SaaS Acquisitions w/ Leo Polovets - Co-Founder and GP, Susa Ventures

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We'Re live. I'm here with Leo Polovitz from SUSE Ventures and today we're going to be chatting about a couple things specifically related to the differences between venture capital and bootstrapping. Me and Leo exchanged a little bit on Twitter and we thought let's help some entrepreneurs understand the differences. So Leo, thanks for taking the time.

Thanks Andrew. Super excited to chat.

So to kick things off, I'd love to hear your background. Suse Benjers, what do you guys invest in? Background story. Any light details you'd like to share on that?

Yeah, absolutely. Maybe I'll do a 30 second intro of myself as well. So I started out as an engineer for about 10 years. I worked at a few venture backed companies. I was fortunate to be pretty early at LinkedIn and at a company called Factual in LA, which are.

What does LinkedIn do?

It's.

I'm just. Everyone knows the business version of Facebook. Everyone knows LinkedIn, man.

I'm just kidding. So I was pretty lucky. I joined when it was about a dozen people joined the other startup, Factual, also roughly the same stage. And then in between did a stint at Google for a few years. And I like startups a lot. I was actually thinking of starting one of my own, but felt like I didn't really know what things looked like when it was two or four people. And I wanted to learn more about that. And about eight, nine years ago, one of my friends was teaming up with some angels. They were thinking of starting a seed fund. They wanted a tech person on the team so they invited me to join and I joined and we kind of just invested as an angel group for about six, eight months. We really liked working together and then we ended up starting suse Ventures off of that about eight years ago. So now like I said, we've been around for about eight years. We're investing out of a $125 million fund. We'll write like one to two million dollars checks into seed stage companies. And we've been pretty lucky. We've gotten to invest in a lot of great companies at seed like Robinhood and Flexport and Mux and many others.

Nice. So let's dive into the good stuff. When does venture capital make sense? Because there's a lot of misconceptions in terms of. And it's also kind of polarizing too between the bootstrap community and the venture bag community. When would you say venture capital makes sense and maybe when it doesn't make sense?

Yeah, well, maybe I'll start by saying I Think in terms of venture versus bootstrapping. I don't think there's a one size fits all best solution or that one is better and one is worse. I think they're just different paths to take. So on the venture side, I think the key things are first of all, just at a high level, you should want to build a really big company. Sort of like your ambition should be a billion dollar company someday. And hopefully you're building in a market that's big enough for a company of that size. If those things aren't true, probably venture is not the right path. If those things are true. Venture can be really good if basically if you're constrained by resources. So if you have a lot of money in the bank from your past jobs and it's just like you and a friend coding something over nights and weekends, you probably are not constrained by capital. But maybe you have a project where you really need to hire five or 10 engineers for a year or two before you can launch. And that's something that most people can't afford without outside funding. Or maybe there's something in a VC's network or expertise or an investor's network or expertise that you really need. Right. Maybe you need access to a certain type of customer that you don't have access to. So those are cases where venture can be good. I think it's less good if money is not the constraint and you're just doing it to kind of get put a brand on your resume or something like that and say, oh, I was backed by this fund because venture basically puts you down a certain track which is to try to shoot for that billion dollar business. And that's not a road you're interested in. It's going to be a lot of friction and frustration for both sides over time.

Nice. And then in terms of, you know, why, why would you say a billion dollars is the bar today for venture backed companies?

Yeah, it's, I think because.

Let me put more context on that because we, you know, we talk a lot about, about you know, changing the world and like helping customers and stuff like that. You know, why doesn't that come first instead of like why is building unicorn the goal if you take venture capital?

