Mark Suster (Upfront Ventures): Bubble? What Bubble? How It’s Different This Time. And How It Most Certainly Isn’t. (Video +Transcript)'

Gretchen DeKnikker

(Less than 20 days to SaaStr Annual 2017. Do you have your tix yet?)

In this session, Jason Lemkin sits down with Mark Suster, Partner at Upfront Ventures, to discuss the state of the fundraising market and how venture capitalists feel about it. This session was recorded just days after the huge dip in the public markets in early 2016, but the fundamentals of how a good company raises capital are timeless.

So just in case you need another acronym (there can never be too many in SaaS) Mark offers: ABR, always be raising. And reminds us it’s never too early to court investors – well before you actually need the money. Both agree that the rise and fall of the public markets may temporarily temper investment fervor, but a good company can always find a way to raise or wait out the storm. Many startups don’t’ survive the dips in venture funding which Mark says makes way for a new cohort of stronger, healthier businesses.

Check out the full transcript below! You’ll find the slides here.

If you want to see more sessions from 2016, we’re releasing a new one each week. Subscribe here to be notified. And be sure to grab your tickets to the 2017 Annual NOW.


Mark Suster:  We’re in bull markets. You tend to drink your own Kool Aid. You just believe the hype.

Leo Widrich:  I’m a former PM at Google, and I’m a statistics nut.

I just love meeting next generation sales leaders, and people who are looking to change. Change is the way that sales are done in software.

Aileen Lee:  Unicorn companies, which are companies that were basically built into be worth over a billion dollars in less than a decade.

Danielle Morrill:  I called all the VCs that were taking meetings with startups, “Zombies.”

Data’s really powerful, because it’s a lot different than working with sources or anecdotes.

Narinder Singh:  In some circles, we’re actually known for our parties just as much as we are for our technology acumen.

Christian Slater:  You want to change the world. You become a yes. You become a one. So I’ll ask you again, are you a one or a zero?

[background music]

Narinder Singh:  Technology’s been such a core part of what I’ve done, because it gives you an opportunity to express yourself in the world, no matter what you’re interested in.

Jason Lemkin:  All right. Pretty cool. Welcome to Mark Suster, everybody. Give him a big round of applause.


Jason:  Thanks, my friend, for coming.


Jason:  I just figured out Twitter about eight months ago. Now I’ve got to figure out Snapchat after Mark.

I know a handful of you read Mark’s blog. I’m sure you guys have seen some of the slides he did on the state of the market. What, about a week ago, for the Upfront Summit?

Mark Suster:  Yep. Last week.

Jason:  There may have been a little bit of change in the market since then, but I love these slides. We’ll do about 10 minutes of that, and then there’s about 10 minutes of stuff I want to dig in with Mark, on questions that I have.

Mark:  Can I steal your clicker?

Jason:  Yes. Let’s see if this goes.

Mark:  How about if we give it up for Jason? What an event.


Mark:  I remember this guy when he was just a pisher.

Jason:  [laughs]

Mark:  2005, 2006, Palo Alto, I was just saying to him backstage, “Walking around Palo Alto, and there was no tech, there was no SaaS. No one was interested in anything. To see you have come this far is really awesome.” I want to ask a real quick favor. I want to ask you to pull out your cell phone real quickly, your mobile if you’re not from the US. You got them out?

Just click on Twitter for one sec. Do a quick search. I don’t see you guys with your phones out so could you…Search for msuster, M S U S T E R.


Mark:  Make sure you’re following me. Scroll down past the Pinned tweet, to the first tweet that I have on there called “ask for the order.” Please, if you’d do me a favor, just retweet it.

Most startups are founded by product people or engineers. They forget the golden rule of building a company, which is not just revenue, but ask for the order. I just thought that would be a good metaphor to start today.

I’m going to tell you some things that you probably know if you read the tech media, the world is falling, yada yada. VCs raising money from the people who give us money, they’re called limited partners, or LPs, has gone back to pre-recession level, so we all have a bit of money.Quote#1 suster1

The interesting thing is that the amount of money that startups are raising has gone up dramatically, two times pre-recession level, lot of money’s gone into the system. What a lot of people don’t know is that if you go back a decade ago, the amount of dollars that we raised as venture capitalists, and the amount of money that you raised as entrepreneurs, was one to one.

In this market, for every dollar we raise, $2.5 are going into startup. That’s the biggest change in our industry. If you look at the left hand side of this graph, the thing that’s growing the fastest is seed investing and angel investing. If you look at the right hand side of the graph, what it says is where the real money is going, is late stage. Huge dollars, coming off the sideline and going into late stage.

This is really led by one major trend that has changed in our industry. This is the amount of non venture capital participation in the industry. It’s gone up dramatically, 55 percent of all capital in 2015. We as VCs, we take in money, we give it to you lot, we hope you do something with it, productive. Then we hope to get our money back.

