We recently caught up with longtime VC Mark Suster of L.A.-based Upfront Ventures, which last raised both an early-stage fund and a growth stage fund several years ago and, according to regulatory filings, is in the market right now, though Suster couldn’t discuss either owing to SEC regulations.
We did talk about a wide range of things, from his firm’s big bet on the micromobility business Bird (which could be publicly traded soon), to his views on decentralized finance, to his fitness regime (we had to ask, as Suster has shed 60 pounds since early last year). If you’re curious to hear that conversation, you can listen here. In the meantime, what follows are outtakes of his reflections on broader industry trends, including the feverish pace of deal-making.
On changing seed-stage check sizes, and how much time VCs have to write them right now:
It used to be 10 years ago that I could write a $3 million or $4 million or $5 million [check] and that was called an A round, and that company probably had raised a few hundred thousand dollars from angels and maybe some seed funds, and I could get a lot of data on how companies were doing. I could talk to customers. I could look at customer retention. I could look at a startup’s marginal cost structure. I could talk to references of 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 “day zero” companies and seed extensions and A rounds and “A prime,” there’s B … I’m not actually doing anything differently than I did 10 years ago, in terms of deploying capital, getting involved with founders very early, helping you build your executive team . . . But the pressure on me is, I now need to make faster decisions. I need to be involved with your company earlier. So I’m taking a little more risk in terms of not being able to look at customers. You may not even have customers.
On why his firm is averse to today’s A and B rounds and leaning more heavily into growth rounds. (It just brought aboard 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 investing platform for buying shares in collectibles; and Apeel Sciences, which makes edible coatings for fruit.)
I would never rule out any round. But what I will tell you is that the new A round that I maybe have an aversion to is, call it, $20 million to $30 million. What does that imply? It implies that you’re paying a $50 million, $60 million, $70 million valuation. It implies that to really drive fund-level returns, you have to have $5 billion, $10 billion, or $15 billion outcomes or greater.
The world is producing more of those. There are maybe 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 be writing $20 million A rounds where you’re taking that level of risk, you have to have a $700 million to an $800 million to a $1 billion fund. And I don’t want to be in that business, not because I think it’s bad, but it’s a different business that implies different skills.
We want to be super early, like the earliest capital; we’ll even take a risk on you want to leave your company and we’ve known you. Let’s say we knew you at Riot Games, we knew you at Snapchat, we knew you at Facebook, we knew you when you were working at Stripe or PayPal. We will back you at formation — at day zero. We want to [then] skip the expensive rounds and come in later.
On whether Upfront invests in priced rounds as well as convertible notes, wherein an investor is entitled to invest at a discount to the next round:
I think there’s a lot of misnomers that rounds themselves aren’t priced. Almost every round is priced. People just think they’re not priced. So [maybe the question is]: Are we willing to do convertible notes, are we willing to do SAFE notes, are we willing to do all this stuff, and the answer is yes. Now, most convertible notes, most SAFE notes, they don’t fix a price, but they have a cap. And the cap is the price. What I always try to tell founders is, what you have is a maximum price with no minimum price. If you were willing to just raise capital and set the price, you’d have a maximum and it’s better for you. But for whatever reason, a generation of founders has been convinced that it’s better not to set a price, which really what they’re doing is setting a max, not a [minimum], and I’m not going to have that argument again. People don’t understand it. [The short version is] we will do convertible notes; we would not fund something that had no maximum price.
Regarding how Upfront competes in a world where deals are happening within shorter time windows than ever before:
If you’re looking for [a firm that will invest after one call] you’re calling the wrong firm. We don’t have as much time to know if customers love your product. You may not even have customers. But please don’t mistake that. We spend as much time as we can getting to know the founders. We might know the founders for five years before they create a company. We might be the people egging them on to quit Disney and go create a company. So we really want to know the founder. The bet that we’re making is now more on the founder skills and vision than on customer adoption of a product. That’s really what’s changed for us.
I always tell 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 doing 35 investments or 50 investments or even 20 investments and they get it wrong because they didn’t do due diligence, OK, well, they have 19 or 30 other investments. If you get it wrong and you chose an investor who’s not helpful, not ethical, not leaning in, not supportive, not adding value, you live with that. There’s no divorce clause.
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