500 Startups' Elizabeth Yin on seed-stage venture capital

Elizabeth became a Partner at 500 Startups in the spring of 2015, but her connection to the early-stage venture fund dates back much further. LaunchBit, Elizabeth’s AdTech startup (acquired in September 2014), was actually part of 500 Startups second batch of investments.

While in Dublin to speak at the inaugural SaaStock Conference, Elizabeth stopped by our office for a quick podcast chat. We covered the difficulties of running your startup while pitching investors, the need for founders to get a handle on taking rejection, why non-technical founders still need domain experience, and much more.

If you like what you hear, check out more episodes of our podcast. You can subscribe on iTunes or grab the RSS feed.

What follows is a lightly edited transcript of the interview. Short on time? Here are five key takeaways:

1. At the end of the day, investors are looking to fund growth, and your startup’s story must be tied to that. I can use your money to buy X number of customers, and the payback will be Y.
2. When you become a founder, you have to learn how to sell – even if you don’t have an outbound sales process. And learning to sell means learning to handle rejection too.
3. Elizabeth has seen an unfortunate irony in venture capital: There’s a tendency for investors to pattern-match, yet VC is all a game of outliers and very rare hits.
4. Non-technical founders still benefit greatly from domain experience. It allows you to truly understand the problem you’re solving – a necessity for success.
5. Many startups begin as side projects, which require a lot of discipline. But when it comes time to pitch VCs, no investor is funding your project until you’re all-in.

John: Elizabeth, welcome to the show. You have an interesting story in that, back in 2011, you were a founder in 500 Startups’ second batch of investments, and now you’re running the Mountain View accelerator. What drew you away from that product-building world to the world of venture capital?

Elizabeth: To be honest I never expected to enter VC. That was not a dream of mine at all, but 500 Startups, they were an investor in (my startup, LaunchBit) – and also an investor in Intercom – so I knew the folks there really well. They’re a fun group, and I started mentoring some companies. One thing led to the next, and I got sucked in.

John: Thinking back to your batch in 2011, how do you think things like funding environment, competitive environment and expectations of startups are different for the 2016 batch of companies?

Elizabeth: Everything is different, actually. If (Intercom co-founders) Eoghan and Des were to go and visit (500 Startups), they would be surprised by how different it is. The kinds of companies we’re taking are different. A lot of the companies we funded back in 2011, including both my company, LaunchBit, and Intercom, were very early. Nowadays, to get into the program in a category like SaaS, you have to have some level of traction.

Inside the 500 Startups Silicon Valley Accelerator in Mountain View, California

There are companies coming in, actually, a handful in every batch, that are doing more than $1 million in revenue run rate. It’s actually a later-stage program now, and to that end, we actually offer customer acquisition help. We’ve hired a whole team of coaches. That’s the biggest difference. And there’s carpet now. Back then, there wasn’t.

John: You know you’ve hit the big time when you’ve got carpet. Thinking more along the macro environment, rather than 500 Startups itself, what hasn’t changed in those five years?

Elizabeth: Back in 2011 the funding environment was actually very good. I don’t think people appreciated it then, because fundraising is always hard. Even though there’s a lot of chatter on the Internet about how investors are tightening their belts, and they’re not investing as much, the reality is fundraising has always been hard. It continues to be hard, but there is still a lot of money out there.

Pitching your story

John: Many of our listeners are at early-stage startups, so if they’re not fundraising now, they’re probably going to be fundraising soon. As someone who’s been on both sides of the VC coin, what’s the most important piece of advice you’d give them?

Elizabeth: There are a lot of components to fundraising, but at the end of the day, the thing to keep in mind about the investor mindset is they are looking to fund growth. So ultimately, you want to tie whatever story you’ve got to growth. Maybe that’s having an understanding of how much it costs to get a customer, and how much those customers are paying. Tie it to that: I can use your money, say $100,000, to buy X number of customers, and the payback will be Y. That’s a super strong story. People don’t want to hear about, “I’m going to hire ten people.” So what? Tie it to growth.

