Mark Suster — Upfront Ventures

Wednesday, May 25, 2022
Mark Suster from Upfront explains why the best time to talk to founders about fundraising is 3-4 months after their last fundraise.  
He was kind enough to share that framework and others this week on LAV.   #longla

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Today I have Mark Suster with me. I was planning to say that Mark is the best known VC in L.A., but there was a big announcement earlier this week. Until recently, Mark was the co managing partner with Yves Sisteron at Upfront. But as of this week, he is the co managing partner with Kara Nortman as well.

Mark, I’m pretty sure that the Kara announcement doesn’t come as a big surprise to most people in L.A. Tech. But I will say it’s a big deal to women in VC, it’s a big deal for L.A. and I know it’s a big deal for Upfront. So congratulations. Thank you very much.

I appreciate it. If I could just say briefly Minnie, you know, my observation about the industry. We know that just a few years ago, only seven percent of VCs were female, so. Ninety three percent were men. And it’s an outrage that that lasted for so long and wasn’t questioned earlier. I tell the story publicly. I called an LP almost a decade ago, and when I was first trying to recruit Kara and I told them is no longer an LP, but not for this reason.

But I told them I was looking at recruiting Kara and its first response was, I hope you’re not hiring her just because she’s a woman. You didn’t even let me say what she did. And I said, OK, so Princeton undergrad, Stanford MBA, five years at Battery Ventures, credit card debt that IAC had an operating role where she helped run Citisearch. Now that I’ve told you she’s more qualified on paper than me, she’s more qualified on paper than Yves.

Can we just talk about, like, what she’s good at in my own recruiter. But that’s like the headwinds that we face. And then secondly, when you look at the great women of our industry, whether I look at Ailleen at Kleiner Perkins or even Mary Meeker. It seems somehow that women had their quit their firms and go raise their own funds in order to be in power.

And the model for our industry has got to be different. We’ve got to promote with them, because if you are in a fund that funds six, seven, eight, nine, 10, 11, 12, we’re like serious pools of capital are aggregated. You know, that’s where women need to step up and have leadership roles. And I think more people in our industry are going to just have to get out of the way and help make that happen.

Kara is not only more qualified on paper, she’s more talented than Yves I are.

And I just look, fifteen years from now when I look back and say, what did she achieve? I’m certain it will exceed anything we’ve done before.

Yeah, I also I feel like things have changed, like it feels for me. It feels substantively different. The the awareness and the people reaching out not to say anything has been solved. But I’m hopeful for the trajectory, so what does this mean for you? Are you then just going to be hobnobbing with Reese Witherspoon?

I would say Kara’s more likely to be hobnobbing with me than I am. I’m not really a celebrity, hob. No, I’m I’m sort of more of a book. Ish computer guy, but so so I mean, I’m still managing partner, right, so I’m still my primary duty’s investing. So nothing really changes. It’s really about apprenticeship. About power sharing, about inclusion/

How do you approach the apprenticeship? And I did ask four questions for you and one of your questions is really good. She said, how do you mentor people to still maintain cognitive diversity? 

So cognitive diversity matters a lot to me. And I’m going to give it to you in a story about Kevin Zhang, who’s a partner Upfront.

So Kevin came from a very nontraditional role, which is that he was an associate at upfront. We had never promoted ever an associate the partner.

He was a video gamer, somewhat introverted biology undergrad at Harvard, went to work at Boston Consulting Group in their health care practice. When he joined like quant, he ran circles around us. He was incredible. And like, he’s just an encyclopedia.

But he was an introvert, so he wasn’t a chess pounder and he wasn’t an arguer. And so I didn’t think he would even become a principal. I just thought what a great resource to do the work. But I started realizing over time that he was also very good at building his network.

So he was getting access to people that were more like him and the people that are like him, who are PhDs at MIT or Georgia Tech, that people like Kevin, a lot more of them are introverted and they’re not chess pounders. And I think humans are very tribal, and I can’t just have all chest pounding Jewish people.

Right like that.

Can’t be it can’t be that. And, you know, all loudmouths and and we have chest pounding, not Jewish people, too. But, you know, it can’t be that persona. And I started to realize Kevin was bringing something really important to the way that we thought about deals. And I started thinking about the puzzle pieces of how we bring together a team that all kind of have the same.