So there's two parts to that. So first of all, I think investors do like companies that are making the world better. They like companies with good missions. I think you actually see this where if a company has a great mission, then they have a much easier time fundraising, recruiting, getting customers. So that's something that VCs really appreciate. Personally and financially. It's also a good trait to have in terms of why a billion dollars. It turns out that that's roughly the size of an exit you need to return most funds. And what's interesting is it's almost regardless of the fund size, right? So if it's a $10 million fund writing 50k checks, they might be buying like a quarter of a percent of a company and by the time dilution's over, you know, a billion dollar exit returns 10 million. But it's the same thing with, you know, $100 million fund. They might be writing checks where they buy 10% of a company, but after dilution and everything, you know, again, you kind of need that size of exit to be really meaningful to the fund. And because of the nature of venture capital and startups, most startups don't get to that scale. And so, you know, for the like 1 or 2% that do, you really need them to be, you know, like return the whole fund versus return 10 or 20% of the fund. So a billion ends up being that magic number. And it's a little bit.

So it's, so it's really in favor of the VC and not the entrepreneur. So to raise funds you need to basically kind of say, hey, I'm going to build a billion dollar company, otherwise it's not even worth your time essentially because it doesn't align with your. Because your job is to make a shitload of money. Like, you know, everything aside, we can say founder friendly, but as a venture capitalist, you have, I assume, GPs and LPs that you have to return capital to. So do you ever feel like just that sort of narrative of just saying you need to build a billion dollar company or this needs to have the opportunity to be a billion dollar company is kind of like misleading entrepreneurs down a path of thinking, you know, a company that probably isn't a billion dollar company that you're going to be funding, if that makes sense.

Yeah, I mean, I think at least for good investors, they try to give that feedback to founders. Right. Because if, if, if the company you're building, let's say, you know, if you talk to 100 professionals, they'd all say your ceiling's probably 50 million instead of a billion. That's not good for you or the investor to raise with the assumption that you could build a billion dollars company someday because there's a chance that maybe something changes and that the opportunity grows a lot. But probably it'll just be friction and frustration because it'll be clear early on that, that's not the path. What investors care about is that there's a chance at a billion and less that you're actually going to get there. Because they know they're going to make 20 or 30 or 40 bets in a fund and maybe one or two will get to that billion dollar mark. And so they're not upset at the other, let's say 29 investments that they didn't get to a billion. They just want to see that everyone tries and does their best. And then some companies will get that far and some won't. But even the ones that won't, they usually can have pretty good exits for the founders and the team along the way, which we can talk about, I would say, I think an analogy on this is just the billion dollar mark is just the viability of this business. And what I mean by that is banks give small business loans, for example, and you can kind of ask a similar question like, well, why do you charge 8%? This company has a great mission. Could you charge them 4% or something like that? But the truth is there's a default rate and there's a cost of capital for the bank. And so there's some number where they just can't charge less than that because then their business doesn't work. And so it's kind of the same on the venture side. You need companies to shoot for a billion whether they make it or not, because you need at least one generally out of a fund to get there. And if not, your fund's not going to do great.

Gotcha. That makes a lot of sense. So basically venture capital don't raise it unless you're really trying to swing for the fences. Is that kind of summary? Yeah, yeah, that's kind of, that's my view is just, you know, and also really, I mean, just from an entrepreneur's view, you're probably going to fail. Like statistically you're going to fucking fail, dude. Building a billion dollar company is not easy. But if you like are passionate enough about your business and you feel the market opportunities there and you're willing to swing for the fences, that's when I think venture capital makes sense. I have a question. This is. We were kind of talking about this before we started recording, but I think venture capital does not make make sense for 99% of entrepreneurs. Would you agree with that or disagree with that or middle ground? Where are you on that?

Honestly, I think that's probably ballpark, right? Maybe it's 97%, maybe it's 99.5%, but I think it's something like that for sure.

Yeah. And my context there is, I think a lot of entrepreneurs have these amazing businesses that, you know, where, you know, they, they kind of do the song and dance of like, I'm going to build a billion dollar business, but when a $50 million acquisition offer comes around and that's going to be life changing for them, like, it's going to pay for their family, it's going to take care of their kids, and the VC just needs to basically return their fund or whatever. I think that's huge misalignment. And I've been seeing that a lot amongst just conversations with entrepreneurs. So I would say, I guess, let me put this back to you. How important do you think it is to ask questions up front with investors? What would you say if you were investing in a company and I asked you, hey, before we do this deal, would you be okay with me selling at 50 million and you make a 2x3x return?

