We recently caught up with Mark Suster, longtime VC of L.A.-based Upfront Ventures, which raised both an early-stage fund and a growth stage fund several years ago and, according to regulatory filings, is still on the market, although Suster does not. Couldn’t discuss either because of SEC regulations.
We covered everything from his firm’s big bet on the micro mobility business Bird (which may soon be publicly traded), from his thoughts on decentralized finance to his fitness regime (we had to ask, as Suster asked). Talked about many things. Shed 60 pounds since early last year). If you’re looking forward to hearing that conversation, you can listen here. In the meantime, what follows are the results of his reflections on broader industry trends, including the faster pace of deal-making.
Check seed-stages on resizing, and how much time the VC has to write them off now:
It used to be 10 years ago that I could write $3 million or $4 million or $5 million [check] And it was called an A round, and that company probably raised a few million dollars from angels and maybe some seed funds, and I could get a lot of data about how the companies were doing. I could talk to customers. I could see customer retention. I could see the marginal cost structure of a startup. I could speak to the founders’ references. I could take my time and be considerate. . .
Fast forward a decade, and $5 million is a seed round, and now there are former seed rounds and “day zero” companies and seed extensions and A rounds and “A prime”, B is. . . I’m not really doing anything different than I was 10 years ago, in terms of deploying capital, engaging with founders very quickly, 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 you launch products and raise downstream capital. But I am under pressure, I need to take quick decisions now. I need to join with your company first. So I’m taking a bit more of a risk in terms of not being able to see the clients. You may not even have customers.
Why his firm is up against today’s A and B era and leaning more towards growth. (It brought on a former Twitter exec to lead the charge here and has meanwhile plugged more than $50 million into several of its portfolio companies, including Bird, Rally, an investment platform for buying shares in collectibles; and Appeal Sciences, which makes edible coatings for fruits.)
I won’t rule out any rounds. But what I’ll tell you is that the new round I probably hate is calling it $20 million to $30 million. what does this mean? That means you’re paying a valuation of $50 million, $60 million, $70 million. This implies that to truly get fund-level returns, you must have results of $5 billion, $10 billion, or $15 billion or more.
The world is producing more of them. There are probably 11 companies in the United States that are pure startups that are worth more than $10 billion. I understood. But if you want to write a $20 million A round where you’re taking that level of risk, you need 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 because it’s a different occupation that means different skills. . .
We want to be super early, like starting capital, we will also take the risk that you want to leave your company and we get to know you. Let’s say we knew you at Riot Games, we knew you on Snapchat, we knew you on Facebook, we knew you when you were working at Stripe or PayPal. We will support you at the time of formation – on zero day. We like [then] Skip the expensive phase and come later.
When asked whether one invests in upfront 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 a lot of misnomers that are not round in themselves. Almost every round has a price. People think they have no value. Therefore [maybe the question is] Are we willing to note convertible, are we willing to note safe, are we willing to do all this, and the answer is yes. Now, most convertible notes, most secured notes, they do not have a fixed price, but they have a limit. And the cap is the price. I always try to tell founders that what you have is the maximum value not the minimum value. If you were just willing to raise capital and set a price, you would have the maximum and it would be better for you. But for whatever reason, a generation of founders have come to believe that it’s better not to set a price, that what they’re really doing is setting a maximum, not a price. [minimum], and I won’t have that argument again. People don’t understand it. [The short version is] We will note the variable; We won’t fund anything that doesn’t have a maximum price.
About how Upfront competes in a world where deals are happening in less time than ever before:
if you are looking for [a firm that will invest after one call] You are calling the wrong firm. We don’t have that much time to know whether customers like your product or not. You may not even have customers. But please don’t mistake it. We spend as much time getting to know the founders as we can. We can know the founders for five years before they form a company. We could be the kind of people he liked to leave Disney and form a company. So we really want to know the founder. What we’re betting now is more on founder skill and vision than on customer adoption of a product. That’s exactly what has changed for us.
I always tell the founders: If someone is willing to fund you after a 30-minute meeting, that’s a really bad trade for you. If a fund is making 35 investments or 50 investments or 20 investments and they get it wrong because they haven’t done due diligence, well, they have 19 or 30 other investments. If you get it wrong and you’ve chosen an investor who isn’t helpful, isn’t ethical, isn’t leaning, isn’t supportive, isn’t adding value, then you stick with it. There is no divorce clause.