Image credits: Mark Suster / Upfront Ventures
We recently caught up with veteran VC Mark Suster from LA Start-up companies, which last raised an early stage fund and a growth stage fund several years ago and, according to regulatory filings, it is in the market at this time, although Suster was unable to discuss any due to SEC regulations.
We talk about a wide range of things, from your company’s big commitment to the Bird micro mobility business (which could be will go public soon), to his views on decentralized finance, to his fitness regimen (we had to ask, as Suster has lost 60 pounds since the beginning of last year). If you are curious to hear that conversation, you can listen here. In the meantime, what follows are discarded shots of his musings on broader industry trends, including the feverish pace of deals.
On resizing the verification seed stage and how long VCs have to write them at the moment:
It used to be 10 years ago that I could write $ 3 million or $ 4 million or $ 5 million [check] And that was called an A round, and that company had probably raised a few hundred thousand dollars from angels and maybe some seed money, and I was able to get a lot of data on how the companies were doing. I could talk to clients. You could look at customer retention. You could look at the marginal cost structure of a startup. You could speak to references from the founders. I could take my time and be thoughtful …
Fast forward a decade, and $ 5 million is a seed round, and now there are pre-seed rounds and “zero day” ventures, seed extensions and A and “A prime” rounds, there are B.. . I’m not actually doing anything different than what I did 10 years ago, in terms of capital implementation, getting involved with the founders early on, helping you build your executive team, setting your strategy, working on pricing, [figure out] what market are you in [figure out] the sequence of how the products are launched and how to raise capital afterwards. But the pressure on me is that now I need to make faster decisions. I need to get involved with your company first. So I take a little more risk in terms of not being able to look at clients. You may not even have clients.
On why your company is reluctant to rounds A and B today and leans more towards rounds of growth. (He only brought on board a former Twitter executive to lead the charge here and in the meantime has invested more than $ 50 million in several of its portfolio companies, including Bird; Rally, an investment platform to buy stocks in collectibles; and Apeel Sciences, which manufactures edible fruit coatings).
I would never rule out any round. But what I’m going to tell you is that the new round that you might be averse to is calling it $ 20 million to $ 30 million. What does that involve? It implies that you are paying a valuation of $ 50 million, $ 60 million, $ 70 million. It implies that to really drive fund-level returns, you need to have results of $ 5 billion, $ 10 billion, or $ 15 billion or more.
The world is producing more of those. Perhaps there are 11 companies in the United States that are pure startups that are worth more than $ 10 billion. I get it. But if you want to write $ 20 million rounds A where you’re taking that level of risk, you have to have a fund of $ 700 million to $ 800 million to $ 1 billion. And I don’t want to be in that business, not because I think it’s bad, but it’s a different business involving different skills. . .
We want to arrive super early, like the first capital, we will even run the risk that you want to leave your company and we know you. Let’s say we met you at Riot Games, we met you on Snapchat, we met you on Facebook, we met you when you were working at Stripe or PayPal. We will support you in training, on day zero. We want [then] Skip the expensive rounds and come later.
On whether Upfront invests in priced rounds as well as convertible notes, in which an investor is entitled to invest at a discount in the next round:
I think there are so many misnomer that the rounds themselves are priceless. Almost all rounds are priced. People just think they are priceless. Then [maybe the question is]We are willing to make convertible tickets, we are willing to make SECURE tickets, we are willing to do all these things, and the answer is yes. Now, most convertible tickets, most SAFE tickets, do not set a price, but they do have a limit. And the limit is the price. What I always try to tell founders is that what they have is a maximum price without a minimum price. If you were willing to raise capital and price, you would have a maximum and it is best for you. But for whatever reason, a generation of founders has become convinced that it is better not to set a price, that what they are actually doing is setting a maximum, not a price. [minimum], and I’m not going to have that argument again. People don’t understand it. [The short version is] we will make convertible bills; we would not finance something that did not have a maximum price.
Regarding how Upfront competes in a world where deals are made in shorter periods of time than ever before:
If you are looking for [a firm that will invest after one call] you’re calling the wrong company. We don’t have that long to find out if customers love your product. You may not even have clients. But please don’t confuse it. We spend as much time as we can get to know the founders. We may know the founders for five years before they start a business. We could be the people who will goad them to leave Disney and start a company. So we really want to meet the founder. The bet we are making now focuses more on the skills and vision of the founder than on the adoption of a product by the customer. That is really what has changed for us.
I always tell founders: if someone is willing to fund you after a 30 minute meeting, it’s a bad deal for you. If a fund is making 35 investments or 50 investments or even 20 investments and they are wrong because they did not do their due diligence, okay, well, they have another 19 or 30 investments. If you make a mistake and choose an investor who is not useful, who is unethical, who does not support, who does not support, who does not add value, live with that. There is no divorce clause.