So I have two thoughts on this. So first of all, I think if somebody asks that and it sounds like it's sort of the plan or something they'd be very happy with in terms of if somebody offered them $50 million in a year, they're like, oh, this is terrific. I'm going to take it and I hope the investors are okay. I think that for us would be a hard attitude to invest behind. And again, it's not because it's a bad attitude.

I actually asked Jeremy Levine that straight up. I said, what if I raise, what if I never raise capital again? What if I, who also did the series B on LinkedIn, what if I want to sell 50 million? He said yes to both. He basically said, listen, if you basically are able to provide any sort of return, I'm happy with that. All I ask from you is try your hardest. You can't guarantee success and be honest with me. Would you kind of agree with that sort of line of thought or you want to sort of. If I asked you those same questions, you tell me to fuck off.

No, I think actually it would be the same answer. But I think that key part is try your hardest. Right? So I think what would be challenging for us is like, if you see a billion dollar opportunity and we see a billion dollar opportunity, but then you get an exit, not because you tried your hardest and 50 is, that was kind of where the company plateaued, but it's more like, hey, the company is 50 today. It's really clear. It'll be, you know, a Hundred in a year and like 300 in a few years with sort of, you know, the trajectory you're going at. And then you're like, well, you know, 50 is enough for me. I'm going to exit. I think that's where like we'd probably be, you know, like, we would support you because it's your company, but we'd be pretty bummed that, you know, you didn't try to take it further.

That makes a lot of sense. Have you ever had a $50 million cash offer in front of you?

I have not. And again, I think part of this comes from the motivation of the founders. And again, it's not a judgment because if I had a $50 million offer, I'd be super tempted. But I think part of it is sometimes if you're looking for a good financial exit, that's in the first couple of years, ventures probably isn't the best path. I think part of building that billion dollar company for a lot of people is not just the like, hey, can I have some percentage of that? I think it's more like I really want to build something that changes the industry or makes customers lives better at a huge scale. And so I think in some ways that's a little bit antithetical to kind of feeling like, well, if I had a good exit where I could take 10 or 20 million off the table, I would take it. And maybe one thing I'd add too is I think investors are very sympathetic that there's a lot of sacrifices in building a company in the early days, both financially and time wise and maybe relationship wise sometimes. I think over the last five, 10 years there's been a big trend of secondaries, sometimes even starting at series A, but almost very frequently like Series B, where if you're raising at $100 million valuation, you can go sell, you know, one or two or like $3 million of your own stock. And you know, that that's a way to sort of like put some money in your bank account so that you feel less stressed about, you know, what if this doesn't work out and then that gives you like, you know, kind of more motivation to swing for the fences. And I think that's a good win win solution.

I think that is good alignment. Let's move over to the, the bootstrapping part. Just what are your, what are your general thoughts on. Because Venture, you know, pros and cons, obviously, you know, I, I do believe if you, if you take venture, you should confidently, like you should know you were signing on the Dotted line that you were going to give it your all, like you're going to swing for the fences when that 50 million dollar acquisition offer comes around. You know, you're going to, you have a, like a fiduciary, you know, obligation to your investors to turn it down. Like even in some situations, you know, if, if it's like, you know, every company's different, maybe it's clear like you're not going to get to a billion and fifty is a good stop. But if, you know, if you got momentum and you got a full tank of gas, like you need to keep your foot on the pedal is my view. So just putting that out there for entrepreneurs of like, if you take venture capital, like you are signing up to build something really big, like, you know, and you owe that to your investors, in my opinion. And I told that to Jeremy as well. I said, hey, like, you know, I'm going to swing for the fences on this one. Let's go. Any, anything you'd add to that? I feel like that was kind of a rant, but.

