How I raised my $11.5m VC fund

A couple months ago, we announced that we finished fundraising for fund 1 of Hustle Fund.  Hustle Fund is my new venture capital firm, and our fund 1 is an $11.5M fund dedicated to investing in pre-seed software startups.  Eric, Shiyan, and I could not be more grateful to our investors for their support and to so many of our friends and family who helped us with this process!

I’ve written before about what it’s like to start a new venture capital fund.  But, a lot of people have asked me about how we actually raised it.  Surprise surprise – we ran our fundraising process using all the fundraising tips I give away on this blog!

First some context

I need to spend a minute explaining a bit about venture capital (VC) structures.  VCs raise money from other investors called limited partners (LPs).  These investors can be individuals / family offices / corporations / institutional funds that invest in VC funds.

Here’s how we raised our fund (and some learnings):

1) We talked with a dozen fund managers before starting 

If you are considering raising a VC fund, I would highly recommend talking with a TON of new fund managers before jumping in to a) make sure this is what you want to do and b) get tips and advice.  The single-biggest tip that I heard over and over from my peers was that they felt that they had spent a lot of time courting large institutional fund investors when they should have spent more time trying to find family offices and individuals and corporates to pitch.  We took this advice to heart and ended up only meeting about 10 institutional investors once or twice to build relationships with them – potentially for down the road.

In the startup-fundraise world, this is analogous to raising from angels vs. VCs.  If you’re super early, meeting with angels is likely going to be the more successful fundraising path.  VCs will take meetings with you, but you want to make sure you are not spending too much time with people who will most likely not be investing right now.  That being said, it can be good to build relationships for down the road.  This is a time tradeoff that every founder — both product founders and new fund managers — have to make.

2) We sized up motivations

This leads me to my next point.  It’s important to size up an investor’s motivations – and this applies when fundraising for a product startup as well.  When you’re meeting with an investor, try to understand why he/she is investing — just in general.

There are many many reasons why someone wants to invest money in companies:

  • To make money
  • To not lose money
  • To take large risk but potentially very high return
  • To get promoted / move up the professional ladder by making a good investment
  • For fame and glory and bragging rights
  • To learn about a business or industry
  • To network with other investors or the founding team
  • etc..

Points #1-4 seem similar but they are actually quite different.  Some people are motivated by making money.  Others are motivated by wealth preservation (to not lose money).  An example of this is that many large institutional fund-of-funds manage retirement plans.  Their goal is to preserve the wealth of the everyday hardworking people who entrusted their savings in them.  Think about it – if you are working for SF MUNI and put your hard saved earnings from your salary into your company’s retirement plan, the last thing you want to hear is that your retirement plan lost all your money by investing in some dumbass new fund manager who invested in dogsh*t startups!  Most retirement plans will not be investing in unproven first time fund managers.

Others don’t mind losing money if there’s the potential to make above and beyond a TON of money.  E.g. you invest $10k and it has a 95% probability of being entirely lost but there’s a 5% chance that it could make $1m.

Then, there are lots of non-ROI reasons to invest.  To learn about an industry or a new technology.  To brag to friends.  To network with other investors or the founders.  Etc.  These are all equally great reasons to invest.

Most people have a blend of reasons, but it’s important to figure out what that blend is.

In our first meetings with all the investors we met with, we tried to assess what motivated each person we spoke with to get a sense of whether an investor would likely be a good fit.  (More on this later)

3) We prioritized speed over dollars

Our focus for this raise was on speed.  According to Preqin, in 2016, it took first time fund managers an average of 17 months to close a first fund.  For us, we decided that we really wanted to raise our fund in less than a year (and ultimately closed in 10 months).  So if it meant raising only $5-10m vs $10m-$20m in twice the time, we wanted to opt for less money at a faster pace.  This essentially dictated our strategy to raise primarily from individuals, because they can make decisions quickly.

The main reason why speed mattered to us is that per SEC rules, we could not market our fund while we were fundraising.  As marketers, we wanted to start actively marketing Hustle Fund as soon as possible.

4) We iterated our deck a LOT!

Storytelling is incredibly important for any fundraise.  As a new VC, we had no brand and no product to show.  In most cases, there’s literally *nothing* that differentiates a new VC from all the other fund managers.

The first version of our deck basically talked about how we had some edge because we went to “fancy” schools, worked at “fancy” jobs and were already active seed investors.  And I remember my friend Tim Chae basically looking at that slide and saying that every fund manager on the fundraising circuit had everything we had.  And he was right.  The hundreds of new VCs who are out pitching right now all went to some permutation of fancy schools and/or worked at fancy companies and/or have done some fancy investing.  These are not differentiators!

Originally posted by various-cartoon-awesomeness

We quickly realized that we needed to be able to tell a differentiated story.  For us, our biggest differentiator is around our model of how we invest – namely, we look heavily at speed of execution in investing the bulk of our fund.  This was not only a story around being different but also around why our past experience has led us to this model and why we are uniquely qualified to invest in this way.

It took us about 20 versions of our slide deck to hit this story right.  Thanks to so many people who gave us feedback on our story and especially to Tommy Leep, who helped us get our story on the right track early on.  If you get the chance to work with him on your pitch – whether you’re a fund or a startup – do it.

5) We built momentum by packing in lots of meetings.  I personally did 345 fundraising meetings between July 9, 2017 – May 25, 2018

In the past, I’ve written about how to generate fear of missing out (FOMO) amongst investors when you’re raising for your startup.  In the beginning when you have raised nothing, it’s hard to generate FOMO.  Whether raising money for a startup or a VC, no investor wants to be first check in.  So the best way to show fundraising momentum when no money has been committed is to pack in a lot of fundraising meetings.  This makes it easier to generate excitement when potential investors hear that other investors are doing second meetings with you.  And you also want all investors to end up committing to you around the same time.

Once you get commits, then you can start talking with other potential investors about those commits, which generates even more commits.  The key is that you need to constantly be meeting with people.

Here’s a graph of all my meetings per week between Summer 2017 and Spring of 2018:

Note: this doesn’t include all the meetings that my co-founder Eric Bahn did.  We often did first meetings with potential investors individually.  So collectively, our total number of meetings was much higher than 345!

You can see this Google spreadsheet of all my meetings to get a sense of what I did week to week.

You can also see from this graph that I began to run out of leads!  This is the most important thing – don’t run out of leads!  (more on that below)

6) We started with a low minimum check size to close investors quickly and raised it over time.  

In the beginning, our minimum check size started at $25k and eventually it went all the way up to $300k (for individual investors).  We did this to generate quick commits and create more FOMO.

Product startups can do this too.  I did this with my company LaunchBit — our smallest check size back then was $5k, and then we increased the minimum.

7) We qualified investors on first meeting

As I mentioned above, we were looking for investors we could close quickly.  For individuals at smaller check sizes, this often meant just 1-2 meetings.  Much like with startup fundraising, if someone was taking too long to decide relative to the number of decision makers involved and the potential check size, then that investor was probably not a good fit for our fund.  You want to be raising from people who are pretty bought into what you are doing – not people who will be an uphill battle to convince.

There were some folks, whom we met, who just were not quite ready to invest either because they were new to/not comfortable with the VC asset class or they were not yet bought into us / Hustle Fund as a first fund.  And that was perfectly fine – the important thing was just to figure that out quickly and move on and generate more leads and meet more new people.

