E6: Chad Byers on Why Susa is Returning to Concentrated, Company-Building Seed Investing

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Welcome back to Turpentine bc, a podcast where we discuss the art and science of building successful venture firms. Today's guest is Chad Byers of Suse Ventures. In just under a decade, Seuss has become one of the best seed firms in their industry. Their $25 million fund1 famously invested in Flexport and Robinhood. Now, 10 years later, they're taking all their learnings and relaunching the firm with a new vision and strategy, which Chad tells us about in this episode of Turpentine vc. If you like what you hear, please subscribe and leave us a review. Now, onto the interview. Chad, welcome to Turpentine vc.

Thank you for having me.

So, Chad, I feel like in a decade you've built one of the best institutional seed firms that exist today. I feel like right after First Round, it's. It's susa. Is that accurate? Is that how you. You see yourselves?

Or.

I know you're too modest, but be immodest for a second.

You're certainly being too kind. I agree with half your statement. And the statement, half that I agree with is the fact that First Round's a fantastic firm and certainly at the top echelon of institutional Seed. I think the clear list of 1, 2, 3, 4, 5 is very murky. I think there's cohorts, right? There's like a tier 1, tier 2, tier 3 type situation. Our goal a decade ago was just to become go from irrelevant to relevant. And I'll jump forward to maybe a topic we'll talk about later. But the goal over the next decade we're now one decade in is how do you go from relevant to number one? And that's the progression that we've been trying to march. So think of it as, you know, Unknown to top 10, top 10 to 1. And that's what I'm going to dedicate the next 10 years of my life to. Professionally perfect.

But before we get to where we're going, let's talk about where. Where we've been and trace the evolution of suse. It's funny, I was listening to an interview you did in 2016 with Harry Stebbings, and you were talking about where you want to take suse, and you were saying you were going to have six gps or five gps, you know, really lean in there, and you kind of had a vision for, for you wanted to take it. When you talk about the evolution of how, how SUSE has evolved and how you've thought about it over the years.

We started Suse Ventures in 2013. At the time, venture was very different. Far fewer seed firms, very collaborative at the early stage. And what we set out to build was how do we come, you know, the best firm for an early stage investor, or should say founder, building a company in the US and we started with a $25 million first fund. We raised a $50 million fund in 2016, a $90 million fund in 2019. And so you can see this very kind of logical progression. And remember at the time there were funds who had had success early that went small fund to multi stage fund very quickly. And nothing wrong with that, just a different strategy. Think about a Felicis, think about a DC vc, think about a forerunner. And our intention was always, can you grow the fund size in lockstep with your brand? And the reason that's an important analogy is if you do that, you'll always get into a disproportionate number of deals that you want to get into.

Right?

There's never going to really be significant adverse selection against that. And so really from the get go, we've been building this institutional seed focused, so stage focused firm. The first deviation from that strategy was 2019. We raised our first opportunity fund. So in 2019 raised a $90 million seed fund, $50 million opportunity fund. And at the time, that $50 million opportunity fund was to primarily invest into our own winners. We had been fortunate enough to back stuff like Robinhood from the seed, Flexport from the seed. Our first fund had now nine unicorns out of 40 companies, all from the seed stage. And so it was really a follow on vehicle. In 2021 is where we kind of did our next emergence of strategy. So we always had SUSE as the core early stage fund. We had launched this OP fund and the OP fund, we raised a significantly larger one in 2021. So we went from a $50 million one in 2019 to a $250 million fund in 2021. Call it what you will, top of the market, whatever, exuberance. But the idea was the first real divergence of strategy. We were not only going to now follow on to our winners, we were actually going to lead or co lead deals in our portfolio as well as net new deals outside in conjunction with. As if that wasn't enough change, our LPs were saying, look, SUSE has always done the same five categories, fintech, healthcare logistics, B2B, SaaS and infrastructure dev. We want to get exposure to these new frontier tech categories. Climate, hardware, robotics, Crypto, space, et cetera. We didn't really have a vehicle to do that. And we felt very strongly that firms need to be extremely focused in what they do from an investment standpoint. So we launched kind of a pre seedy discovery fund called Humbaventures. Again, another guerrilla name going back on the SUSE name, which was $15 million to go explore that category. So now if you kind of come up to present, we now have these three strategies, right? We have this pre seed fund in Frontier Tech. We have SUSE as the core early stage investing asset. We have this opportunity fund and we learned some hard things and this will get into why where we're going. And I actually haven't publicly announced this, so hopefully we can align this with our public blog post and drop it at the same time. But our learnings were a couple things. Like one, we confused the market on what SUSE was. We confused LPs, we confused founders, we confused other investors. We realized that these different strategies require different skill sets. And investors, we realized that no one has enough time to do all three if they're totally different businesses. And so all these things really helped us realize our new vision and strategy on what we're implementing today, which is if you take a page out of the big asset management firms or even, you know, private equity or other, they commonly have different strategies with their own brands right underneath an umbrella or underneath on top of a platform. And in venture you rarely see that because brand and venture really matters, right? You build the brand of a firm and it actually matters and it resonates with entrepreneurs. And so what we're actually going to do is each of these strategies we're now relaunching with their own brand. So we're preserving the SUSE brand as a seed stage only fund, as we've been doing for a decade. Our OP fund we're rebranding to Kivu K I V U Ventures. And it will be a standalone fund that sits on its own, that does A's and B's. It can do all of the early stage deals in suse, but it can also do net new. And then we have this Frontier Tech discovery fund we called humbaventures. And it will have its own brand and identity. And so on the back of this, each of the founding gps of SUSE is managing one of these pools of capital. The reasons that they're their own brands are a couple things. One is brand clarity. Every founder LP investor now knows exactly what these pools of capitals are intended to do, who works on and has dedicated teams. Two, they have their own investment Committees so they can make independent decisions, deliver a way better experience to entrepreneurs. They know the product they should go to for their company. 3 I think this is a network effect business. The more you invest in a specific category, you build domain expertise, the better you're going to be an investor and the better experience you can give an entrepreneur because you understand their business way faster. So all of these things are now better. And so our future vision here is you'll have this backend platform where these each products sit on top of but they will be kind of operationally independent but also like share you know as much best practice as we can.