#protip: founders who think they need to “raise $1M to ramp up sales” have their head up their ass — it works the other way around.— Dave McClure (@davemcclure) September 5, 2016

John: Dave McClure tweeted recently that if you’re saying you want $1 million to build a sales team, you’ve got it backwards. You should be building a sales team so you can get $1 million in investment, or $1 million in revenue.

Elizabeth: Exactly, and I think his point was a little bit misconstrued by some people. The point is exactly this: investors want to understand what the growth story is here.

John: How hard is it to balance fundraising and all the competing things you have to do as a co-founder? You can’t really do fundraising as a part-time thing, right?

You want to tie whatever story you’ve got to growth.

Elizabeth: Oh, no. It’s actually super hard. It’s hard at every stage for various reasons, but in the beginning – let’s say your first or second seed round – typically the person who’s doing the customer acquisition, whether it’s the CEO or whatnot, is also the person who’s doing the fundraising. It’s a very similar skill set, and you have to make a decision: are you going to focus on customer acquisition for your business, or are you going to focus on fundraising?

If you go out and fundraise, it has to be a full-time job. That means you need to have whatever team you’ve got, and that may be just one co-founder, help you fill in while you’re out, and that’s tough.

John: What did you enjoy most as a co-founder that maybe you miss in the investment world?

Elizabeth: In the investment world, even though we do coaching in the seed program, it really isn’t the same as building a company. You miss out on the actual building of product and building of teams, and at the end of the day, you also miss out on all the highs. Certainly, startups are mostly lows, but you miss out on all the highs. They’re not the same when you watch your portfolio company go through an awesome moment.

Learning to take rejection

John: You created a boot camp of sorts, Rejectionathon, which is about his putting yourself in casual situations where you make yourself uneasy. Things like going to a Burger King and trying to order a cheeseburger without meat. The idea here being that you must learn to deal with rejection. Why is that such a key thing for founders?

Elizabeth: Rejectionathon is a side project of mine. It’s an event I’ve done a couple of times now, and you just put yourself out there.

The impetus was from when I was starting LaunchBit. I come from an engineering background, so I had no background in sales and no inclination to do sales. Unfortunately, or fortunately, when you’re thrown into your startup, you have to sell. You don’t have any other choice, and so that was the situation that I was in. I was extremely scared to even just talk to anybody, let alone sell ads, which is what I had to do.

Over the course of the next few years, I actually became pretty good at it, but I figure you don’t have to do a startup for a few years to try to build a thicker skin. That’s why I started this. All founders need this skill set, even if you don’t have an outbound sales process. Even for fundraising in itself, talking with potential partners, or even just hiring people, this is a very useful skill set for founders.

John: What kind of situations do put people in to give them that feeling?

Elizabeth: Nothing’s illegal, but some of these things will definitely put you out of your comfort zone for various reasons. One thing that’s just really plain hard to do is to try to borrow $50 from a stranger and then return it. That’s just very difficult, but then there are also weirder things, like, ask somebody to smell you and make sure that your deodorant is working. It ranges, but it’s all a little crazy. Frankly, we put everyone in teams for this event, so it’s a little bit easier, and people can support each other. There’s no way individuals would just do this in their free time.

John: You write a lot about how to get the attention of investors in a very nuts-and-bolts, best practices way. It reminded me of being a journalist and advising people on how to get the attention of someone who’s really busy and time-poor. It really seems to boil down to be persistent, but don’t be rude. Is that what you see?

Elizabeth: I think being persistent is great, and actually, investors like it. Don’t feel like you’re bothering them. What I would not do is say, “Hey, why haven’t you responded to my email?” or anything like that. Just pretend they never got your email, and chances are they probably never read your email. You’d be surprised the number of emails that just flood my inbox every day, and I’m pretty on top of my email, but it’s just hard.

John: Is email even the best way to get a VC’s attention these days?

Elizabeth: You have to try a lot of different channels. For some VCs it’s email, but investors are on all the channels, because this is their job. You’ve got people on Snapchat, I get pings on Facebook Messenger, picking up the phone, everything.

Fighting stereotypes as a founder

John: You raised $1 million for LaunchBit, but you said you much preferred selling the product than trying to sell the company to investors. Selling the product to customers is a lot easier. What kind of VC behaviors did you see that you found particularly troubling?