This is really important, because I think one of the top mistakes I made in fundraising as a product startup founder and one of the top fundraising mistakes most first time fundraisers make is in spending too much time with people who just will not close quickly enough.  It’s tempting to spend time with any investor who will take a meeting with you.  And it often seems like it’s really hard to generate new leads.  But now that I’ve done this a few times, the better approach is to try to keep looking for new warmer leads rather than to feel stuck warming up cold ones.

8) We generated lots of leads (in the beginning) using brute force

Building on my point above, I think one of the top reasons founders (or fund managers) spend too much time on meetings with people who are clearly not going to invest soon is that they don’t know where to find more leads.  If you’re a product startup and you’ve exhausted a typical list of VCs (such as this one from Samir Kaji at First Republic), you’re probably wondering, “Now what?”  Where do I go now to raise money?

When I was a founder, this was certainly the mindset I had.  My perspective now, though, is that the world is filled with infinite money sources, and it’s my job to find the right matches as quickly as possible.  This mindset also takes the pressure off tremendously.  As a founder, I felt a lot of pressure to close a particular person, because it just seemed like there was a finite pool of startup investors.  Now with a more seasoned view, I feel no pressure at all, because there are actually a lot of people who are interested somewhere in the world – you just need to find them.

This means that you have to be generating a lot of leads and doing lots and lots of first meetings (see graph above).  So how did we generate leads?

We used a pretty standard B2B sales playbook to do so:

8a) Get referrals

We started by approaching friends and acquaintances and asked everyone if they were interested in investing or knew 1-2 people who might be interested in chatting with us about potentially investing Hustle Fund.  This actually allowed us to branch out pretty quickly, because people know a lot of people! And those people know a lot of people!  So even if you are starting with someone who does not have any money or is really not interested in investing in VC, just by asking for just 1-2 solid intros, you can actually find some interesting contacts.

I want to highlight the ask for “1 to 2 intros”.  The ask is NOT, “Hey if you know anyone whom you think might be a good fit” <– NO!  People will just brush you off and not think about your ask.  You want each person you meet to legitimately think about the best-fit person in his/her network out of the thousands of people they may know.  Having a specific simple ask to just think about one person in 2 minutes is a doable / realistic ask of everyone you know no matter how close you may be to him/her.

The other thing that I think people automatically assume is that in order to have a good network, you need to be someone like Ashton Kutcher and have an amazing network.  That certainly helps!  But it’s not necessary.

These are all the people I made this referral ask of:

  • Family
  • Friends
  • Friends’ families
  • Former co-workers
  • Former founders I’ve backed either in the past or present
  • People I met at events where I spoke
  • Organizers of events where I spoke
  • Where appropriate, I even asked some founders who pitched me at Hustle Fund on their businesses!

If you think about it from this perspective, if you are in the tech industry, there are so many people you can pitch / get referrals from.  Every tech worker is fair game – do you know how much tech workers make per year?  So. much. money.  Do you know how many of them know other tech workers?  Those are the only people they hang out with.  Any startup founder you know – no matter how much they are succeeding or flailing  — knows investors who have backed them or other startup founders.

On our $11.5m fund, most of it, including all of our largest anchors — special thank you to Shanda, LINE, and Naver — came from referrals – not from within our direct network of people we already knew.  Some of our investors are referrals who had other referrals.

So how do you soft pitch someone?  (and you should be soft pitching literally everyone you meet)

You know when people ask you, “Oh how have you been, what are you up to these days?”  That’s your window to soft pitch.  “Great!  I started this new fund.  These days, I’ve been, ya know, raising some money for it.  So if you or a couple friends you know are interested in taking a look, I would love to chat!“  Gauge the reaction.  If it’s positive, then try to set up a more formal meeting to actually pitch.  If it’s negative, then ask for 1-2 referrals.

Using a Cialdini-esque approach, you want to ask for the moon.  People will either fulfill it, which is great.  Or if they can’t, they feel bad and want to be helpful and will likely help you with whatever smaller ask you have.  Referrals are that smaller ask and really were clutch in helping us raise our fund.

I soft pitched everyone at every party I went to.  I soft pitched my optometrist during my eye appointment.  Under Obamacare, you now get basically a free meeting to pitch a health professional while getting a checkup.  Your doctor / dentist / optometrist / lawyer / accountant – these are all people you can pitch or ask for referrals from when you meet them (and they all have money 🙂 ).

We asked some of our closer friends for a TON of referrals (way more than the 1-2 that I mentioned above).  They were *so incredibly helpful*.  I probably owe them my first born child, but I’m not sure they would really appreciate the tantrums.

This referral strategy is a lot of work and requires a lot of meetings, but it’s a way to get started and get tapped into networks you don’t have.

8b) Throw parties / brunches / dinners / events

Some of our friends were a bit uncomfortable doing introductions for the purpose of fundraising.  Money is a funny topic that people don’t like to talk about very much in the US.  Some people view investment opportunities as opportunities and other people view them as liabilities (as mentioned above).

So, an alternative approach we used sometimes to get referrals was to ask our friends to throw parties / dinners / brunches and invite people we wanted to meet.  So, if your friend is connected to someone you want to meet, an alternative ask is to ask your friend to throw a dinner / brunch (and you pay for it) and invite both you and that person you want to meet.  Then you can soft pitch directly the person you want to meet without your friend having to feel awkward.

Interestingly enough, I found that entrepreneurs and investors were very comfortable doing direct introductions for us, while my friends who have always worked at big corporate jobs (and have never raised money before), were less comfortable.  And that’s ok.  The party / dinner / brunch route is an alternative path to the same result.  We ended up attending a lot of lunches / dinners / events that are not reflected in the meeting-count on the graph above.

In addition, we also threw a lot of dinners / talks / parties / events ourselves, and we invited both people we were talking to and committed investors to those events.  These events were helpful in closing investors as well.

Talks at conferences were also a good way to show off knowledge and give people a sense of how we thought about investments.  We have ended up meeting a number of potential LPs from events and conferences where we gave talks.  Events allow you to be “thought leader”.

8c) Do your own pattern matching

Once we started getting investors, we noticed some patterns emerge.  Even though we had focused our raise primarily in the Bay Area and didn’t travel much, a lot of our investors are from outside the Bay Area.  We conjectured that there might be much stronger interest outside of the Bay Area, where access to tech startups, is limited.

As it would turn out, almost half of the money in our fund comes from Asia (not Asian Americans but from Asia-Asia) even though we didn’t make any trips out there.

But patterns can also be thesis-driven.  Another pattern we found for Hustle Fund was that anyone who had been a mentor for or a manager of an accelerator really resonated with our thesis and invested in our fund.

It might be worth honing in on a pattern and trying to find as many people who fit that pattern.

Speaking of patterns, one interesting side note observation is that we had really poor success in converting female investors (despite actually investing in a lot of female founders both in the past and with Hustle Fund).  In Hustle Fund 1, < 5% of our investor base is made up of women.  (Defined as: we spoke with a woman from that entity or household). But we have pitched both men and women.  I’ve had many other friends who have raised money for funds or startups who have noted similar observations – women are seemingly much more conservative with their investments.

