Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: Upfront’s Mark Suster on COVID Redefining What A Great Company Looks Like and What Valuations Look Like, Why Pay-To-Play Is Back On The Table & Why We Will See The Death of Party Rounds About this episode Mark Suster is the Managing Partner @ Upfront Ventures, one of LA's leading and largest venture firms with a portfolio including the likes of Bird, GOAT, Maker Studios and Ring.com to name a few. Prior to joining the world of venture, Mark was the founder & CEO of two successful enterprise software companies, the most recent of which was sold to Salesforce.com where Mark became VP, Products. Mark is also the author of one of my favourite industry blogs, Both Sides of The Table. In Today’s Episode You Will Learn: 1.) How Mark made his way from founding enterprise companies to joining "the dark side" of venture with his move to Upfront? 2.) How does the current economic landscape change the world of B2B? How will renewals be impacted? How will customers approach discounting? Similarly, how will the world of B2C be impacted by COVID? How does this impact marketing and ad spend? 3.) How does Mark think about reserve allocation today with Upfront? How does that change in the face of COVID? Why does Mark believe this environment will redefine valuations? How should founders respond in the face of heavily changed valuations? 4.) Does Mark believe we will see a graveyard of new venture firms who have deployed too quickly and have too many hungry mouths to feed? How does Mark think about building temporal diversification into the portfolio? How can managers use reserves more intelligently moving forward? 5.) Does Mark agree with the Twittersphere that VCs remain "open for business"? How will we see deal volume impact? How will we see size of transaction impacted? What is the most important role a VC can play today? How will the M&A market also be impacte din the face of COVID? Items Mentioned In Today’s Show: Mark’s Fave Book: Disunited Nations: The Scramble for Power in an Ungoverned World Mark's Most Recent Investment: Solve As always you can follow Harry, The Twenty Minute VC and Mark and on Twitter here! Likewise, you can follow Harry on Instagram here for mojito madness and all things 20VC.
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Harry Stebbings? We are back for another week in the world of venture with me, Harry Stebbings. And if you'd like to suggest questions or guests for future episodes, you can on Instagram at H Stebbings 1996 with two Bs. And I really do love to see you there. But to our episode today, and I always remember reading this guest writing very early in my venture career. And it was so formative to my thinking. And I'm thrilled to welcome back to the hot seat Mark Suster, Managing Partner at Upfront Ventures, one of LA's leading and largest venture firms with a portfolio, including the likes of Bird, Goat, Maker Studios and Ring.com, to name a few. Prior to joining the world of venture, Mark was the founder and CEO of two successful enterprise software companies. The most recent of which was sold to Salesforce.com, where Mark became VP of Products. Mark is also the author of one of my favourite industry blogs, Both Sides of the Table. If you have not checked that out, it really is a must.
0:44 Harry Stebbings? And I do also want to say a huge thank you to Cara Norton, Greg Bettinelli and Koby Fuller for some fantastic questions and suggestions today. I really do so appreciate that. But before we move into the show today, I want to take a moment to mention HelloSign, a great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution used by millions to securely send and request legally valid digital signatures and agreements. They raised a total of $16 million in funding and recently got acquired by Dropbox for an impressive $230 million. Check out hellosign.com/20vc to join the thousands of companies and founders who value fast, secure and simple e-signatures. And speaking of signatures and getting deals done there, you really need to build that relationship.
1:29 Harry Stebbings? And there's nothing like meeting face to face and there's nothing like Zoom to make that happen. Zoom lets you connect and do business across town or around the world. Zoom ties together all of your communication needs into one easy platform for video conferencing, phone calls, group chat, webinars and your conference rooms. And connect easily from anywhere, your mobile phone, your laptop or conference room. Zoom is how business gets done. Get your free account at zoom.com today. Meet happy with Zoom. And finally, I've always been a big history man. And so I want to talk about Cooley, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Cooley has formed more venture capital funds than any other law firm in the world.
2:10 Harry Stebbings? Fifty plus years working with VCs. They help VCs form and manage funds, make investments, and handle the myriad of issues that arise through a fund's lifetime. So to learn more about the number one most active law firm representing VC-backed companies going public, head over to coolie.com and also check out cooliego.com. But that's enough from me, so now I can't wait to hand over to Mark Suster, managing partner at Upfront Ventures.
2:39 Speaker 01 You have now arrived at your destination.
2:42 Harry Stebbings? Mark, it is such a pleasure to have you back on the show. As I was saying to you just before, it's been three years since our last episode. What a three years it's been, but thank you so much for joining me again today, Mark.
2:51 Speaker 02 I'm thrilled to be here and the three years for you has just been magnificent. It's been wonderful to see how many successful episodes of the show that you've done and I've enjoyed many of them myself. So thank you for doing the show.
3:03 Harry Stebbings? Well, I mean, that means the world to me and I just love doing it. It seems very incredible that it's my job, but I really appreciate that. But I want to start with you, Mark. So tell me, and for those that maybe missed our first episode, how did you make your entrance into the wonderful world of venture and come to be a GP at Upfront today?
3:18 Speaker 02 Sure. Well, I had previously founded two tech startups. They were both in a field known as document collaboration. Back when I was doing it, people didn't seem to care that much collaborating on documents. And now it's become the thing. We've seen collaborative tools from anything from a Dropbox or a Box, but you also have companies like Slack and companies like Procore in the construction space where I started, and it's become quite a big deal. But having been a two-time CEO, after I finished a period of time as VP of Product at Salesforce.com, the firm that had funded both of my companies asked if I wanted to join as a partner. And so since 2007, I've been a partner at what's now Upfront Ventures.
