Elizabeth Yin

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.