May 1, 2024 · 58m · news
Mark Suster: Why Private Equity Will Replace IPOs and M&A as the Exit Path | E1147 · 20VC with Harry Stebbings
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of 20VC, Upfront Ventures General Partner Mark Suster sits down with Harry Stebbings to analyze the structural changes in venture capital, offering advice on fundraising, valuation discipline, and alternative exit routes like private equity, while also sharing candid perspectives on current geopolitical and domestic political issues.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 16.6% of the talking time here. How this is scored →
Harry as informed peer 4.9 Guest teaching 6.2 Guest disagreement 2.5 Harry pushing back 3.8
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 45:29 Suster openly rejects Stebbings' premise on reserves
When Stebbings asserts that middle-tier portfolio companies rarely generate value and questions reserves, Suster bluntly responds 'I'll just disagree' and refutes the host's framing with historical fund data.
Hardest push from Harry ▶ 37:23 Stebbings challenges Suster's space thesis contrarianismStebbings directly refuses Suster's positioning of space tech as an overlooked thesis, pointing out massive existing VC commitments and spinout cadences.
Biggest teaching moment ▶ 28:35 Suster contrasts public market scale against private unicornsSuster educates Stebbings by highlighting that only 343 internet/software companies in the US public market are worth over $1B, exposing the absurdity of over 1,600 private unicorns.
Harry holds his own ▶ 42:29 Stebbings challenges Suster's valuation discipline on founder qualityStebbings demonstrates strong venture expertise by challenging Suster's $11-12M entry discipline, arguing that top tier founders automatically default to Andreessen's $25M valuation pricing.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcome Back: Recalling Skype Calls and Graying Hair | 1 | 5 | 1 | 0 | Stebbings opens with light banter about their past interview before Suster pivots to a serious statement about Passover and hostages in Gaza. Stebbings graciously listens and admits he was unaware of the historical context of Passover. | |
| Suster's Transition to Venture: Operators vs. Founders | 6 | 4 | 2 | 5 | Stebbings introduces strong pushback by quoting a prominent VC firm founder who argues that operator investors lack zero-to-one capability compared to founder investors. Suster responds constructively by highlighting the psychological trauma and resilience unique to two-time founders. | |
| Psychological Resilience, Startup Hardship, and 'Lemons Ripen Early' | 4 | 6 | 1 | 2 | Stebbings asks probing questions about startup adversity and fraud. Suster educates the host with insider details about founder embezzlement cases settled via confidential NDAs. | |
| The LP Fundraising Journey: 'Lines, Not Dots' and Persistence | 5 | 7 | 2 | 5 | Stebbings cites Suster's iconic essays but challenges his 'lemons ripen early' rule regarding LP fundraising behavior. Suster reframes LP rejection cues and recounts his relentless persistence in closing Morgan Stanley. | |
| Fundraising Execution: Minimizing First Closes and LP Targets | 6 | 6 | 3 | 6 | Suster outlines his contrarian view that fund managers should close on minimal amounts early, which Stebbings repeatedly challenges as looking like a failed raise. Stebbings presses Suster on LP perception and fund-of-funds requirements. | |
| Market Cycles, Greed, and Disciplined Secondary Selling | 5 | 7 | 1 | 2 | Suster gives a detailed breakdown of historical market multiples and his firm's disciplined strategy selling $1.2B in secondaries during the 2021 peak. Stebbings asks sharp operational questions about secondary sales mechanics. | |
| The Death of IPOs and the Rise of Private Equity Buyouts | 6 | 8 | 3 | 5 | Stebbings pushes back on Suster's market correction timeline by citing current absurd valuation deals in Europe. Suster schools the host with data comparing 343 public tech companies over $1B with over 1,600 private unicorns. | |
| Generative AI Valuation Traps vs. the SpaceX Space Revolution | 7 | 6 | 4 | 7 | Stebbings delivers sharp pushback against Suster's space tech thesis, arguing it is consensus rather than contrarian and warning of software investors losing money in hard tech. Suster defends his thesis by citing SpaceX spinout volume and team specialization. | |
| Venture Fund Strategy: Reserves, Discipline, and Ego Lessons | 8 | 7 | 5 | 8 | Stebbings challenges Suster's $11-12M valuation cap as creating adverse selection against top founders and questions the rationale for capital reserves. Suster forcefully disagrees, sharing data on long-term winners and a painful early career mistake where ego cost him a $350M exit. | |
| VC Career Advice and the Hardware-Plus-Software Thesis | 6 | 5 | 2 | 2 | Stebbings calculates fund return math on Upfront's early Ring investment. Suster explains his hardware-plus-software investment framework and reflects on why Ring sold too early. | |
| Discussion on US Presidential Election and Trump vs. Biden | 3 | 8 | 4 | 3 | Stebbings asks about the US presidential election and rising antisemitism. Suster delivers an extensive historical lecture on global demographics, Zionism, the Bolshevik revolution, and far-left radicalization. | |
| Campus Protests and Donor Revolt at Universities | 2 | 5 | 2 | 1 | Stebbings asks how universities should handle campus protests. Suster commends donor and parent revolts at elite universities before both wrap up the interview. |
Statements from this episode (33)
Mark Suster: 2021 tech overvaluations were worse than dot-com bubble
“1998, 99, 2000 are nothing compared to the overvaluations of twenty-twenty-one.”