4:02 Harry Stebbings? I mean, incredible operating experience. I do have to, oh, sorry, too interested and off schedule. But how did your operating experience impact your investing mentality, do you think?
4:10 Speaker 02 Well, when I started, I had the philosophy that too many investors that I had come across didn't have real startup operating experience. And I didn't feel like I always got the advice that I could have used at the time I could have used it. And so even my blog, which I think you know is called Both Sides of the Table, I was starting with that metaphor, which is I've been on your side of the table. I understood what it was like to negotiate terms against VCs. I understood what it was like to raise too much capital, hire too many people, and then not hit my targets and have to cut back and cut costs. I've been through massive economic cycles like we saw in the dot com correction. And so now as a venture capitalist, I feel like I can speak from the heart,
4:53 Speaker 02 from real experiences of hiring and firing and restructuring, of selling, of having to renegotiate contracts when I work with startup entrepreneurs. So I'd say more than anything, what it did is it gave me a compass of what to look for. I was looking for a kind of resiliency and grit that I saw in most of my peer group who were successful. And hopefully, people who were looking for that from their investor felt like that was a good pick for them.
5:19 Harry Stebbings? You mentioned the market corrections there, Mark, and it's such a unique time right now. We're in a greater uncertainty than ever before. Economy virtually shut down, as Howard Mark said on the show recently. If we start by vertical, you mentioned obviously about collaboration software being the thing right now. When looking at the B two B landscape, Mark, what can we expect from the current economic landscape?
5:38 Speaker 02 Well, one of the things I've been advising our founders of B two B companies to think about is this. You often are signing annual contracts, so you haven't seen the full extent of how the correction is necessarily going to impact you. If some of your clients are hotel companies or airline companies, you see the impact on those clients right away because they're probably telling you they can't pay their contracts, right? But for the rest of your clients, you don't really have full visibility in what's coming. And what I can tell you is this, in a booming market, senior executives Mid-level executives, junior executives are paid to innovate. They're said, why aren't we launching new initiatives? Why aren't you doing new things? Why aren't we trying new tools? Why aren't we keeping up with our nimble competitors?
6:23 Speaker 02 In a contracting market, people all across industry are paid to cut costs. Why aren't you cancelling contracts? What are you renegotiating? What do we not really need? So a certain amount of your renewals just aren't going to get done. People aren't going to view you as critical. But let's say you have software that is critical and is making a difference. Don't think that makes you immune from people coming back and asking for a cost reduction. So you might have a decent year in the next year ahead, but you might find that your revenue year over year stays flat. And you probably geared up your sales force and your marketing team and your professional services, your go-to-market, to grow at thirty, forty, fifty plus percent per year. And the reality is you're not going to need all that infrastructure
7:08 Speaker 02 over the next year if your revenue is not going to be there. So I'm encouraging people to get in front of that trend, get your cost base down and plan for, you know, hope for the best, plan for the worst.
7:19 Harry Stebbings? I totally get you. Can I ask, in terms of those conversations, how do you advise the portfolio founders to negotiate those discounting discussions? In terms of their loyal customers, you want to honor them, but you also have a business to run. How do you advise their discussions go and the tone they take?
7:33 Speaker 02 The people who don't understand the current economic environment and how it's impacting everybody will end up losing a lot more contracts than preserving good ones at lower prices. I think you need to accept that the world has changed, accept that people are going to want to renegotiate and pay less. And what can you get in exchange for that? So one of the things, I was involved in helping guide one of the portfolio companies of which I'm involved, through their single largest customer renegotiating their entire contract. And what we were able to, sadly, you know, we cut, I don't know, forty percent off the annual contract, which is a very hard thing to do with your largest account. What we got was a one-year extension.
8:16 Speaker 02 So we have longer-term visibility, but at a lower cost. And what we had to do was figure out what Feature set we could cut back so that we had a justification on how to cut back. And we asked for more executive level sponsorship so we could strengthen our relationships. But as I said to the team, this is real politic. You're going to end up with a zero and you can't afford a zero with this customer and face the new reality.
8:38 Harry Stebbings? I totally agree with you in terms of that. I am intrigued. I always think back to Robert Smith from Vista Equity, who said about software contracts being the highest quality of revenue and contract. But then I also think in a time like this, actually, you know what? People don't pay. I guess I'm interested, do you agree with it being the highest quality revenue contract? And how do you think about that statement?
8:57 Speaker 02 It really depends, and I would have to have heard the context in which he said it. But let me say this, there was a term that was used a decade ago called shelfware. And shelfware was back in the day when packaged software literally came in a package. The metaphor is I would buy the box, I would install it, I was super excited about it. But then it sat on my shelf. Like in other words, it didn't really get implemented. It wasn't really being used to full force. I think if you look at a lot of software companies, and by the way, some very successful public software companies. A lot of their customers are paying for the top of the line license. And they have way more licenses than their organization really needs. Because all the leverage was with the software company, was with the seller.
9:38 Speaker 02 And I can tell you, whatever you want to say about quality, even great companies are going to see their contracts renegotiated. And it's just the reality. You're going to see people saying they want to deprecate to a lower quality addition of a software product. There are companies who didn't allow that in the past. If you went for the, say, enterprise was the max addition you could get, they didn't allow you to gracefully fall back. People are going to say, I bought 1,200 licenses, but I only use 800 of them. I want to cancel 400. It's going to happen. So if you don't have a plan for that happening, both in terms of how you gracefully do it, what you're asking for in return, and how you size your cost base, you're going to be in for a huge shock. And that shock is going to come in Q4 and Q1.
