Mark Suster Upfront Ventures

What Mark Suster, Upfront Ventures says about topics vital to entrepreneurs

Mark Suster Posts – Titles

Mark Suster  Posts  – Titles  ( 19 posts)

 

No Great Science to Determining Valuations

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster's Financing Advice for Entrepreneurs   

Be Leary of Too High a Price

Select the Highest Quality Investor Available

Successful Entrepreneurs have these Qualities

Angels vs. Series A vs. Series B Characteristics

Dilution Benchmarks & Fundraising

Fundraising Terms Pile Up with Later Stage Investors

VCs Want Big Outcomes & May Block a Sale

Mark Suster:  Angels Need Five Skills to Excel

Mark Suster: Valuation-What It Is & Its Ranges

Great Entrepreneurs Pivot

The VC “Squeeze” and Dilution

The VC Assumes there’s an Option Pool

Go “Fat” after Hitting Product/Market Fit

The First Rule of Choosing a Brand

Shoot for 18-24 Months of Runway When Fundraising

Options are Always Common

 

The First Rule of Choosing a Brand

Mark Suster Partner Upfront Ventures and former entrepreneur

“The first rule of choosing a brand [] is to figure out the image you want to project.  [Start by defining] the attributes you [want to project] when [people] think about your brand.

[] [Consider] First Round Capital [which most likely chose its name] because [it] wanted to excel at early-stage investing.” 

In sum, a brand’s name should “represent the kind of organization or community you want to build [with] either [] a functional name (i.e. Instagram) or a nonsense name that doesn’t paint you into any particular corner (Twitter) or even a generic name where you fill in the marketing messages to define that brand (Los Angeles).”   Mark Suster, Some Thoughts on Branding Startups and Communities, April 17, 2012; http://www.bothsidesofthetable.com/2012/04/17/some-thoughts-on-branding-startups-and-communities/

Go “Fat” after Hitting Product/Market Fit

Mark Suster Partner Upfront Ventures and former entrepreneur

“[Suster] believe[s] that most companies can exist in the experimentation mode for 3-4 years. They should start “lean”.  If they hit a product /market fit (meaning you suddenly see a massive uptick in usage and/or revenue) then these companies need to go “fat”.  [Otherwise] industry titans around them will eat their lunch.”  Mark Suster, Changes in Software & Venture Capital- Part 2 of 3, June 29, 2011;  

http://www.bothsidesofthetable.com/2011/06/29/changes-in-software-venture-capital-part-2-of-3/

Note:  ‘Lean’ means minimizing resources as in the Lean Startup strategy espoused by Eric Ries author The Lean Startup.  ‘Fat’ means allocating significant resources to fulfill the mission.

The VC Assumes there’s an Option Pool

Mark Suster Partner Upfront Ventures and former entrepreneur

“The VC assumes [there will be] an option pool [] to hire and retain talent to grow [the] company. [] The more senior members [the company has], then the [fewer] options [needed] and vice versa.  Industry standard post [the] first round of funding will be 15-20% [for the option pool].  [Suster] say[s] “post” funding because [one will] need more than this amount pre-funding to get to this number after funding. [] 

[It’s standard] that the VC wants the options includ[ed] before [he] funds [].”  The option pool dilutes the founder’s percent ownership, not the investor’s.  The option pool suffers the same percent dilution the founder suffers when a VC invests his money. 

“Note that the term sheet [says “Pre-Money” valuation and nowhere does] the term sheet [say] “true Pre-Money” or “effective Pre-Money”– that’s for [the founder] to calculate.”   True or effective pre-money is based on a lower price/share due to options increasing the number of shares incorporated in the calculation. The result is a lower true pre-money than pre-money, the latter which is also called “nominal” pre-money valuation.  Mark Suster Want to Know How VC’s Calculate Valuation Differently from Founders, July 22, 2010;    http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

 

The VC “Squeeze” and Dilution

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] most VCs have a 20% minimum [equity threshold] so bringing in multiple VCs can be very expensive in terms of dilution. [] The biggest problem [with 2 VC’s in a deal] is the “squeeze.” All VCs want to own between 25-33% [equity]”, above their internal 20% minimum.  A founder with co-founders can quickly get very diluted once an option pool is included.  “[]There are [] VCs [] who don’t cling to the old “20% or the highway” mentality [] and [Suster] suggest[s] [founders] seek them out.” Mark Suster, How Many Investors are Too Many? February 22, 2011http://www.bothsidesofthetable.com/2011/02/22/how-many-investors-are-too-many/

