Mark Suster blogs at Both Sides of the Table, which describes him as follows. “Mark Suster is a 2x entrepreneur turned VC. He joined Upfront Ventures in 2007 as a General Partner after selling his company to Salesforce.com.”
Writing this post on Mark Suster has been relatively easy since he writes and speaks clearly, thinks rationally and is generous with advice. 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.
Coming up with twelve solid quotes from a public figure is not as easy as you might think. There are a lot of people I would *love* to write about but they are private and don’t say much in public about business or investing. Some people who would otherwise have a lot to teach about investing or startups work very hard to stay out of the press. Mark Suster is, by contrast, such a prolific source of material that instead of struggling to find quotes to include, I had to figure out what to cut out.
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 18-24 month 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 4X their money. Keep in mind that companies aren’t regularly bought for $100 million+ either.”
“VC’s want meaningful ownership … and the ‘fairway’ is 25-33% of your company.” “Be careful about ever dipping below 6 months of cash in the bank. You start fundraising when you have 9 months left and begin to panic if you get down below 3 months.” The only unforgivable sin in business is to run out of cash. But raising too much cash can also cause significant pain due to dilution. Getting the mix right between these two states is an art and not a science. Of course, these are general rules, and the right amount to raise & to have on hand in any given case will depend on factors like
– the nature of the business (e.g., is it capital intensive; is customer acquisition cost high, how high is the burn rate) and
-the current state of the business cycle, which is constantly in flux. Venture capital is a very cyclical business.
As just one data point, Wharton recently quoted Pitchbook as saying: “in the past, Series A rounds meant entrepreneurs would give up roughly 33% of their company. This year, the average is around 27.7%.” That is after a seed round, and in today’s world you can get an extreme situation where startup has raised as much a $5 million in convertible debt before they do a Series A round. Bill Gates famously wanted enough cash in the bank to cover a full year of expenses in the early years of Microsoft, but (1) that was a different time and place with very different business models and (2) the business was generating that cash internally. Microsoft raised no venture capital, except for a small amount near the IPO to convince a specific investor to join the board of directors. Many people forget that when Microsoft went public Bill Gates owned about 50% of the company, which is a very rare thing. In contrast, some founders today have diluted themselves down to a few points of the equity by chasing fast growth in a cash consuming business model.
Finally, raising too much money can cause a lack of discipline and focus. Benchmark Capital’s Bill Gurley points out that “more startups die of indigestion than starvation.” Someone pointed out this week that too much money also means that issues and problems that should be dealt with by company culture are resolved instead by money which can mean that long term stability is threatened.
2. “There is no “right” amount of burn. Pay close attention to your runway.” “Your value creation must be at least 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 (3x) to hit his/her MINIMUM return target that his/her investors are expecting. So money spent should add equity value or create IP 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 press has a huge tendency to transform a comment 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 that readers are fascinated with.
Valuation and burn rate 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 dilutionville or a broken capitalization table, which is an ugly place to be. Having some cash in reserve can come in very handy when markets essentially stop providing new cash for a period of time. Bill Gurley has told 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 2000’s (when the Internet bubble popped) and the company was able to hang on for many years until growth resumed. Since market disruptions in the short term can’t be predicted with certainty, some amount of cash cushion has positive optionality. The question is not whether a cash reserve is needed, but how much. Danielle Morrill has a great post on burn rates which includes a $200K fully burdened cost-per-employee.
3. “The average VC – traditional VC – does 2 deals per year… from maybe 1,000 approaches.” Don’t take it personally if a VC does not want to invest in your startup. There are many reasons that potential investors say no. Also, try not to forget that the numbers cited by Mark Suster obviously mean that the top 100 VCs (individuals not firms) only make ~200 investment a year. Given that about 4,000 startups want to get funded in a given year, not all of them will be funded by a top 100 VC. The scarcest asset a VC has is time, and as a result they can only be he helpful to so many portfolio companies and on so many company boards. In other words, a great VC is more time-limited than capital-limited. If you do get funded, it will likely be after making a significant number of unsuccessful approaches and actual pitches. Some people can get funded quite quickly because of their reputation but they are the exception and not the rule. The venture capital firm Bessemer has a nice page that lists all the startups they rejected.