Elizabeth: There’s my own personal experience, and then there’s also experiences from friends that I’ve heard of. From my perspective on LaunchBit, probably the most egregious thing I faced was in a meeting with an angel investor. I was pitching him on my company, and at the end of the meeting I asked, “So what do you think?” I kid you not he said, “I don’t want to say the wrong thing and call you a meek Asian woman, but I question how you’ll lead a company of a hundred people.” I had to take a second to process this, because I could not believe what I was hearing. I’d never heard anything like this before, and then my next reaction was, gosh, I better come up with a good response right, because otherwise, I will seem like a meek Asian woman.

Things like that come up all the time. I know women who have been touched in inappropriate places. We had a portfolio founder who asked me for some advice on a borderline situation, which was an investor that said, “Hey, I want to invest. I think you’re so smart, and sexy,” so it was like he was mixing in good, professional qualities with inappropriate adjectives. There are a lot of borderline situations, and I don’t have great advice for what you do in those situations, because sometimes you just got to take the money and roll with it, but this is very common.

John: Isn’t it a big problem as well that people have tendencies to pattern match others out? Even if there isn’t overt sexism, someone might say, “Well, you’re not the typical white, 20-something Stanford grad,” and therefore they’re going to ask inappropriate questions, or be unsure of how to evaluate you.

Elizabeth: To be honest, although I was pretty angry and obviously the comment that angel investor made to me was inappropriate, when I stopped to think about it, in some sense he had done me a bit of a favor. As inappropriate as the situation was, maybe that’s what other people were thinking, and so, from that point on I made an extra-concerted effort to be louder, sit up straight and use better eye contact, and my fundraising process went a lot better from that point on. So there may be pattern matching happening there that other people are just keeping to themselves.

VC is all a game of outliers. You just can’t pattern-match.

To your point, yes, there’s a lot of pattern matching. I actually think that’s ludicrous in the VC industry. When I first came into 500 Startups on the investor side, I thought, “Oh, it’d be amazing to look at all this data. We have 1,600 portfolio companies. Let’s see if we can find trends to see what makes for a successful company.”

As it turns out, VC is all a game of outliers, the very rare hits. So many random things can happen, and you just can’t pattern-match. That’s the irony of it all.

John: So in fact, they’re doing themselves a disservice. You need people with different experiences and from different backgrounds.

Elizabeth: Yeah, and at the end of the day, even if you have a smart team with a great opportunity, it’s a lot of luck, too.

John: Eoghan McCabe, our CEO, is a big fan of asking for recruitment help from people he’s actually really interested in hiring. It’s how we landed our VP of engineering, Darragh Curran, for instance. You wrote a great post recently about why, when you’re fundraising, you have to be very clear about what you want. There’s no point in going to angels asking for advice on fundraising. Ask them for an investment, if that’s what you want.

Elizabeth: I like Eoghan’s approach for hiring. Where the analogy breaks down for fundraising is that if you are an investor, and you’re trying to decide whether or not to invest, you’ll need to know a lot of details about the company, such as how much revenue they’re doing, their growth, etc, and those are usually things that don’t come up in a casual conversation about advice. In contrast, someone who may be interested in taking a job at your startup, they may be willing to take that job without knowing what your growth rate or revenue level is.

Maybe they should or shouldn’t. I’m not sure, but the level of due diligence that a job seeker or would-be potential candidate would do with your company is not at the same level as an investor, so that’s why it doesn’t quite apply. Also, it’s very difficult, unless you’re talking about an investment, to get into the conversation of such detailed nuances about your company.

Where early-stage investors see value

John: Effectively, angel investors, once upon a time, were people who were relatively wealthy. At this stage, with syndicates and things like that, a lot of angels are upper-middle-class people who probably work at tech companies and have some money. Basically, they’re playing with their pension, right?

Elizabeth: Exactly, we have several 500 founders who are by no means wealthy, they haven’t exited at all, but they might invest $1,000- $5,000 in a company. To your point, if you do that a handful of times, that’s equivalent to investing in your retirement, so they don’t necessarily see themselves as investors.