Let’s say ambition and competitiveness, like the same traits that you look for in a partner, hardworking, willing to do the work, you’re willing to do whatever it takes to help founders and being founder friendly like Seth Sternberg, once when I did a podcast a decade ago, he he said to me, short people hire short people and tall people hire tall people. And I laughed.

But but like short people should hire tall people, right? 

Right, and you hired or promoted Kevin, which is fantastic. And you hired most of the partners who are at Upfront now.

And give me a little of the history of you at Upfront.

OK, so let me let me first say one thing, which is the most recent partner we hired is Aditi Maliwal. She was on the podcast, she was great. She’s wonderful. She’s quite young and all the best ways. She’s an old soul. And Kara hired her. You know, we all hired her. But Kara led the process. I said to her, OK, I want to add a female partner. I didn’t say I want to add a partner. I want to add a female partner, and, you know, I don’t care if that sort of rubs a few men in the wrong way because, you know, for hundreds of years, men have had the 90 percent advantage.

And if we’re not going to fight hard to change the numbers, the numbers won’t change.

So you asked about me. I joined the firm in 2007. I was one of six partners when I joined. When I came in, I had already worked with Yves for seven years, almost eight, and I’ve said to me even before he hired me, that he thought I would be managing partner one day.

And we kind of had a 10 year plan and it only took four years, but that was like more circumstances than anything. And so in 2011, I became co managing partner and Yves was on my board of my first startup. 

He’s always nice. He’s always friendly. He’s always a gentleman. Right. And and he gets what he wants with sugar or honey, I guess, as they say. And, you know, watching someone, like, accomplish so much without ever having to be tough.

There’s a lot you can learn from that. Sure.

Sure. I don’t know if this is two questions or one, but it came from Kara. So it’s a good it’s a good one. She said, we all know you have big inspiring frameworks, which I actually didn’t know, but I like that and then explain your style debate.

So I’m not sure if that’s two or one. So roll with whichever one you like.

Well, I I think the single hardest thing for smart people, because almost everybody that we deal with in our worlds are pretty darn smart, right.

But I think it’s a thing that a lot of people struggle with is contextualizing knowledge and information.

And that’s something that I think as a skill that I’ve worked on for the last 20 years and being able to put ideas into a framework, into a box and contextualize them and be able to reference them and say, OK, now I have a decision framework and I can I can deviate from the framework. But I think a framework is a useful place to start from.

What’s a good example of contextualizing an idea and putting it into a framework? Well, for example, what should we be funding? What’s important to fund, you know, and and having like a compass of what fits in that box of what we should fund and when should we fund it? And, you know, I’m trying to develop frameworks for how we think about that. And how we thought about that in 2009 is very different than how we thought about it.

In twenty, twenty, twenty nine, we could sit on the sidelines for six months. We could take our time, we could ask them to hit milestones, we could look and see and we could write a two and a half million dollar cheque for twenty one percent of a company.

And they would be they would have customers. They would have references. We could do all those references. We had very few people like competing for the deals. And so our mindset was very different. Today, almost entirely, what we’re funding is pre revenue. Wow. Almost entirely. And why is that? OK, so here’s a framework for you is, you know, I look at the most expensive round of venture is the round in which they’re raising 10 to 12 million dollars at twenty five to forty or fifty, maybe up to 70 pre.

And maybe it’s 20 million dollars because they have enough early signs that they attract all the capital that wants to compete for those early signs and metrics, but not really the guaranteed success. So you’re paying right now if you have a billion dollar fund or a billion and a half dollars fund. But that’s the world you exist in. But our medium first check is three point five million dollars and our median ownership on first check is twenty one percent. And we know that.

But let’s take clubhouse. Right. The clubhouse could be a transformational company. Like, I’m not a hater at all. I applaud everything that they’re doing. But like clubhouse is like, let’s chuck it out there.

Let’s have some let’s have a great team of engineers working on a problem and like, iterate, iterate, iterate. But like from day one, it’s not like really solving a big world problem.