Whilst more money has gone into the system, M&A activity is not up. In fact, recently, it’s down quite a bit. This was the first January. This is the IPO market. This was the first January in more than a decade where there were no IPOs. Zero, bupkis, bagel, nada.

We’re accumulating all these investments and not accumulating distribution. I set out to talk last week. Prior to Black Friday, I wrote these slides. Actually, sorry, that’s not true. I did write most of the slides. I added this one slide right after Black Friday, which is the last three months of some of the public stocks.

I’ve been talking about this for months, about how late stage valuations and public market valuations have become totally uncorrelated. The same thing happened in the real estate bubble. The amount that you could get for rental income versus the amount you could sell your property for was so out of whack, there are historical norms. Markets are correlated. I’ve been trying to point this out for a while, that when this happens, it is going to have a rippling effect.

This is US Venture backed median valuations. Median valuations went up three X in two years. Three X. Then this happened in Q4. That’s the last data point, off a cliff. Is it a trend? Is it an aberration? It takes a few quarters to know if it’s a trend, so I’m not willing to call it. But this is a data point, it’s worth noting.

We went and asked a bunch of VCs what they thought was happening. If you look at the left hand side, that’s what they thought happened in Q4. 61 percent of VCs said valuations that they were observing were down marginally, 28 percent said they stayed about the same, and 6 percent said they increased.

Then we asked among the right hand side, “What do you expect to happen going forward?” 61 percent said they expected valuations to go down but tellingly, 30 percent said they’re going to go down significantly. This polling data was prior to Black Friday.Quote#2 suster1

If you look at what’s happening in mutual fund valuations, people like TROW, Fidelity, these are quasi public portfolios, and they’re marking down their valuations. What you can say is really happened is this sentiment has started to swing and it’s swinging towards controlling your burn and not driving growth at all costs.

It was clearly born out in our survey data. 157 VCs, 62 percent of them said they were working with their portfolio companies to cut costs. It’s not something people like to tweet about. It’s not tweet worthy. One gets attacked for saying, “Cut costs,” so they don’t say it. But they’re doing it.

I think the message is pretty well received amongst the startup community. I think that’s a good thing. Some people have taken very high profile stands, which is great. Birchbox cut 15 percent. Yahoo cut 15 percent.

The other thing that people need to realize about VCs is we not only haven’t been exiting companies and we’ve been on this really big bull run of investing, investing, investing. We’re starting to stack up the number of boards that we’re on. When our companies are struggling to get financed, when our companies are taking longer, when our companies valuations go down, when our exits aren’t happening and our boards are accumulating, the balance shifts away from your biggest strategic asset in fundraising. FOMO, fear of missing out.Quote#3 suster1

There’s not a lot of FOMO in Silicon Valley venture right now. In fact, when we polled people, they said, “I’m still going to do great deals. You have to do great deals in good markets and bad, but I don’t feel in a rush anymore.” 77 percent said the pace is slowing down. “The pace slows down when I’m not worried that someone else is going to gazump me.”

50 percent said they may see the pace slow down but they’re going to invest in good markets and bad. They used two words that 82 percent of all respondents used, caution and concern. What I’m speaking to is sentiment, the sentiment of how VCs think.

Then we ask the people who fund venture capital firms. I won’t bore you quite with these but they’re in my deck if you want to download them. Basically, what that just said is that the people who invest in VC funds are going to continue to invest in VC funds. I think we’ll be able to keep raising money but I think you’re going to see us invest more slowly.

What I expect going forward, loss ratios are going to go up. In the last seven years, eight years, nine years, every startup’s a winner. I like to say it’s P. T. Barnum, everyone’s a winner. That’s not the real world.

With the storm that comes in and many startups not surviving that’s actually a healthy thing because the cohorts that are going to be built after the storm are going to have an easier time because they’re not competing against people giving away stuff free, fueled by venture capitalists who are going for growth at all sake, winner take most markets. I think you’ll see healthier companies be built.Quote#4 suster1

I think really the momentum is shifted from the rabbit to the tortoise. Take your time, build real companies. It’s not all doom and gloom. We look at these categories, transportation, VR, AR, computational biology, food, agriculture, aerospace. There’s so much great innovation happening right now. I think the long march of technology will continue. We’re just going to return to normalcy. Thank you.

Jason:  That’s good. Thanks Mark. Just sit right here. It’s cool.

Mark:  You want that and that?

Jason:  It’s all good. I know there’s some stuff you want to talk about too. One thing I want to highlight from your presentation that might not be obvious to people, a synthesis of some of those slides is, forget about the market for a moment. VCs are going to feel more full now. They’re going to be coming off less boards, they’re going to have fewer exits, they’re going to focus more on their portfolio, FOMO’s a piece of it.

