Mark Suster: Why Private Equity Will Replace IPOs and M&A as the Exit Path | E1147

1. 0:00 – 3:00

   Intro

   1. MSMark Suster0:00

      1998, '99, 2000 are nothing compared to the overvaluations of 2021. So we're two years into a correction. I think it's gonna take another five. Of the 1,200, 60% were marked by four firms, okay? SoftBank, Tiger, Koaichu, and Insight. People invest the most amount of money when the market is just about to hit the peak. When markets fall, that's when everyone sells.

   2. HSHarry Stebbings0:28

      Ready to go? Mark, this is so exciting. You know, I first interviewed like seven or eight years ago.

   3. MSMark Suster0:46

      Yeah.

   4. HSHarry Stebbings0:46

      I think it was on like a Skype call. I was probably about, you know, 21 or whatever it was. But thank you so much for joining me in person today.

   5. MSMark Suster0:52

      I'm thrilled to do it. Thank you for offering. I, did I have gray hair back then?

   6. HSHarry Stebbings0:56

      No, you looked actually about-

   7. MSMark Suster0:57

      (laughs)

   8. HSHarry Stebbings0:57

      ... 20 years younger. Venture's really taken it out of you, didn't it? (laughs)

   9. MSMark Suster1:00

      Yes, that's a grueling industry.

   10. HSHarry Stebbings1:02

       But no, it's so lovely to do this in person. Uh, before we dive in-

   11. MSMark Suster1:05

       Yeah.

   12. HSHarry Stebbings1:05

       ... is there anything you want to start with?

   13. MSMark Suster1:06

       Yeah, I would, if it's okay with you. Um, today is actually Passover. And Passover is a holy day for Jewish people, so you might ask why I'm here. Um, this is maybe the first year I haven't been home with my family having a Seder. I actually came to London to pick up my son who did a study abroad. Um, but for any non-Jewish listener, I just want to acknowledge what Passover is. It was the struggle of the Jews to flee from slavery from the Egyptian people, and it's a story from the Bible about the goal of the Jews to return to their homeland. And the homeland of the Jewish people, many people don't know, s- all Jews know, was actually Israel. And so we originated from, uh, Judea and Samaria, which is modern day Israel. And we, over time, were enslaved and, uh, oppressed throughout thousands of years. We were founded about 4,000 years ago, uh, for dates. And the idea of Passover is that eventually you will return to your ancestral land. So we say every Passover, "Next year in Jerusalem." And we've been saying this for thousands of years. And so I just want to acknowledge that. There's still 130 people being held hostage in Gaza. The 130 people, for a lot of people who want peace, I think everyone wants peace, including Jews, but the starting point is to acknowledge that there's 130 people taken hostage, held by terrorists, of which it's estimated 20 to 40 of them are already dead and not released. So at least on this Passover, I want to acknowledge the people who don't have the freedom that I have today.

   14. HSHarry Stebbings2:45

       I mean, first, thank you so much for doing it today. Um, and I didn't actually know that in terms of the-

   15. MSMark Suster2:49

       Yeah.

   16. HSHarry Stebbings2:49

       ... historical context of Passover, so I really appreciate you sharing that. (laughs) It's a tough one to also pivot from-

   17. MSMark Suster2:54

       (laughs) Yeah.

   18. HSHarry Stebbings2:55

       ... to venture, I have to admit.

   19. MSMark Suster2:56

       Yeah.

   20. HSHarry Stebbings2:56

       But you know what? I've done so many of these shows-

   21. MSMark Suster2:58

       Yeah.

   22. HSHarry Stebbings2:58

       ... I can just do it seamlessly anyway.

2. 3:00 – 4:06

   Entry into Venture

   1. HSHarry Stebbings3:00

      For those that don't know Mark, how did you make your way into venture, just first setting the scene?

   2. MSMark Suster3:04

      Yeah. So I first got into venture in 2007. And in 2007, I had started two software companies. My second company I sold to salesforce.com. And I actually love Salesforce. It's a great company. But after you've been an entrepreneur for 10 years, at least for me, the idea of working at a larger company and, uh, not running the company was not something I wanted to do. So I contacted my VC firm and I said, "I think I might start a third company." And they said, "Have you ever thought about being a GP? Have you ever thought about being an investor?" And of course, I had thought about it. I think a lot of people kind of think about, "Would I make a good investor?" The problem is in 2007, people didn't really want operators. A lot of VCs were not operators. And so I said to my then mentor, my still mentor, Yves Sisteron, uh, who's the founder of Upfront, um, I said, "I'll do it as long as I'm a GP, as long as I'm actually writing checks and being an investor." So in 2007, I started.

3. 4:06 – 8:22

   Founders vs. Operators

   1. MSMark Suster4:06

   2. HSHarry Stebbings4:06

      Okay. So, uh, if we just start on that, I actually sat down with one of the leading kind of founders of one of the best firms the other day and he said, "We get operator investors wrong. Founders who turn investors are brilliant."

   3. MSMark Suster4:19

      Yeah.

   4. HSHarry Stebbings4:19

      Operators are generally not.

   5. MSMark Suster4:22

      Okay.

   6. HSHarry Stebbings4:22

      They've run divisions at large companies. It does not mean you understand the zero to one, the granular. And it's such a different element between founder-turned-investor and operator-turned-investor, and we should delineate between the two. Have you found that there's a difference and how do you think about that?

   7. MSMark Suster4:36

      I do think one thing that was unique about being a founder two times is I think I uniquely understood the journey, not unique to me, but relative to someone who hadn't done it, the journey of zero to one, just how hard it is. And, uh, you know, we were talking just before we started about the kicks in the shins that you really take, um, as a founder, even of a venture fund. Um, but in fact, uh, I remember raising capital, my mom assuming w- I was gonna IPO sometime soon. I'm thinking I have six months' cash left in the bank. M- my employees coming to me and asking if they should take out a loan to buy a house, and I'm thinking, "God no, like why would you do that? I have no idea if we're gonna be in business in seven months." And you've got to suppress all of that. You've got to turn up at the office every day with enthusiasm and, and telling people all the positive things that are gonna happen, and you sort of learn what that psychological thing is for founders. So that's something I try to bring to the table.

   8. HSHarry Stebbings5:36

      How do you do that today, Mark? Like there's always hard times and you will continuously get punched in the face.

