VC Elizabeth Yin explains the ‘hype market’ and how founders can use it to get better deals, higher valuations

Elizabeth Yin

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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 …read more

Source:: Business Insider


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