Fascinating. Thanks for the overview. And so you're leading, is it that you're leading suse? Leo is leading Humbo. And what's the breakdown?

Yep, so I'm going to manage and lead SUSE for us. My partner Leo is going to be leading Humba for us and my partner Seth is going to be leading KUU for us. That all aligned with our personal interest sets and we are where we are already spending the majority of our time. And so you know everyone is super excited about this new direction our teams are etc. And in a lot of ways I think like we're one of the first venture firms to really think about unique products sitting next to each other. And so in a lot of this is an experiment.

Yeah, it's fascinating because you know you mentioned Felicis who maybe was starting seed and then just become multi stage. Why, why not just take that path? Just all under one brand, raise a 500 million dollar vehicle and just do, just do all the above. What are kind of the pros and cons Talk about the trade offs.

Yeah, I always think about the perspective we all need to care about is the entrepreneur like that is who matters in this picture. Forget everything I said about the LPs and everything because it's entrepreneurs who matter. If you are an entrepreneur approaching a multi stage firm and they have everything under one roof, you might accidentally navigate to a partner that doesn't know your business or your category. Your experience in that pitch meeting is going to be them teaching them like the fundamentals of healthcare for them to understand your business. Furthermore, you're going to go to an investment committee where the majority of the people in that investment committee might not know anything about your space or your industry and they're going to vote on your vote on your business depending on the firm structure. I think secondly if you talk to anyone in a multi stage fund that has 10 plus investing partners, it is Operationally run like a cluster f, like it is a horribly run business. Venture firms are, you know, may maybe for outsiders, although your pod might have a lot of insiders listening. It's no secret. Venture funds are run typically very terribly as businesses. And so this allows us to have much more streamlined operations and decision makings around each of these products. I think it's all about delivering a better founder experience, extreme brand clarity, knowing which fund serves the product or industry that, that you're raising for specifically. And then when you go and pitch the team, everyone on that team should be, you know, specialists and experts in exactly what you're doing. If you go pitch Leo on my team something in frontier tech, like he's going to have spent the last three years in IT angel invest in a bunch of IT LED investments out of Humba and a bunch of those, like there's real network effects there. And so I think that it all comes back to who the customer is.

Yeah. And it's interesting because the, the customer at the end of the day in terms of what drives returns obviously is founders. But you also need to, you know, sell LPs on a strategy that they'll, that they'll get behind. And you guys are in the fortunate position of having, you know, proved it over a decade with, with big wins that perhaps you have, you know, flexibility in, in what you're able to do.

I think we got very lucky in our first fund and it's paved an easier path for us and, and maybe they give us a bit more flexibility because of that. But actually in talking to our LPs, they're actually quite excited about this structure. I think it's important to state that the management company is not changing. And I think a lot of people might, might not really know that. They might assume these are breaking up into individual vehicles. The management company is staying the same. The platform behind it in terms of finance ops, etc is staying the same. And so, you know, from an LP perspective, one of the unique things we're doing is we're not stapling these funds together. You know, you just asked the question, why not raise 500 million, might not raise a 500 million plus an OP fund on top of that. The secret of this industry is most venture firms have to staple those funds together to get the other entities raised. Andreessen people want Andreessen early, but they might not want the mega fund that sits on top because of fund math. But you have to do both. We don't staple these products together. So an LP can now come to us and say I want X product or I want the platform and they have full control over that. And so, you know, we think about SUSE as a startup and if you take that analogy, then like any company, they have individual products that do different things. We're now no different. And an LP can buy those products or the platform. I think it's actually more choice, not less.

Say more about what this means for the future of where you hope these things go. And, and you know, what does SUSE look like five years from now, ten years from now?