Great Entrepreneurs Pivot

Mark Suster Partner Upfront Ventures and former entrepreneur

“Great entrepreneurs pivot.  Evan Williams [] and David Sacks are great entrepreneurs.”  Williams was a co-founder of Odeo a predecessor to Twitter.  Sacks originally founded Geni.com which beget Yammer, a business social network. Yammer was purchased by Microsoft in 2012 for $1.2 billion. Mark Suster What Makes an Entrepreneur (3/11) – Ability to Pivot, December 17, 2009; http://www.bothsidesofthetable.com/2009/12/17/what-makes-an-entrepreneur-310-ability-to-pivot/

Mark Suster: Valuation-What It Is & Its Ranges

Mark Suster Partner Upfront Ventures and former entrepreneur

“Valuation = whatever an investor is willing to pay. Investors want to own 25-33% so it can be determined by how much you raise. [] early investors know how much they want to invest and what the norms are by stages. There are huge variances (and prices go up and down dependent on market conditions), but general guidelines on valuation:

angel: sub $1m
seed $1-$2.5m pre [pre-money valuation]
A round: $2-5m pre. Up to $7-8m for super experienced entrepreneurs
B round $7-12m pre. Outliers can be $20m pre. EXTREME outliers (see: FourSquare) can fetch crazy prices.
C round: 100% dependent on company performance.”

Mark Suster comments from Want to Know How VC’s Calculate Valuation Differently from Founders?, July 22, 2010;  http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Mark Suster: Angels Need Five Skills to Excel

Mark Suster Partner Upfront Ventures and former entrepreneur

Suster identified “[] five skills [angel investors need to excel]”:

1.  “Access to the Best Deal Flow” []

2.  “Domain Knowledge

“[]Domain knowledge [] [is] [well-honed industry knowledge].” “[] It requires domain knowledge to know what you’re talking about and success long term as an angel. [] One of the biggest problems is when “you don’t know what you don’t know.””

3.  “Relationships with VCs

“[] Relationships with VCs [] protect [angel] investments” by taking out angels’ positions. 

4.   “Deep Pockets

A company is either acquired or has an IPO in an average 7-10 years.  Suster says that angels’ deep pockets providing follow-on investments minimize these risks:  dilution, inability to protect good investments and a lack of deal diversity.  “[] [Angels] need to be able to do a large enough number of investments to create enough deal diversity.”  The greater the deal diversity, the lower the risk. 

5. “Access to Buyers”

“[] the best investors influence their end-games through well-cultivated relationships with eventual buyers of their portfolio companies.” [] [Helping] companies exit to the right buyer and importantly at the right time” can be crucial.  Mark Suster, Angel Topics Sept. 14, 2010

http://www.bothsidesofthetable.com/angel-topics/

VCs Want Big Outcomes & May Block a Sale

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes.  [VCs] will demand a veto right over [a company sale].  [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company.  [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks).  It’s just too much time to spend [] for such a small total return.  Many VC’s would still let [a founder] sell []” but some would block the sale.  Mark Suster  Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

 

Dilution Benchmarks & Fundraising

Mark Suster Partner Upfront Ventures and former entrepreneur

Negotiations between entrepreneurs and investors include dilution and other fundraising terms.  “[] the “fairway” of [investor’s equity] is 25-33% per round [i.e., entrepreneurs’ dilution]. [] If [the entrepreneur is] “super hot” or “super experienced”, [he] can end up with much less dilution –in some cases 12-15%.  But this is the exception, not the rule.”

“[] [These] dilution numbers don't take an option pool into account [].  Options are additional dilution.”

“[] [Valuation can be driven up] ONLY if there’s [] competition [for] a deal.  [Investors stay honest when entrepreneurs] talk with multiple parties.”

Fundraising also requires considering how many future rounds are needed and expected total future dilution.  It’s not an arbitrary spreadsheet-driven exercise reflecting attaining profitability.  It requires “understanding [industry norms necessary] to build a successful Internet business and where [the company falls] on that spectrum given [its business type].”  Mark Suster,  8 Questions to Help Decide if You Should be Raising Money Now, February 17, 2011 and comments;  http://www.bothsidesofthetable.com/2011/02/17/8-questions-to-help-decide-if-you-should-be-raising-money-now/

Angels vs. Series A vs. Series B Characteristics

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] Angel investors [] [invest] at the highest risk because much less is proven in the business.  They expect and need to earn a much higher return for the risk they’re taking. 

[] When a [Series] A investor gets involved, usually product has shipped, usually [there are] the first clients and some proof points, management team is better and solutions are more thought-out.   

[] [In] Series B [investors] are looking at metrics [] like how many clients have [been] signed up, [] costs of acquisition, [] conversion rates, [] LTV (lifetime value of customer), [] churn, and they want to see data, facts and figures.