Mark Suster: Venture market correction will take another five years
“So we're two years into a correction. I think it's going to take another five.”
Mark Suster: Investors deploy peak capital right before market tops
“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.”
Suster: Tech industry will see many more startup frauds exposed
“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.”
Suster: VCs settled with embezzling founder, getting equity but zero cash
“It's one step worse than that, which is, I know of a company in which the founder embezzled money. Ok, literally stole millions of dollars. In order to not end up in a big legal battle, their VCs ended up settling, and they got all the stock back, but none of …”
Suster: Rejections come quickly in fundraising while commitments take months
“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 going to tell you no quickly because no's come quickly and the yes's take months.”
Mark Suster: Upfront's 2012 fund will return over 5x cash-on-cash
“That 2012 fund for us, I think is going to be a phenomenal success. By any measure, it'll, it should return north of five X capital cash on cash.”
Suster: Venture fund managers should pitch the smallest viable fund target
“Put the smallest number on the front of your pitch deck that you're possibly raising.”
Suster: Doubling fund size to $100M doesn't change core strategy
“50 to 500 fundamentally changes your strategy. 50 to a hundred, you're still playing in the same ballpark.”
Suster: Institutional LPs re-commit to future funds far more than friends and family
“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.”
Mark Suster: All investors act like sheep and follow herd mentality
“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.”
Upfront Ventures sold $1.2B in secondary positions during 2021 peak
“We sold 1.2 billion dollars worth of positions in 2021. When everyone was writing crazy checks, I sold six hundred million dollars that year.”
Software revenue multiples hit 24.6x in late 2021 versus 9.6x average
“Public stock markets in November of 2021 software was trading at 24.6 times NTM next 12 month revenue, 24.6. If you look at the ten-year average, the ten-year average public market, 9.6. The twenty-year average, 6.2.”
Upfront Ventures deployed nearly $50M into discounted secondaries in 2023
“So in 23, I started buying secondaries at discounts. We deployed almost fifty million dollars into secondaries in 23 at deep discounts at a time where other people were, like, scared about the market”
Mark Suster limits secondary sales to 40% maximum during market run-ups
“Usually, in a run-up, I'll usually sell 33 to 40% maximum.”
Suster: Private equity buyouts and secondaries will drive future venture capital returns
“Where, where are returns going to come from? They're going to come from private equity. So private equity firms are going to step in and buy assets from venture capital funds. They will either buy A company or they will buy secondary.”
Suster: Upfront Ventures maintains median entry valuation between $11M and $12M pre-money
“So our median valuation on entries between 11 to 12 pre”
Suster: Only 343 public US software and internet companies are worth $1B+
“So if I take all of software 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.”
Suster: 1,000 startups funded in 2021-2022 will never exit at $1B+
“Of the 1221 and 22 that were funded, my guess is a thousand of them will never achieve an exit value of a billion dollars or more.”
Suster: SoftBank, Tiger, Coatue, and Insight marked 60% of 2021-2022 unicorns
“Of the 1260% were marked by four firms, ok? SoftBank, Tiger, Coachu, and Insight.”
Suster: Upfront Ventures participated in zero SoftBank or Tiger deals
“So we had zero SoftBank deals, we had zero Tiger deals, we had one Coatoo deal, one Insight deal.”
Suster: Generative AI seed deals carry a 44% valuation premium
“If you want to do generative AI in 20, 23, 24, you're paying 44% premium to do a generative AI deal.”
Suster: Series B generative AI deals command a 200% valuation premium
“At the B round, it's like 200% premium to an enterprise software company.”
Suster: Investors entering generative AI from 2023-2025 won't see strong returns
“So if you're betting on generative AI for the first time in 23, 24, 25, good luck making returns.”
Suster: Upfront Ventures is not doing a lot of generative AI investing
“We don't write right now upfront is not doing a lot of generative AI.”
Suster: Upfront Ventures is deploying significantly more capital into space
“We're putting way more dollars into space right now.”
Suster: SpaceX spin-outs exceed 100 companies raising over $10B
“So there's been more than a hundred spin-outs now from SpaceX, more than a hundred. They've raised more than ten billion dollars, and the vast majority of them are in Los Angeles.”
Suster: Upfront maintains $3.2M-$3.5M initial checks and 18-21% ownership
“Since 2009, if you take every one of our funds, they've been median between 3.2 to 3.5 million dollar first check in. And they've been median between 18 to 21% ownership.”
Suster: Upfront reserves 58% of fund capital for follow-on rounds
“So, we invest 40% of our fund, usually 42% of our fund, and we reserve 58%.”
Suster: Upfront generated $1.4B from six hard-to-fund, capital-efficient startups
“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 fi…”
Suster: Fast-growing startup rejected $350M acquisition offer before crashing to $0
“And then I had one big company that was incredibly fast growing is the fastest growing company I had ever seen. And so I piled money into it and it ended up being a zero. We had an offer to sell the company for three hundred and fifty million dollars. Founder …”