Yeah. So you started off by mentioning first round and they're an incredible seed stage firm who has built a real platform, right? So think of venture simply as a two by two grid, right? On one axis you have platform versus non platform. And when I say platform, I mean you've built out service teams and you've built out marketing teams and PR teams and recruiting teams and all that kind of stuff. On the other, actually you kind of have concentrated portfolio to index portfolio. Right. And so on the platform side, probably the most, you know, quintessential non platform firm would be benchmark and quintessential platform firm would be Andreessen. On the concentrated side you probably have like, on the most extreme, like a K9 which most people may not be familiar with, but unbelievable firm run by Manu. He does like two or three deals a year, you know, high concentration. On the flip side of that, you have YC or 500 at, you know, hundreds of startups in a fund. And our North Star is much more like the benchmark or the seed version is probably like an IA Ventures, which is another just top tier, incredible fund that flies under the radar often. That's more of our North Star. How do we do concentrated seed stage investing at ASUSA Ventures? And I'll speak for SUSE on where we're going, you know, concentrated small number of companies, 35 per fund and relatively low platform. So not a huge team. And the reason I think that's really important is you focus all of your time back to decision making and supporting companies and that is it, Right. It's like, you know, I just saw your tweet about, you know, what Ilya said over at Kleiner. In a lot of ways I think I agree, the venture we are trying to practice is the venture that was invented 40, 40 years ago, which it was all about. Lower volume, higher ownership, fewer deals, more involvement, shoulder, shoulder, company building. That's what this business was started. And I think we tend to try to practice it in that way, that's the North Star.

What do you think about a firm like Thrive? Do they take that strategy to the max in terms of just like, you know, very few investors, ton of money and they're doing all stages, I guess. Do you agree with that characterization? And two, would you ever aspire to. To be at the scale of them or do you think it doesn't make sense?

Thrive is a very unique firm in that I think they have done incubations as well or close to as well as the top firms. By the way, a lot more people have tried incubations and it has not worked. So they clearly do something there that is unique and special and they've actually executed it in a very real way. Because of that, they've raised huge amounts of capital and they can flex up to doing extreme growth rounds. The biggest difference between us and Thrive would just we will never get to that size of capital because of our focus on early stage. We never are going to drift into the true growth $100 million check rises. Even on Kivu, our kind of upfund new op fund brand, it'll only do A's and B's. So this is still like the bulk of early stage venture. And if you talk about SUSE and Humba, they're just doing precedent seed. And so it's just a much more concentrated. Now this concept of incubation is a fascinating one that we could talk forever about. I think you have a massive uptick in firms attempting to do it. My bias is that it's way harder than people think and very few of those will actually generate real returns, I. E. Distributed, actually realized returns. I think it's very difficult. We've done a couple, but I think creating a factory to do it is extremely hard and perhaps Thrive's done it the best, but I think it's challenging.

Hey. We'll continue our interview in a moment after a word from our sponsors. How have you guys thought about incubations and. Yeah. And where you want to take that?

So we have done a couple in our past and the form factor that we do it with probably looks more like a seed investment to the outside world. When we do an incubation, what we mean is we were involved from day zero or negative one. We might have had the idea. We found a team that was either working in the space or around the space to kind of adopt that idea and build a company around it. And we were the founding investor. Our investment doesn't look like we own 40% of the company. It looks like a Typical seed round, we own 15% of the company or something like that. And what we say from day zero is this is your business. We're not even co founders, we are just investors. It doesn't matter whose idea all that history will be. This is your company. And I think that is the only way to do incubations without having some form of adverse selection. There are rare cases like Sutter Hill or other where the investing partner literally is the CEO of the company. That's a different structure. But as the non operating CEO, venture firms taking 40, 50% of the company in my mind is a huge red flag and will rarely work out.

You mentioned that there are different approaches that you could have taken and it is interesting. Once you sort of earn the right based on prior returns, you could try to go big and be a platform or be a multi stage firm and. And you kind of have your bread and butter of where you want to play. How much of that is an aesthetic or not aesthetic, but really just based on the skills and interests that you have versus how much of it is that you think this is actually the best strategy. Which is all to say that if you were an LP trying to maximize your returns, would you be investing across strategies or would you say hey, I'll do that. People trying to be IA ventures, you know all day that that's the best place to play. How do you think about that?

Yeah, my answer eight years ago would be different from today. I'm now convinced because I've worn an LP hat. I'm an LP in 15ish micro funds and up and coming seed funds. I'm now convinced there are multiple ways to be successful at early stage venture and the key is mapping your strategy to your team. And I'll give you an example. One of my good friends and ventures, Greg Rosen over at Box Group, they had great returns. I think what they do, they've built a great business, right? They do about 100 to 120 companies per fund. My original bias would be that's ridiculous, that's way too many companies, one company can't return the fund, etc. Etc. Etc. But they are sourcing wizards. They see everything. They've actually played the Switzerland card maybe as well as like the SV angel strategies of the world. And they get into enough of the interesting top tier stuff that as a portfolio basis plays out, they have strong returns. My bias personally and grafted onto our team and what we actually want to go do, the thing that gives us joy in the world professionally is getting to spend all of our time on a small number of things and have those things be extremely meaningful if they work out. Right. Robin hood was a 5x fund returner for us. Right. On one investment. You don't get that if you build 100 company portfolio. And so our strategy plays well to our team. There are many ways to be successful in the early stage business. However, your question was also if I was an lp, if I was an LP and I could only pick one strategy, I would pick the SUSE strategy because I think it is the best chance at delivering a truly outsized fund multiple. You have a higher variance on a low, on a smaller portfolio, but you have the ability to generate these crazy outcomes which if you're an LP and you're building across a bunch of different asset classes and ventures, one of your asset classes, you need that to have the chance to be the mega hit. If I'm building a relatively large venture portfolio and I'm doing 10, 20, 30 managers, I'm probably doing some diversification of strategy. But I would still concentrate on folks that are doing what I call the OG venture capital because I still think back to the point it drives the biggest outcomes.