And it’s like having spent years building this thing. And the third thing that really matters a lot, Minnie is founder Upfront fit. Hmm. Yeah.

And we spent a lot of time thinking, is this someone who really wants to work with us and we’re willing to walk if we don’t think that’s the case. And so there’s a lot of attributes we look for to say, is this somebody that we truly want to work with for the next decade of our lives?

My related question is, it seems like if we’re all playing the differentiation game, like I’m more differentiated than, you know, the guy down the street, it seems like the wrong game to me. Like it seems like I’m adding no value if I’m giving you your eighth term sheets and filling. It doesn’t have to be me. It could be anyone. I’m not actually helping you any.

And I’m not sure I understood the premise,I think differentiation is everything. So let me say this.

Minnie, as you know, I always spend time saying if you look at investing, investing like VC is like a pimple on the butt of the whole world of investing, it’s such a tiny, tiny, tiny thing that we do here that we think is so self-important.

But the real money is like things like public markets and commodities and, you know, currency and all the big dollars.

And they always talk about edge like if you’re if you’re a public person and you’re investing against everyone else, you have to have edge. And I think this is don’t talk enough about edge know, they kind of do, but they don’t really.

And I would say, look, you have to know something or somebody that very few people know, and that’s something you’re not going to be the world’s expert on it and you’re not going to be the only person who knows that if you’re the only VC knows that you’re talking about the wrong market. But my goal is to make sure we’re not competing against eight hundred bucks. We might be competing against eighteen. And so I’ve asked everyone it up front to have a practice area.

And not to be scattergun. So, for example, Kara, when she joined, I’m like, you can take some time to figure out your practice area. So she did a few deals in different categories. And very quickly, I said, I think you would be great at cybersecurity. You have, like, amazing relationships. It’s a growth area. We don’t cover it as a practice today.

And people love you in that sector. You’re smart. You did it at Battery Ventures. You have like that history. And then, lo and behold, she’s gotten into great cybersecurity deals. And here’s the thing is great deals in a category like FleetSmith, which Apple bought, and she made a great return in two and a half years after investing.

But like success at Fleet Smith and Open Raven and bright like success begets more success in that category.

So let’s go through them, Aditi in our practice, focus on FinTech. And that said, she’s spending all her time on fintech. Greg has done marketplaces. He came from eBay like he knows marketplace is better than most people I know. But look at it. He did go, you goat is selling.

I can’t tell you the exact number, but I will tell you that probably in twenty twenty one it’ll pass two billion dollars with with a, B with a B like this is a real company.

Yeah. And Greg was at the idea of formation stage of goat. Right. Like it’s really like a lot of it was his idea. He doesn’t like to take any credit for a lot of it was his idea of threadup which is a marketplace. He hand-picked a company called Rally.

And I think Rally is going to be one of our great, great investments and Rally.

What they were doing, nobody was doing was they were creating fractional ownership with SEC approval to trade initially in cars, collectible cars, but now into collectible items like sports cars and memorabilia.

And it’s such an amazing marketplace model. But like that’s what happens when you do that, Yves, you may not know, but like he was the head of North American investment for Carrefour, for which for a period of time was the second largest retailer in the world behind Wal-Mart. This is pretty Amazon.

And he invested in some tiny companies called Starbucks and Office Depot and Costco and Dick’s Sporting Goods and PetSmart and Jamba Juice. And I could go on on behalf of Carrefour. That’s what led to the creation of Upfront Ventures. So he knows the grocery supply chain. So it’s no mistake that he’s focused on sustainability of food and supply chains and did appeal sciences, which is an amazing company now valued at north of a billion dollars, and Ynsect out of France, which we already talked about.

So that’s his practice area. I have Kobie Fuller, who sourced Exact Target when he was at Insight Partners, knows a lot about the software market and marketing automation. And I’m like, dude, lean into that. Like there’s a ton of great companies out there. So he funded like Bevy and Cordial and a number of players in that sector and he runs in those crowds.

And Scott does a great company called MetaCX, but that’s his practice area.

So my practice area. Sorry, Kevin, Kevin, Kevin.