Just as a side tangent: it’s fine if people – men or women – don’t want to invest in Hustle Fund per se.  But, if professional women with some level of means are not taking some financial risk, they won’t achieve the same level of financial success as their male counterparts.  Think about this – we talk everyday about how women don’t make the same amount as their male counterparts at all these tech companies.  But we don’t talk at all about how women are left behind on investments.  Every rich person knows that you don’t make money on salaries – you make most of your money on investments.  If you were in the seed round of Dropbox or Google with just a few thousand dollars invested, you wouldn’t even be concerned about a salary.

8d) We made a video

We made a video (see to explain who we are.  This was a bit of a gamble, because we spent $13k(!) all in on producing this video.  That being said, we thought it was worthwhile, because we believed we could stand out if we did the video well.

This gamble has paid off in spades.  In part, I think it’s because no other VC (that I know of) has a video on their website.  So it may be worthwhile to pay for an asset that no one else has in order to stand out.

9) Your richest contacts are not necessarily your biggest checks and vice-versa

Building on a prior point about soft pitching anyone and everyone is that it turns out there was no correlation between wealth and check size.

This was an interesting learning for us.  In the beginning, we made a list of our richest friends and how much we thought each could invest.  We were so wildly off in meeting these numbers.  On the flip side, some of our friends who are not super rich surprised us and invested substantially.

There are so many reasons for this.  a) Making a lot of money in itself doesn’t mean that people have a lot of money.  They could have a big mortgage.  They could spend a lot of money.  They could have a lot of capital tied up in other projects or investments.  b) There are also a lot of people who don’t make a lot of money but are very good at saving it and investing it and secretly have a lot of wealth.  The Millionaire Next Door is a good illustration of both of these points.  c) Some people come from wealthy families and you just have no idea that they do.  d) People also have varying levels of bullish-ness on you, your thesis, and your asset class.  People also have varying levels of risk / reward tolerance.

It’s also important to note that sometimes people who are not / don’t seem like angel investors can become angel investors for you.  Andy Cook talks about how he brought in new investors who had never invested in startups before into his round.  We did the same as well.  Just because someone isn’t already an angel investor doesn’t mean that he/she couldn’t be.

This is why our grassroots strategy of taking so many meetings worked so well – we just never knew who would actually be interested in investing.  And we could not find any way to qualify people apriori.  This is why it’s so important to pitch anyone and everyone – it’s hard to know who will bite and who won’t.

10) We used a CRM to manage our process

This process requires a CRM, because you need to make sure that leads are not being dropped through the cracks.  We invested in using a CRM right away to track conversations to move people through our pipeline.

This also made it easier for Eric and me to divide and conquer – we would take our own meetings with individuals and regroup for second meetings and beyond.  And we could both see who was talking with whom so that we didn’t start different conversations with different people from the same fund or approach the same people.

More importantly, it was critical that we maintained discipline over all those months to keep the CRM up-to-date.

11) You’re not hot until the end

This applies to both startups and funds.  Fundraising is always a slog in the beginning, because you’re trying to generate lots of leads and qualify them.

This is a graph of what our fundraising looked like:

The blue line represents our soft commits over the months (verbal / written email commits).  The red line represents money we actually closed legally (signed docs).  As always, “soft commits” are a bit more ambitious than actual commits, but in the end, they should converge (or come close).

As you can see, we averaged getting about $1m per month in soft commits for the first 6-7 months to get up to around $6.5m in commits, which we closed in Dec 2017.  If you follow the red line, you can see that there is a surge of $5m at the end, which literally came together in the last couple of months of our fundraising process!

Like almost every raise I’ve seen, you’re just not hot until the end.

12) This all sounds easy but it takes hustle AND a village to do this!  

The fundraising process I’ve outlined above is executable and accessible for anyone.  And it actually sounds easy.  Just do a bunch of meetings and ask everyone for intros or money, right?

But wrapping up this post, I’ll leave you with a couple of final thoughts.

12a) It takes lots of hustle and lots of meetings to get this done. 

Last July (2017), when my new baby was about 7 weeks old, I decided to quit my prior job in the middle of my maternity leave and started Hustle Fund shortly afterwards.  That summer, during the day I would leave him with my parents, and I would go from meeting to meeting, stopping to pump milk in SF parking lots or at large tech companies’ mothers’ rooms.  At night, I would work on decks and update our CRM.  I would sleep about 4 hours a night sporadically as the baby would wake up every 2-3 hours to drink milk.  I got through most days on lots of coffee and adrenaline.  But no matter how tired I was, it was important to go into each and every meeting just as excited as ever.

I don’t mention this schedule to “brag about my hustle,” but just to paint reality – it really does take a lot of work to do lots and lots of meetings.  It’s important to work smart, but for some things, as smartly as you work, there is no shortcut for just lots and lots of hard work.  And know that as hard as it is, you’re not alone.

12b) It takes a village to really go anywhere. 

To start this fund, I leaned on a TON of people.

While this small section here doesn’t do justice to my gratitude, I did want to highlight just how many people my awesome co-founder Eric Bahn and I roped into this raise.  (I’m also incredibly grateful to have a fantastic co-founder in Eric and now Shiyan Koh!)

  • Our ~90 investors in our fund (they occupy way fewer LP slots but there are at least 90 individuals / spouses / family members / companies and people with a stake in this)
  • Past founders I’ve backed who have introduced me to their investors; one successful founder even generously offered us her PR agency and offered to foot the bill!
  • Current founders who went through their rolodex in trying to help us connect with their other investors / VCs / rich friends
  • VC friends who supported us with personal investments / investments from their funds / intros to their investors
  • Friends and family who came over to my house to cook food / bring over take out / buy us food – it was pretty incredible not to have to worry about food for a while
  • Friends and family who housed me in their spare bedroom or their couch on my fundraising trips since we have limited budget
  • Friends and family who introduced me to all kinds of rich and well-connected people
  • My blog readers who introduced me to their network
  • My own immediate family who took care of my kid(s) every week for months!
  • And big props to my spouse JJJS as well as Eric’s spouse and Shiyan’s spouse for really bearing the brunt of all the work that goes into starting a fund.

There were literally hundreds of people who helped us get this thing up and running (and we are just at the beginning).  And I’m so very thankful to all of them for their generosity.

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

It’s actually hard to hustle

I should have known that when we picked a company name like Hustle Fund, it would lead entrepreneurs to introduce themselves as “real hustlers”.  But, I think my definition of hustle is very nuanced, and it’s not what most people think it is.

Very often, most people think of “hustlers” as people who are:

  • super sales-y
  • slick talkers / great at talking
  • doing 100 different things all at once
  • working really hard and wearing that hard work as a badge of honor

One entrepreneur even told one of my business partners that he didn’t think of himself as a hustler because he wasn’t doing anything illegal!  Hah!

But this is not what “hustle” means to me.  To me, hustle is about scrappiness to achieve to focus.  The key word is focus.

Originally posted by various-cartoon-awesomeness

I think the hardest part about running a startup is having focus.  Focus is the key thing needed to grow a business.  Because you have limited time and money, you can’t afford to invest in many different facets of your business. You can usually only afford to do just 1 thing really well otherwise a whole bunch of things will end up turning out mediocre or half-heartedly done – even if you are burning the midnight oil and working really hard.

This is easier said than done, though.  What this means in practice is saying no to just about everything.  In fact, taking on LESS at a startup in many cases is actually better than taking on more.  This means saying no to meetings that will lead nowhere.  It means not pursuing partnerships that will only produce incremental returns or revenue.  It means simplifying product and reducing features.  Ignoring lots of emails.  Etc.