Yeah, I think the argument for the box group sort of portfolio construction, a more repeatable, consistent return. There's, there's less variance in, in the return. But that, that also means perhaps, you know, less likelihood of having a 10x or you know, really outlier. Outlier. I was struck by this idea, you know, in 2016 that you were thinking of, hey, may, maybe I'll have six gps and that'll be a way to differentiate because we'll just have more time per partner. Right. Like you mentioned, you know, I ventures you meant. We talked about first round. First round is heavily invested in platform and kind of that institutional service orientation. They've been pioneers there. You know, some firm, I think IA doesn't do it as much. They're really just the craft of investing and GPS adding a lot of value. I feel like you do a bit of both or where have you come around to that and how have you thought about that at suse?

Yeah, there's a couple ways to think about this. It's like, you know, what is the right amount of dollars per partner? Right. That's a nice backlog of math. When you think about early stage specifically, you know, where I, where I've netted out to it is having more than 200 million bucks and doing seed. It doesn't make a lot of sense. It gets real hard to deploy that amount of Capital effectively in the early stage, maybe more than 150. So like Spark Notes for SUSE on our next fund, on our early stage product, we're actually not going to know that we're not going to go that big. I mean, you know, fortunate to be able to raise a lot of capital, but we're going to stay, you know, constrained intentionally under that constraint. You can't have 10 partners. So what is the right number? I think the right number is probably between four to six. Today we have five check writers on SUSE early stage alone. And that's not including Seth and Leah who are running their own strategies that can still do seeds with us. But we, you know, we have a big, a big bench here of incredible investors. And so I still think our North Star is like a true partnership of many investors on a capital base that most people would laugh and say that that should all be for one investor. But I think if everyone is capital constrained on how much that they really want to deploy into the early stage, they'll have a higher bar, they'll make better decisions. And if I said, Eric, you can do 10 deals a year, Eric, you can do two deals a year, I honestly think your two deals will probably be better. You have this natural constraint of okay, I really need to do only the best stuff I see every year. I'm always, you know, harken back to when I talk to friends over at Benchmark. How rarely do you do an investment they do one to maybe two a year and it's because they only truly do the best. And if they don't do a deal a year, that's okay. And I've instilled that culture here on our team, which is you're not paid to do deals. You're paid to find really interesting stuff in the world that can have asymmetric upside. And then let's go partner with those people and see what they can build. And so I think it's just we're trying to set a culture here of what I think will drive the right outcome, right, like figure out the inputs to drive the right outcomes.

Benchmark might bristle at this and I'm about to have them them on the show, but my sense is that they are doing a bunch of post product market fit investing just based on where they invest. Now they also do some seed, some, some origination. So it's not blanket. Just most Series A firms tend to do things that have post product market fit, whereas seed, I sense it's like somewhere in between or maybe often it's pre product market fit. And I was talking from Brett Burson at first round and he was saying that the biggest thing that venture firms could help entrepreneurs with that they often don't know how to do is help entrepreneurs get to get to product market fit. So talk about how you think about where is the sweet spot of of of where you guys invest and why that works for you guys.

So venture has changed over the last decade since we've been in business and we started in 2013, 2014, 2015. I'd say our first fund was primarily investing in post product market fit companies or not post. But I would say in that journey they had a product with customers. You could actually see a product, talk to a customer and say is this providing value? The world is totally flopped because mostly the amount of capital into the early stage is so available that that founders now can raise pre idea or post idea pre product. We're having to pay to take on way more risk and we're often having to pay more than we paid 10 years ago. I think venture is getting increasingly hard obviously at the early stage because of these factors. Right. We're getting paid to take more risk and we're paying a higher price to take that risk. And you have to believe that outcomes are then bigger today to generate the same outcomes. And we could probably debate that all day long. I think it's very hard to measure. And so the only way for us to kind of get comfortable with that is one just have to be more disciplined. Like we have deployed at extremely slow pace. For any other managers listening to this, you know, we've probably done three early stage deals in the last nine months which is way off pace for us. We typically do a deal a month and on the kind of upfund side kuu side we've done one deal in nine months. Now that's probably not too dissimilar when talking to friends, Ameritech or others. Like a lot of firms have been slow at at many of the stages today. But I think it's because we're trying to find the right amount of risk for us and entrepreneurs we really love. And on on the margin we'd absolutely prefer to see product. So I think that's like how the arc of history has changed here. And I think Brett's totally right by the way. The only thing SUSE pays attention to is helping companies get from wherever they are when we invest to product market fit. I mean that is the journey of a seed stage firm. And what our job is helping an entrepreneur do because once they get to product market fit, I think of that as that that is where a series A takes place. Right. I think of the analogy I always use of the framework is you invest in a company to go build some machine and the machine is like de risking all these hypotheses that they had. And once the machine is built and you know what happens when you put a dollar in, what comes out the other end, then you can go now finance the next set of of put dollars in and see kind of tune that machine. And so yeah, I would agree. And I think this arc has changed over time.