Well, so, so I agree with you. I mean, I think if you don't need capital, like I, you know, I would just bootstrap as long as you can. Right. And for some people it's, you know, if you have like no money in the bank, like you need a, you know, a pre seed or angel round right away. Um, and on the other hand, maybe if you, you know, if you're pretty lean or you have some money in the bank, you can, you know, get to a series A or even further and like never raise money. And I think that's great. I think also, like, I just want to, you know, kind of keep chatting about this smaller exit on the road to a billion piece to put some numbers to it. We've done probably about 130, 135 investments over the last nine years and about 30 of them have exited so far. And of those 30, maybe five or six were great and about 25, we either got $0 back or we got some fraction back. But we've always been supportive of those exits. Um, I think out of the 30, maybe there was one where we felt like, hey, this company can go further, but the founder wants to sell and like we wish they'd, you know, kept trying to go further. Um, but the other 29 is sort of like, well you, you know, you swung for the fences and this is where you landed and we'll just try to help you find the best landing spot, but we'll support you like whatever that landing spot is.

Yeah, I mean that's, that's just the reality of startups too is again, when I said like you'll probably fail, like you. Statistically, you know, startups are hard, most do fail. So that's, that's, that's not surprising. And that's another thing I think entrepreneurs should really think hard about is because when you take venture capital, you kind of fix, you set yourself into a fixed outcome, which is IPO or an acquisition in some cases, maybe you can cash for the business if you're super lucky. Yeah, but that's really, really rare. But yeah, I agree, you're signing up for something. Let's change a market here. Let's completely rewrite the rules of an industry.

And for what it's worth, the companies that don't succeed on the venture out, it's not 100% clear that they would have had a much better path than the bootstrap route. So most of those companies we worked with that exited where we got no money back or very little money back, they usually had no revenue or very little revenue. So if they couldn't do that with capital, maybe there's a chance that with no capital they would have been a little bit more creative or something. But it's more like they tried to go after business and it turned out the business wasn't there or the approach wasn't quite right. And so in those cases, I think probably whether you bootstrap or take vc, like the outcome is not going to be great regardless because you kind of took a bet that you were right, but it turns out that you were wrong on the market or the customers or something like that.

Yeah. And huge respect for entrepreneurs that swing for it.

Yeah, a hundred percent.

Because, you know, a lot of times I don't know if you agree with this, but I've always thought the number one reason for startup. What would you say the number one reason for startup successes?

For startup success, I think in the early days it's product market fit because it's very elusive and hard to find true product market fit. And then as you scale, I think it's more like operational excellence because it's easy to plateau if you don't hire well or if you don't manage the company well as it grows to kind of layers and layers of teams and managers and things like that.

Nice. My answer would be market timing where you just kind of time, you almost get lucky. Like you basically enter a market where something has shifted. Like I think YouTube is a good example of that. Airbnb is a good example of that. Uber is a good example of that. Google is a good example of that. Facebook is a good example of that. LinkedIn is a good example of that. Where basically, you know, there's a slew of companies that have tried to do a similar thing before that, but like YouTube as an example. Wasn't until, you know, Adobe Flash came out that really was allowed videos to be, you know, compressed down to a size where you can actually view them on a website without, like, loading an hour. Uber, obviously, you know, the release of the iPhone. Airbnb, at a time right after the recession when people were dying for any sort of extra cash. So those sort of, like, making bets on this is why I always kind of like, question the thought around tam, because usually the biggest businesses always start out in a low TAM market, and then the market timing grows that market size over time. But we could do a whole nother podcast, and I'm probably wrong on it. That's just like my. My personal thoughts.

Honestly, I. I mean, I would say, like, I think most of the companies you mentioned, I agree with a few. I'm less sure about market timing. Like, maybe Google or Facebook. Those seem to me like. Like Google is more of an algorithm advantage because, like, they. Page rank.

Yeah.

And then Facebook, I feel like it was more like. Like, they had this really great distribution hack with, like, colleges, and it really took off.

I would agree with you on that, too. And then MySpace and then a good backstory on Friendster, I read about they had huge technical debt. Like, huge technical debt. And so the site became so slow. Facebook just kind of ran laps around them. And then I remember that because I.

Remember signing up for Friendster in the early days, and a lot of times, like, the pages wouldn't load kind of in that first year or two, and. And then, yeah, like, Facebook did a good job with that.