As a founder, even with all activities reduced as much as possible, it’s still difficult to truly focus, because there are some activities that need to get done in a business that take up a lot of time but don’t actually contribute to the growth of your company.  Such as reviewing legal paperwork with your counsel.  Setting up new accounts and adding 2-factor authentication.  Setting up a checking account.  Applying for a credit card.  Etc.  These are all activities that need to get done and take up time that don’t actually help your revenue (or whatever your KPI is).

Compounding time management issues, startups also have a lack of resources.  E.g. how do you move your lead gen number when you have no marketing budget?  Even if you are good at time management and saying no?  Being scrappy to achieve focus is just really hard.

My last thought on this is that the good news and the bad news is that being able to successfully hustle is somewhat of a level playing field (though difficult for everyone!).  By this I mean, I’ve found that the best hustlers come from all walks of life.  People who go to Ivy League schools or worked at Google and Facebook are not necessarily good at hustling (some are and some are not).  Often, people from these places actually are given a TON of resources, so scrappiness is not actually something they know how to hone.  I went from being a marketer at Google where every news outlet wanted to cover all of our product launches to a bootstrapped 2 person startup where no one cared at all.  In addition, people who go to top schools are often very good students.  They are often good at being on top of projects and doing everything.  Unfortunately, at a startup, you have to deliberately drop the ball on a lot of tasks in order to free up time to really really knock 1 thing out of the park.  This is a difficult skill for people who are perfectionists who otherwise excel at non-startup jobs.  On the flip side, I’ve also met entrepreneurs who were not good at following directions at school or work, but are able to do incredibly well with their own startups because they have relentless focus on what matters most to the business at the expense of other things.

Working on improving my own hustle is something that I strive for everyday – since Hustle Fund is a startup in itself, we, too, have a bajillion and one things that we need to take care of but really should only be focused on 1 thing at a time.  This means, for example, if we are focused right now on saying helping our portfolio companies, it means that we can’t be responding to everyone who has sent us a pitch deck.  This is fine balance, but something I’ve thought about everyday for the last decade or so since embarking on this startup journey.

How do you hustle?

Pre-seed is the new seed

A few months ago, I was talking with a friend of mine who is a successful serial entrepreneur.  He has done incredibly well financially on his past two startups, and he’s now building his third company.  When we were talking, he expressed frustration in raising his series A round.  This was surprising to me.  I asked him about his metrics, which are good, but they were not at series A level.  I asked him who he was pitching, and he rattled off a list of usual suspects on Sand Hill.  All of those investors told him that he was too early.  It turned out he was going after the “wrong” group of investors. People he would have pitched 3 years ago had all moved downstream now that they had raised much larger funds, and he really needed to be pitching “post-seed” funds.

Every blog post needs a gif of a stuck kitty… Originally posted by kittiesaresuperserial

It struck me that a lot has changed about the fundraising landscape even in just the last three years.  So, I thought it might make sense to take a step back and talk about all the stages of early stage fundraising here in the Silicon Valley.

In early stage investing, at least in Silicon Valley, there are basically 4 stages: pre-seed, seed, post-seed (or pre-A), and series A.  In the “old days,” there were only seed and series A, and before that, only series A!  All of these changes have created a lot of confusion.

Here are my thoughts on these stages:


This is really the old “seed.”  Very typically at this stage, little to no traction is needed, and investors are looking for lower valuations than seed investors for taking on extra risk by going in so early.  Another consideration here is that, in the minds of pre-seed investors (who are very often small funds and will be allocating most of their capital in the first round or two), valuation matters a lot more to them than a larger fund who might invest in you at this stage as an option for later. If a startup comes to me looking for a $3m effective pre-money valuation vs another company who comes to me looking for a $7m effective pre-money valuation, basically what is being suggested here is that the latter company has to have a 2x+ greater exit in order to be just as good of an opportunity as the former.  The outcomes of both companies are, of course, unknowable, but that is essentially what goes through the minds of investors who are looking at lots of companies with different valuations.

Also, to be clear, pre-seed doesn’t mean that one just thought up an idea yesterday and has done nothing.  There’s a lot of work to do to prepare to raise money at this pre-seed stage.  It could be building an early version of the product,  or getting your first set of customers, or even doing pre-sales or lead generation well before having a product.  In fintech or health, it could be in dealing with regulations or getting particular approvals even if you’re not able to launch.

Investors at this stage are very much conviction-investors, meaning they either bought into you and your thesis or they did not.  It’s very difficult to convince an investor at this stage to change his/her mind.  This is a bit of a crap shoot because even if a pre-seed investor has bought into you as an awesome operator, if he/she has not bought into your thesis, it will be difficult to land an investment.

These rounds are typically < $1m in total.


Today’s well-known seed investors may have previously invested at an earlier stage with smaller checks, but because many of these funds have now raised $100m+ funds, they are now writing much larger checks.  Typically this is $500k-$1m as a first check.  This means that they have to really believe in you and your business-thesis in order to pour that much capital into a business. As a result, this stage has created a fairly high traction bar.  It can be upwards of $10k-$20k per month or more!

Seed rounds today are quite large – typically $1m-$5m!  I believe that some of these seed rounds are way too large, and there’s a looming market correction on the horizon for everyone.  I’m of the belief that early ideas can never effectively deploy $4-$5m in a very cost effective way.

Post-seed (pre-A)

This is a stage that was created because the bar for the series A has gone sky high.  This really is what the series A used to be.  A few years ago, people touted that in order to raise a series A, you needed to hit $1m runrate.  Now, you typically need a lot more traction to raise a series A round.  This magical $1m runrate number is now the rough benchmark for the post-seed stage, but it’s not series A investors who are investing at this stage. New microfunds have cropped up to invest here.  They are looking for $500k-$1m runrate level of traction.  This was my friend’s problem; he wasn’t quite at series A benchmarks and needed to pitch post-seed investors.

These post-seed rounds are also quite big these days, sometimes upwards of $5m+.

Series A

This is really the old series B round, but Sand Hill VCs who are known for being Series A investors are serving this stage.  This is typically a $6-10m round.  Companies typically have $2m-$3m revenue runrate at this point.

If you do the math, VCs are buying roughly 20% of a startup, so valuations can be upwards in the $50m+ range for today’s series A rounds!  On the low end, I haven’t seen a valuation of < $20m, and that would be for a really small series A round.

Some additional thoughts:

1. There are lots of caveats around traction.

If you’re a notable founder, have pedigree, are in a hot space, or you run your fundraising process really well, it’s possible to skip a stage.  I’ve seen some really high flying series A deals happen lately with friends’ startups, where they are not quite in series A traction territory, but they have so many investors clamoring for their deal that they can raise a nice big series A round. They’ve run their fundraising process well, and they generally have great resumes and are in interesting spaces.  Same with the seed round – if you are notable or have pedigree, you can often raise a large seed round with little to no traction on your startup.

2. Sometimes the line between post-seed and series A is quite blurry, but the valuations are very different.

I have a few founders I’ve backed who are just on the border of post-seed/series A metrics and are able to get term sheets from both series A and post-seed investors.  There’s a huge difference in valuation.  The post-seed deals tend to be $10m-$20m effective pre-money valuation, and the series A deals are at least $20m+ pre-money if not much much higher.  So, if you’re on the border, running a solid fundraising process is especially important in affecting your valuation.