And say more about how you think about what makes ASUS partner. When you've thought about partner recruiting, how do you think you think about recruiting for your investment team different from how other firms think about it, perhaps in terms of how you look or what you look for?

Yeah, I'll try to be kind of formulaic about this. So here are the qualities we look for in people. The first is there's this term I'll borrow out of the book power law called embeddedness, which is how embedded is a person in the communities in which they're reliant upon for deal flow. So that could be you're deeply embedded in the alumni network of the stripe community, or you're deeply embedded into kind of gen AI research. Right? That is your, your network, your world, or you're just known as a top early stage deal node and you kind of see a bunch of stuff. So a person has to come with embeddedness in a community that's highly interesting to us. The second is early stage venture is going from generalist to specialist. And the reason for that is we now compete with not only angels, micro funds, seed funds and multi stage funds and everyone in between. But the people at those firms are no longer the average business school person. Nothing against them, or generalist finance or generalist operator. You're now going up on the other side of the table against the former CTO of GitHub, who's now in venture. And if that company is a technical DevOps business or developing a tool for engineers or coders, you're going to have a really hard time beating that person unless you're a deep domain expert in what they're building. And so we need people who come with an expertise in one of the sectors we invest in. We have five sectors we invest in, so you have to have a specialty. And actually I just saw in your tweet about the interview with Mamun and Ilya, them saying this major minor Concept. I think we think about it extremely similarly. So embeddedness has to come with a specialty. And then the third is we have a bias for just hyper competitive people. I think anyone that says this business is not competitive or you don't have to have that drive either thinks differently from us or I think is lying to themselves. I think this is a competitive business that's getting even more competitive. And if you don't have the drive to spend the extra hour on a Friday night or other absolutely grinding to see the next company or build your network or do whatever, I think you decrease the chance. It doesn't mean you won't be successful, but you decrease the chance of your success. I often find it funny when people say, well, venture capital, it's like a very easy job. And I will say being an entrepreneur is ten times harder. But I also don't think it's a coincidence that the best venture capitalists of all time are the hardest working people. People of all time. Right. Like Vanode and John Door and Moritz. Like these people were obsessive of the craft. It's not shocking they were the most successful. So anyone here has to be willing to absolutely grind and put in the time to increase the chance you can be successful 100%.

I've always marveled at how hard these already, you know, people who already made it work, they work harder than the, the people who are trying to make it. Often it is interesting, you know, I'm compelled to just like dig in deeper as to like what does thrive or some of these firms. And I'm a big fan of thrive, but like believe that you don't believe around, around the AUM game. I assume that firms that raise a lot more than you do, I think they think that they're likely to have lower kind of return like on a multiples basis, but because it's much bigger, you know, AUM and the expectations of return. They find LPs who are aligned with, with, with, with, with that and overall they'll make more money just because of a sheer amount of dollars. Is that a right characterization of these. These firms that just become, you know, tens of billions. A. And if you have the opportunity, why not do something like that?

Yeah, I think about this all the time. I think it's such a great question. It comes back to when I said we think of SUSE as a startup and therefore we now have products and we're now finally realized we should think about these as products, like our different strategies, but also at a firm level. We are a product we are a product for a certain type of LP, an LP that can deploy 5 to 10 million and have it be meaningful for their fund. If you are an LP that has to deploy 100 to 500 million, we can't absorb that amount of capital in our strategy. So you inherently have to go to a firm that's raising 500 to $2 billion. Funds that can absorb $100 million check they now know that by doing so and playing the fund math game of the scale of that capital that it's highly probabilistic that they're not going to get a 5X. It's nearly impossible on a billion or more in capital. But you just have to beat the real returns of the other parts of their asset class. And maybe the larger the fund gets, like go to the extreme sovereign wealth fund or something. Probably the average capital across all their assets may be earning 6 to 8% or something around there. Even as your mega venture fund, if you're beating that, you're in the high teens. Even with illiquidity added in, they'll still buy that product all day long. So it's back to exactly what you said. Every fund is a product and each of those products fits a type of LP in a different way. So if you have the chance and you've been hyper successful to go build the mega firm product and make max money, why don't you. Why didn't USV raise 3 billion? They were the top performing fund by far. When you get look at the leaked returns. I mean they just. The returns were insane. And it comes back to the people running those businesses have to decide how they want to spend their day and it might even be at the cost of making more money. But the thing I always tell our team here is if we just stay hyper focused and we do the benchmark of seed to make it simple and we have a $200 million max size fund and we can 5x that. We're generating hundreds of millions of dollars in carry for everyone on this team every couple of years. If that is not enough to be happy with and to do interesting things in the world and be philanthropic with, you can definitely choose other paths in life that maybe have bigger upside. But we prefer the work that this fund size enables. And we also have a internal North Star and I choose the words specifically here. We try to maximize value creation per dollar in the world on behalf of LPs. So it's value creation per dollar be the most efficient platform in putting dollars into the entrepreneurship, innovation ecosystem of the world and that's the thing that gets us excited. And if we do that well, the money will be fine.

Talking about the benchmark of seed for a second, I want to dive deeper into the value add thing. Like, you know, there's been all these experiments, all these services over the years and what are the unique ways to add value to founders? What have you found looking at the ecosystem, looking with your own founders, like really moves the needle and what is kind of marketing or doesn't really move the needle in the way that people might think.