10:18 Harry Stebbings? I'm really interested. You know, obviously, I'm a seed investor, you're a series A investor largely. I'm interested in terms of companies that I work with, they say, hey, I can cut burn and I can survive, but my numbers aren't going to look great. And in 12 months, I'm not going to be in a better financing position with great growth numbers to go and raise an A. Is survival the next milestone? Or do we still need to see that growth to get to the A in your mind? Help me on that one.
10:42 Speaker 02 I think we're going to redefine what a great company looks like, and I think we're going to redefine what valuations look like. The reality is throughout history, it took time. It took time to sell your product, to get people to embed it across their organization. It took time to scale contracts and some companies are still going to grow at extraordinary rates because sometimes the right software comes along at the right time. I mean, look at Zoom going from 10 million monthly actives to 200 million or daily actives, 200 million in three months' time. Like, you can hit a moment of great need, but the reality is most companies take time. And I think the idea of showing growth metrics at all expense, trying to get it as quickly as possible, may not end up being the winning formula going forward.
11:27 Harry Stebbings? Speaking of those growth metrics, we spoke about B to B there. If we maybe switch hats slightly and shift to B to C, what do you think the current economic cycle impacts the B to C landscape in your mind?
11:37 Speaker 02 Well, I think there's also an issue that I see in B to C, which is this. If you have a product that you have to sell every single month, some people saw an immediate decline in purchasing. And we know that, and they see it in the numbers, and we see it as an observer in the credit card data when you review like the credit card analysis companies that provide you third-party data. But there are many companies that haven't yet seen a massive decline. They might be down 6% quarter over quarter, they might even be flat or modestly up. But I don't believe the economy has seen the full impact of two, three, four quarters of contraction in consumer sentiment. The stock market declined and there's a term from economics
12:20 Speaker 02 called the wealth effect. When you feel less wealthy because your 401K goes down, your stock holding goes down, 401K being a US Thing, but the value of your retirement goes down, that people start spending less. But the reality is the stock market hasn't corrected as much as it might. In the United States, we've gone in the last three weeks, we're recording this middle of April 2020. Unemployment went up 17 million new unemployment claims in the last three weeks. That's the most ever in human history and the fastest growing unemployment rate in human history. And we don't know how high that's going to go. Is it going to peak at 20 million or is it on its way to 45 million?
13:01 Speaker 02 We don't know, but I can tell you if 17 million people are out of work for six months or more, spending is going to go down everywhere across almost every category, maybe other than grocery and pharma.
13:13 Harry Stebbings? I think that, and again, I'm using this for my own personal learning here more, but like, you know, when I advise founders today, as you said, we don't know. It's so unprecedented in terms of the scale, in terms of GDP decline, in terms of unemployment growth. I guess my question to you is when advising founders, what's the number one piece of advice that you give to portfolio CEOs today? And how do you think about that, given the level of unprecedented A, knowledge that we have, and also just uncertainty?
13:37 Speaker 02 Well, there are things we do know already, Harry, so I want to make that clear, which is we know already the size of the shift away from marketing dollars and ad dollars, for example. So if you're impacted by that, it's immediate. I mean, 40% decline right now in quarter over quarter for second quarter. And we're already seeing it in the data of people starting to cancel marketing orders that we know are being canceled. If you look at Goldman Sachs, Goldman Sachs had forecasted 29% decline in quarter two over quarter one, or no, sorry, 24%, which would have been the largest ever GDP decline again in human history, quarter over quarter. And then two weeks later, they revised it down to 39% decline.
14:19 Speaker 02 So whether it ends up being 20% or 40% decline, it's just unprecedented decline. So to your question, my advice is this, treat it very seriously. This is not a small little thing that happens for two months and then our lives go back to normal. And you need to adjust your cost base, you need to create as Long of a runway as you possibly can to show as much evidence of success. Now, there are some people say you shouldn't even be talking to VCs right now because VCs have their head in the sand, let's say. I disagree with that. I think you need to start the conversations early. You need to show that you're having momentum and making traction. And I think it might take four times more VC meetings to get one check than it did only three months ago.
15:02 Speaker 02 But prepare for probably the hardest economic environment of any of our lifetimes, not just yours if you're a younger founder, but of anyone alive today.
15:11 Harry Stebbings? You mentioned there about speaking to VCs and, you know, it's proliferated VC Twitter, which is open for business, done four term sheets in the last two weeks. And I look at it and I go, really? I mean, my question to you, Mark, is do you believe that this open for business maybe marketing stance is true? And how do you think about that today in the current environment?
15:30 Speaker 02 All I can tell you is from a data source of one, which is us. We funded a company today. We submitted the term sheet two weeks ago and I've never met the founder in person. We greenlit another term sheet last Monday. It'll fund early to middle of next week. I've never met the founder in person. We are going to our partner meeting next Monday with a third deal that we're very excited about. One person on our team has met them in person, but nobody else has met them in person. And we have two companies closing north of $50 million rounds this month.
16:05 Harry Stebbings? I mean, incredible in terms of the volume. I guess my question to you is, how do you think about LP communications? Given them always being playing an active role in the investments that you make, how do you think about communicating the high volume even in today's environment?
