimp them. I was terrible at this, and Jennifer largely fixed all of my mistakes (as always). Since I was so bad at the ethernet cable making process, they asked me to help them put together an internal webpage to keep all their meetings / schedule together. Great! I could put my basic HTML skills to use. I don’t think they liked the amateurish turquoise background that I chose, so someone at LinkExchange quickly fixed it.

I was more of a nuisance than help, but what I saw that day was super inspiring. Here were a bunch of friends who were getting together to build things. They could wear whatever they wanted, saunter in whenever they wanted, and eat all the pizza they wanted. And they all had varied tasks and were taking business meetings in what looked like a kitchen? There was never a dull moment. It was the dream. Neither of my parents worked in tech and certainly not startups, so this was incredibly eye-opening, and immediately, I knew that this was what I was going to do when I grew up – become an entrepreneur and start companies. Without this exposure to startups in 1996, I don’t think I would have made this realization (if at all) for many years.

Fast forward a few years later. Microsoft bought LinkExchange just 2 years later for a reported $265m. Tony and his college friend Alfred (who also was at LinkExchange) decided to start a startup incubator with their own money. (As a side note, the food at their restaurant in this incubator was fantastic!) This was bold and unique, because Idealab was really the only one doing something somewhat similar at the time. The concept of accelerators or incubators would not come in a big way until years later.

I don’t think Tony knew this, but while in high school, I cold-emailed almost every single one of his portfolio companies to ask them for an internship. I was determined to work at a startup as soon as possible in high school and start my startup career. I ended up working at one of his portfolio companies (probably unbeknownst to him) in the summer of 2000 which really help set me on my path to a career in startups. Often that first opportunity is the hardest to land, and each subsequent opportunity opens more and more doors.

By late 2000, the stock market had crashed and everyone was fleeing startups. Newspapers ran headlines saying that tech was dead and that all programming jobs would be outsourced. They couldn’t have been more wrong, but most people panicked and stopped investing in startups. Tony, was always a first-principles thinker, and he leaned into this and ended up co-leading one of his portfolio companies Zappos. As an e-commerce company that provided free shipping and free returns, Zappos’ margins were razor thin. This scared most VCs. (This would certainly scare me.) But, he believed that it could work if customers had a great experience and would become repeat customers. So, he poured a lot of his own capital into the business when no VC at the time would touch this company. While many VCs pontificate about high level things, he looked at problems from a bottom’s up approach which made his thinking often unique from others.

In order to make the Zappos model work, he needed customer service to be top notch, reliable, and have a lower cost. It was clear to him that this model wouldn’t work in pricey San Francisco. So, he made another bold decision to move the company to Henderson, NV, which could provide all of those things. This was at a time when certainly most people believed you can only build an internet business in the San Francisco Bay Area. In hindsight, when they ended up needing to hire tons of people, being the BEST internet company in the Las Vegas area allowed them to swoop up talent that would have been a huge war to win in San Francisco. The other thing that was apparent to me, is that the Zappos family was incredibly diverse — and free to be themselves. Tony’s attention to culture and cultivating an open and welcoming work family left a lasting impact on me, and he started doing this well before it became a trend. Like so many of you, his book Delivering Happiness has affected my own thinking.

Fast forward many years, Jennifer and I were working on our own startup, and we were grappling with a particular challenge. We decided to consult Tony and get his advice. In a very Tony-like way, he basically told us to do what we thought was best. I remember feeling frustrated at the time, because…I didn’t know what was best! I had wanted him to tell me what he thought was best! But a good mentor helps you find your own answer – he/she doesn’t tell you the answer.

In that meeting, he also pulled out a book and told me to read it. The book was Start with Why by Simon Sinek. So I read it. The gist of the book is that to build a great company, you need to go back to first principles. Most people start building a company by trying to sell their product details. “Buy my shoes! They are grey with stripes.” But customers, employees, and everyone want to rally around something much bigger — something inspirational that the company stands for. It actually took me many years to process this and actually figure out how to implement this — I didn’t get this right for LaunchBit, but after marinating on this advice for years, this is what we’ve been striving to do at Hustle Fund. We aren’t just capital deployers. We are trying to create a movement and a philosophy. That particular meeting with Tony is one that I play in my head over and over – I feel like I finally understand what he was getting at and that is what I most wanted to tell him this weekend.

If cynics believe that it’s impossible to get ahead in life without being an asshole, Tony Hsieh is a good example of someone who defies the norm. He was never flashy and always kind and generous to all. I could go on and on in writing this, but thank you, Tony, for helping me in so many ways that you may not have been aware. For your kindness, generosity, and inspiration.

Sending big hugs to the entire Hsieh family whom I consider to be my second family and who took me in during my formative years and had a huge impact on who I am today.

The myths of follow-on investing debunked

Follow-on investing is a fascinating topic. There are all these myths floating around out there. On the investor-side, I hear all kinds of things involving how much of your fund to allocate towards follow-on funding. Or whether to invest in every round. And on the founder-side, I hear myths about how you should only approach investors who do follow-on or how you should *not* approach investors who do follow-in in case they decide not to invest. And if any investor decides not to invest, is that negative signaling? Does the investor really not believe?