So inherently in our decision to be less platform, more focused. I'm generally a believer that platforms can be valuable, but that on the margin they might distract the investors more than they are net helpful. Now, there are exceptions to that across a couple of these platforms. The first point I would make is we have a lot of Data. We have 140 companies over a decade. The best companies needed the least help. I will debate anyone on that till the day I die. We now have enough data for me to feel like that's pretty conclusive. Having said that, it's not that you still don't help. The way I think about it is be helpful in crux moments. There are moments in a company trajectory and history that are crux moments. Other than that don't get in the way of really good founders. You talk to the best founders, they'll say that their investors are annoying, they're constantly in the way, I hate the board, etc. I find weak founders actually try to involve investors more. The vast majority of investors actually don't think great tactical advice. I'll give you a story from our portfolio. I had lunch with a CEO I've worked with now for four years. We led the seed round, they went on to raise a Series A. And I had lunch with him in London over the summer and he's like, you guys have been the best investor for us. And I was like, really? I feel like, you know, I've, I've been there on our calls and I've listened, but actually haven't done too much. He goes, you've, you, you did what you needed to in a crux moment. And he said, we were thinking about when to raise a Series A and you strongly urged me to go out when we did because you felt like the market was going to turn and you were 100% right. And had we waited three, six months, the market would have turned. It would have been significantly harder to finance this business. And that moment alone was more valuable than any other, like small kind of Feedback you could have given. So in, in the right moment you stepped in and, and gave advice on a topic by the way that I actually think investors sometimes know more about than entrepreneurs. The vast majority of topics the entrepreneur knows more than the investor. So that's like one be helpful in crux moments. Other than that, get out of the way. The second is provide frameworks and historical data. Don't give specific suggestions or operating feedback. Most investors are bad operators unless they were actually world class operators which then they get an asterisk and they're allowed to. But bring historical data. What do we all have as investors? I have a data set of working with 50 companies over the last decade, hands on. I saw everything that worked in great companies that are now public or billions and I've seen everything that didn't work. And a lot of great companies had good people, good ideas, but they failed for many reasons. And so if you're an entrepreneur and you're saying hey or thinking about doing XYZ, I can say I've seen this 10 times. Here are the decisions made, here are how they played out. Now go make the best decision for your business. Like that. That's really the framework that, in which we operate under. So every investor at SUSE tries to practice that style. It's the style that's worked for us and, and the one that we believe in.

Yeah. Going back to the benchmark of seed, you know, I've heard the argument before that you know, sometimes seed firms have to become multi stage firms even just to become good seed firms because multi stage firms can just, you know, bid up or just have more resources or more respect and can, you know, compete with seed firms at seed better than seed can. Of course seed firms will counter position and say hey, they're unfocused or signaling risk or things like that. But it's hard to compete with Sequoia or Founders Fund or Benchmark or Andreessen etc. And so how do you, how do you think about that?

Any early stage investor that says signal risk and all this stuff, they're just lying to themselves like that's not going to win you a deal, that's not going to have a founder not pick a better price, you're going to have to fight and you're going to have to compete. And at the end of the day it's going to be if you are a specialist seed fund and you can't convince an entrepreneur you are built to help them get the product market fit better than this other firm who's writing an option check into you or their dollars aren't that significant and people spend time against dollars. That's on, that's on you. You're going to have to be competitive. I don't think there's a silver bullet here. There is no solution. Having said that, you have to get to a specific scale of seed to even be able to write the size of checks that the multi stages can. So we've been lucky enough to break out of that pack and get to an amount of capital where we can write a 2 to 3 million dollars check head to head against a multi stage firm.

Right.

So that's point one, we can write a comparable check. Point two is then how do we compare on price? We can be flexible on price. We're never going to chase price as much as a multi stage funnel. We're going to lose deals over that. We're going to have to walk away and we're going to have to pick our shots. And I think that's just part of the game today. Having said that, in my career now over 10 years, I've seen multi stages come in and out of seed twice full pendulums of in and out. We might be going through a reset where again they're going to pull out at some point. The only thing different about this this time is they actually raise dedicated seed funds and staff them with dedicated seed folks. But if you talk to the really senior people at those firms, they'll sometimes say I have no idea what our seed fund's doing, I don't know the deals they're in. And I suspect that like the evolution and pendulum might swing back and again. And so as a seed manager, we're just hearing knocked back and forth by multistage funds as this pendulum swings. But I think that'll continue forever. And lastly, as I said, you need to architect your firm and your partners here to say I have a larger data set on helping companies get from 0 to 1. I eat a product market fed as we talked about earlier being the North Star. And if you can't win a deal outright with your firm's brand and yourself, because at the end of the day this is a people business. The person is picking a person to work with, then that is the entire business. Right. You have to be able to do that.

You mentioned, you know, you've talked to, you know, upon reflecting on the founders you backed over the past decade that the best ones required the least help. I'm curious if the best ones were were hot deals or contrarian deals.