   9. MSMark Suster5:41

      Yeah.

   10. HSHarry Stebbings5:42

       How do you continuously show up to the team and be like, "No, no, it's great. It's all good," and go home to your, your family and say, "No, no, it's good," and it, it's sometimes not good?

   11. MSMark Suster5:50

       It is true it's sometimes not good. I think in order to be an effective entrepreneur and in order to be an effect- effective venture investor, you have to be able to compartmentalize. You've got to be able to put problems into a box and say, "I know I'm gonna have to deal with that problem. I'm gonna deal with it at some point in time. But if that, uh, encompasses everything I do, then nobody else can operate." What I learned was that there's a lot of people who can't deal with that. They can't d- I, I'd say the majority of people can't deal with the stresses. So like in our worst days at my first startup company, which was based in London, uh, a lot of the people who came from bigger companies quit 'cause they wanted to go back to bigger companies. It proved too stressful.

   12. HSHarry Stebbings6:33

       Can I ask you-

   13. MSMark Suster6:33

       Yeah.

   14. HSHarry Stebbings6:34

       ... what was your worst days?

   15. MSMark Suster6:36

       The things that people don't tell you about venture, losing money is hard for anybody and nobody wants to lose money, and taking write-offs is, is really painful. But there's worse than that. There's worse than that because... Like, we sort of, as an industry, we lionize founders and we say they're amazing, and VCs are, of course, terrible and evil.

   16. HSHarry Stebbings6:57

       (laughs)

   17. MSMark Suster6:58

       But there's the same proportion of good and bad people who are entrepreneurs, who are investors, who are big company people, operators, whatever. Like, the human population is the human population. So if you're gonna fund 120 or 150 people, you're gonna find some entrepreneurs that are not good.

   18. HSHarry Stebbings7:14

       Mm-hmm.

   19. MSMark Suster7:15

       And so w- you know, I found myself in a situation of people that I had backed for years, um, that suddenly turned bad and they threaten you, they threaten lawsuits. You've got to deal with the legal side of it. I know many GPs dealing with this now, and they call me and they can't talk about it publicly.

   20. HSHarry Stebbings7:33

       Okay, so I'm totally... Do you think we will see many more frauds come out from the last few years?

   21. MSMark Suster7:37

       You're already seeing it. You know, we're reading about it, like, almost monthly in the press. Yes, you're gonna see a lot more of it.

   22. HSHarry Stebbings7:43

       Do you think they will be exposed, though?

   23. MSMark Suster7:44

       It's one step worse than that, which is, I know of a company in which the founder embezzled money. Okay? Literally stole millions of dollars. In order to not end up in a big legal battle, their VCs ended up settling and they, they got all the stock back, but none of the money back. What he did was illegal. Y- it's the same as going down to a, a bank and stealing millions of dollars. Like, if you could imagine someone like that not being prosecuted. So they got back all the stock, he got to keep the cash, and they signed legal agreements that they're never able to talk about it. And that stuff happens.

4. 8:22 – 15:36

   Navigating Challenges with Experience

   1. MSMark Suster8:22

   2. HSHarry Stebbings8:22

      So when these hard moments happen, what do you do today? With all the years of experience that you have, how do you manage that conflict in your own mind today?

   3. MSMark Suster8:31

      Well, I view the job of a CEO and the job of a managing partner at a venture fund, so I run our venture fund, is really to shield people from that. That's literally part of your job as a leader, is to shield other people from the stresses and pressures that you face. Um, talk about y- you know, fundraising. Like, fundraising is not easy for VCs. Like, maybe it's easy if you're Sequoia, Andreessen Horowitz, but for all the rest of us, fundraising is hard. I know through 30 years of doing startups and venture that persistence pays off and your ability to work through problems pays off. So if I look at venture capital, going and raising money, um, I used to tell people about fundraising, which is lemons ripen early. And what do I mean by that? So if you go ask 30 people for money, five or 10 of them are gonna tell you no quickly 'cause nos come quickly and the yeses take months. So the problem is psychologically, you get in your head, "Oh my God, everybody's telling me no." And you could easily give up. And people do give up. And my mindset is, "I know our returns are good. I know our team's good. I know the opportunity in the market's good. I'm just gonna keep moving ahead and I know we'll get to the finish line. But it's my job to not let everyone on my team feel that way, so I have to suppress it."

   4. HSHarry Stebbings9:53

      Okay. So I love so much of your writing, by the way. We haven't talked about this. I mean, one of my favorites is lines not dots-

   5. MSMark Suster9:57

      Yeah.

   6. HSHarry Stebbings9:57

      ... but I do just want to fini-

   7. MSMark Suster9:58

      For sure.

   8. HSHarry Stebbings9:58

      ... touch on the, um, lemons ripen early. I find a lot want to keep optionality. "Well, that mark was really interesting. Let's, let's stay in touch over the next few months." And then when you come back and say, "Yale," and you name your great institution, and they go, "Oh, we'd love to be in."

   9. MSMark Suster10:12

      Yeah.

   10. HSHarry Stebbings10:13

       And so actually, do lemons really ripen early with LPs actually being scared to get off the fence?

   11. MSMark Suster10:18

       Yeah, I think they do. Um, there's no doubt about it that... And we know that entrepreneurs get this behavior too from VCs where they say, you know, "We really like you, we just wanna see a little bit more traction." And I tell all founders that we want to see a little more traction is the same thing as saying no.

   12. HSHarry Stebbings10:35

       Well, I think it's saying actually, "We don't believe in you enough right now." 'Cause if we did, you'd just get over the data stuff. We've all done pre-seed. We've all done no-data investing.

   13. MSMark Suster10:43

       Of course. So it just means no.

   14. HSHarry Stebbings10:45

       Yeah.

   15. MSMark Suster10:45

       And if they actually tell you no, they're worried you're not gonna come back to them, so they don't actually tell you no. They grin fuck you. They smile at you and they say, "As soon as you have more traction, please come back and see me." Of course, LPs do that too, right? It's human behavior. Uh, but I would say two things. One is some actually do tell you no. Um, and they tell you no in the nicest way. They'll say, "Listen, right now..." They'll say... I'll give you an example. The equivalent of we need more traction is, "Hey, we have a full stable of managers right now and we're gonna do mostly re-ups. It's one in and one out, so in order to take you, I would have to drop somebody else." That just means no. Right?