4. “You have to ask for the order.” Success in the venture business is way more dependent on sales skills than people imagine. VCs, founders and startup executives are constantly selling. The range of things that must be sold is long. Selling the prospects of the business to potential new employees is a huge part of what must be done for a startup to be a success. They are selling services and products, but also to potential investors and employees. If you don’t want to spend time and effort selling these things, starting a company is not something you will be much good at. And to sell successfully, you need to “ask for the order” since if you don’t do this 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. As John Doerr said once: “Believe me, selling is honorable work — particularly in a startup, where it’s the difference between life and death.”
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 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 they seem to be flying inches from disaster and close to death. If the founders and leadership of the company lose their nerve the outcome is very seldom pretty. Jane Park (the founder of e-commerce startup Julep) tells a great story about how the 2007 financial crisis took her company to the brink of running out of cash, and how she had to borrow $100,000 from her parents to save the business. That was courageous not only on her part but her parents, given that it was 50% of the money they had saved at that point in their lives toward retirement. The other great part of the story is how she used analytics to save her business. The data told her that people were not coming in as often, but were spending just as much when they did visit. By creating a loyalty program, Julep was able to get though the crisis. That’s a fantastic example of tenacity.
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 you nose in a mistake to force yourself to confront what needs to be changed. The best founders actually change rather than merely talking about change. One way to identify mistakes is to have people you can trust to tell you things they see from a different perspective. If you have someone who is loyal and trustworthy, who listens well and has good judgment, you truly have something that is invaluable. People like Coach Bill Campbell have these qualities, which explains their popularity as advisors.
7. “It’s 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. The poseur founders and employees tend to run for safety during a down market, so that is helpful too since there is transparency on who’s willing to take risks and bet big. One of Warren Buffett’s most famed quotes is on this point: “Be greedy when others are fearful, and fearful when others are greedy.” Google was founded in September 1998 and when the Internet bubble popped a few year later, their ability to hire great people was enhanced by the downturn.
8. “If you have options in life, you won’t get screwed.” Getting to Yes by Roger Fisher became one of the best-selling books of all time based on this simple idea. In that book, Roger Fisher taught readers about the importance of having a BATNA (Best Alternative To a Negotiated Agreement). When you have an alternative, you can get a better set of terms and price. That Fisher’s insight was a big enough revelation to turn into his book a massive bestseller is, well, amazing, but then there it is. He developed the book at Harvard and that did help put an academic gloss on what anyone paying attention in life should know. As a simple example of this principle in operation, you should never say you will buy anything before agreeing on terms – including price. As another example it is wise to have multiple suppliers, unless they are selling a commodity.
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 details 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 which are the result of a mix of real world experience and natural aptitude. Everyone makes mistakes but some people have an ability to make a higher ratio of new mistakes to repeated mistakes. Successful founders pay attention and learn. They naturally know how to multitask. In addition, they are almost always readers. 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.” I was in a meeting with a group of VCs once on Sand Hill road in the 1990s, and someone referred to a particular executive as “Mr. Ship.” This was meant as a compliment. What the person meant was this executive shipped promised product 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 cover photo of a tech publication is an overrated skill. For a look at the things a founder must do to succeed, I suggest you read my post on Bill Campbell.
11. “Don’t hire people who are exactly like you.” “When I see a CEO who takes 90% 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/she doesn’t trust his/her colleagues. Let your team introduce themselves.” Diversity in the broadest possible sense makes for better team. Different skills, different personalities, different interests, different methods, different backgrounds, etc. People who get things done know how to hire other people with complementary skills. Mark Suster is also pointing out 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 M’s: management, market size, money, momentum.” “In startup world, low GM almost always equals death which is why many Internet retailers have failed or are failing (many operated at 35% gross margins). Many software companies have > 80% 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 that a VC is looking for when investing in a startup. Mark Suster identifies some of these things throughout these twelve quotes: Large addressable market. Significant optionality. High gross margin. The time it takes to cover your expenses. He also points to one of my biggest pet peeves about business: journalists who are obsessed with the top line revenue of a business. Unfortunately, these journalists too often pass this obsession with top line revenue on to others.
I have easily said this thousand times: revenue does not equal profit. It is such a simple idea and it only requires grade school math to understand. I included this quote in my post on Jeff Bezos and it is appropriate to quote it again: “free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins… What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.”
I recommend all of Mark Suster’s posts at Both Sides of the Table