Yeah, We've debated this one a lot too. So, you know, our two biggest wins have been Robinhood and Flexport. In Robinhood's case, they very famously had, I think Baiju said they had 110 firms pass. So it was certainly a cold deal. It was a pick your allocation type deal. You were not fighting or being crammed down type situation. And happy to tell that story more broadly. Flexport was, I would say, definitely not cold. I mean, plenty of people were interested. Ryan is just so compelling as a storyteller and fundraiser. It was actually, this is a fun story. We were talking to Ryan on the phone because he had just gone through YC and all of our partners were in different places. And so we were on the phone with Ryan and in the background we had a WhatsApp chat going and we said we should commit on the spot. It was the only time in the firm's history we committed to a company in the pitch meeting and I was obviously the right decision. Ryan's gone on to become a really good friend and now I guess investor himself. But that deal I think was probably hotish. And so if you know those are the top two, if you look at the top 10, it's actually majority not hot. And what's even. Furthermore, if you, if you not only include hot, not hot, but you actually look at, you know, there's top deal by, by value the company gets to. The other metric that's very important is by net asset value to the firm. Right. Like what was the best return? All the hot deals were really high priced and all the non hot deals were extremely low priced. And we have many deals that were not hot deals that had been larger returns on an absolute basis for the firm. Even though the outcome wasn't as high because our entry price was, was less than half. And so, I mean, Sam Lesson's running around talking about this a lot right now and I think he is onto something here which is, you know, he wants to go find all the things that no one else wants to fund because the entry prices are so low. I'm actually a big believer in him that seed funds can't build a practice paying 25 or 20 at seed. Like you can't build a portfolio that way. And so we're probably going to be a far more price disciplined player over the next decade than a lot of our peers because we believe that that's important for building seed funds.

Yeah, we did applied intuition. I think the first round was at 40 and now they're at three, you know, billion plus. Something but that's outlier like for everyone that you know, like you can't build a practice on that.

They're certainly, I mean one of my favorite quotes is I think it's a John Doer quote or something is like every great company and he's mostly talking after the seed, right? So like when it's a real business, every great company is overpriced. The problem is there's a bunch of shitty ones overpriced and it's your job to figure out which ones are which. Like most great companies post Seed are expensive. It's very rare that there's kind of a hidden gem at the Bee right now Seed is very different because we're often proxying on a single individual. But you're totally right, there are still plenty of hot deals at Seed that end up becoming great companies.

I was going to bring up Sam lesson because he's also make, you know, he came on the show and he's, and he was just on 20 minute VC and he's talking about how hey, there used to be this factory model where you would raise the seed firm. The seed firm would then help the founder kind of package up the traction so they then raise a series A and then raise a series B, et cetera, go public. And what, what he's saying we're realizing in the market is that a lot of these or some of these unicorns are actually fake. There's actually a lot fewer amazing companies than we thought. And as a result this factory model where you could just like package up, you know, go from one stage to the next is he thinks unlikely to come back again. And so what that means is maybe raising a big seed round and then not raising anymore until things are like totally taken up. But you know, companies trying to get profitable. What do you think about his, is he over extrapolating or what do you make of this kind of this argument?

So I agree and disagree with parts of what he's saying. The thing, you know, there's elements I disagree with. Things I disagree with is like one, it is quote unquote pretty predictable to go manufacture a multi billion dollar outcome with this machine. I still think it's like exceedingly hard and rare. Now we had 1250 unicorns, so that is quite a few. Right. And many of them are not great companies. And so but I still like would push back on the notion that it's you know, fairly easy to go manufacture these things. The thing that I vehemently agree with is that actually conceptualize of what a Great company is a great business, a great business model, great unit economics. You think of the perennial tech, you know, elite of Facebook and these kind of 5,500 billion trillion dollar plus companies that are just compounders. But even think about the new ones like a snowflake or others. These are great businesses, not good businesses. The vast majority of companies venture capital has been fighting over the last decade were good companies. Right? And we could talk at length about that definition, but let's just leave it high level and broad for now. Will it change going forward? And this is where I also partially disagree with Sam, which is I think part of the reason the factory exists is that there are funds that are multi stage fund and specialist funds that play along that food chain. And humans are inherently emotional, they're inherently chasing the next thing that they think is a hot company or has positive signal or other. Very few investors have been proven if we all look at the data, to be exceptional investors over a decade timeline. And if that is true and most, you know, investors are average or good, they're going to continue to fund the good company production timeline or factory floor. Whatever analogy Sam's drawing, I actually don't think it's going to go away as much as I would prefer it go away. I think what Sam's talking about now, one element I agree with in terms of it won't go away, but I do think there's going to be a realization of new entrepreneurs who are going to build companies in new ways and they're going to say, wait a minute, these things were massively overfunded. There were structural disadvantages with how they were set up. If you didn't execute perfectly, you have this negative flywheel of down rounds and people leaving that can materially impact your business. Or let's say you make it to a good outcome and you own 4% of the company. I do think there will be a new cultural generation of entrepreneurs building businesses differently that do exactly what you said, raise a big seed round and never raise again. Or you know, Zapier, the founder of Zapier was just on a podcast, I forget which one I was listening to. But you know, obviously their path was crazy, right? Raise 1.3. Now, you know, this is a good example again of they didn't have to raise because they had a great business. The fact that they could build profitably meant that they had such demonstrable product market fit that they never had to raise again. And this all comes back to product market fit, which is the vast majority of things we over fund and venture never had demonstrable product market fit. They had to push sales and marketing so hard to grow that next incremental dollar when the true great businesses have such a market pull that you can tell. And in those cases you're going to see more entrepreneurs choose the zapier path. Choose the path Sam's talking about and just build great independent companies.

