MARK SUSTER IS AN entrepreneur, angel investor, and the managing partner of Upfront Ventures. Suster is the godfather of the rising Los Angeles startup and venture capital community. He is generous with advice and writes and speaks clearly. He is also fearless in terms of the positions he takes on issues, even if they are contrarian, which makes what he says quite interesting. Before joining Upfront Ventures, Suster was vice-president of product management at Salesforce.com following its acquisition of Koral, where Suster was the founder and CEO. Prior to Koral, Mark was the founder and CEO of BuildOnline, a European software-as-a-service (SaaS) company. Mark received a BA in economics from the University of California, San Diego, and an MBA from the University of Chicago.
1. “If it’s your first time getting funding, you shouldn’t over-raise. Take whatever the right amount of money is for you, whether that’s $1 million, $5 million, or $10 million.”
Try to raise eighteen to twenty-four months of capital.
When the hors d’oeuvres are passed, take two…. But, put one in your pocket.
What I like about raising less money is it allows you to move slower, and with a new company, you don’t really know what the demand for your startup will be. If you realize, “Holy crap, we’re on to something here,” then you can always raise more money.
If you raise, say, $7 million off the bat, you’re on the express train. It’s either a big outcome or nothing if you assume investors are expecting four times [4X] their money. Keep in mind that companies aren’t regularly bought for $100 million-plus either.
VCs want meaningful ownership … and the “fairway” is 25 to 33 percent of your company.
Be careful about ever dipping below six months of cash in the bank. You start fundraising when you have nine months left and begin to panic if you get down below three months.
The right amount of money to raise and to have on hand in any given case will depend on factors including the following:
• The nature of the business (e.g., how capital intensive it is, how high the customer acquisition cost is, how high the burn rate is)
• The current state of the business cycle, which is constantly in flux; venture capital is a very cyclical business
Bill Gates famously wanted enough cash in the bank to cover a full year of expenses in the early years of Microsoft, but that was a different time and place with very different business models, and the business was generating that cash internally. Microsoft raised no venture capital, except for a small amount near the initial public offering to convince a specific investor to join the board of directors.
2. “There is no ‘right’ amount of burn. Pay close attention to your runway.”
Your value creation must be at least three times [3X] the amount of cash you’re burning, or you’re wasting investor value. Think: If you raise $10 million at a $30 million pre- ($40 million post-), that investor needs you to exit for at least $120 million (three times) to hit his or her minimum return target that his or her investors are expecting. So money spent should add equity value or create IP [Intellectual Property] that eventually will.
Raising venture capital is like adding rocket fuel to your company— which leads to a lot of bad behavior.
There is a big difference between a cash burn rate that is too high and valuations that are too high. The media has a tendency to transform information about burn rates being too high into a comment about valuations being too high. I suspect this happens because the concept of wealth is both easier to understand and a topic with which readers are fascinated. But burn rate and valuation are not the same. Businesses can be spending too much cash in an environment where valuations are reasonable. Spending too much cash is a fast ticket to painful dilution or a broken capitalization table. Having some cash in reserve can come in very handy when markets essentially stop providing new cash for a period of time.
Bill Gurley tells a great story about how OpenTable had to cut its cash burn rate severely when the ability to raise new cash dried up in the early 2000s when the Internet bubble popped. By conserving cash, the company was able to hang on for many years until growth resumed. Since market disruptions in the short term cannot be predicted with certainty, some amount of cash cushion has positive optionality.
3. “The average VC, traditional VC, does two deals per year … from maybe one thousand approaches.”
A founder should not take it personally if a venture capitalist does not want to invest in his or her startup. There are many reasons potential investors say no. Entrepreneurs should also remember that the numbers cited by Suster here refer only to venture capitalists (individuals, not firms) in the top-one hundred; these individuals make only about two hundred investments a year. Given that about four thousand startups are looking for funding in a given year, not all will be funded by a top–one hundred venture capitalist. The scarcest asset a venture capitalist has is time, and as a result, he or she can be helpful to only so many portfolio companies and serve effectively on so many company boards. In other words, a venture capitalist is more time limited than capital limited.
4. “You have to ask for the order.”
In order to sell a product successfully, you need to “ask for the order.” If you do not, you will never close a sale. The best product or service does not always win if the team does not learn how to sell it. It can be awkward for some people to ask someone to buy something. Other people have no problem doing so. Why this is true is a bit of a mystery, but I have noticed over the years that people who were B and C students in school “ask for the order” more easily than A students as a general rule. People who were A students often seem to think they should not have to ask. It is a helpful life experience to spend some time selling something. It usually makes you a better buyer and certainly a better seller.
5. “Tenacity is probably the most important attribute in an entrepreneur. It’s the person who never gives up—who never accepts no for an answer.”
What do I look for in an entrepreneur when I want to invest? I look for a lot of things, actually: persistence (above all else), resiliency, leadership, humility, attention to detail, street smarts, transparency, and both obsession with their companies and a burning desire to win.
There are times in the life of every successful startup when it seems to be flying inches from disaster and close to death. If the founders and leadership of the company lose their nerve and persistence, the outcome is very seldom pretty.