Yeah. And I think. I can't remember who acquired my news core, but I think they kind of just. Yeah. Anyways. Okay, Moving on to.

But I do maybe really quickly. I'll say. I do agree with you. I think timing's really huge where if you don't have it, you can still build a great business a lot of the times, but when you do have it, it's just like riding a wave. Like every. A lot of things just become so much simpler.

Yeah. Like, that's what happened with. I was down here with business apps. It was just the right place, right time. I got completely lucky. The iPhone just came out. Everyone was Trying to build like an app for their business. We were so early that we almost built like a BlackBerry version, which I'm glad we didn't. But it was. And I was, and I was, and I was 21. Like, I had no experience. Like, so it wasn't like operational genius or execution. It was just kind of right place, right time and a lot of hard work. But I do feel that was a market time business. But maybe we'll, maybe we'll do a follow on podcast for that.

I mean, it sounds really amazing. And yeah, like I said, I think timing, you're right. Like it can have a huge impact.

So let's move on to, you know, bootstrapping. Let me hear just like your thoughts on the benefits of it and then possibly the downsides as well.

Well, I think benefits are, you know, you own the whole company, so, you know, whatever, whatever happens to it, like, if it has a great outcome, it's all yours. I think you also have a lot more latitude and how to run it, right? So you're, you know, you, unless you want to, you probably don't have a board or you, you know, you don't have anyone that you have to like, maybe convince of like big things you want to do. And, and I think also because of that, like, you have more latitude not just in how to run it, but like what direction you want to go in. Like, you could try to build a billion dollar company, you could try to build a million dollar company or, you know, a cash flow business or whatever you want. And I think the cons are, you know, I think when you don't have like capital in the bank other than maybe your own capital, you know, that that can lead to a lot of personal pressure. And for a lot of people, a benefit is you get a lot of creativity out of that. But also I think it's a lot of personal pressure. Sorry, what were you gonna say?

I wholly agree with you on the, the con that you just mentioned is when you, when you bootstrap it, you're, you're kind of putting like, you know, you could go bankrupt. Like, you could, you know, unfortunately, I've seen those scenarios as well, just through the amount of entrepreneurs I talked to where, you know, they try to bootstrap something, they put their life savings in the MVP and then it's gone, you know, because again, like, statistically, I don't, I don't know if there's a good data set on, you know, success rates of venture versus bootstrap because it's kind of Like a shadow market. But startups are hard. We can probably both agree on that for sure. And I think that's kind of. And then another con of bootstrapping sometimes is, I think, you know, when you catch lightning in a bottle, like, you should press on the gas and just raise a little bit of money, like just to hire, like that extra, you know, engineer or something like that to really make your. To really maximize, you know, your outcome. Because building a successful startup is so hard. So hard, so hard. Like every entrepreneur who exits, the first thing they typically do is start another company and they realize how hard it is to build what they built. Go ahead.

I was going to say, to your point about personal bankruptcy, people don't often think about bootstrapping venture funds. But I actually had this experience with SUSE in the early days. LinkedIn had just gone public, so I had some stock from that. So I had a little bit of a safety net. But basically we were angel investing. For the first year. We didn't have a fund, so there were no salaries, but there was cash outlay for the angel investments. And my fiance at the time was now my wife. We had talked about it, where if we didn't raise a fund in the first year, I should go try to work at Google or Facebook or Twitter, because I couldn't afford to do that for a very long time. And so having a fund where I actually had a salary, that was definitely a key point for us in terms of being able to invest for the last eight years.

Nice. I think, you know, one. One, like, really, like, good way to kind of view, you know, bootstrapping. Because I think a lot of bootstrappers value, you know, freedom, ownership, you know, not having anyone tell them what to do, which I fully respect. And I've been through that journey. My angel investors, like I told you, Christian Friedland, he. He was like a, um. Basically we didn't have a port. We. We just were, you know, we were good. He already knew he was going to see returns, so there was very little pressure. And I made it clear to him earlier I wasn't going to raise additional funding. But the point I want to make is like, you know, you can view raising money as giving out.