   16. HSHarry Stebbings11:27

       T-

   17. MSMark Suster11:27

       Like, you have to learn the signs that mean no. Or they tell you, "We're, you know, looking to be 17% in venture, and right now we're 21% in venture, so we have to scale back." That just means no.

   18. HSHarry Stebbings11:40

       Sure. I find that-... more agreeable though. I'm like, I get that. That makes sense. The ones where I get very angry as a GP is when they do 60 references, 10 meetings with you and your team, and then come back and say, "Actually, we're still developing our emerging manager program and we don't feel ready for it."

   19. MSMark Suster11:57

       Yeah. And you should have known that before you did the work, yeah.

   20. HSHarry Stebbings11:59

       Absolutely. Like, that's appalling. In terms of the lines not dots, do you still agree with that? Like, you fundraise can, yeah, I mean, like we all do, kind of continuously.

   21. MSMark Suster12:08

       Yeah.

   22. HSHarry Stebbings12:08

       I'm shocked by how few LPs do invest without existing relationships. How do you think about that, lines not dots, and whether it really holds true today?

   23. MSMark Suster12:15

       So the analogy, just for anyone who hasn't seen it-

   24. HSHarry Stebbings12:18

       Mm-hmm.

   25. MSMark Suster12:18

       ... is, uh, on an x-axis is time, and then a y-axis is performance. And I always said to entrepreneurs, "When I meet you, you're a dot. You might be high on the y-axis, you might be low on the y-axis, but however you performed, you performed and I formed an opinion of you. If I meet you a second time, a third time, a fourth time, it starts to form a pattern, and that's the line." And sometimes the pattern is up and to the right, "I can't believe you launched your product, you hired great people, your revenue's going great." And then your co-founder quits or sues you, or you got bad press, or Google announces they're gonna crush you, and then it's down. But over time, you start to see a trend of who you're dealing with and the resilience they have. I think the same is true for LPs making commitments to VCs. Like, you know, your, you have colleagues that left, or you took a write-off in Pakistan, right?

   26. HSHarry Stebbings13:08

       Mm-hmm.

   27. MSMark Suster13:08

       And what did you make of that? What did you learn of that? How did you respond? How resilient are you? What did you do when everyone was writing huge checks at enormous prices in 2021? Were you doing the same thing or were you selling? Were you taking money off the table? So they get to see a pattern over time. Some of my best LP relationships said no to two funds before they finally came in.

   28. HSHarry Stebbings13:30

       Huh.

   29. MSMark Suster13:31

       And so I just viewed it the same way, I'm like, "You just haven't yet seen enough of me to make a decision." But because I'm persistent, I keep going back. I always tell this story about Morgan Stanley. So Morgan Stanley, I had gone to see Jamie Sparren six times.

   30. HSHarry Stebbings13:46

       (laughs)
5. 15:36 – 19:26

   Founders' First Close Strategy

   1. MSMark Suster15:36

      getting paid back.

   2. HSHarry Stebbings15:37

      I, I, I love this in terms of just natural discussions. If we think about lessons from the fundraising's, how do you advise founders on when to do a first close? I get so many founders that say, like, um, 30%, 60%. How do you advise them and

   3. MSMark Suster15:50

      When you say first close, are you talking about founder of a startup company or founder of a fund?

   4. HSHarry Stebbings15:55

      Founder of a fund.

   5. MSMark Suster15:56

      Okay. So I have unconventional views on most things, okay?

   6. HSHarry Stebbings16:00

      (laughs) That's why you're the best podcast guest. (laughs)

   7. MSMark Suster16:02

      Okay. So I'm gonna tell you my unconventional view. They always, I mean, the industry people you meet will tell you you want to be one and done, 'cause it's a sign of strength, right?

   8. HSHarry Stebbings16:12

      Mm-hmm.

   9. MSMark Suster16:12

      To show that you could close all your money at once. I always tell people, "Raise the minimum amount you can to get closed." So let's say you're raising $100 million, okay? If you can close on 20, if someone's willing to write that check and close on 20, close. And then you need to create a narrative on why you closed on 20. And the nice thing about closing on 20, let's say you're on fund two. If, for whatever reason, the rest of the money doesn't come, you're still in business, and all you need to do is get through the next two to three years when you're raising your next fund, now you've got three more years' experience. When you have the 20, you'll start deploying checks. Now you have three, four, five deals for future people to evaluate. Usually, in a fund, you have up to one year-

   10. HSHarry Stebbings16:53

       Mm-hmm.

   11. MSMark Suster16:53

       ... to raise the additional amount of money. So I always say to people, "No matter what, just be in business." So my current fundraising, and I can't really talk about fundraising, but let's imagine I was fundraising. You go out to raise $300 million, let's say. Um, if you can get 200 in the bag and just put it away and be done, even though you're not writing che- why wouldn't you? But you've gotta explain to people, why are you committing before other people? Because no one wants to commit first. People always want to be the last check in.

   12. HSHarry Stebbings17:23

       Wh- what's a good narrative for closing on, say, 20 of 100? Because that's not even a minimum viable fund size.

   13. MSMark Suster17:28

       I think it is.

   14. HSHarry Stebbings17:29

       20-

   15. MSMark Suster17:29

       You can do a $20 million fund, sure.

   16. HSHarry Stebbings17:31

       But if you were raising 100 and say, doing a We Lead series-

   17. MSMark Suster17:35

       Well, the pro-

   18. HSHarry Stebbings17:35

       Is it legal?

   19. MSMark Suster17:35

       The problem with closing only 20 out of 100 is it looks like failure. So the first advice I give to people is, put the smallest number on the front of your pitch deck that you're possibly raising. So if you want 100, you're raising 50 to 60, and then end up oversubscribed. If you close 20 of 50, that's still failure, but that's (laughs) not as bad as 20 outta 100. And you've just gotta have a positive narrative. When you close to 20, you say to people, "I think we will get to 50. I think we will get to 60." And you have to believe that, right?

   20. HSHarry Stebbings18:04

       Sure.

   21. MSMark Suster18:04

       But, but you might not get there.... if they really negotiate hard, give them something like, I don't know, can you give them a little extra economic incentive for being the first 20 to commit?