No matter what happens, even when everything bounces back next week, VCs are going to lean forward a little bit less for a while. If you’re full, if you’re on eight boards and you’re worried about four, you’re less excited to lean in for that next investment than when you’re actively seeking out a half dozen or more investments. Everyone will feel that somewhat.

Mark:  I call that triage. When you’re going through and you’re looking at your patience, fucking hell.

Jason:  We both had some success here, right?

Mark:  Mine was significantly worse. Mine was what?

Jason:  You never know what happens with unicorns the days.

Mark:  There’s a whole lot of water in this thing.

Jason:  I think the chair is vinyl, isn’t it? I think we’ll be all right.

Mark:  I was promised alcohol.

Jason:  You were promised alcohol. It will come.

Mark:  It’s not yet 10:00 AM. Although, it is afternoon in England. It’s afternoon somewhere.

Jason:  Backstage, we’ll have two appletinis here when you’re ready.

Mark:  Obviously, I already had one. Here’s a thing. VCs, when they go through triage…By triage, I mean, let’s say you’ve got 10, 11 companies and you’re trying to figure out, “Holy shit, these three or four may not survive.” You start focusing all your attention on those.

What people who aren’t experienced in dealing with venture capitalists maybe don’t realize, if you have three investors, it’s not as simple as saying, “We’ll just save this company. We’ll just give it one year’s cash,” because it could be two people who say, “Let’s give this company cash,” and the third one doesn’t. That third one may have paid 150 pre or 200 pre and the early ones may have paid 8 pre.

The ones who paid eight pre are like, “Yeah, of course, we should fund this.” The one who paid 200 pre is thinking, “If I give you another $10 million, I’m not sure you’re going to be worth three or four hundred pre. I don’t mind if you sell for 50 pre because I’m still just going to get my money back.

You end up with this fighting amongst your cap table. It means that it’s much harder to get companies financed. There’s a lot of recaps and lowering evaluation and fighting. It takes time to work through the system.

Jason:  There is that fight and then just to tease down that I’ll tell you what others did, the other thing that I observed, you’ve certainly been investing longer than I have. Through about last summer, every VC firm or VCs that got more and more into SaaS enterprise, everyone wanted to do a deal.

We can talk about whether the quality bar went down and other things but they wanted to do a deal. They had slots. For a variety of reasons from your slides, I don’t think they will be as hungry to do a deal in the first quarter and the first half of this year.

Even if you’re doing great, the existential experience you might have had, forget about everything else, it’s just a different environment. It won’t feel anything like it felt before because there won’t be as much hunger to deploy that maniacal amount of the pace of capital that we saw a year ago.

Mark:  That’s true. I try to talk in simple metaphors because I feel like it makes it more memorable. What I’d like to leave people with is there’s no more FOMO.

Jason:  No more.

Mark:  That encapsulates everything that you said. FOMO is like, “I got to do a deal. I want to do deals. I’m in this business to do deals.” Now they’re like, it’s like deflation    “If I’m going to buy a house and I feel like I need to buy a house but prices are dropping every quarter, I might as well just wait to see what happens next quarter.”

Jason:  Yeah.

Mark: And venture’s like that. It’s like, “If I could do a deal now, maybe there’s better prices next quarter. Maybe there’s better prices the quarter after now.”

I also want to point out this. Remember I said, “10 years ago, a dollar into VC was a dollar into entrepreneurs. Now it’s $1 into VC, $2.5 in entrepreneurs.”

There were so many first time funds, whether it was the big bank setting up their own funds, whether it was everyone out now raising a fund, whether it was syndicates on AngelList. Everyone had new money. Those people were especially willing to write checks.

The truth is, many of those people are still willing to write checks. It’s very different if you have a new fund, a hundred million dollars, you’re sitting on one board, versus you’ve been in the business for 15 years and you’re on eight boards. Life is very different.

Jason:  Since you’re both sides, let’s use Upfront as a case study just to help other founders. How many partners do you have now? I should know this but…

Mark:  We have five full time investment partners, we have one venture partner, and we have two principals and those principals do write checks.

Jason:  Let’s call it six FTEs here.

Mark:  Six FTE.

Jason:  For your fund size, you’re trying to do two deals per partner per year, rough and tough?

Mark:  Yeah. I can give you the exact…

Jason:  Then what I’m going to ask is, how does that impact this year? Are you still going to do 12 deals this year? Are you going to back load them a little bit?

Mark:  Then the LP data, and we’re going to release the full surveys, if anyone’s interested, the one thing LPs complained about is that VCs were coming back to market to raise funds too quickly.

Jason:  18 months of back in market.Quote#5 suster1

Mark:  18 months. The historical norm is three years. We raise funds every three years. If you’re a good fund, you raise every three years. If you struggle, it’s every four or five years. If you’re super on top of it, maybe two and a half years. People have been raising every 18 months because they’re just deploying capital.