16:18 Speaker 02 Well, let me make sure that I still answer the first part of your question and I'll talk about LPs. So with respect to the first part of your question, I think probably the market overall is massively down. Number of deals being done and the fact that we're active right now could just be an aberration or just market timing. We're seeing great deals. We're tending to fund a lot more, call it $3 million checks than $10 million checks in terms of new money right now. So when we're looking at companies. We're looking at bright eyed, bushy tailed. We're going to build this for the next 10 years. We're in the first six to 18 months of our journey. As opposed to a company been around for six years and suddenly finds itself in a cash crisis with three other investors and it needs fixing.
17:03 Speaker 02 Like it needs fixing is a very hard thing to do. And those will be the companies that are hardest to finance, which is the majority of companies today. So I don't want to pretend like it's easy. It's hard right now, but deals are getting done. So if you have a good company and if you adjust your expectations and you put the energy into it, you can get done.
17:21 Harry Stebbings? Do you think the crunch is then at A or B? Where do you think that core crunch is?
17:26 Speaker 02 Look, it's going to be harder to raise money across every phase of venture capital because the last five years have been unprecedentedly easy on a relative basis to the last 20. So I don't know if it's a reversion to the mean. I think it's going to be much harder for a period of time because when there's so much uncertainty, people just don't finance as much. But even when you get more certainty and more confidence back, I suspect it's going to be harder to raise funds for the next five years than it was for the last five. Where in the chain is it harder to fund? Look, the later stage you are, the more capital you've raised, the higher your valuation relative to your financial performance, the more difficult it'll be
18:10 Speaker 02 because you may have to reassess your own expectations of valuation. You know, it used to be, okay, my revenues were up 250% this year. Therefore, my valuation should go up by two and a half X or should go up by four X or whatever. And it might be that you grew 250% year over year. Therefore, you were able to get a flat round done. Because if investors aren't there, one reason they might not be there is their expectation of what the public markets or what the M and A markets are eventually going to pay for these deals might be adjusted. And so they're willing to pay lower price.
18:45 Harry Stebbings? How do you advise founders then when it comes to their relationship to future round pricing? Is it take the money when it's on the table?
18:52 Speaker 02 Listen, it's very specific to your individual company and no advice is going to be universal. But what I would say is be humble. Understand that a strong balance sheet gets you through difficult times. That ultimately optimizing for a one over a zero is the single most important thing. If you have incredibly strong metrics and it's still trending well even in this market and you have a product that maybe speaks to the uniqueness of this environment. Let's say you have food production, food distribution, group collaboration, health tech related stuff. Like there's a number of categories that are doing well right now. You might have more confidence to say, you know what, I'm going to wait. I'm going to wait until I get the price that I want.
19:34 Speaker 02 If you're in a category that's more difficult right now, so selling e-commerce, anything that's ad-supported, or maybe even a SaaS-related company where valuations were paying 13 to 15 times, sales might end up paying four times sales, five times, six times sales, I don't know. And ultimately, you are going to have to pay close attention to what prices are being set in the market, what the public market comps are, because that'll be partly what people drive their expectation on private market valuations are. And a lot of companies won't succeed because people hold on artificially to prices that are too high.
20:12 Harry Stebbings? Speaking of prices Darren, kind of private versus public, and you mentioned M&A. Jason Lampkin, a mutual friend of ours tweeted the other day that the fastest thing to fall in a time like this is M&A prices. Would you agree with him here on the M&A price impact?
20:25 Speaker 02 Yeah, no question, because if there's a limited set of buyers and a whole bunch of companies that want to be acquired, and remember my mindset at the start of the podcast was, people right now are not paid to innovate. They're not paid to innovate. They're paid to cut costs. And so if they're acquiring companies, the rationale is not going to be, hey, there's this great new innovation that I can launch. It's like, we're acquiring something that's going to help us as a buying organization, cut costs or drive efficiency or close down another part of our business. Or sell product more cheaply or whatever it is. You know, it's just going to be much harder to come by. And the buyers know that there aren't that many other outlets for these privately held companies. So they can be picky.
21:07 Harry Stebbings? Yeah, no, I I do totally agree, especially in the kind of reduction of innovation. I mean, challenging impact on M and A there. We've spoken before and you said about kind of corrections being just so hard for private market fundings. Why is that specifically in your mind and what drives this?
21:20 Speaker 02 Well, in public markets, there's liquidity and there's price signaling. And so you know what people are willing to pay. And so in real time, you don't get to hold on to false hope that you're worth 800 million. If the market marks you down to 400 million, you're worth 400. Now you might believe that the market itself is going to correct, but the market kind of sets price. And you decide, do I need more capital? And if I need capital, can I raise it from the debt market? Or am I going to do a secondary offering in the public markets? But you don't get to say I'm worth 800. You're worth what the market will pay at that moment in time. Part of the problem that we have in the private markets is if you raise that 80 million and the markets judge that a company with your metrics in your market is worth 40 million.
22:05 Speaker 02 You're just not getting enough signals to tell you that. And also, Harry, you'll have a bunch of VCs that have already marked up your position to 80 million. They've already accounted for that and what they tell their LPs. And they're not dying to go back to a $40 million valuation. So to go back to 40, you've got to have a founder who realizes the price, investors who accept that this is a new reality and everybody acting in concert in the goodwill of the company. And that's a hard thing to do.
22:33 Harry Stebbings? Speaking of investors accepting that new reality, the other scenario is the investors club together, put in reserve allocations may be heavier than they expected and maintain price almost artificially. I guess my question to you is, how do you think about your specifically reserve allocation changing in the context of such unprecedented times?