John: At 500 Startups, you put a high value on potential investments having their unit metrics in good shape. What does a founder need to show you to prove they’re tracking the right KPIs closely, and what are those KPIs?

Elizabeth: That will vary from company to company, but as a vast generalization, most people who are selling something, one of their KPIs will be related to revenue. It could be revenue. If you’re marketplace, it could be gross merchandise volume. It really depends, but it’s probably tied to money.

What’s important, along those lines as well is, how much does it cost you to get that customer who’s paying you, and how much is that customer paying you at the end of the day? For pure-consumer companies, such as Pinterest or Instagram, it’s a little bit different. But for revenue-generating companies, those are the kinds of unit economics we’re looking for founders to have a solid understanding of.

John: You’ll quiz them and make sure that it’s a solid understanding, I presume. It’s not just a baseline understanding.

Elizabeth: There are varying levels of sophistication, and it isn’t so much about the founder’s smarts, but more about their level of sophistication with their knowledge of their current business. When you first start, you have no idea how much your customer is worth. You can make some assumptions, but (you need to be able to) separate what you actually know and what you think will hold true six months or a year from now. Obviously, the more data you have around what you know is our preference, but we know that lots of things will change over time.

John: Are there particular verticals, or particular trends, that you’re excited about at the moment, which you think are a good fit for 500?

Elizabeth: We tend not to look at trends and look more at the individual businesses. That being said, there are certain spaces that are hot and we tend to see more founders chasing after certain trends. One trend in B2B is the verticalization and segmentation of marketing automation or sales automation.

Just about every vertical – it could be boring industries like, say, construction – that previously didn’t have any software, now, there are a lot of people providing software for them. The next step will be more specific software for particular use cases in these verticals, such as not just generic, broad marketing automation, but maybe marketing automation for e-commerce. We’re already seeing a lot of players in that, but there’ll be other verticals as well.

John: Do you think the founders need to come from the vertical in those cases? We’re definitely are seeing a lot more non-technical founders.

Elizabeth: Yeah, and I think that’s fine, because the development of software these days is not as complex as it used to be, compared to the ‘90s. That being said, having domain experience is really good, because it allows you to really understand the problem. It’s super important to know exactly what you’re solving – not just a general idea of what you’re solving, but exactly what you’re going after. People who come up with a random idea and then go after it, that doesn’t last very long unless you have a real dedicated interest in it.

The difficulty of the side project

John: You’ve also written quite a bit about side projects, and it’s something we see a lot. People say, “I’m working at my day job, but my startup is a side project” Can you really do that and build something sustainable, or grow something? Is a side project just really a distraction?

Elizabeth: There are two stages. One is you’re working at your day job. Maybe it’s some big, slow company, and you are working nights and weekends on your startup. That’s perfectly legit, because in the beginning, you don’t quite know the details of what you’re going after exactly, and you may need extra time. It may not make sense for you to jump ship right now if it doesn’t seem like you’re even close to product-market fit. And from a practical standpoint, a lot of people need to get paid.

That being said, no investor will fund you until you’re full-time and all-in on this. That’s fine. Some things are meant to stay as side projects, and that’s something you’ll discover too.

What I think is a little bit more risky is if you are running a startup, and you also have a side project going on. That’s tough, because your startup really needs your attention. Where it makes sense to do a side project, in that case, is if your existing startup is not going anywhere, and you need to pivot or experiment. Then of course it makes sense. It’s like you’re starting over, but with some baseline knowledge this time.

John: You’ve said a common mistake is people waiting too long to release, because it’s not perfect. If you’re trying to do that, the side hustle, it’s going to distract you. Will you ever release anything?

Elizabeth: Side hustles need a lot of discipline, because it can be easy to say, “I’m too tired from my job today. I’m not going to work on it,” or you work on the wrong things like needing to incorporate or whatnot. It’s really important to have specific goals if you have the intention of turning it into the company. Of course, if you just want it as your side hustle, that’s also fine. It’s just a different thing.

John: Absolutely. Okay, Elizabeth, it’s been a really fascinating chat. Thanks for talking with us today.

Elizabeth: Thanks, John.