   22. HSHarry Stebbings18:16

       Would you do that?

   23. MSMark Suster18:17

       I haven't done it.

   24. HSHarry Stebbings18:19

       Yeah.

   25. MSMark Suster18:19

       But would I do it? Of course I would. If I had to, sure.

   26. HSHarry Stebbings18:22

       So, so what would that be? That would be extra carry? That would be-

   27. MSMark Suster18:24

       Maybe you get a discount on your fees. Maybe you have a slight discount on carry. Maybe there's some other incentive-

   28. HSHarry Stebbings18:31

       (laughs)

   29. MSMark Suster18:31

       ... you can give to someone to committing the first 20 million.

   30. HSHarry Stebbings18:33

       Okay. We know funder funds. Uh, I, I'm not singling them out-
6. 19:26 – 20:44

   Institutions vs. Personal Networks

   1. MSMark Suster19:26

   2. HSHarry Stebbings19:26

      Okay. Should you go after the institutions or the big names first, or should you go after your friends and your family, get the local corralled around you? Which one's the better one?

   3. MSMark Suster19:37

      Well, first of all, money's money, okay? So you could have Harvard, Yale, Princeton, Stanford, but their money doesn't come with anything additional, right? (laughs) So money's money. Then the hard job is yours. Like, you have to deploy it. You have to get founders to want to work with you, and then you have to make returns, right? So it helps a little bit to have the brand than to raise other LP money. But money is money. And do I think people should go for institutional money? Absolutely, yes. Why? Because institutional money is way more likely to be in fund two and fund three and fund four, whereas friends and family money's not as likely to repeat. So just like with CEOs who I might say, "Look, if you can't raise institutional money, raise friends and family money. It's the backup, probably not your leading plan," same is true for funds. Like, the funds, if you can raise from institutional investors, you should. And the thing is, there are institutional investors that want to write $3 million checks. So if you're raising a $50 million fund, like, that's a good size for them.

   4. HSHarry Stebbings20:43

      Yeah. I get

7. 20:44 – 25:49

   LP Influence in Fundraising Dynamics

   1. HSHarry Stebbings20:44

      you totally. Are LPs sheep around brand names? Do you notice that big brand names, your Harvards, your MITs of the world, do convert people who could be on the sidelines?

   2. MSMark Suster20:53

      All investors are sheep. End of story. Like, I don't want to pick on LPs. Like, LPs are no different than VCs. They're no different than retail investors. I took my first investment course in 1997, and one of the things I learned from my professor at University of Chicago is that people invest the most amount of money when the market is just about to hit the peak. Why? Because if you've been seeing three solid years of every time you write a check, next quarter and the quarter after and the quarter after, it's worth more, then at some point, the whole market comes in and wants to write checks. When markets fall, that's when everyone sells. And they sell because you start looking at, "I'm taking losses. I can't absorb these losses." So you sell. And of course, psychologically, that's the opposite of what you should be doing. Like, when markets see a runup, you should be selling. When markets are falling, uh, you should be buying. Now, I'll give you a real world example. 2008, uh, fourth quarter of 2008, I had sold my company. I had a bit of cash. I said to my wife, "I think the stock market's a little bit beat up post-Lehman Brothers. I'm gonna put money into the market." And I said to her, "Please don't log into Charles Schwab." Because by definition, the checks that I write are gonna be worth less two weeks later, two weeks later, two weeks later. It's really hard to do. And so I put a little bit of money and I dollar averaged down between about November of 2008, uh, 'til about March of 2009. And for anyone who doesn't know, March of '09 was like the nadir of the global financial crisis. I'm logging on every day saying, "What have I done?" Psychologically, it was really stressful and hard.

   3. HSHarry Stebbings22:32

      And you keep doing it, if you're dollar averaging down.

   4. MSMark Suster22:34

      And that's what I did. And I kept writing checks and I kept taking losses. And I said to her, "Fundamentally, I believe in these companies." So-

   5. HSHarry Stebbings22:41

      I can feel your goosebumps. (laughs)

   6. MSMark Suster22:41

      ... but listen, I'll tell you the names. I bought Verizon, I bought Altria, I bought DuPont. So I bought some safe names. I bought Microsoft, I bought Google, I bought Amazon, I bought Morgan Stanley, I bought, um, Goldman Sachs. Like, I bought Citigroup. And then all of a sudden people are saying, "Citigroup's going to go bankrupt." I'm like, "What have I done," right? And then the market, of course, had a huge rebound starting in April. And it, it was unabated until 2021. But I sold as soon as I made a profit. I just, like, I couldn't handle the stresses of it. But let me tell you now in my professional career, Harry, I, um... In 2018, we'd seen this booming market, right? I started selling. So we sold in 2018, '19, '20 and '21. And I've been public about this. We sold $1.2 billion worth of positions. In 2021, when everyone was writing crazy checks, I sold $600 million that year. Why? Public stock markets in November of 2021, uh, software was trading at 24.6 times NTM, next 12-month revenue, 24.6. If you look at the 10-year average, the 10-year average public market, 9.6. The-

   7. HSHarry Stebbings23:50

      Wow.

   8. MSMark Suster23:50

      ... 20-year average, 6.2. So I call that football field. Uh, one side of the pitch is like the low watermark, 6.2. The other side, the high pitch, uh, high watermark is 9.6. And we're trading at 24.6 in the public markets. In the private market, it was 50 times NTM to 100 times NTM. It just made no sense, right? So we became a seller. And part of that was, you know, some companies just exited, but part of it was a conscious effort to do secondaries, okay? So I learned psychologically people are buying, I'm selling. Now, in 2023, everyone was shitting themselves because they had so many losses from 2021. We did not. So we did not just because we dialed back our pace of investments. I don't want to say like I'm perfectly smart and I timed the market perfectly, but we just had a sense valuation said gotten crazy. So in '23,... I started buying secondaries at discounts. We deployed almost $50 million into secondaries in '23 at deep discounts at a time where other people were, like, scared about the market and I'm like, "I'm an investor."

   9. HSHarry Stebbings24:56

      Do you sell all of your position? Do you sell part of your position? I know it's dependent, but how do you advise-

   10. MSMark Suster25:00

       Usually, uh, in a run-up-

   11. HSHarry Stebbings25:02

       Mm.