22:51 Speaker 02 Well, I guess we're lucky because we've been around for 24 years and we've been through multiple economic cycles. And we've been in a position where reserves were harder to come by. So we're incredibly methodical about how we do. Reserve planning. I think one thing that's going to hurt in this market is just how many funds are on Fund One, Two or Three that haven't had to deal with this issue before. And particularly seed funds that are smaller that haven't had to think as much about reserves. For example, if you didn't have to think about reserve policy and you wrote a bunch of checks and your strategy was to raise SPVs, special purpose vehicles for your winners. And you were just going to finance your winners through SPVs. SPVs are much harder to raise now.
23:36 Speaker 02 And so your ability to protect not just your winners, but also your companies that are struggling and need to get from point A to point B to maybe someday be a winner. It's going to be much harder. And don't forget that in that $80 million round that gets cut back to a $40 million, if you don't participate, sometimes you get flushed down to zero. And so if you don't have reserves and you're playing in a game where big checks are being written, you have the highest markup, but you might find your position at zero.
24:05 Harry Stebbings? Can I ask, sorry, I haven't seen this before. Does pay to play come back in these situations?
24:10 Speaker 02 It doesn't come back. It is back. It's back. Pay to play is on the table. I think any deal that is being recut from a high price to a low price and where you don't have an outside lead supporting it and where existing investors are having to put their hands in their own pockets. They may still believe in the deal, but it's not an environment that anyone likes, which is everyone putting their hands in their own pocket at a cheaper price to quote unquote, save a company that doesn't have outside capital as interest. The last thing you want is a free rider. You know, like if four people have to put their hands in their pocket and the fifth says, I got no money available, no one wants a free rider. And that's where pay to play comes in.
24:50 Harry Stebbings? Yeah, I do want to touch on, you said about the methodical element of the reserve allocations there. Just kind of digging in there, what does that look like? Because I also like between managers on the show who say, hey, we stack rank quarterly across five different metrics. We rank them across the team and then we produce probability scenarios on each. And then I hear others who say, that's not optimal. You have no idea which one's outperforming in which case you have no idea how the macro responds. How do you think about the methodical element of reserves planning?
25:15 Speaker 02 Done is break down our funds in terms of the dollars that we're going to write into first checks. And then we model out how many we're going to do at the seed stage, the A stage and the B stage. And what reserve dollars we historically have put into each of those categories. So we're investing somewhere between thirty nine to say forty two percent of our fund in first checks. And we reserve the balance and then we pace ourselves. So the problem the industry's gotten itself into is the average pace of a VC fund used to be about three years. And we've been religiously on three years since two thousand and nine. So our funds have been oh nine, twelve, fifteen and two thousand and eighteen.
25:59 Speaker 02 Since two thousand and nine, we had older funds before that. And the industry average right now is two point two years. And you have some firms coming back every eighteen months. So if you're on that kind of cycle, raising constantly, investing constantly. You're probably going to be a little bit less disciplined when it comes to reserve planning and thoughtfulness about how you build a portfolio in the first place. And then there's a interesting spot, which is our goal is to invest a hundred percent of the capital that we raise. But as you may know, for reserve planning, that requires you to do something called recycling. So recycling means you get an exit, I take those dollars and I reinvest them back into the portfolio or into new deals.
26:42 Speaker 02 But if you build out a reserve plan, you probably are counting for recycling dollars funding your deals in say years four and five. And you could hit a place or maybe in year six, you could hit a place where you don't have the reserve dollars you were expecting because you're trying to get to a hundred percent. And you could theoretically have to pull from management fees and stop paying any fees to yourself in order to fund your reserves if you haven't done good planning and if you haven't gotten any recycling dollars.
27:13 Harry Stebbings? I mean, many things don't matter. How do you think about adequate levels of recycling? Sometimes I see super aggressive one thirty, sometimes I see one ten. Where do you sit in terms of the adequate amount?
27:23 Speaker 02 Well, as I said, every fund is different. It depends. On your stage and the dollars you do. So we do eighty nine percent over the last several funds has been about eighty nine percent in seed and A. And of that eighty nine percent, two thirds of it is A, one third of it is seed. So we're actually pretty sizable seed investors, but we are, as you said earlier in the show, A investors. We do eleven percent of our dollars in B deals. So at each of those, we know what our typical dollars are. We have all the past data to look at how much did we end up on average committing to the different types of seed versus A versus B. And so we build a plan that says, how many dollars do we need for all those categories?
28:04 Speaker 02 And then we try to be religious about not over allocating dollars just because deals are getting done. So you can run the mistake of saying, I have twenty percent of a company that raised at, let's say, a sixteen post. Now suddenly their next round is an eighty post and I want to defend my position. So I'm going to keep twenty percent. So I end up writing a pretty sizable check in that round and that's one way to quickly get over your skis. So we try to be careful in the early days of making sure that we're on top of every quarter reserve, looking at what our reserves are and planning accordingly.
28:40 Harry Stebbings? Got you totally. I do want to touch on the other element, which was just the speed of deployment. You mentioned obviously eighteen months in some cases. It just leaves a lot of hungry mouths in the portfolio. Do you think we'll see a graveyard of these very fast allocated funds who've reserved not enough and deployed too fast?