He focuses on video games, his personal passion. So he had Seriously, which was bought and bought for hundreds of millions of dollars, by the way, which a great return for upfront. And he does applied biology, which is as undergrad at Harvard. And then he went on to do that, as I told you, at Boston consulting group.

And my practice areas is computer vision. And I’ve been spending a ton of time on computer vision companies, anything from Nanit the baby cam monitor, which we’ll do tens of millions of revenue this year, also next year, and density, which is using sensors to monitor how people move around office space, which is just like record growth and covid to Osmo, which is doing children’s games.

So we’ve all got our practice area because we’re looking for edge to know people that let fewer people know and topics that fewer people know.

So so that’s great and made me feel like I need to go find my practice areas a little bit better, but but, you know, it’s my ultimate goal is to serve the entrepreneur.

Right. And that’s kind of why we’re just not your ultimate goal is to make money. If if that’s your ultimate goal, you’re in the wrong business. Right. Like, note that. No, it’s your proximate goal, not your ultimate goal, your job. And this is what VCs don’t understand. Your job is to return capital. 

You need you need to be comfortable waking up in the morning with that idea because this is what VCs are confused about.

OK, that’s your job. Your job is to take someone else’s money, combine it with your money and give them more money than they gave to you. That’s your job. Now, what is your product? Your product is an entrepreneur.

And it’s true that people like me know anyone great who joins this industry joins it because we want to work with entrepreneurs and we want to help them on the journey. I get that right. And that’s where we spend a disproportionate amount of our time, you know, maybe call it 80 percent of our time. And that’s what excites us.

I get all that. But the reality is the job of a VC is to return capital. I hear you.

I don’t think they’re incompatible. Maybe I should have said my goal is to help these entrepreneurs. They can be incompatible.

Because if you if you define your passions wrong or your priorities wrong, you can chuck I can chuck half a million dollars into a whole bunch of passion projects with entrepreneurs I want to work with and feel great about it, but not return capital.

I hear your point. I still think that’s the way you return capital is by helping the entrepreneurs build great businesses. Of course I agree with that.

And of course I’m being controversial intentionally. It’s like a CEO, you know, who’s in love with their product, spends a ton of time on their product, but their job ultimately is to return money to shareholders right there. They have to understand that that their job is not to be a great product person.

Their job is to be a great CEO.

Yeah, I think I mean, it’s interesting. Look at Google. I was a product manager. Right. It was always what’s best for the user, what’s best for the user. And that will, in the long term, bring Google boatloads of cash.

And so I still kind of have that mentality to this, which is it’s a long term think if you’re fooling yourself.

If I could say so. Does Google do what’s best for the user bullshit, you know, shit. Hold on. Hold on. Yeah, let’s answer that question.

What Google does is they optimize ads so that you can’t find what you really want to find anymore. Or in SEO, you click on someone who’s nothing more than an aggregator for themselves to make money.

And I will tell you this story, which is like anything I go to find, any product I go to find, I go to find, you know, I want to find like nutrition products or I want to find, you know, what is the best biking shorts or I want to find that anything that I’m interested in and I click on it is some damn version of like someone who aggregates six other e-commerce sites and then has a click referral to that so they can make my I can’t find like it’s not a good user experience.

Google is not good honestly to the user at all. They’re optimized around how they make the most money for their shareholders and themselves. I love Google, but but you need to be honest about what it is.

Well, you know, my pushback there is I can’t speak to your bike shorts or really to the past, you know, decade go to find a hotel, go to find like a flight, go to find a doctor, go to go find any category and tell me if you really find it on Google.

But I sat in there for ten years and it has drinking the Kool-Aid, drinking the Kool-Aid and watching the decisions and pitching products. And saying to Patrick, who at the time was our CFO, and, you know, I haven’t been there since Ruths been there and I’ve heard things have changed. And but, you know, I pitch products to Patrick and I remember really well and this is not, you know, the e commerce, but it was the Arab Spring.

And during the Arab Spring, they had shut off access to satellite TV and they’d shut off access to the Internet. They restored access to the Internet, but no one could get their news from satellite TV. We were going to start streaming Al Jazeera, you know, on the Internet, which hadn’t really been done before. And Patrick, bless his heart, was just like, look, I was like, he’s got tons of costs, no revenues.

