Apr 20, 2020 · 47m · 20vc
20VC: Upfront's Mark Suster on COVID Redefining What A Great Company Looks Like and What Valuations Look Like, Why Pay-To-Play Is Back On The Table & Why We Will See The Death of Party Rounds
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In this episode of The Twenty Minute VC, host Harry Stebbings interviews Mark Suster, Managing Partner at Upfront Ventures, on how economic downturns redefine startup valuations and venture capital dynamics. Suster delivers crucial insights on extending operational runway, fund reserve management, the return of pay-to-play deal terms, and why conviction-led lead investors will replace fragmented party rounds.
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 23.8% of the talking time here. How this is scored →
Harry as informed peer 4.5 Guest teaching 3.9 Guest disagreement 2.2 Harry pushing back 3.1
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 36:11 Mark Rejects the Death of 20% Ownership Target
Mark explicitly rejects Harry's assertion that 20% ownership targets are dead, insisting that ownership targets will rise as party rounds fail in economic downturns.
Hardest push from Harry ▶ 15:11 Harry Challenges 'Open for Business' VC PRHarry refuses to accept VC social media proclamations at face value, questioning whether the open for business stance is merely marketing.
Biggest teaching moment ▶ 8:57 Mark Reframes Software Contract QualityMark corrects the assumption that software contracts are bulletproof by highlighting shelfware, tier downgrades, and license reductions during downturns.
Harry holds his own ▶ 27:13 Harry Demonstrates Fund Recycling KnowledgeHarry demonstrates advanced venture fund knowledge by pressing Mark on specific recycling percentages and modeling approaches.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Mark Suster's Background and Operational Experience | 2 | 2 | 1 | 0 | Harry asks Mark about his background and how his operational experience shapes his investing mindset. Mark articulates how being a two-time founder gives him empathy and practical wisdom when advising entrepreneurs. | |
| B2B SaaS Dynamics During Economic Downturns | 5 | 5 | 2 | 3 | Harry brings up Robert Smith's assertion about SaaS revenue quality, prompting Mark to explain why enterprise customers still renegotiate or drop licenses in downturns. The exchange shows moderate technical depth from Harry and nuanced industry knowledge from Mark. | |
| B2C Impact, Macroeconomic Outlook, and Advice for Founders | 3 | 4 | 2 | 2 | When Harry emphasizes how unprecedented and unknown everything is, Mark responds with concrete data points on Goldman Sachs GDP revisions and unemployment spikes to ground his advice. The discussion remains friendly and advisory. | |
| VC Reality: Open for Business & Remote Dealmaking | 6 | 3 | 3 | 6 | Harry challenges the common VC Twitter narrative about being wide open for business during the pandemic. Mark responds with direct evidence from Upfront's recent investments while validating Harry's skepticism about the broader market. | |
| Funding Crunches, Down Rounds, and Private vs Public Pricing | 5 | 4 | 2 | 3 | Harry brings industry peer context via Jason Lemkin's tweet regarding falling M&A prices. Mark agrees enthusiastically and explains how corporate acquirers shift focus from innovation to cost-cutting during downturns. | |
| Reserve Allocations, SPVs, and Pay-To-Play Dynamics | 6 | 4 | 3 | 4 | Harry demonstrates sharp venture knowledge by asking whether pay-to-play dynamics are returning. Mark strongly confirms this reality and details why VCs enforce pay-to-play to prevent free riders during recapitalizations. | |
| Upfront's Disciplined Fund Management & Time Diversity | 6 | 5 | 2 | 4 | Harry displays strong technical understanding of fund management by bringing up recycling percentages and stack-ranking methods. Mark breaks down how Upfront maintains fund discipline, 3-year pacing, and time diversity. | |
| Limited Partner (LP) Dynamics and Secondary Markets | 4 | 4 | 1 | 2 | Harry asks whether LP defaults will spike, allowing Mark to explain the LPA structural penalties and secondary market mechanics that mitigate defaults. Mark also shares a candid reflection on how losing naive optimism caused him to pass on Uber and Box. | |
| Conviction over Consensus & The End of Party Rounds | 6 | 6 | 5 | 6 | Harry directly challenges Mark's stance on target ownership, suggesting 20% ownership targets are obsolete. Mark rejects the premise, arguing that party rounds crumble in downturns and leads will demand higher ownership. | |
| Quickfire Round: Books, Board Members, Branding, and Latest Investment | 2 | 2 | 1 | 1 | Harry leads a rapid-fire sequence covering recommended reading, board dynamics, branding, and Mark's investment in Solve. The segment is warm and collaborative, ending with mutual praise between host and guest. |
Statements from this episode (28)
Suster: Too many VCs lack real startup operating experience
“Too many investors that I had come across didn't have real startup operating experience. And I didn't feel like I always got the advice that I could have used at the time I could have used it.”
Upfront portfolio company traded 40% contract discount for one-year extension
“One of the things I was involved in helping guide one of the portfolio companies of which I'm involved through their single largest customer renegotiating their entire contract. And what we were able to do, sadly, you know, we cut, I don't know, 40% off the an…”
Unprepared software startups face major revenue shock in Q4 2020
“So if you don't have a plan for that happening, both in terms of how you gracefully do it, what you're asking for in return, and how you size your cost base, you're going to be in for a huge shock, and that shock is going to come in Q four and Q one.”