   12. MSMark Suster25:02

       ... I'll usually sell 33% to 40% maximum, maximum.

   13. HSHarry Stebbings25:06

       At a time or just generally?

   14. MSMark Suster25:08

       Yeah, because, uh, uh, generally.

   15. HSHarry Stebbings25:08

       Mm.

   16. MSMark Suster25:09

       Because I'm a venture capitalist, I believe in long positions so if I have a company that went from, in one case, zero to 600 million in net revenue, okay? Like, it's hard to get to scale so you don't want to have your gems sold when you get to $600 million net revenue. But at the same point in time, it was about 3X overvalued for the public market comps, so I took 150 million off the table, I kept 200 long.

   17. HSHarry Stebbings25:34

       (laughs)

   18. MSMark Suster25:34

       So I had some LPs say, "Why would you do that?" And I'm like, "I don't know. If I was a public investor, I would imagine I would do that. Why wouldn't a private investor do that?" 70% of my LPs were gracious and appreciative and thoughtful and kind. But a couple were very

8. 25:49 – 38:13

   The Misconception of IPO Liquidity

   1. MSMark Suster25:49

      vocal and it was hard.

   2. HSHarry Stebbings25:50

      That- I mean, that's astonishing. Uh, one thing that I really worry about today, Mark, is like you mentioned kind of liquidity and-

   3. MSMark Suster25:55

      Yeah.

   4. HSHarry Stebbings25:55

      ... you know, money, getting cash back. IPO markets are not open and the spigot is turned off and Lina Khan is crushing M&A.

   5. MSMark Suster26:04

      Yeah.

   6. HSHarry Stebbings26:05

      I'm like, "Shit, venture doesn't work when we don't have the other end of the spectrum open."

   7. MSMark Suster26:09

      It's funny you say this. Um, I, I told you already I have unconventional thoughts. Let me tell you this. Um, so when I first got into technology, there was one goal of every founder, there was one goal of every VC: IPO. The problem with IPO, even if you can IPO, there's no liquidity. So it's like a dirty secret, like you take a company public, it's worth a billion dollars, you hold 180 million of that billion dollars. But there's no float, there's no one trading the stock until you become enormous. So you're sitting on $180 million, congratulations, you can't get out. So that market is shut. But even if it was open, it's not nirvana, right? So you, that's one channel. The second channel's strategic acquisition, so we all aspired to exit to Google and Facebook and Amazon or whatever, Microsoft. But that market, as you've already noted, is largely shut. So where, where are returns gonna come from? They're gonna come from private equity. So private equity firms are gonna step in and buy assets from venture capital funds. They will either buy a company or they will buy secondaries. So secondaries the fastest-growing part of the market right now. Um, but here's the thing, they're gonna pay rational prices-

   8. HSHarry Stebbings27:24

      Mm-hmm.

   9. MSMark Suster27:24

      ... 'cause they're professional investors who have to make money, they have to make a return. If you're selling at rational prices, how can you pay irrational entry prices? So I've always said, like, entry price matters, you have to have discipline, right? So our median, uh, valuation on entries between 11 to 12 pre at a time where people are paying 25, 30, 40 pre, it got crazy. Like in 2021, people were paying 60, 70, 80 pre for pre-revenue companies.

   10. HSHarry Stebbings27:53

       Uh, sorry, Mark, they still are.

   11. MSMark Suster27:54

       Yeah.

   12. HSHarry Stebbings27:55

       I- in Europe, we had three 20s on a 100 in a week.

   13. MSMark Suster27:59

       Really?

   14. HSHarry Stebbings27:59

       Yeah, for nothing. No revenue, no product, no nothing.

   15. MSMark Suster28:01

       So in 2021 and 2022, there were 1,200 companies valued for the first time ever at a billion dollars or more, in the private markets, 1,200, okay? But let's give you some historical context. Where did the term unicorn come from? I assume you know.

   16. HSHarry Stebbings28:18

       Eileen Lee.

   17. MSMark Suster28:18

       Yeah.

   18. HSHarry Stebbings28:19

       Mm.

   19. MSMark Suster28:19

       So she wrote an article in 2013, okay? If you look at 2012, guess how many unicorns there were?

   20. HSHarry Stebbings28:30

       Uh, in 2012?

   21. MSMark Suster28:31

       Mm-hmm.

   22. HSHarry Stebbings28:33

       35.

   23. MSMark Suster28:33

       One.

   24. HSHarry Stebbings28:34

       Oh, wow.

   25. MSMark Suster28:35

       That's why she called it a unicorn. In 2013, there were three. By 2015, there had been like 25 or 30. By 2018, these are net new per year, there were something like 50 or 60. And then fast-forward to 2021, it was more than 700. It was like 749 in that one year, okay? So why the explosion? They were valued at a billion dollars, they weren't worth a billion dollars. How many public market companies do you think are worth a billion dollars in the US?

   26. HSHarry Stebbings29:07

       I would have no idea.

   27. MSMark Suster29:09

       So if I take all of software-

   28. HSHarry Stebbings29:11

       Mm.

   29. MSMark Suster29:11

       ... and all internet companies, there are 343. That's it. That's the whole universe. That includes Facebook, Google, that includes Amazon, all of them, 343, and yet there's 15 or 1600 in the private markets. How could that be?

   30. HSHarry Stebbings29:28

       So how many, if you were to make an assessment, how many do you think are legitimate unicorns?
9. 38:13 – 40:10

   Investors’ Transition from Software to Hard Tech

   1. MSMark Suster38:13

      on it.

   2. HSHarry Stebbings38:13

      Okay. No, uh, listen, I get you there totally. Do you not worry that we have a generation of formerly software investors now moving into hard tech, infrastructure, energy? These are fundamentally different games. I do not play this game because I don't get it, like I don't do biotech. I think we're gonna see a huge amount of people like we did in '05 with clean tech lose a lot of money 'cause they don't get it.