3. Large Sand Hill VCs are doing seed again – selectively.

Sand Hill VCs who tend to invest at the later stages have now found series B to be too competitive to win.  They are now starting to do series A deals and seed deals to get into companies earlier.  In many cases, the deals they are doing at seed are large deals with little to no traction.

You may wonder, “Doesn’t this contradict what you just wrote?”  What’s really happening is that the world of early stage investing is becoming bifurcated. If you have pedigree and are perceived to be an exceptional high signal deal, you can raise a lot of money without much of anything.  These are the deals you read about in the news that make people think fundraising is so easy. “Ex-Google product executive raises $4m seed round.”  This goes back to point #1.

If you don’t have that pedigree, then you basically need traction to prove out your execution abilities at the seed, post-seed, and series A levels.

4. Lastly, with the definition of “seed” expanding, more fundraising is done on convertible notes or convertible securities.

I’m now seeing more rounds get done with convertible notes and securities for much longer.  This is actually good for founders because it means you have a much larger investor pool to tap.  In the “old days,” if you couldn’t raise a Series A from the, say, 20-50 Sand Hill VCs out there, you were dead in the water.  Now, you have a lot more flexibility to raise from angels and microfunds without a formal equity round coming together.  I think this is a really good thing for the ecosystem because at this stage, it’s still not clear who is a winner based on metrics.  There’s still a lot of pattern matching around who gets funded at these early stages.  By the time you get to the series B level, it’s pretty clear who is on a tear and who is not, and that is much more merit-based investing.  Short of that, the more angel investors we can bring into the ecosystem of startup investing, the more companies will get a shot to prove themselves.

You may wonder, “Well, are there actually companies that are being overlooked by VCs in earlier rounds who later are able to hit series B metrics and raise a VC-backed series B round?”  Having looked at a lot of data around this, the answer is definitely YES!  While it’s true that the vast majority of companies who end up raising a series B round from VCs previously had notable institutional VC backers even as far back as their seed rounds, VCs still end up missing a number of companies at the earlier stages.  These actually go on to do well without them and end up coming out of left field and raising money from late stage VCs.

Header photo by Ross Findon, Unsplash

The #1 thing successful founders think about for their next startups

At Hustle Fund, we back both first time founders as well as repeat founders.  One thing I’ve noticed is that almost every repeat, previously-successful-founder focuses on the same thing for their respective startups: customer acquisition.  These founders not only think about customer acquisition first, but in many cases, they will even:

  • Abandon a startup idea altogether if the customer acquisition strategy isn’t strong
  • Pre-sell or generate leads well before building a product to try to validate demand

Some thoughts on customer acquisition from my own learnings over the years both as a startup operator and talking with a lot of startups:

1. Unit economics matter A LOT.

Unit economics are something I’ve found most entrepreneurs (and investors!) don’t think about at all.  Forget about traction and hockey stick growth.  It’s hard to get there without ideal unit economics.  Very simply, your cost to acquire a customer needs to be lower than the value of that customer (lifetime value).

This is obvious.  Diving in a bit more into some thoughts here:

a. Ad-based revenue streams generally have terrible unit economics.

A typical ad-based revenue stream on a media website is around $5 per 1000 eyeballs ($5m CPM and give or take $1-$20ish CPMs).  In other words, if you can get 1000 people to come to your website consistently for under $5, then this business model works for you.  This is incredibly hard to do, and most sites cannot do this at scale.  As always, there are exceptions: if you build a viral consumer product (such as an Instagram) where people are just coming to your site or app in droves at no cost to you, then you’ve got a great business. If they are not, it’s very hard to use paid acquisition to generate that type of traffic for under $5.

As a result, second time founders very often shy away from ad-based consumer ideas, but when they do, they think about what viral mechanisms you can implement first and engineer the product around that mechanism.  Marketing first.  Product second.  Here is a good case study on LinkedIn (scroll down to see how they grew).  Second time founders focus on lucrative verticals that pay more per eyeball or focus on ad formats that pay more (such as email newsletter sponsorships).

Ads can also be cost-per-click or cost-per-action ads.  Although you can make more money by running per-click or per-action ads on a per conversion basis, it’s also a lot harder to bring about these actions.  In particular, one thing to consider if you’re trying to make money off affiliate ads is to think about how unique the product/service is in the ads you’re running.  For example, if you are running affiliate ads for hotels, you might get 3-5% on a sale.  So if someone books a hotel at, say, $100, then that means you might make $5 on that transaction.  If this is a generic hotel, then there are likely other affiliates who are doing paid marketing to try to get users to their sites/apps to convert users as well.  Moreover, the hotel itself may be running ads to drive traffic to their site/app, and for them, a conversion is worth far more than $5.  You will likely get outspent on any paid marketing channel you may use to drive traffic to you at scale if there are other people trying to drive traffic to the same property.

Even if you are not scaling with ads, partnerships and SEO also cost money, and your competitors or even complementary companies are all spending money on partnerships and SEO in order to drive as much traffic as they can.  One way to make an affiliate-ad-based revenue stream work is to have access to unique products that no one else online is trying to sell.  This could mean partnering exclusively with someone who makes products offline (and who is not tech savvy to compete online with you).

Another way is to have unique promotion channels, but these must be scalable.  Honey, for example, is a browser extension that is always in your browser and helps find coupons for you for any site you browse.  This allows them to retain users for a long time and make some affiliate revenue by directing you to particular offers that they get paid for.  There are some hardware companies, for example, that make money based on affiliate revenue. They sell their hardware at cost – say, a new refrigerator.  When you buy food on a recurring basis, they make recurring revenue by your buying food through their affiliate channel.  You will use your fridge for a decade or more, so the retention here is high.

There are clearly many companies making money on ads of some sort, so this is not to say that you cannot build a big company with ads.  You definitely can, and there are many who do.  Remember, the key insight is you need your revenue stream to be much more lucrative than the cost to acquire your customers who generate that revenue.

2. B2B startups have high margins.  Sales cycles matter though.

Many serial entrepreneurs tend to gravitate towards building B2B startups.  I can’t tell you how many founders I know whose first company was a consumer company and then built only B2B companies after that.  B2B companies can have great unit economics.  Business customers, depending on the problem, are less price sensitive than consumers.

HOWEVER, the length of a sales cycle is a strong consideration for most repeat successful founders.  For repeat founders, this can actually work BOTH WAYS.

Longer sales cycles

On one hand, I know some really successful founders actually opt for a longer sales cycle.  (I use “sales cycle” loosely; by this I mean the time it takes to get a product paid for, and so this involves both product development and time to get a check from a customer). Some successful founders would prefer to go after a REALLY lucrative revenue opportunity that has a “longer sales cycle” because they can capitalize their company long enough with their own money + friends’ money to gain the sale.  In some sense, their moat is capital because most people will not be able to access enough capital (either by raising or by bootstrapping) to go after a similar opportunity.  Examples of this include startups that are building a new airplane, car, rocketship, power plant, etc…  Most first time founders cannot just start bootstrapping a new rocketship startup.

Originally posted by boldlygiffing

Shorter sales cycles

Sales cycle, as a consideration, also works the opposite way.  Many repeat successful founders would also actually prefer to go after opportunities with a much shorter sales cycle.  If we use Christoph Janz’ animal framework for building a big business to identify types of customers you can be going after, these founders won’t be hunting elephants, but they might go after rabbits or deer business customers.

