- Elizabeth Yin, who founded the tech startup LaunchBit, wouldn’t have invested in her own business. In a viral Twitter thread, she explained why even really good businesses get passed over by VCs.
- Investors are looking for the highest return on their investment, she told Insider, which isn’t always the company that has the most solid business plan.
- The secret to getting term sheets at great valuations is to understand the “hype market.”
- She explains how to create a bit of “FOMO” among the VCs you pitch.
- Visit Business Insider’s homepage for more stories.
Elizabeth Yin wouldn’t have invested in her own startup, LaunchBit. Founded in 2011, LaunchBit was an ad startup that helped software-as-a-service companies find customers. It was acquired by BuySellAds for an undisclosed amount in 2014.
Yin now runs the VC firm Hustle Fund that she founded in 2019, and invests in the pre-seed rounds for about 50 companies a year. Her portfolio companies include Webflow and NerdWallet.
But if LaunchBit had been one of Hustle Fund’s many pitches, it would have been a no. “When I went to raise money from VCs, I was just completely clueless,” she told Insider.
There are so many startups to choose from, many of them exceptional, that investors often “nitpick” reasons not to invest, she wrote in a Twitter thread. Is the valuation too high? Is the idea unique enough? Are there too many similar products?
“LaunchBit would have been filtered out on ‘too competitive’/not enough differentiation for sure,” she wrote.
A good business versus a growth one
With her experience as both an entrepreneur and a VC, Yin explained the difference between how investors and founders think — and why running a good businesses may not be what most interests a VC.
For instance, as a founder, Yin wasn’t overly concerned about whether LaunchBit was different from products already on the market.
“With my [entrepreneur] hat on, I know very well you don’t need to do anything unique,” she wrote. “Heck, often it’s better NOT to do something unique, cuz you know there is demand. And just do that well.”
But, as an investor, she’s looking for something groundbreaking that can challenge an industry, perhaps create one, even if the revenue isn’t there yet.
But most investors aren’t just looking at the idea, they are looking for the best returns, regardless of if those companies are great businesses. That’s a realization she had as an investor that she called “mind-blowing.”
As Yin put it, “Your best winners are not necessarily your best companies!”
And that means that what people think about a company, especially other investors, is almost as important as an idea that might “knock it out of the park,” she describes.
She wants founders to understand this, which she calls the “hype market.”
Some companies become swarmed with investors, which creates “hype” among dealmakers. This causes investors to compete with their deal offers and the valuation they offer will surge as a result.
One example is the infamous WeWork, she said, which was initially adored by investors — scoring a staggering $47 billion valuation. When it tried to go public, it disclosed information about its business model and management that caused its downfall.
Playing the ‘hype market’
Some venture capitalists even make it a strategy to find and play the “hype market,” she believes. Yin is forthright enough to say that this is good for her and her investors, similar to how good news causing a public stock to rise is good for public investors.
“There are other VCs out there who are trying to change their strategy to hop on these companies we think will be hyped up,” she said. “As an investor, obviously, I do benefit from this hype.”
Because, regardless of a startup’s revenue, growth or even rare profit, if that startup gets acquired or goes public at a valuation that tops what private investors offer, venture investors like herself will still see a huge payday.
Yin said this incentivizes investors to throw cash at hyped up companies, instead of less buzzy startups that may be better run.
Some founders criticize the entire VC industry because this so-called “hype market.”
Expensify CEO David Barrett told Insider that such VCs are out to “pump and dump” startups, which is why he stopped taking money from them and focused on using profits to fund growth instead.
“I’ve made no secret of my disdain for venture capitalists,” Barrett said. “Because I think the entire playbook for being a private company right now is how you pump and dump a startup to some bigger sucker.”
Women founders disadvantaged
Yin’s startup, LaunchBit, didn’t have “the hype” — in fact, she’s noticed companies with female founders rarely do, especially when those companies address women-specific issues.
“As we have seen time and time again, the ideas that get funded are also the ideas where the VCs really have the problem themselves,” Yin said. Basically, she believes that, until there are more female investors, it will always be harder for women to benefit from the “hype.”
If a female founder has “an amazing resume and background,” they can sometimes “pull together a round and a solid valuation,” she said. But their companies are still “not hyped in the same way that I’m talking about, where the valuations jump like 20x.”
There are many questions Yin struggles with in regards to this “hype market” — what great businesses are getting overlooked? How long does the “hype” last?
However, her main piece of advice for founders pitching to VCs is to try and create the hype for your startup as best as you can. The more VCs that want in on your company, the better off you’ll be, she says.
“You have to generate FOMO regardless of whether the market is interested in investing or not,” she said. “Get more investors in the round, and you have more leverage over what your valuation can be.”