   3. MSMark Suster38:33

      Of course you have to have skills. So as I look at my practice, we don't, um, have generalist in- investors. We have specialist investors. Um, so I actually don't believe that much in a concentrated fund around one theme. Um, we are what I've started calling multi-thematic fund. We have themes, but we have five or six themes. And so we have partners who just stay in their swim lane of their themes. So I have a team just looking at space and national defense. I have a separate team just looking at healthcare. When we started doing healthcare investments in, like, 2014, 2015, 2016, most people in venture capital were saying, "Don't invest in healthcare. It's a regulated industry. It's hard to make money." Some of our best returns are now coming from that sector. So we try to stay focused on what we know.

   4. HSHarry Stebbings39:22

      I get you. Do you also worry about, bluntly, exit environments for those companies? They are not traditional. There's not, like, 20 space companies in the public markets like there is consumer enterprise venture.

   5. MSMark Suster39:32

      Well, first of all, if I define space as rocket launching-

   6. HSHarry Stebbings39:36

      Mm.

   7. MSMark Suster39:37

      ... yes, there's not a lot of exits. But what is actually happening in space, the vast majority of what's happening in space is satellites and it's communication. So it's either Earth observation or media or telecoms. New use cases are emerging and they will emerge, like, uh, extracting minerals or zero gravity manufacturing. There are new use cases that will be created. But do I worry about exit environment? I worry about exit environment for all of venture. You're a software company, if you become big, who's gonna buy you?

   8. HSHarry Stebbings40:07

      (laughs)

   9. MSMark Suster40:07

      Like, who's gonna buy all these $13 billion

10. 40:10 – 48:33

    M&A Landscape Evaluation

    1. MSMark Suster40:10

       companies?

    2. HSHarry Stebbings40:10

       Mark, what happens to the M&A environments? Like, you know, we have the CMA in London that blocked Figma.

    3. MSMark Suster40:15

       Right.

    4. HSHarry Stebbings40:15

       I mean, London blocked Figma.

    5. MSMark Suster40:17

       I think you will have... Like, the biggest buyers will struggle to buy the biggest companies. So that's why I think a lot of those may end up, well, either you get big enough to IPO, and there will be plenty of those, um, or you end up getting bought out by private equity who ultimately probably combine you with other businesses until you're big enough for an IPO. Um, but it's probably easier to get exits at the $250 million to a $1 billion level-

    6. HSHarry Stebbings40:44

       Mm-hmm.

    7. MSMark Suster40:44

       ... because the universe of buyers is much greater. Back to this idea of capital efficiency, back to this idea of entry price mattering.

    8. HSHarry Stebbings40:52

       I get you. Do you think founders have realized that message though?

    9. MSMark Suster40:55

       I think it matters what teams are you backing. There will always be founders who are going to be the biggest players in the industry, and those companies, if they're successful, will drive great returns. So Anduril, uh, m- amazing company. Like, God bless everyone who backed that company. It's really important for national defense, for, for the United States, and for the Western world. And they have really big ambitions, and I think it's gonna be a public company one day.

    10. HSHarry Stebbings41:22

        Do, do you agree with the thesis of, like, uh, Founders Fund, who kind of go, instead of trying to be in the category around it, f- regardless of stage, just be in the company? Which is why they're, like, plowing into OpenAI, which is why they plow into Anduril. Just be in the number one at whatever price. Or are you like, "Uh, there's ancillaries around the edges"?

    11. MSMark Suster41:42

        I don't know is the answer. I know it's not my strategy. I know that I don't have the skills to do it. But look at their history. Like, they've been incredibly successful with that strategy. It's kind of hard to bet against Founders Fund. Their returns have been phenomenal. Their team's been phenomenal.

    12. HSHarry Stebbings42:00

        No, listen, I, I totally agree with you. Do you think... Do you outcome scenario plan when you invest?

    13. MSMark Suster42:05

        Not really, but we do generally think about what we think the exit environment's like, and we care a lot about valuation and discipline. Because for us, I can't plan that Founders Fund world. I'm not Bryan Singerman or Peter Thiel or, you know, any of these guys who have been able to plow $150, $200 million into a single company and be right consistently. So it matters to us.

    14. HSHarry Stebbings42:29

        You said 11-12 for entry price. And I love your honesty around price discipline, because everyone normally says, "Well, it just matters that you're in the best companies." Question on 11-12. Uh, respectfully, anyone who comes out of a great company now raises 5 on 25 from Andreessen. How do you do 11 or 12? And does that mean that you're getting different funds?

    15. MSMark Suster42:48

        I, I... So your question actually is, is there a selection bias? Are you picking companies that are not gonna be as good? I don't agree with the premise. I don't believe that everyone raises 5 on 25 from Andreessen. I think Andreessen's great for some people, not good for other people. Um, and also, our median, uh, investment pre-money is 11 or 12, but we pay 20, we pay 25. It depends on the founder. It depends on how much progress they've made. It depends on what we see as the opportunity and how competitive it is. Um-But do I think that there's selection bias? No. There are great people who leave companies. You have to make an earlier bet. I might have been able to wait six months, nine months, 12 months to make a bet. We have to know the founder before they create the company.

    16. HSHarry Stebbings43:34

        How often when you break the rules are you right or are you wrong?

    17. MSMark Suster43:39

        I don't think I can really put a number on that. I think, um, post hoc, we rationalize everything. So, we just want to back the most talented founders working in the industries that we're focused on, um, and we wanna stay disciplined. Since 2009, if you take every one of our funds, they've been median between $3.2 to $3.5 million first check-in, and they've been median between 18 to 21% ownership. That's what we do. That's our strategy, and we're disciplined about that strategy. We haven't diverted from that.

    18. HSHarry Stebbings44:15

        How do you think about reserves?

    19. MSMark Suster44:17

        So, we invest 40% of our fund, usually 42% of our fund, and we reserve 58%.

    20. HSHarry Stebbings44:24

        In the next subsequent round, or in the subsequent two, three rounds? How do you think about that distribution?

    21. MSMark Suster44:28

        The 58% is reserved for all subsequent rounds.

    22. HSHarry Stebbings44:32

        Okay.

    23. MSMark Suster44:32

        And, and you know, the job of every VC is like, "Let's create three buckets after we write the check." Bucket one are the companies that just clearly aren't gonna work, and then you try to minimize the amount of capital you put into those. Bucket two are the ones that are clearly working, and you really wanna back up the truck as much as you can. But bucket three also matters. These are companies that you really believe have a prospect of building something big, and the market just hasn't accepted that yet, and getting them over the hurdle matters.