28:54 Speaker 02 Well, the deployment and the reserves are not necessarily correlated. I just want to make that clear. But the problem with speed of deployment is you end up doing too many deals too quickly, joining too many boards and maybe investing at a pace. The nice thing about being over a longer period of time is if you invest over a three years versus eighteen months, you're more likely to pick up a different phase of the economic cycle. You're more likely to pick up a platform change. So you get time based diversity. So if you invested before the iPhone launched, I think it was two thousand and seven and I think they launched the App Store in two thousand and eight, two thousand and nine. In 2005, 2006, you missed it.
29:38 Speaker 02 If you were in a fund that went 06, 07, 08, you can start to pick up the early winners who launched when the App Store went live. And some of the biggest companies that were built in that era in mobile were built right then because they had mobile apps that came out when there was much less competition in the App Store, like Instagram being an obvious one. So being across time and time diversity is important for catching platform shifts and changes to regulatory environment, changes to geopolitical environment and changes to the economy itself.
30:11 Harry Stebbings? Can I ask, we spoke about the fast deployment from GPs there and funds there. In terms of the LP profile, we've seen a new profile of LP in many different forms enter the VC market over the last years. I spoke to one manager the other day who was talking about LP defaults. Do you think we'll see a wave of LP defaults in this new and unprecedented economic time?
30:29 Speaker 02 Well, LP defaults have always existed in a period of huge economic correction, but I think they tend to be pretty mild. The reason being is, first of all, the penalties for LP defaults are pretty harsh if you have a decent LPA. So they're not always wanting to give up the assets they have. One thing they can do rather than default is they can sell in a secondary. What they're trying to do is getting rid of something called unfunded liabilities. Because if they gave you $20 million for your fund and they've only funded eight of it, their bigger fear is what about the 12 that eventually is going to be called? And if they have 10 of those, they have $120 million of unfunded liabilities. But there's an efficient mechanism for selling on secondary.
31:13 Speaker 02 And at least your benefits of selling on a secondary would be greater than your benefits of defaulting. Also, if you want to be a long-term LP and you're in economic trouble, if you resort to a default, that's a reputational risk that I think will end up boxing you out of this category in the long term. So I don't think that's going to be a major problem. What will be a major problem is people coming into your next fund. Because if they find themselves in a bad economic situation, what they end up doing is cutting commitments to managers that they've had for a long time.
31:45 Harry Stebbings? Yeah, no, I do agree in terms of those cuts. Before we dive into the quickfire, Mark, I do have to ask you now, given the time and given the role that we both play, how do you think about the most important role that a VC can play today is?
31:56 Speaker 02 A most important role that a VC plays, fundamentally, we're people managers. I think we like to think we're super smart, capital allocators, masters of the universe, futurists on technology. But really, it comes down to a bet on a person because ultimately, the company is built by a founder, by founders or an executive team. So the very first thing is being really, really good at identifying people and being a good talent manager. And then frankly, the most consequential decision you make after the first check is figuring out the strengths and weaknesses of the founder and then working with him or her to figure out how to build a team that complements them. And when you look at the most successful companies and the most successful teams,
32:40 Speaker 02 I think that's the winning formula. The most obvious is looking at Facebook and the role that Cheryl played with Mark Zuckerberg in the early days. But virtually every company has that, you know, Keith Raboy at Square in the early days with Jack, when Jack was working across multiple companies. But there's a million examples of great complements to founders that really help build companies.
33:01 Harry Stebbings? Can I ask a personal one? When you analyze and do a little bit of self-reflection, what would you say your weaknesses are?
33:06 Speaker 02 What I think of is one of the things it takes to be super successful as a founder is what I call naive optimism. And naive optimism is you don't know what you don't know, so you assume anything's possible. And something could have been tried 10 times and didn't work before. And the older you get, like me, I'm 51, almost 52. I've seen so many things not work that the danger is I see something and I'm like, ah, I've seen that before. It hasn't worked. And so I think that naive optimism really matters. And what I'm trying to do is bet on people who have really big ambitious ideas. I almost say to my LPs, if I'm not making you slightly uncomfortable when I write a check, I'm probably not doing my job.
33:49 Speaker 02 Because if I write something and it's super obvious to you, and my job is to really try to stay At the forefront of where things are going to be in five years or seven years. I have to make you scratch your head a little bit to say, I don't get it. Like, why would that be a big success? And sometimes I run into that problem of lack of naive optimism where I say, that just can't be done. And I've been proven wrong several times on that. The obvious example, Harry, is Uber, where having lived in London and seen the taxi lobby and how strong the taxi lobby was in London, that clouded my vision for what was possible. Having lived in Los Angeles and seeing how few people ever use taxis, that clouded my judgment. If I look at Box, when I saw Box, I had built a document management company.
34:33 Speaker 02 I knew how hard it was and I just said, that can never be a big company. So getting in my own way of my own jaded past of seeing things not work.
34:42 Harry Stebbings? I know, and listen, I do understand that past experience infiltrating. How do you encourage dissent at the investment decision-making layer of the partnership? Obviously, kind of consensus kills outliers is often the statement said. How do you think about the need for consensus and also how you encourage productive dissent between the partners?
34:59 Speaker 02 It's funny you say that because we actually actively use the term that we're looking for conviction over consensus. So I'm looking for conviction. I'm looking for someone who really believes and they're going to own that belief. They're going to have done the work, the research, the calls, have a thesis, have a point of view. And if they're right or wrong, they own it. So if they're wrong, they got to spend a lot of their personal time fixing it, which is no small ask. I usually prefer that they have at least a second person. We have eight full-time investment partners. I usually prefer at least a second as supporting them. But if it's down the fairway and down the fairway for us, let's call it a three to five million dollar check for 20% ownership.