6. “I hate losing. I really hate losing. But you need to embrace losing if you want to learn. Channel your negative energy. Revisit why you lost. Ask for real and honest feedback. Don’t be defensive about it—try to really understand it. But also look beyond it to the hidden reasons you lost. And channel the lessons to your next competition.”
I think the sign of a good entrepreneur is the ability to spot your mistakes, correct quickly, and not repeat the mistakes. I made plenty of mistakes.
The excuse department is now closed.
There are a lot of people with big mouths and small ears. They do a lot of talking; they only stop to listen to figure out the next time they can talk.
Learning from your mistakes is such a simple idea. There is nothing like rubbing your own nose in a mistake to force yourself to confront what needs to be changed. The best founders actually make the changes necessary to adapt rather than merely talk about change. One way to better identify mistakes is to surround yourself with people you can trust to honestly tell you how they see things. If you have someone in your life who is loyal and trustworthy, listens well, has good judgment, and is willing to give you sound advice, you have something truly invaluable.
7. “It’s in the down market that real entrepreneurs are formed.”
The best time to form a business is often in a down market. People are easier to recruit, and there is less competition. For example, the ability of Google, founded in 1998, to hire great people was enhanced by the downturn caused by the Internet bubble popping a few years later.
8. “If you have options in life, you won’t get screwed.”
Getting to Yes became a bestseller owing to this simple idea. In the book, which is about negotiation, Roger Fisher and William L. Ury discuss the importance of having a BATNA (best alternative to a negotiated agreement). When you have an alternative, you can get better terms and a better price. As a simple example of this principle in operation, you should never agree to buy anything before agreeing on terms—including price. Negotiate before you agree to do something, not afterward.
9. “You can read lots of books or blogs about being an entrepreneur, but the truth is you’ll really only learn when you get out there and do it. The earlier you make your mistakes, the quicker you can get on to building a great company.”
If you’re going to lead an early-stage business, you need to be on top of all your details. You need to know your financial model. You need to be involved in the product design. You need to have a detailed grasp of your sales pipeline. You need to be hands on.
The skill that you need to be good at to be effective as an entrepreneur is synthesis.
Don’t let your PR get ahead of product quality.
Your competitors have just as much angst as you do. You read their press releases and think that it’s all rainbows and lollipops at their offices. It’s not. You’re just reading their press bullshit.
Do not be dismissive of your competition.
Successful founders tend to have a big bag of skills that are the result of a mix of real-world experience and natural aptitude. Everyone makes mistakes, but some people have the ability to maintain a higher ratio of new mistakes to repeated mistakes. Successful founders pay attention and learn. They know how to multitask. And they surround themselves with smart people who also confront their own mistakes. One good test of whether you are looking at your mistakes is: Have you changed your mind on any significant issues over the past year? If you have not, how deep are you digging? How much are you thinking?
10. “Entrepreneurs don’t ‘noodle’; they ‘do.’ This is what separates entrepreneurs from big-company executives, consultants, and investors. Everybody else has the luxury of ‘analysis’ and Monday-morning quarterbacking. Entrepreneurs are faced with a deluge of daily decisions—much of it minutiae. All of it requiring decisions and action.”
In the 1990s, I was once in a meeting with a group of venture capitalists on Sand Hill Road, and someone referred to a particular business executive as “Mr. Ship.” This was meant as a compliment. What the person meant was that this executive shipped promised products on time. Getting things done is an underrated skill. People who can generate a few months of publicity and look swell gazing off into the distance in a tech publication cover photo are not people who create value in the long term.
11. “Don’t hire people who are exactly like you.”
When I see a CEO who takes 90 percent of the minutes of a meeting, I assume that as a leader, that person probably doesn’t listen to others’ opinions as much as they should. Either that or he or she doesn’t trust his or her colleagues. Let your team introduce themselves.
Diversity in the broadest possible sense makes for a better team: different and complementary skills, different personalities, different interests, different methods, and different backgrounds. Suster also believes that a genuinely functional team does not rely on a single person to get things done.
12. “Focus on large disruptive markets.”
We want the 4 Ms: management, market size, money, momentum.
In the startup world, low gross margin almost always equals death, which is why many Internet retailers have failed or are failing (many operated at 35 percent gross margins). Many software companies have greater-than–80 percent gross margins, which is why they are more valuable than, say, traditional retailers or consumer product companies. But software companies often take longer to scale top-line revenue than retailers, so it takes a while to cover your nut. It’s why some journalists enthusiastically declare, “Company X is doing $20 million in revenue” (when said company might be just selling somebody else’s physical product) and think that is necessarily good, while in fact that might be much worse than a company doing $5 million in sales (but who might be selling software and have sales that are extremely profitable).
There are a range of things a venture capitalist looks for when investing in a startup. Suster identifies some of these things in the quotes included here. For example: a large addressable market, significant convexity, and high gross margins. He also points to one of my biggest pet peeves about business: journalists obsessed with the top-line revenue of a business. Unfortunately, such journalists too often pass this obsession with top-line revenue on to others. Revenue is not profit. You cannot tell whether a business is creating value with just an income statement. An investor must understand unit economics to understand when value is being created.