Zoom grew from 10M to 200M daily active users in three months
“I mean, look at zoom going from. Ten million monthly actives to two hundred million or daily actives, two hundred million in three months time.”
Sustained unemployment will cause widespread spending declines outside grocery and pharma
“If seventeen million people are out of work for six months or more, Spending is going to go down everywhere across almost every category, maybe other than grocery and pharma.”
Ad spend saw a 40% quarter-over-quarter drop in Q2 2020
“40% decline right now in quarter over quarter for second quarter. And we're already seeing it in the data of people starting to cancel marketing orders that we know are being canceled.”
Founders will need four times more VC meetings to raise capital
“It might take four times more VC meetings to get one check than it did only three months ago, but prepare for probably the hardest economic environment of any of our lifetimes, not just yours if you're a younger founder, but of anyone alive today.”
Upfront Ventures is closing deals entirely remotely without meeting founders
“We funded a company today. We submitted the term sheet two weeks ago, and I've never met the founder in person. We greenlit another term sheet last Monday. It'll fund early to middle of next week. I've never met the founder in person. We are going to our partn…”
Upfront has two portfolio companies closing $50M+ capital rounds in April 2020
“And we have two companies closing north of fifty million dollar rounds this month.”
Upfront Ventures favors $3M checks over $10M checks during economic downturns
“We're tending to fund a lot more, call it, three million dollar checks than ten million dollar checks in terms of new money right now.”
Mature startups facing cash crises will be hardest to refinance
“So when we're looking at companies, we're looking at bright-eyed, bushy-tailed, we're going to build this for the next 10 years, we're in the first six to 18 months of our journey, as opposed to a company been around for six years and suddenly finds itself in …”
VC fundraising will be harder from 2020 to 2025
“I suspect it's going to be harder to raise funds for the next five years than it was for the last five.”
Unrealistic valuation expectations will drive startup failures
“A lot of companies won't succeed because people hold on artificially to prices that are too high.”
M&A prices drop in downturns as acquirers prioritize cost-cutting
“Yeah, no question. Because if there's a limited set of buyers and a whole bunch of companies that want to be acquired and remember my mindset at the start of the podcast was people right now are not paid to innovate. They're not paid to innovate. They're paid …”
Special Purpose Vehicles are much harder to raise during economic downturns
“SPVs are much harder to raise now, and so your ability to protect not just your winners, But also your companies that are struggling and need to get from point A to point B to maybe someday be a winner, it's going to be much harder.”
VCs without follow-on reserves risk being wiped out to zero
“And don't forget that in that eighty million dollar round that gets cut back to a forty million dollar, if you don't participate, sometimes you get flushed down to zero. And so if you don't have reserves and you're playing in a game where big checks are being …”
Pay-to-play provisions have returned to venture capital deal structures
“It doesn't come back. It is back. It's back. Pay to play is on the table.”
Upfront reserves roughly 60% of fund capital for follow-on investments
“So we're investing somewhere between 39 to say 42% Of our fund in first jacks, and we reserve the balance and then we pace ourselves.”
Upfront has maintained a strict three-year fund deployment cadence since 2009
“And we've been religiously on three years since 2009. So our funds have been oh nine, 12, 15 and 2018.”
Venture capital industry average fund deployment cycle shortened to 2.2 years
“And the industry average right now is 2.2 years. And you have some firms coming back every 18 months.”
Upfront allocates 89% of fund dollars to Seed and Series A
“So we do 89% over the last several funds has been about 89% in seed and A. And of that 89%, two-thirds of it is A, one-third of it is seed. So we're actually pretty sizable seed investors, but we are, as you said earlier in the show, A investors. We do 11% of …”
Longer fund deployment pace is necessary to capture platform shifts
“So being across time and time diversity is important for catching platform shifts And changes to a regulatory environment, changes to geopolitical environment, and changes to the economy itself.”
LP defaults won't be a major issue, but fund re-ups will
“So I don't think that's going to be a major problem. What'll be a major problem is people coming into your next fund, because if they find themselves in a bad economic situation, what they end up doing is cutting commitments to managers that they've had for a …”
Suster passed on Uber and Box due to personal biases
“The obvious example, Harry, is Uber, where having lived in London and seen the taxi lobby and how strong the taxi lobby was in London, that clouded my vision for what was possible. Having lived in Los Angeles and seeing how few people ever use taxis, that clou…”
Suster predicts lead VC ownership targets will rise above 20%
“Yes. In fact, I think it'll go up from 20%, not down.”
Suster predicts party rounds will perform worst over the next three years
“And party rounds did incredibly well. For the last five years, but I suspect party rounds are going to do the worst for the next three years, because getting conviction across three or four small investors that each own seven, eight, nine, 10% of your company …”
Suster recommends Peter Zeihan's geopolitical books for predicting business shifts
“If you want to understand the world and what's happening around you, read The Accidental Superpower, The Absent Superpower, and Disunited Nations. And Disunited Nations is the most recent. Each one of those books Has predicted what was going to happen in the w…”
Great board members focus on granular work and difficult budgets
“The things that really matter are people who turn up, roll up their sleeves, have a point of view, will do the detail work, actually read spreadsheets. And be thoughtful and be one step ahead of the game on things that are harder that people don't like to do, …”