    24. HSHarry Stebbings45:01

        Well, bucket three is also, uh, I don't know. It's kind of just a bit in the messy middle, and you don't even maybe have the belief that you once did. It's just, it's slower, it's harder, whatever. But my question to you is like, I don't think the rocket ships are sustainable value generators, and I think we overestimate our ability to pick our winners early, especially between seed and A. With that in mind, I question the effectiveness of reserves.

    25. MSMark Suster45:26

        So, um, I'll just-

    26. HSHarry Stebbings45:27

        Especially if you get ownership-

    27. MSMark Suster45:28

        I'll just-

    28. HSHarry Stebbings45:28

        ... like you do.

    29. MSMark Suster45:29

        I'll just disagree. So first of all, I disagree with the premise about the third bucket, which you kind of say, "Oh, those companies..." I don't know how you'd characterize it, but aren't likely to work. Some of our best returns have come from companies nobody else wanted to fund, but they were doing something fundamental, and it just took longer. On average, of our companies that take longer and that we had reserves for, on average, it took six years to raise a growth round, okay? But those companies, by definition, are more capital efficient because they didn't have access to it. I have six deals that fit this category that returned $1.4 billion of returns in companies that other people didn't want to fund.

    30. HSHarry Stebbings46:11

        We're agreeing.
11. 48:33 – 52:59

    Biggest Investing Mistake

    1. MSMark Suster48:33

       sometimes.

    2. HSHarry Stebbings48:33

       Mark, what's been your biggest investing mistake? I think we learn a lot from mistakes.

    3. MSMark Suster48:37

       Early on in my career, it's exactly what you said. When I had winners, I wanted to pile money into winners. And it worked for me for the first two times I did it, and so I just thought that's the thing you do. And then I had one big company that was incredibly fast-growing. It was the fastest-growing company I had ever seen. And so I piled money into it, and it ended up being a zero. We, we had an offer to sell the company for $350 million. Founder didn't wanna sell. Market changed, and it eventually sold for zero.

    4. HSHarry Stebbings49:07

       (sighs)

    5. MSMark Suster49:07

       Yeah, it was hard.

    6. HSHarry Stebbings49:09

       How did you change as a result of that?

    7. MSMark Suster49:11

       So, we started getting more disciplined about reserves, and I started doing better planning and realizing that what drove me to make the mistake in the first place was ego.I was driven by, like, I'm not going to have a new investor come in and own more than I own because I've done all the hard work for the last three or four years. Or, "This is my winner," or like, "Okay, I know I have $6 million into this, but why wouldn't I have $15 million into this?" So I think really ego got in the way, and I made that mistake really early in my career, and then I started advising the rest of my partners. I'm like, "Don't let ego get in the way." Like, we can love the founder, we can love the market, and just not love the valuation.

    8. HSHarry Stebbings49:51

       Ooh. Yeah, that's tough. I have a thing where I don't think actually... I think it's quite dangerous for younger investors deploying capital if they've never raised money. It's so easy to come into venture and be like, "Oh, amazing founder, five million, five million, five million." Me and you know it's fucking hard to raise money. If you don't have the perspective of how difficult it is, I think it changes how you think about deployment.

    9. MSMark Suster50:12

       Not just raising money is hard. Driving returns is hard, right? It's easy to write checks.

    10. HSHarry Stebbings50:19

        (laughs)

    11. MSMark Suster50:19

        Like, writing checks is the easy part. Making returns is the hard part. And so I always tell people, like, when you're new in venture, if you look at seven deals and you have great networks, and you look at seven deals, you're gonna find three that look good and you're gonna want to write those three checks. If you look at 70 deals, you're still gonna find probably three, maybe four that you really like to do. If you look at 700 deals, okay, it's not gonna be three or four, you might wanna do seven to 10 deals. But the chances that those first three are gonna be the deals that you do is almost zero. It really is a numbers game. You really need to see lots of deals, and over time you start to realize this is something special. So I tell people, "Just be patient when you first join venture. Don't deploy capital too quickly."

    12. HSHarry Stebbings51:03

        Do you think richer investors make better investors? They're not scared of downside. They don't kind of worry so incessantly. It's like, "Ah, you know what? I believe," and they have that upside maximization mindset.

    13. MSMark Suster51:15

        I don't know. But I think, like, deeply analytical people who are self-confident enough to believe something that other people don't believe, when everybody tells you you're wrong and you're still making the investment, that's what matters, you know? And believe me, I've done... For the last 12 or 13 years, I've been doing hardware investments. You know, we did an investment in Ring. We were the seed investor in Ring. Everybody on Shark Tank passed on it. We wrote a check. Uh, I wrote a check into Nanit, a baby camera company. It produces hardware. To this day, people still tell me, like, "Why would you invest in a hardware company?" But Apple's a hardware company. SpaceX is a hardware company. Tesla's a hardware company. Hardware plus software is incredibly valuable, so the hardware actually provides you with a differentiated return if you also have a services business. So for me, it's hardware plus software. And believe me, a lot of people don't agree with that.

    14. HSHarry Stebbings52:09

        Does that not just show you how hard venture is? If you think about Ring, it's like a billion exit. You have 12, 15% on the exit. You're like 120 million back. On a 300 million fund, it's like 40% of the fund.

    15. MSMark Suster52:19

        I wish he didn't sell.

    16. HSHarry Stebbings52:22

        Yeah.

    17. MSMark Suster52:23

        I understand why he sold. I think it was right for him, and maybe it was right for the market. But, I mean, Amazon sells billions of Rings now, billions of dollars worth of Rings. Like, I look at what could this have been.

    18. HSHarry Stebbings52:37

        Yeah, on our door. (laughs)

    19. MSMark Suster52:39

        Yeah. Yeah, yeah, they're everywhere. Now, Jamie would argue, and he's probably not wrong, that Amazon wanted to own this market anyway, and Google really wanted to be in this market anyway, and it was gonna get too competitive.

    20. HSHarry Stebbings52:50

        Yep, I get that. Um, is there anything that you're not asked that you wish you were asked before we do a quick-fire round?

    21. MSMark Suster52:57

        That I'm not asked?

12. 52:59 – 58:59

    Concerns over Potential US Election Outcome

    1. MSMark Suster52:59

       Um...

