VC Mark Suster on Founder Skills - Beyond Products & Customers

VC Insights from Upfront Ventures’ Mark Suster

A recent discussion with Mark Suster, a partner at L.A.-based Upfront Ventures, revealed insights into the current venture capital landscape. Upfront Ventures has recently concluded fundraising for both early-stage and growth-stage funds and is currently exploring new investment opportunities, though specific details are restricted due to SEC regulations.

The conversation covered a broad spectrum of topics, including the firm’s investment in Bird, a micromobility company potentially heading for a public offering, perspectives on decentralized finance, and Suster’s personal fitness journey – a 60-pound weight loss achieved over the past year. A full recording of the discussion is available for those interested. The following highlights key takeaways regarding industry trends and the accelerated pace of investment activity.

Evolving Seed-Stage Investment Sizes and Due Diligence

Ten years ago, a $3 million to $5 million investment typically constituted an A round. Companies at that stage had usually secured initial funding from angel investors and seed funds, allowing for thorough data analysis. Detailed examination of customer retention, cost structures, and founder references was commonplace, enabling a deliberate and considered investment approach.

Currently, $5 million often represents a seed round, with additional funding stages like pre-seed, “day zero,” seed extensions, and various A and B rounds emerging. While the core investment principles remain consistent, the heightened speed necessitates quicker decision-making and earlier engagement with companies, sometimes even before demonstrable customer traction.

A Shift Towards Growth-Stage Investments

Upfront Ventures is demonstrating a preference for growth-stage investments over traditional A and B rounds. This strategic move is supported by the addition of a former Twitter executive to lead growth initiatives and substantial investments – exceeding $50 million – in portfolio companies like Bird, Rally, and Apeel Sciences.

A typical $20 million to $30 million A round implies a valuation of $50 million to $70 million, requiring substantial returns – potentially $5 billion to $15 billion – to achieve fund-level success. While such outcomes are possible, they are relatively rare. Successfully navigating this landscape necessitates larger funds, ranging from $700 million to $1 billion, a scale Upfront Ventures is intentionally avoiding.

The firm prioritizes early-stage involvement, even backing founders transitioning from established companies like Riot Games, Snapchat, Facebook, Stripe, or PayPal. This approach allows them to bypass the more expensive later-stage rounds and re-engage with promising ventures at a later point in their development.

Convertible Notes and Pricing Strategies

Upfront Ventures considers both priced rounds and convertible notes, which offer investors the right to invest at a discount in future rounds. A common misconception exists regarding the pricing of rounds; most are, in fact, priced, even if not explicitly stated.

Convertible notes and SAFE (Simple Agreement for Future Equity) notes often include valuation caps, effectively establishing a maximum price. Founders should recognize this as a ceiling, rather than a lack of price altogether. While a generation of founders has been led to believe that foregoing a fixed price is advantageous, it primarily sets a maximum, not a minimum, and Upfront Ventures will not invest in instruments lacking a price cap.

Competing in a Fast-Paced Investment Environment

Upfront Ventures distinguishes itself by prioritizing thorough founder assessment over rapid investment decisions. While acknowledging the accelerated pace of deal-making, the firm emphasizes the importance of building relationships with founders over extended periods – sometimes years – before committing to an investment.

The firm’s investment strategy is increasingly focused on the founder’s skills and vision, rather than immediate customer adoption. Suster cautions founders against accepting funding after a brief introductory meeting, emphasizing that a hasty decision can be detrimental. Choosing the wrong investor can have lasting consequences, unlike other business partnerships where a separation is possible.

Ultimately, Upfront Ventures believes in a deliberate approach, prioritizing deep understanding of the founding team and a long-term partnership over quick deals in a competitive market.