And he’s like, this company. You need to think of it as half movement, half public company. And like, I heard that over and over.

And like, I greatly admire Google. I greatly admire them as a company. And I think they have the best and brightest people out there. So you have no pushback from me. But to pretend that their goal is really to benefit the user I think is misguided. If you were the, you know, the king and waving your magic wand to mix metaphors, you know, would you just beef up our regulators?

It’s a really hard topic. I give people like Jack Dorsey a lot of credit where people are hating on Jack Dorsey. He has a really unenviable position and I think he really is finding a good way to balance a really tough situation. Sundar, I think the same like, you know, Google historically has been very progressive in how it thinks about China, for example, and not kowtowing to China.

So I have a lot I know it’ll sound like I don’t have a lot of admiration. I have a lot of admiration for them.

I have less admiration for Mark Zuckerberg and for what Facebook has done. I don’t know. I guess I would struggle to be an employee at Facebook. And I don’t understand how there’s not a bigger mass exodus. But Mark also has a really tough job. Right, because he probably has compass a lot better than it publicly appears to us. And he’s got to make really tough decisions and he’s trying to do that.

And but but to your question, I have a book recommendation that I’ve been telling a lot of people about called Americana. And it’s a four hundred year history of capitalism in the United States, and when you read about the fights of two hundred years ago, three hundred years ago, one hundred years ago, 80 years ago, you’ll realize that we pretend like these fights that we’re having, this is like, oh, my God, the world has become awful.

And we’re finally having these fights. These are like political fights that we’ve been having for hundreds of years. But but if you read about it, they talk a lot about the history of regulation and the emergence of the consumer economy in the United States, which was the first global place where you truly have consumerism, was a lot of hucksters pitching it to people that didn’t work and that were harmful.

And so people were using the mail and they were doing it via the mail. And then the government realized that if they didn’t step in and say, wait a second, like if you’re telling people to swallow this cocaine product, that’s going to be harmful to people and that’s going to impact our society, our economy, our ability to recruit for wars and other things that governments do.

And they realized they had to play a bigger role. And that’s where regulation came out. And regulation is both a pain in the ass. And the problem with regulation is it’s often legislated and lobbied for by people who have vested interests in setting it up to restrict competition. So I’m not like pro tons of regulation, but I’m not pro zero regulation either.

So I don’t know whether to go back to VC or just roll on global, no, we can go back to VC and we’ll go back to VC. But where was. Oh, so OK. So here is maybe where I need to change my mindset, according to you at least, which is where I was going with this was if I’m giving someone their eighth term sheets, I’m not really helping them in their journey all that much.

If we approached a deal that already had seven term sheets?

My advice to the partner, and as you know, it’s usually not seven, like we sometimes approach a deal that has two term sheets, and I will say to the partner, shame on us for not being there nine months earlier. It matters when you meet the people. Right. So, again, framework and I’ve drawn this all up, I have like the power keynote slide showing this, which is the best time to go out and hunt for a deal and play offense is right after they’ve they’re funded.

It’s probably like three or four months after they’re funded. So let me assume that someone raises angel seed money and let me assume that that’s going to last 12 to 15 months. If I get involved that month, 13, I’m an idiot. Why? Because it month 13, if they’re still talking to me like I’m probably the only one looking. Right.

So, like, if it’s like two months and you’re out of cash and it’s like it hasn’t gone well, I waited too late.

If I let’s again, with my 15 month framework in mind, let me say that I’m looking at month 11 when you really probably are actively talking to people. I’m also too late because now I’m one of eight and like I don’t really have a source of differentiation. If I think on the 15 month time frame and I’m talking to you in month one or month two even, I’m probably too early. Why am I too early?

Because you’re exhausted from having raised the last round and you’re just like, let me just do my job.

Right. So so the sweet spot is month three.

In this case, month three to maybe month nine, you have a six month window. And the earlier I’m talking to you in that process, the more likely I am to get to know you, the more likely I am to get to know the rest of your executive team, the more likely I am to be one of three, not one of twelve, the more likely I am to demonstrate value to you where you might say God, wouldn’t it be nice taking money from Minnie rather than even having to go out to market?