Because these companies are often able to move a lot more quickly than elephants, founders can often pre-sell before a product is ready.  Or at a minimum, generate a lot of leads before generating momentum and starting to validate a business opportunity with real people and real money.  This pre-sales strategy, of course, can also be used for consumer businesses that sell things.

As a side note: many companies in our portfolio at Hustle Fund, regardless of what they’re building, have pre-sold their products before building anything.

3. Does your business have naturally short retention?

Repeat successful founders also think a lot about retention.  Some ideas seem like a good ideas but actually are not because of the retention component (or lack of). Here is an example:

I used to run some wedding-related sites; there’s obviously a real need for products and services in the wedding space.  Plus, engaged couples pay a lot for weddings!  On the surface, this seems like a good space to be in, but the retention is terrible or non-existent.  Once someone gets married, in many cases, this person won’t ever come back and generate revenue… at least not for a decade or so later  (Although I did once have a customer who bought from me, then called off the wedding, and then a few months later came back to my site to buy more because she was now engaged to someone else. The vast majority of my customers were not in this camp). This is not to say that you shouldn’t do a wedding-related startup, but it’s important to think about how to retain a customer and convert him/her towards other things.

The Knot is a great example of a site in the wedding category that tries to retain people.  The Knot would not consider themselves a “wedding company.”  They would consider themselves a “lifestyle company” – they retain their users by moving their users to “The Nest” and later “The Bump” as you start settling down into married life and then having children.  This allows them to make money on their users for a much longer timespan.

Retention applies to B2B companies as well.  For example, there are a lot of startups who offer products/services to startups.  When their customers outgrow them and become big companies, can they grow with them and offer products that make sense for larger companies?  Hubspot is a good example of this.  Initially, they focused on SMBs, but today, a lot of enterprise businesses use them.  They still do partnerships with startup organizations/accelerators so that startups can start using their platform and grow up in the Hubspot ecosystem.

If you are starting a company around a person or a business’ stage of life, think about how you can retain your customers and users over time.

4. It’s nice when someone else pays for a customer.

This is a very rare customer acquisition situation, but in some cases, a company can jump on the opportunity where a consumer benefits but someone else pays on behalf of the consumer.  This is nice because the consumer gets something for free and is still your user/customer.  The customer acquisition is easy because this person doesn’t need to pay money.  Rather, someone else is footing the bill and must do so.  This is a fantastic customer acquisition situation.

This type of scenario often happens in weirdly regulated situations.  In health, for example, almost all online pharma startups are in this category.  A startup gets a consumer to sign up for service to get his/her medication for free.  His/her insurance pays for it.

This type of inefficiency happens in other industries as well and is something that I personally look for. We’ve backed a couple of companies that fall into this category (they are not all in health).  The customer acquisition is incredibly fast and high growth (i.e. easy to convert users when something is free to them and that something is awesome).

In summary, when I evaluate startups, a big initial criteria for me is evaluating how deeply the founders have thought about customer acquisition (and retention) and whether they are customer acquisition-centric founders.  This does not mean the founders need to have marketing and sales backgrounds; in fact, most of our founders do not have this background. Thinking about the unit economics as a business owner BEFORE building your product is incredibly important regardless of your background.

Cover photo by Bianca Lucas on Unsplash

11 Things I’ve learned from running a micro VC in the last year

It’s been about a year since I started working on Hustle Fund with my business partner Eric Bahn.  People often ask me what it’s like to start a micro VC and whether they should do one too.  (Hunter Walk just wrote his perspectives here)

Here are some of my learnings from the last year.

1. It is absolutely the best job in the world for me.

I enjoy learning about new technologies and ideas – and you get to see a lot of them in this business, especially in early stage investing.  I enjoy working with founders immensely, but most importantly, I love fundraising.  I know – that isn’t what you thought I was going to say  (more on this later).

Much like running a product-startup, you’re your own boss, so you sometimes end up working really hard and at all hours depending on where you are in your fund life cycle. If it’s work you enjoy, then it doesn’t feel like work.  There’s also a lot of flexibility, and I’ve definitely taken advantage of that.  You can whimsically pick the most powdery day of winter and go up to Tahoe to ski.  Or go to the beach or lake midweek in the summer, and no one will be there.  It’s great.

2. Starting a micro VC is just like starting a product company.  Except harder.

Probably 10x harder.  If you go in knowing that with eyes-wide-open, then it’s totally fine, but most people don’t do enough homework before deciding to start their funds.  I would talk with at least 10 micro VCs before deciding to do this.

3a. In particular, there is no money in micro VC!

Hah – this seems ironic, but I’ll explain.

Most people think VCs have a lot of money.  That’s if you work for an existing large established VC.  If you are starting a VC, this is definitely not true.  I’ll break this down across a few points, but the gist is that you have to be willing to make no money for 5-10 years.

If you are not in a solid financial situation to do that, this business can be terrible for your personal life.

Originally posted by auroras-boreales

3b. Micro VC’s have no budgets.

This is surprising to a lot of people.  Even if you have, say, a $10m fund, most of that money needs to be used for investing – not for your livelihood or for other things.

In fact, the standard annual budget that VC funds have is 2% of the fund size for the life of the fund (typically 10 years).  If your fund is, say, $10m, then that means you have a yearly budget of $200k.  To be clear, this isn’t your salary; this is your budget to run your company.  Your salary does come from this number, but you also need to cover the salaries of everyone else on your team (if there are others on your team).  If you travel, those costs come from this number, too.  If you have an office, that cost also fits in here.  Health care and benefits also fit under this.  Marketing – t-shirts, watches, swag, parties – all of this fits under this budget.  There are also fund ops costs that need to be factored into this number, too.  When you factor in all these costs, $200k actually doesn’t go far.  To give you some perspective, my salary today is less than what I made at my first job out of college… in 2004.

You need to be willing to bootstrap for about 5-10 years.  In contrast to building a product company where most people bootstrap for maybe 2-3 years and then either raise some money or build off of profits or throw in the towel, when you sign up to do your own VC, you are committed for 10 years (the standard life of a fund).  You can’t throw in the towel.  And if your fund does well – i.e. your companies either raise more money or they grow their revenues a lot – you also don’t make more money because your salary is based on a percentage of your fund size.  Your salary (or lack of salary) is stuck for years – until you raise your next fund and have new budget from that fund.

Some Micro VCs write into their legal docs that they will frontload all of their budget in the first few years.  Under this model, instead of taking, say, a $200k budget per year for 10 years, some funds will do something like frontload the budget – say, $400k per year for 5 years.  This can help increase your budget, though there are still fund ops costs every year for 10 years, so I’m not sure how these funds end up paying for those costs in years 6-10 if they are taking the full budget up front.  This is not something we do at Hustle Fund.

Other micro VCs will try to make money in other ways by selling event tickets or whatnot.  In many cases, depending on how your legal docs are written, consulting is discouraged.  It actually is very hard to bootstrap a micro VC because on one hand, you get virtually no salary but are also mostly prohibited from making money outside of your work.

3c. You also will make General Partner contributions to your fund.

At most funds, you will also invest in your fund as well.  This allows you to align with your investors and have skin in the game, and this is standard practice.  In many cases, fund managers invest 1-5% of the fund size.  So, if you have a $10m fund, you’d be expected to invest at least $100k to the fund.