I thought I would make a video addressing any and all of these myths. As always, your position on these questions really depends on the exact nature of your situation.

Here’s how to think about follow-on investments in startups:

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Happy 3rd birthday Hustle Fund!

Wow 2020 – what a year! I’m not going to lie – it’s been a pretty crappy year. The world often feels like it’s falling apart. I hope you are staying safe and healthy and wishing you the best in everything. 

At the same time, I also have tremendous gratitude. And today, I’m specifically calling out my Hustle Fund Family. Whether you’ve worked with us in some capacity, invested in us, pitched us, taken money from us, watched / read our content, introduced us to people, etc – THANK YOU so so so much! It takes a community to grow something successfully.

It takes a lot to get a startup – any startup – off the ground. This past Tuesday marked our 3rd birthday at Hustle Fund – we fully expect another year of tantrums and poop on the floor.

3 years ago, my business partner Eric Bahn and I set out on a 30-year mission — to help entrepreneurs who hustle — people who execute with velocity — get access to resources. We started this with our modest $11.5m VC fund that we spent 9 months raising. We met with over 700 prospective investors. And, I personally started this journey just 8 weeks after I’d given birth to my younger child. 2017 was quite a year.

(Side note: I reflect on our beginning years and raising our VC fund on First Republic’s new podcast called Venture Unlocked: check it out here. I’m biased, but I think it’s worth a listen!)

Fast forward to today, we now have:

  • $45m+ under management (more to come…)
  • 2 customer acquisition schools (unannounced)
  • 1 special investing program (unannounced) 
  • 2 online internet shows (1 unannounced)
  • 200+ portfolio companies
  • 1 incubated software company (unannounced) 
  • 13 people who work with us at Hustle Fund

Whew…

It is amazing how together we have built so much of that in just the last 3 years – most of that in 2020. My team is amazing – I could not have imagined accomplishing so much in a short period of time. I can’t wait for the next 27 years.

A few stats on the founders we’ve backed with our VC fund across the US, CAN, and SEA: 

  • 30% of our companies led by female founders
  • 16% of our companies led by underrepresented minority founders
  • 15% of investments are “cold” (cold applications w out a referral of any type)
  • The vast majority of companies we invest in are B2B, followed by fintech, followed by consumer digital health
  • 3 Hustle Fund Founders who are LPs (we hope to grow this number!)

We have invested largely in the San Francisco Bay Area (36%). This is surprising to me. My prediction 3 years ago was that by this time, we would have only 25% of our companies from the SF Bay Area. But despite all the naysayers of the SF Bay Area, I continue to see CEOs move here BUT with their team elsewhere. I don’t know if you would call that a “Bay Area” company nor do I even understand what the concept of “geography” even means anymore. Indeed, as one of our newest portfolio companies asked us just a few days ago, “Why can’t I write down ‘remote’ as my location?” Good question indeed. We have now changed our location form to reflect that as a choice, and in fact, I suspect the entire above graph is largely irrelevant and inaccurate – especially during these COVID times.

I have so many hopes and dreams for the next 27 years in furthering our mission of empowering founders who can execute with speed. We haven’t scratched the surface on these goals yet, but we look forward to tackling things like: 

  • Investing truly globally
  • Supporting our companies in the late stages
  • Incubating more software companies
  • Accelerating companies in areas overlooked by many VCs including but not limited to: hardware, DTC, media, food, and the environment. 
  • Incubating part-time founders
  • And much much more…

It may be many years before we can even attempt to experiment with or tackle any of these things. Like any 3-year old startup, focus is important. We continue to work hard, hire well, conserve cash, and most importantly, build out scalable processes and technology. I have no doubt we will put a dent in experimenting with some of these things in the next 3 years while fully recognizing that this is a 30+ year journey with hopefully strong continuity after I’m gone.

We could not have come this far without ALL of your support and help. Thank you so much for joining us on this long journey to make the startup world a more fair and better place!

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Writing copy: How to pick an enemy?

I don’t usually dole out advice on copy. Heck, I’m not a liberal arts major or a great writer myself. And not particularly creative.

But when founders find their customer acquisition isn’t working, is it because the copy is terrible? Or is it because there isn’t really a need? How do you write strong copy in an easy way without being a creative person?

A great strategy is to “pick an enemy”. I talk about that in this video:

I also reference in the video a blog post that I thought was really good that you all should read. One of our portfolio companies Parrotmob published an interview with Heidi Zak, CEO/co-founder of ThirdLove.

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Should you include financials in a pre-seed startup pitch deck?

I received a cold email from Jaime asking some very good questions about what should go into a pre-revenue startup pitch deck?

Do you include financials? How long should it be? What about exit opportunities?

My general philosophy is that you should have at least 2 pitch decks – an email deck and a presentation deck. An email deck should be short (~5 slides) and the goal of this deck is to just use it to get meetings. It should have a nice overview of your business and present enough information to a would-be investor. A presentation deck is for an actual meeting and should be much longer.

I address all of these questions in this video – watch for all the details:

As always, if you have questions about pitching, feel free to subscribe to my blog! 🙂

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