35:41 Speaker 02 If it's down the fairway and you have high conviction and there's not one or two partners laying on the track saying, we just absolutely cannot do this deal, we'll green light it. And I'm okay with that. I'm okay with dissent and we have some very heated conversations, as you can imagine, and I think that's healthy.
36:01 Harry Stebbings? Listen, I do too, absolutely. Final question before the quickfire, sorry, too intrigued. Do you not find the days of 20% ownership relatively over? When I look at kind of a lot of the deals that I see, more and more collaborative, more and more closer to 10%. To me, the 20% seem over. Would I be wrong in that perspective?
36:16 Speaker 02 Yes. In fact, I think it'll go up from 20%, not down. And listen, we talk about three things that matter to us. One is the mythical product market fit. And at the stage that we're investing at, we're investing in a belief that product market fit will exist, rather than it completely existing. The second thing we talk about is founder market fit. We want to know that this founder is uniquely positioned to offer the product to the market and has unique insights, knowledge, relationships, beliefs, skills that other people don't have. And those two things are kind of obvious. But the third thing we talk about is founder upfront fit.
36:55 Speaker 02 And we fundamentally believe that we want to back founders who want an incredibly supportive VC, who is going to back them in good times and bad. It's not a guarantee, and it's not guaranteed forever. But when you hit a hard bump in the road, we're not the firm that says, hey, no one else funded you, we're out of here. And party rounds did incredibly well for the last five years. But I suspect party rounds are going to do the worst for the next three years. Because getting conviction across three or four small investors that each own 7, 8, 9, 10% of your company is so much harder, both because nobody really has as much vested interest in your success.
37:38 Speaker 02 They'll turn to places where they think the value is going to be higher for them, and you've got to get a coordinated group of people to all agree. And you know, if you have two firms that say, yes, we believe we'll write a check, and two firms that say, no, I don't think we want to, chances are you're going bankrupt. So I think the days of incredibly strong conviction and backing from investors will likely come back, not slide backwards.
38:03 Harry Stebbings? That's super interesting to hear. And yeah, I do agree when you phrase it like that. I do want to move into my favorite though, Mark, which is the quickfire round. So I say a short statement and you give me Your immediate thoughts. Are you ready to dive in?
38:13 Speaker 02 I am.
38:14 Harry Stebbings? Okay, so we're all in self isolation, looking for some intellectual advancement. What's the favorite book and why?
38:19 Speaker 02 Well, I'm gonna give you a set of three because they're all related. I think if you want to understand the world and what's happening around you, read The Accidental Superpower, The Absent Superpower, and Disunited Nations. And Disunited Nations is the most recent. Each one of those books has predicted what was gonna happen in the world on geopolitical basis, which ultimately impacts business. Each one of them has been a few years ahead of what's actually happened. And Disunited Nations couldn't have predicted the pandemic, but they exactly predicted what was gonna happen in a global breakdown of countries working together, of isolationism, and breakdown of supply chains of things like food and oil.
39:04 Speaker 02 And they're fascinating reads. They're very data-rich, and I couldn't recommend them highly enough.
39:09 Harry Stebbings? Who's the best board member you sat on a board with and why?
39:12 Speaker 02 I've sat on boards with many great members, so if I said one was my favorite, it would be disingenuous. But I'm gonna talk about one that I really enjoyed and who I found valuable, which is Rory O'Driscoll at Scale Ventures. I love working with Rory because, number one, I like people who do the work, and many VCs don't do the work. And it was super appreciated that in tough situations, he was always with her, rolling up his sleeves, doing the work. He always had a strong point of view, loosely held and willing to make compromises. But it's always nice to have a board member as a point of view. He always brought humor, which I love, because in tense situations, having humor matters. He clearly cared. And so if I look at the things that really matter are people who turn up, roll up their sleeves, have a point of view, will do the detail work,
39:57 Speaker 02 actually read spreadsheets and be thoughtful and be one step ahead of the game on things that are harder, that people don't like to do, like compensation plans and looking at budgets and forecasts, right? And trying to call BS on something that may not be right. And that's what great board members do.
40:16 Harry Stebbings? Tell me, what's the hardest element of your role with upfront today?
40:19 Speaker 02 You know, look, I think it's a hard time to be a VC. It's much harder to be an entrepreneur, so I'm not looking for sympathy. But since you asked me, it's hard because we're dealing with so many founders who have bet so much of their lives on their company and their futures. And just looking at the disruption and the pain going on in their companies, in their families, having to let employees go, having to feel the personal stresses associated with not 100% knowing if they're going to survive, having to take pay cuts, having to do all those hard things. Some cases where they maybe were in the transportation sector and their revenue literally went to zero overnight. And so I'd say that part of it, it's pretty tough right now.
41:04 Speaker 02 You could put your head in the sand and just let everybody deal with their own problems. And believe me, many VCs do that. But you know, I tried to pick up the phone. Now I'm doing a lot more Zoom calls and I'm trying to check in on everyone and trying to be present and give advice constantly to people who want it.
41:20 Harry Stebbings? We're both in the game of VC brands. I'm interested, how do you think about the importance of VC brand?