    2. HSHarry Stebbings52:59

       Are you worried about Trump?

    3. MSMark Suster53:02

       (sighs) .

    4. HSHarry Stebbings53:03

       I'm in London, and so we see the ****** light.

    5. MSMark Suster53:06

       Yes, I am-

    6. HSHarry Stebbings53:07

       Yeah.

    7. MSMark Suster53:08

       ... is the honest truth.

    8. HSHarry Stebbings53:10

       (laughs)

    9. MSMark Suster53:11

       Um, I'm, I, I fundamentally don't believe that he cares about democracy. And so that worries me. And I know that a lot of people that I'm friends with don't share that view. Um-

    10. HSHarry Stebbings53:22

        But would you prefer Biden in this state?

    11. MSMark Suster53:25

        Look, I'm like everybody else. I'd prefer third, you know?

    12. HSHarry Stebbings53:28

        (laughs)

    13. MSMark Suster53:28

        I'd prefer somebody else. But these are the choices that we have, and it's, it's, uh, not a great choice. You know what worries me? Um, of course the extreme right worries me. It always has. But the extreme left worries me too, and they've become so radicalized, and they've really become radicalized against my people. They've become radicalized against Jews. If I could say it to you this way.

    14. HSHarry Stebbings53:50

        Mm-hmm.

    15. MSMark Suster53:51

        There's, I don't know, about two billion, um, Christian people in the world. There's about 1.3 billion Muslims in the world. There's a little over a billion Chinese people in the world. There's a little over a billion, 1.3, 1.4, Indian people in the world, right? Like, this is the world's populations. There are 15 million Jewish people in the world, 15 million. So let's take world population. That's not one percent. That's 0.15% of world population. We have historically for thousands of years been amongst the most persecuted people there are. We were forced out of North Africa. We were forced out of Iran and Iraq. We were forced out of these places. We returned to our ancestral homeland. The land that we acquired, we acquired by purchasing it. We purchased it in the late 1800s, um, up until 1947. It was all purchased. Zionism was a movement to aggregate money and convince people to return to their ancestral homeland. It was not a state. There was... It was a British mandate. It was o- uh, occupied by the Ottoman Empire for hundreds of years, and then by the Brits. The Brits took the land, and they said in 1917, the Balfour Declaration, said, "We're gonna give a land to the Jews."... the Jews are going to have an ancestral homeland. And there were roughly the same-sized population of Muslims as there were Jews at the time, and they were granted a homeland. And f- to see the far left now villainize the most oppressed people in history, um, that we somehow are the oppressors is beyond absurd, but it happened in the UK. Jeremy Corbyn allowed anti-Semitism to rise in the far left in the UK, and it's happening in the US and we need to put a stop to it.

    16. HSHarry Stebbings55:41

        Can I ask, when you look at the rise of anti-Semitism, we mentioned, you know, what we're seeing at Columbia right now, do you think that's always been there, deep-seated anti-Semitism within these people who we haven't seen before? Or is it just suddenly the-

    17. MSMark Suster55:51

        Deep-seeded anti-Semitism has existed for thousands of years (laughs) , right? It's, it-

    18. HSHarry Stebbings55:56

        But it's not the topic du jour of middle-class white people who just want something to protest about.

    19. MSMark Suster55:59

        Let's, well, let me give you a historical context. Let's look at Russia. So Russia, there was something called pogroms, which are the Russians w- have been killing Jews for hundreds of years. In 1917, you had the Bolshevik Revolution, and they said, "Out with the leadership who's autocracy, like, the common man, the common people are gonna take control of the company." Socialist movement, right? The Jews were incredibly supportive of that. Why were they supportive of that? Because they'd been oppressed for 100 years, they're like, "Wait, we all get to be equal?" And you know what the Bolsheviks did? They turned around and said, "Yes, we're all equal, except for the Jews." Right? So the Jews don't have a seat at the table, so they started to oppress the Jews. The Russians have been some of the most oppressive people, killing Jews for hundreds of years. So anyway, like, do I think it's new? Like, uh, I would tell you that anti-Semitism-

    20. HSHarry Stebbings56:50

        So you believe all these, like, white middle-class students who are suddenly anti-Semites have suddenly, like, uh, have always been anti-Semites? I'm almost just, like, I think it's topic du jour, I'm gonna join that brigade for today.

    21. MSMark Suster57:03

        For you to be willing to deny that more than 1,200 people were killed on October 7th, for you to say that people weren't really raped, that babies weren't really killed, for you to believe that Jewish people who ... I mean, something like, uh, 20% of the population of Israel is Muslim today. They have elected officials in the Israeli government, on Israeli courts, in senior positions, and for you to call something like that genocide is beyond absurd. And is it a perfect democracy? Of course not (laughs) , like, and do I believe in every one of their policies? Of course not. But it's a democracy, right? It's a democracy that welcomes minorities, that welcomes women in leadership roles. And now, suddenly, for the far left to try and villainize that, it's like a, it's a crazy ideology.

    22. HSHarry Stebbings57:57

        So what do you do if you're a university? We've seen universities struggle to manage it in any effective way.

    23. MSMark Suster58:03

        Well, thank goodness you have activists, especially the donor base and the parent base that are starting to revolt against Harvard, against Penn, soon against Columbia, and they're forcing change. And I hope that forced change continues, where, you know, education should be a place where all ideas can be explored, but where no single group is targeted. Like, the way that Jews are being targeted now at Columbia, can you imagine any other oppressed group, Black people or Latino people or Chinese people or LGBT people, being marginalized the way Jews are right now? It's beyond absurd.

    24. HSHarry Stebbings58:41

        Listen, I, I do, I do agree. You can't imagine it bluntly.

    25. MSMark Suster58:45

        I need to wrap-

    26. HSHarry Stebbings58:46

        Yeah.

    27. MSMark Suster58:46

        ... but it's been lovely to see you. I really appreciate you hosting me.

    28. HSHarry Stebbings58:50

        Honestly, Marc, thank you so much for doing this.

    29. MSMark Suster58:51

        Yeah.

    30. HSHarry Stebbings58:51

        I so am glad that we ... thrilled to do it, uh, in person, uh, and I'm so glad that, you know, you're in Europe.

Episode duration: 59:00