[] Check sizes grow as the risk is decreased and usually coincides with the founders themselves needing more capital.”   Mark Suster-This Week in Venture Capital #14 with Rick Smith, founder of CrossCut Ventures, Jul 15, 2010  @ 50-52 min into interview;  http://www.bothsidesofthetable.com/2010/07/15/this-week-in-vc-with-rick-smith-of-crosscut-ventures/

Successful Entrepreneurs have these Qualities

Mark Suster Partner Upfront Ventures and former entrepreneur

 Suster believes successful entrepreneurs have these qualities:  “1. tenacity, the most important [].  2. street smarts []” including “[] know[ing] [] how customers buy and how to excite them [], [an ability to] spot opportunities that aren’t being met and [] design products to meet these needs. []”. “3. ability to pivot []” which “[] might just be a totally different business model.[]”  “4. resiliency  []. 5. inspiration [].  6. perspiration [].  7. willingness to accept risk []. 8. attention to detail [].  9.  competitiveness []. 10. decisiveness []. 11. domain experience []. 12. integrity  []”.    Mark Suster, Entrepreneur DNA, December 15, 2009;http://www.bothsidesofthetable.com/entrepreneur-dna/ What Makes an Entrepreneur (2/11) – Street Smarts December 16, 2009

http://www.bothsidesofthetable.com/2009/12/16/what-makes-an-entrepreneur-210-street-smarts/

What Makes an Entrepreneur (3/11) – Ability to Pivot December 17, 2009

http://www.bothsidesofthetable.com/2009/12/17/what-makes-an-entrepreneur-310-ability-to-pivot/

 

Select the Highest Quality Investor Available

Mark Suster Partner Upfront Ventures and former entrepreneur

 Suster advises entrepreneurs to select the highest quality and most experienced investors available.   It’s generally better for the company long term to have the right investors vs. optimizing every last piece of equity up front.  “Worrying about giving up an extra 10% [equity] at [an early] stage can be meaningless if the ultimate outcome is either success or failure.”  Mark Suster, Raising Angel Money, July 19, 2009; http://www.bothsidesofthetable.com/2009/07/19/raising-angel-money/

Be Leary of Too High a Price

Mark Suster Partner Upfront Ventures and former entrepreneur

 “[] [Suster has] seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten [] [trapped] when [] markets correct and they got ahead of themselves [on inherent market valuation]. []

[It’s] OK to [] shoot for the “top end of normal” for the market conditions. [] [He] caution[s] entrepreneurs from [] raising money at significantly ABOVE market valuations. []

If [entrepreneurs] haven’t figured out product / market fit and therefore still have a highly risky business [they] run great risks for getting too far ahead [] on valuation. [] [Most] investors won’t want to [][do] a “down round,” which creates tension between them and early investors.

[] [Sophisticated] investors know [a major down round] is fool’s gold.  They get a cheaper price, [] wipe out much founder stock value and [] reissue [founders] new options. [Founders] take the money []” except their incentives get eliminated.

[] He advises “[] us[ing] competition to [][ensure] a fair price [and] rais[ing] a slightly higher round than [] [otherwise for some strategic reserve]. [] [One wants] to show an uptick in valuation [] for new investor confidence and to maintain [early investor relations].”  Mark Suster  Why Startups Should Raise Money at the Top End of Normal,  June 5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

Mark Suster's Financing Advice for Entrepreneurs

Mark Suster Partner Upfront Ventures and former entrepreneur

Financing advice for entrepreneurs:  

“[] 1. Always have a lead [investor], [] [someone] with enough skin in the game []” to mobilize other investors and help “[not] just [] [with] tough times, but for conflict resolution in general.

2. [] [Financing should be] stage appropriate [];

3. [] [Understand] where the VC is at in [his] fund [] [including] when [the] fund was raised, how much capital [] [was] raise[d], how much is allocated, when [it’s] raising [its] next fund and what [its] “reserve” strategy is. []

4. Make sure [] [investors get along] [];

5. Always pitch outsid[e] [investors] for follow-[on] [rounds] [] to [keep] [inside investors] [] honest [];

6.  Always [] [include] value-added angels. []”

Mark Suster, How Many Investors Are Too Many?  February 22, 2011; http://www.bothsidesofthetable.com/2011/02/22/how-many-investors-are-too-many/

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

No Great Science to Determining Valuations

Mark Suster Partner Upfront Ventures and former entrepreneur

“There is no great science to [how prices (valuations) are determined].  The earlier [one] invest[s] the higher the chances the company won’t work out and thus [one] pay[s] a lower price than later-stage investors. [An investor tries] to pay the appropriate price for [his] perceived risks of the company succeeding and protect [himself  if] it isn’t quite as valuable as [he] had hoped.  As the risks [] get eliminated the higher the valuation investors are prepared to pay.”  These risks over time are “[first] product [], [then] market [], [then] growth/scale [] and [finally] monetization/competition [].”    Mark Suster, Why Startups Should Raise Money at the Top End of Normal  June  5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/