Not only are you not making money on salary, you are also expected to contribute your own money to the fund.

There are some funds that don’t write this requirement into their legal docs, but it’s something that a number of would-be investors always ask about (in my experience).  They want you as a fund manager to be incentivized to make good investments because you are staking your own cash too.  And this makes sense.

3d. Sometimes you need to loan money to your fund.

There have been several cases over the course of the last year where either Eric or I have had to loan Hustle Fund money interest-free to do a deal that needed to be done now (before we had the fund fully together).

One thing that is different about raising money for a fund (vs a product-company) is that when investors sign their commitment, they don’t actually send you the money right away.  So, let’s say we raise $10m; we don’t actually have the $10m sitting around in a bank account.  This surprises a lot of people – VCs don’t actually have cash on hand!

The way investors invest in a fund is they sign a paper committing to invest in the fund.  Later, when the fund needs money, the fund does a capital call.  Typically, capital calls are done over the course of 3 years.  So, if an investor commits to investing $300k into a fund, then on average, that fund will call 1/3 of the money each year over the course of 3 years.  In this case, that would be roughly a $100k investment each year from this individual.  The capital calls are not done on a perfectly regular cadence because sometimes a fund will need money sooner than later.  Most funds try as best as they can to do regular capital calls.

This also means that there’s a lot of strategy and thinking that needs to go into capital calls.  For example, when you’re first starting to raise money and have very little money committed – say $1m – it can be tempting to call 50% of the money right away to start investing $500k into a couple of deals.  However, as you continue to raise, subsequent investors will be required to catch up to that 50% called amount.  Let’s say you round up another $6m in capital; this means that all of a sudden, you have $3m that you’re automatically calling to catch up to the proportionate amount that the first set of investors contributed.  And if you’re writing small checks out of your fund, much of that $3m will then just sit around in your bank account, not earning interest, and will negatively affect your rate of return.  Instead of doing a capital call, loaning your fund money is a way to ensure that you don’t have capital just sitting around in your bank and counting against your rate of return.

There are bank loans you can get once you are fully closed and up and running, but very few banks will loan you money in the very beginning when you have raised nothing – hah.

3e. And even if your fund does well, you still make very little money at the end of 10 years!

First, most VC funds are failures.  In fact, much like startups, I’ve heard that 9 in 10 VCs will not even get to 1x returns!

But, if you happen to be in the lucky 10%, there’s a range even here.  The “gold standard” for profitable VCs is a “3x return” benchmark.  If you’re above it, you’re considered excellent.  This is very hard to do.  Just getting into the profitable category is an accomplishment in itself.

Let’s suppose for a moment that your fund is excellent (because we all believe that our funds are excellent), and let’s say that we return 5x on our fund. On a $10m fund, a 5x fund return means the fund will return $50m.  Using a standard 20% carry formula, and after returning most of the gains to the fund’s investors, it means that the team will receive $8m.  If you have 2 managing partners, that’s $4m per person – but 10 years later.  Considering that you’ll make no salary for much of that time, there are many other professional, tech, and established VC jobs at big Sand Hill firms that will make you more money or the same amount of money on salary alone (not including benefits or stock) with greater certainty.  You don’t have to be a 90%+ performer as a Director of Product at Google to accomplish the same outcome as an exceptional micro VC manager.  Think about that – you risk so much, much like a startup, but your upside is equivalent to working a steady job at Google for 10 years!

For all of these reasons, microfund managers who are able to raise more money on subsequent funds end up doing so because for the same amount of work and risk, you’d much rather be paid more in salary and in carried interest later.

4. You should love fundraising.

I think most people think that, as a VC, you spend most of your time looking at deals.  The breakdown of a given week for me is something like:

  • 50% fundraising-related (preparation of materials , meeting potential future investors, networking, etc.)
  • 20% marketing-related (content, speaking, etc.)
  • 5% ops (legal, audit, accounting, deal docs, etc)
  • 15% looking at deals (talking with co-investors and referrers, emailing with founders, looking at decks, talking with founders)
  • 10% working with portfolio companies

Of course, it varies a bit if you’re at the beginning of a raise or if you have closed your fund.  The point is, you will spend a solid chunk of your time as a micro VC on fundraising activities.  Even if your fund is closed and you don’t have a deck to pitch, you are always in fundraise-mode.

If you have never fundraised for anything before, you will probably think that this process is horrible.  Having raised money before for my startup and having coached a lot founders on fundraising over the last few years, I’ve grown to love it.  And part of that is just lots of practice. The more you practice, the better you get, the more you like doing something.

5. Fundraising for a micro vc is exactly like fundraising as a product-startup.  Except more involved.

Prior to raising a fund, it never occurred to me to ask where fund managers raise their funds.  That was just not something I had thought about before.  For the big Sand Hill VCs, most of them raise money from institutionals.  These are retirement and pension funds at government entities, endowments at universities, or similar.  As you can imagine, these entities are pretty conservative, and rightly so. The pension check that granny is counting on for her retirement shouldn’t be frivolously thrown away on a fund that invests in virtual hippos recorded on some blockchain.

As a first time manager, often it can be difficult to convince these types of institutional funds to invest.  It can be done if you have a strong brand already.  Even if you are an experienced angel investor or worked at a well-known VC fund, you’re still starting a new fund with a new brand, and there are still questions about whether you can repeat your past success on this new brand.

This means that much like product-startups, you end up raising primarily from individuals, family offices, and corporates.  Much like with raising money from angels and corporates for a product-startup, angels and corporates don’t have websites announcing that they are funding vc funds.  You have to hunt for these folks.  Often these “angels” whom you can access are folks you know or folks who are 2-3 degrees away from you whom you don’t know yet (see my post on raising from friends and family).

And much like a product-startup, the check sizes are going to be smaller if they are from individuals (unless you know lots of very, very wealthy individuals).  When we first started fund 1, our minimum check size was $25k – much like the minimum investment amount for a typical product-startup.  Except we were raising tens of millions of dollars, not $1m.  $25k doesn’t go far on say a $10m fund.

This means you need to be doing lots of meetings, and this takes time.  The average time for a microfund manager to raise a fund is ~2 years.  We felt fortunate and incredibly thankful to our investors to be able to raise our fund in < 1 year.  When you think about it, that’s still months of active fundraising  (see point #4).

6. And you have a limited number of investors you can accept.

Per SEC rules, you can only accept 99 accredited investors into your fund.  This means that if you want to raise a $10m fund, you need the average check size to be above $100k.

When product-startups set a minimum check size, it’s usually arbitrary.  If you’re raising $1m for your product-startup, it won’t hurt you to take some investors at $1k or $5k checks here and there, especially if they are value-add.  With a fund, every slot counts.

So when we started with $25k as a minimum check size for some friends, we knew we needed to quickly raise that bar in order to raise a significant enough fund and still maintain 99 investors.  We ended up having to turn away a lot of great value-add, would-be investors who could not do a higher investment.  I would have absolutely loved to bring in more investors if I didn’t have this restriction.

In other words, you cannot just accept $5k here and there from friends and claw your way to momentum.

To get around this, some funds set up a “1b” fund.  For example, Hustle Fund 1a and Hustle Fund 1b split startup investments equally between the two.  That would be one way to get bring in more investors, but because the costs of this setup start to go up, we decided not to do this.