LPs are complaining about that. I think you’re going to see a return to normalcy. We need to invest in good markets and bad markets. Just real quickly on the math is, we have a $280 million fund. Let me park about $40 million of that for random shit. $240 million, about half of that, $120 million, is primary, we’re going to give to entrepreneurs.

About half of that is reserve to follow on. So $120 million, we’re going to do it on a three year investment cycle. That’s $40 million a year. I have five full time partners. Assume $8 million a year.

If I give a little money to principals, assume that each investment partner does, let’s call it $7 million a year and our average check size is $3.5 million. We’re going to do two deals, $3.5 million average per year. It seems so mysterious, like VCs have all this money but it’s really based on pretty solid interest.

Jason:  It’s not that much, right?

Yeah. Just for fun, you’ve got two deals per partner, $3.5 million each. You’re an investor. You’d love it if you could invest with slightly lower valuations for the same quality companies. It’s not critical but it’s a benefit. Let’s dig down. Every partner is still going to do two deals this year. There’s all this press, all these tweets but you’re still going to do two deals this year.

That’s true, right?

At a zen level, does any of this stuff matter? I know if you’re raising money tomorrow and you screwed it up and you didn’t hit your…it matters but from your perspective, it’s pretty much…


Jason:  …standard operation today, right?

Mark:  Back to my metaphor, the forest. Storm comes. It clears out. You have healthier cohorts. If I can write a $3 million check at a 7 pre, 8 pre or $1.5 million check at a 4 pre, 5 pre, great.

What’s going to be really painful in the next three years is all those companies that raised 5 on 25 because they could, because people had FOMO. They go out to do their next round. They’re doing $1 million ARR or $2 million ARR.

People are thinking, “Well, I could get a brand new company for 11 or 12 pre doing $1 million ARR or I could fund you and you’re going to want 40 ARR…$40 million pre. Then you say, “Oh, don’t worry. We’ll just do it at 15. We know the market’s change will be reasonable.”

I’m thinking, “You think I want to piss off your investors by forcing them to do a down round? Life’s too short. They’re not going to want to send me more deals.” We don’t say it but we just move on.

Jason:  But a lot of that is let’s call it…I mean, the letters changed but that’s more series A and series B risk, and it’s real. That’s a real issue.

Mark:  Yeah, it’s a real issue.

Jason:  The average founder here, let’s assume they’re at $1 million or $2 million of ARR and they only have real angel money, not a fund. If you’re going to do two deals this year, if you love them, valuation variance aside, they’re still going to be funded. It may take another two months. It may take more…


Mark:  I think if that’s what’s in this audience, you guys are in great shape.

Jason:  Yeah, in great shape. I don’t…

Mark:  The next 18 months are going to be great for companies who have built real businesses but are not over capitalized but it’s going to take longer. You’re going to have to work harder, meet investors early, well before you need the money. Don’t think you can raise money at demo days. Don’t think you can save it all up for fund raising season in two months of a year. A, B, R.Quote#6 suster1

Jason:  Absolute Bitching Returns? What is it?


Mark:  Always Be Raising.

Jason:  Always Be Raising, got it.

Mark:  I’m not raising our next fund until 2018 but guess when I started?

Jason:  You’re raising it now. You started last week.

Mark:  Yesterday.

Jason:  You started yesterday.

Mark:  Always Be Raising. Look, the problem with the advice from most investors is most investors on this topic are wrong because what they want you to believe is that you go to VCs. You create a competition. You get five or six into a frenzy. You maximize…that’s the biggest load of horseshit I’ve ever heard.

My metaphor, back to metaphors, is X axis, Y axis. X axis is time. Y axis is your performance. Your performance may be revenue but it may just be how you demo your product, how you perform on the day, people you hired, whether you’re in the press.

On any given day, to me you’re a dot. Over time, I see your trend over time. I decide if you’re someone I want to work with. The longer I get to know you, the easier it is for me to make the investment decision when I need to. Frankly, if I get it wrong, I get it wrong. I write off money. If you get the investor wrong, you’re stuck. There’s no divorce clause in raising money.

Jason:  You’re stuck.

Mark:  Why would you want to wait for two months, force it all and not get to know them? Why don’t you find out if they return email? Why don’t you find out if they introduce you to people when they said they were going to introduce…all that stuff that matters, wouldn’t you like to know?

Jason:  You would, yeah. It’s good. All right. I want to ask about eight other questions but let’s thread into the conversation.

Mark:  Sure. Let’s do it.

Jason:  Let’s get Danielle up on stage and do the slides. Then we can dig in.

Mark:  Awesome. Let’s go for it…

You can view Mark’s slides here.

Published on January 18, 2017
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