And if you’re in a competitive market, if you’re not there a month three like you’re too late. So when people come to me in month nine or month eleven or month thirteen and I come to me, I mean my partners and they’re like, we have to rush.

They already have two term sheets.

And I don’t know, maybe we fucked this one up and maybe we should just look for the next thing now.

Yeah, yeah, yeah. I mean, I was going to ask you some about the summit or like moments that stood out for you. But you interviewing Josh Kopelman, that’s who it was, I think, when he said his average like first meeting to term sheet has gone from ninety days to nine days.

That bloom like that made me rethink some things.

Well, but but neither you nor I are Josh Kopelman and in good ways and bad ways.

But but they they have the ability to do a nine day decision. And I guess we don’t add up front. We don’t. I mean we can we have. Yeah. But that’s not my best self. Yeah. And we write slightly larger checks, we take board seats and everything we do.

What they’ve done brilliantly is a diversified portfolio in which they do some board seats and some larger checks. But a lot of what they do is smaller checks, earlier stage. They have more diversity of deals and then they’re really good at downstream VC relationships. And so they’re like, OK, we wrote five hundred seven fifty K into this deal. We’re doing a lot of these. Do we trust the series A investor who’s going to take the board seat because they’re going to have to do all the work and they can refine everything for how they get more deals done.

Totally. And and they, like you, also have this big following. And so I guess one question for you is you’ve got, you know, a huge presence on social media and everywhere, you know, do you think that that’s a you know, how do you think about the value of that? And do you encourage that for for others?

The hardest thing to compete for in any market, but particularly in the market we exist. And you already talked about like how do you break out of being the eight term sheet? Right. The hardest thing to compete for a share of mind.

And how do you get your mind like you can only take so many one hour, one on one meetings or thirty minute zoom meetings before you tap out, but you can influence share of mind in entrepreneurs vs. corporates, anybody by getting an opinion out there. And if I spray and pray my opinions across a lot of things, again, it’s also not that useful, but if I write 10 blog posts on cybersecurity or 10 blog posts like Fred Wilson said, I don’t know, a decade ago or so, I was on a panel with them and he said, it’s like Venus flypaper.

I put out the flypaper and I say, I’m interested in crypto. I’m interested in computer vision. I’m interested in geriatrics, I’m interested in marketplaces. I’m interested in cyber. And I read a bunch of stuff about that. Well, everyone is in that sector starts to pay attention first of all, like putting ideas out and getting criticized for them is how you either strengthen your argument or realize your argument was wrong.

So there’s a lot of goodness that comes from that. But it’s really about share of mind.

Yeah, OK. So I know I’m over. I know I’m out of time. So do you like that though? Do you like being a fairly public person?

Like, I feel like a lot of people, you know, you can be a target if you if people disagree with you or don’t like what you’re putting out.

Oh, it’s a love hate relationship. I am a target. I do occasionally piss people off. I don’t enjoy that. I really don’t like making anybody upset. I’ve learned from it. You know, earlier in my career, I would just my opinion mattered more than anything. So I would come out and say something really controversial and mention a company by name.

Then you fast forward three or five years and those people, like, resent you. Oh, my God, what did I accomplish with that?

So I really try to counsel people, be positive. I hate all the people who are, like, hating on Quibi right now. I think they fucking know what went wrong with the analysis on Quibi. So stupid. And there’s people who are publicly doing it who drive me fucking nuts and I’m not going to mention them by name.

Do you have any surprising predictions for L.A. in the next few years. Not for L.A., I think, like the long term structural trends for L.A. are amazing.

I think the flight from San Francisco and I’m from NorCal, like, people don’t know that because I was born in Philly and I’m such a big Eagles fan.

But like I grew up in Northern California, I grew up a software coder, like I’m at my heart, like at Silicon Valley, like geek. But the flight is real and it’s going to persist.

And I think L.A. is going to continue to rise, but it’ll have its ups and downs like every market.

Yeah, yeah. Well, Mark, thank you so much for your time today. I really enjoyed I could chat for hours, but thanks for coming on the podcast and thanks so much for all that you’re doing for L.A. and the community.

I appreciate it.

And thank you for having me and thank you for doing a show it’s great