7. Ok, so there’s no money.  You also cannot change the world on fund 1.

If you can get past all of the above, and you’re still “yay yay yay – I want a life of making no money and want to fundraise all day and night for whatever cause I am trying to support,” the last piece is that you should know that you cannot change the world overnight.

I know so many aspiring micro VCs who go into this because they want to fund more women or minorities or geographies or some vertical that is underfunded.  I think those are all awesome worthy causes.  And me too – the reason I’m doing this is that I don’t believe the early stage fundraising landscape is a meritocracy, and I want the future of funding to be much more about speed of execution rather than about what you look like or how you talk.

But, you absolutely need to go into this with a 20-30 year plan.  If you’re a small little microfund with, say, $5m, you won’t be able to change the numbers in any of these demographics because impact happens at the late stages when VCs pour tens of millions of dollars into companies – not $100k here and there.  What does affect change is having lots of money under management.  That happens by knocking fund 1 out of the park.  And then fund 2.  And then fund 3.  And growing your fund each step of the way.  And growing your believers who start to hop onboard your strategy – not only your investor base but other VCs.  That is a 20+ year plan.

Moreover, you need to be contrarian to have a good fund, and at the same time, you cannot be too contrarian on fund 1 because you need to work with other VCs in the ecosystem.  You need your founders to get downstream capital.  To a good extent, I do care a lot about what downstream investors think and how they think about things.  You can only start to be very contrarian once you have more money under management (i.e. have proven out the last couple of funds) and follow on into your companies yourself.

In short, you will not make any money on fund 1.  You might need to loan money to your fund.  You will need to have money to invest into your fund.  You will constantly be selling your fund as an awesome investment opportunity for this fund and the next fund and the fund after that, etc…  You will not change the world on fund 1.  But, if you still love all of this and go in with eyes-wide-open on all of these things, and if you believe you want to do this for the next 20-30 years, then I would highly encourage you to go for it.  I think it is the best job in the world.

Why I invest outside Silicon Valley

I grew up here in the Bay Area during the dot com boom.  I went to college during the bust.  And when I graduated, it was booming again.  From that perspective, things have been mostly rosy in the Silicon Valley for startups! (except for 2008-2009, which is another story).

Now, I think we’re in trouble, Silicon Valley.  I think we are on our way down as an early stage startup hub unless we start to fix some of the problems around here.

These days, although my VC fund Hustle Fund is based in the San Francisco Bay Area, I actively seek to invest in startups outside the Bay Area (to be clear, we do invest in companies here opportunistically, but we do not actively scout here).

1. Silicon Valley and San Francisco are too expensive

With the high cost of living in the San Francisco Bay Area these days, a lot startup capital must now go towards founders’ rent.  In fact, people here qualify for low income housing if they have a household income of $117k!  This is absolutely insane.  This takes capital away from investing in companies themselves.

At this cost-of-living level, the Bay Area is no longer affordable to many founders who are not already rich.  As much as people love the $8 avocado toast and the sunny weather around here, these are all less attractive when you’re crammed into a small room with 9 other people on bunk beds in a small apartment.

Given the choice – based purely on economics – of whether to start a company in the Bay Area vs say Austin, Austin makes a lot more sense.  This is a no brainer.

Originally posted by gabelewis

2. Other startup hubs are on their way up

Other places like Austin have always been cheaper than the SF Bay Area, but previously, the cost-of-living delta was not as great as it is today.  In addition, not only is the Bay Area becoming prohibitively expensive, other cities are becoming more attractive as startup ecosystem.  This makes the decision to start a company in the Bay Area even less compelling when there are equally attractive options elsewhere.

In fact, my favorite place to scout for startups is in Toronto and Waterloo.  Not only are the people there nice as all hell (and the dollar exchange rate works in my favor), but there is incredible talent.  This is because large tech companies have established serious offices there, including Google and Facebook.  Additionally, startups in this ecosystem have now grown large (Shopify is TO’s poster child unicorn), and the experience that tech workers get at a growth startup is good fodder for the next generation of startups (Note: I know everyone in Ottawa is going to be mad at me for calling Shopify a TO startup, but to be fair, there are massive numbers of Shopify employees and former employees in TO).  Other cities that I like are LA (basically my backyard), Boston (oldie but goodie), and Atlanta.  I need to spend more time in Denver, Boulder, Salt Lake City, and Austin.  I also look at the “pan-midwest”: Chicago, Cincy, Indy, etc.

The rise of “other startup hubs” will only continue to trend upwards as today’s startups become large and talent from those companies eventually find their way to new startups.  This will make it harder for SF to compete for startup founder talent.

I would say, though, the SF Bay Area is still on top for growing a company at the late stages today.  It still has the most experienced talent for this stage because there have been a lot of high-growth companies successfully built here.  Those people all learn from each other.  In addition, a lot of the multi-stage tech VCs are also still here.  It might be doable to raise an angel or micro-seed round locally outside the Bay Area, but for the late stages, there’s still much more capital being invested in companies here.  Lastly, M&A is also still big here. The tech companies who are doing big acquisitions are in the Bay Area (though this is changing too).

3. So, where should you start a company today?

At this point in 2018, I think what makes the most sense is for a startup to start where he/she wants to be.  Personally, where do you want to live?  Use free content from the internet to learn new skills and focus on growing your business.  If your company ends up getting to a certain growth stage, then it makes sense to open an office in the SF Bay Area.  This is probably true only after the series A, in my opinion, where you’re doing perhaps $300k-$1m per month in revenue.

Many startups these days are successfully using a distributed model.  This can work depending on the type of culture you want to set for your company.  Do your employees like to socialize with each other?  Or do they like to just focus on their work and socialize outside the office?  Are your employees good at written communications?  Documentation?  Companies like Automattic, for example, have established a truly distributed work model, but this works because that is part of the culture and is important to the people who work there.  In some sense, this is also tied to your business model.  If you have a heavy sales model, for example, having a whole team of remote sales folks probably doesn’t make sense.  You need camaraderie and in-person energy.

A hub and spoke model might also work, where there are small offices in a few places so that people can still socialize with their co-workers but then are tied back to the mothership in San Francisco.  Intercom and Talkdesk, which both have European founders, have HQs in San Francisco but also significant offices in Ireland and Portugal.  I think models like these are the wave of the future regardless of whether there’s an international tie or not.

4. But VCs don’t get it

Unfortunately, many VCs, ironically, are the greatest laggards of new trends.  Many VCs will still only invest in their backyard because they believe they have to meet people in person even though video conferencing solutions like Zoom are really good these days!  Many VCs are also averse to new ways of working (e..g, remote working) even though the costs at the early stages work out way better for companies like these.  This is a risk; you might not be able to raise money from some VCs if you have an “unusual” work model.

5. What the future holds

I think that an increasing global trend is that a number of cities will (and already are) emerging as startup hubs. I think that the good news is that entrepreneurs can now start a company from almost anywhere.  In the long run (20+ years from now), even at the late stages, we will see new funds that will invest outside the Valley as well as new multi-stage funds popping up outside the Valley to invest in growth stages outside the Bay Area. If the SF Bay Area cannot get its act together on lowering or maintaining the current cost-of-living, my prediction is that the SF Bay Area will RIP as a startup ecosystem (except for rich entrepreneurs) altogether.

I hope that doesn’t happen.  But that trajectory is on its way. That is why I invest outside the SF Bay Area.


Cover photo courtesy of HBO