41:25 Speaker 02 I think it's critical. I think it's critical in ways that it's hard to explain, just like branding in general is hard to explain. But as a VC, the easy bit is writing checks. It's not hard to write checks. It's hard to win deals that other people want to do also. And that's almost the definition of the deals you should be wanting to do, which is ones where there's a founder who has access to different funding sources and can consider his or her options. And you're just one of those options. And brand really plays into that. They have to perceive that you're going to be value add. They have to perceive that you're going to act in a good way that represents their interests in good times and bad. They're going to want help with introductions. They're going to want to help with figuring out difficult things and getting access to publicity.
42:09 Speaker 02 And all of those things are encapsulated in brand. Because when they go to make a decision across firms, it's a very emotional thing that you can't just say, oh, I did a scorecard and you got a 4.36, therefore I pick upfront. And it's the intangible of brand that ends up winning deals in tough times.
42:25 Harry Stebbings? What do you know now, Mark, that you wish you'd known at the start of your career in venture?
42:29 Speaker 02 There's probably two things that I know, that I believe now, I can't say I know now. One is whenever I felt like I knew something that a team didn't know, and I had value I could provide in helping solve a problem, that I always had to jump in and help solve it. And now I realize there's some value in stepping back and giving a founder time, and letting them come to their own conclusion. And that if I get involved in four months versus six weeks, sometimes it's okay to just let it simmer. Number two is, I think a decade ago, I liked conflict a lot more. I felt like Howard Rourke, I had like a true north, and I had to say what I believed, and always had to be right, and always had to be scrapping it out.
43:13 Speaker 02 And I changed a lot in the last 10 years. And I still have a strong opinion. I think hopefully most great entrepreneurs and VCs do have strong opinions. But I try not to get as angry about things. I try not to let things bother me as much. I try not to second guess people's motives quite as much. And I find myself with a lot more inner peace, honestly.
43:33 Harry Stebbings? Mellowed like the fine wine, Mark. Tell me, final one. What's the most recent publicly announced investment? And why did you say yes and get so excited?
43:42 Speaker 02 There's a company I'm in love with called Solve. And Solve is a British founder. In fact, a good portion of our company's in the UK. But the founder is based in Los Angeles. What they do is they produce video games. And I'll give you quotations, or inverted quotes for the Brits. What they do is video games. So they shoot short form video, which is true crime. And then you start discovering and watching the video. But then you realize that you're actually playing a video game. And you get dragged into the story and solving the crimes, and playing games as you go. We are live in test markets. We're not yet live in the US or the UK. But in test markets, it's performing incredibly well.
44:27 Speaker 02 We have a very popular show on Snapchat. It's called Solve. You can find it on Snapchat. That's a small snippet of what you're actually going to see in the real product. But we have millions and millions of viewers every month on that. We released a podcast on iHeartRadio. It was one of the most successful podcast releases in the genre. Also millions of followers. And the video game is just killer. And I can't wait till it goes live publicly available worldwide.
44:54 Harry Stebbings? Mark, as I said to you at the beginning of this, you're advising me four years ago when I was still at law school. And this was just a tiny little podcast. You've always been there for me and I so appreciate your support. And so thank you so much for joining me again today.
45:05 Speaker 02 Thank you for having me. Little could I have known just how successful you would have become at this. You are a master of what you do and congratulations.
45:15 Harry Stebbings? As I said there, Mark was advising me four years ago when I was at law school. He's always been there for me and just a wonderful, wonderful person. So I want to say huge personal thank you to him. If you'd like to see more from Mark, which he always is a must, then you can find him on Twitter at MSouster. Or you can check out the blog at bothsidesofthetable.com. That really is a must. Also likewise, I'd love to see you behind the scenes here on Instagram. You can do that on at Hdebings1996 with two Bs. It'd be great to see you there. But before we leave you today, I want to take a moment to mention HelloSign, a great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution used by millions to securely send and request legally valid digital signatures and agreements.
45:57 Harry Stebbings? They raised a total of $16 million in funding and recently got acquired by Dropbox for an impressive $230 million. Check out hellosign.com/20vc to join the thousands of companies and founders who value fast, secure and simple e-signatures. And speaking of signatures and getting deals done there, you really need to build that relationship. And there's nothing like meeting face to face. And there's nothing like Zoom to make that happen. Zoom lets you connect and do business across town or around the world. Zoom ties together all of your communication needs into one easy platform for video conferencing, phone calls, group chat, webinars and your conference rooms. And connect easily from anywhere, your mobile phone, your laptop. Top or conference room. Zoom is how business gets done. Get your free account at zoom.com today.
46:42 Harry Stebbings? Meet happy with Zoom. And finally, I've always been a big history man. And so I want to talk about Cooley, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Cooley has formed more venture capital funds than any other law firm in the world with 50 plus years working with VCs. They help VCs form and manage funds, make investments and handle the myriad of issues that arise through a fund's lifetime. So to learn more about the number one most active law firm representing VC-backed companies going public, head over to Cooley.com and also check out Cooleygo.com. As always, I so appreciate all your support and I can't wait to bring you a fantastic Founders Friday episode on Friday with Rahul at Superhuman.
Previous 20VC: Notion's Fundraise with Index: The Most Anticipated Deal in The Valley: How It Came To Be | The Future of Remote Work |How Notion Approach The Balance of Growth and Profitability Next 20VC: Superhuman’s Rahul Vohra on How 1-1 Customer Onboarding Can Scale Efficiently to $100M ARR, Why Gamification Does Not Work But Game Design Does & What Game Design Means For The Next Generation Of Product Managers Page updated October 26, 2026 · transcript and summary are machine-generated