Say more about what predictions do you have for the, for the kind of near term, you know, three to five years of venture, whether it's, you know, macro and how that might impact venture or just how where you think venture is, venture is going.

So I think there's a couple vectors here. The first is I'm a big believer that venture is going to go into this bifurcation in terms of stage. You're going to have these on the high end, these multi stage asset management firms. You know, I always laugh with friends like Andreessen is now one of the best like recurring SaaS business of all time is doing like 350 million a year in fees. That's like predicted for 10 years written into legal documents. Right? You're going to have these multi stage asset management firms and then you're going to have these specialists in either sector, stage or other discipline and they're all going to have disciplined fund sizes. I think if you're in the middle, life gets tougher. You don't have the deepest pockets to compete on those mega rounds with the huge, huge firms. And then you're also not a specialist where you can sell an entrepreneur. This is all we do. We're going to be the best person to serve you in this category. And I think a manager today kind of needs to pick the fight that they want to go fight. And so that, that's kind of like thesis number one. I think thesis number two is what we talked a little bit about in terms of individual investors. Specialists will start to win over generalists. The world has more investors than 20 years ago or 10 years ago. You have to be more of an expert in the category. You're competing against former big time CEOs and CTOs and executives who have come out of the big companies and joined the big multi stage funds. That is your competitive set. If you can't beat those people, you can't be in this business anymore. And so specialist over generalist. And then my last big prediction, and this is on one hand sad, but one hand is a reality is I think venture has finally made it to where private equity and other asset classes did. It just took 50 years from when it was all founded. But we've reached the asset management part of the curve which is like this is now a mega asset class. There is so much capital in it. I think overall real returns will lack historical returns. This won't be as much of the alpha generating part of the world because of just, you know, oversupply of capital. And I think the power law will get even greater. You know, the top decile that used to do X, I think it'll be the top like 5% that'll generate the same X in the future. And so, you know, I think those are the three big trends we think a lot about here and like how it impacts us.

Fascinating. So specialists over generalists and in conclusion, or kind of wrapping up a bow a bit, you guys could have taken either path. In theory, you could have gotten the big AUM path, but you've chosen to become more specialists in nature. And that wasn't something that was super native because you're, you guys may be a little bit generalist, but by nature. But you realized you didn't want to, this is me projecting. You didn't want to be stuck in, in, in middle land. So you had to develop or cultivate or emphasize the specialist nature by, you know, these different fun vehicles. Is that right?

Yeah, I, I think of it as Ari, what are the things that are north stars? Back to your question 1. It's a focus on early stage. It's a focus on smaller portfolios, It's a focus on disciplined fund sizes. It's a focus on as we're a, you know, generalist firm in that we do five categories, but we're specialist investors here. Right. Because that's how you win a deal. And so generalist firms, specialist investors and strategies and you know, that's how we think about the world. And then, and then to the start of the whole conversation, I think we're pushing the envelope in venture and thinking about if you do have multiple strategies, develop those as products. So in the eyes of the customer, the entrepreneur, they know exactly who they're going to, why they're going to, and the experience they're going to get from it. And I, you know, again, this will be a test, but it'll be interesting to see how the, how the ecosystem evolves with this concept.

And so if you were starting SUSE in 2023 without the, a track record, would you lean really hard into specialization in terms of like, what am I the best firm in the world to go doing? Or might you take a similar path? How do you Think about in terms of firms you invest in or how would you start from scratch today in this market?

I. I would. I would go. I would do what probably K9's doing, what he's been doing for a long time, what Manu's been doing. I would do what I love, which is low volume, right. Really high ownership, high involvement, because that gives me meaning. It's all back to you have to do the thing that resonates with you. That's what I would do. Now I'm lps and I'll call out a friend, Nicole Wishoff. I'm an LP in her fund. I'm a mega fan. She's a straight hustler. You know, she makes a lot of noise on the Internet and I love her attitude. You know, she's doing the strategy that fits her. Right. She is an amazing networker. She's the biggest hustler I've ever met. She works 20 hours a day. So she's doing a more generalist, larger fund strategy, leading tons of companies less specialized in a specific sector because her, her superpower is connecting, meeting everyone, seeing all the deals and then picking her shots. And so it's just back to doing the thing that feels authentic to you. Back to the SUSA or box comparison that you can be successful with. Either. You know, my bias would be, you know, doing exactly what we're doing, just on a much smaller scale, improving, proving the track record. Again. The. The thing I always say about, and I talk to first fund managers all the time. I talk to one 10 minutes before this. And the key is like, just grind as hard as you possibly can in fund one. Get as lucky as you possibly can. You create your own luck because if your fund one is good, venture gets significantly easier. It's one of the biggest flywheel businesses of all time.

Yeah, totally. Is there anything we didn't get to that would be worth adding or any other color to your upcoming announcement that. We'll make sure to release this afterwards?

No, I'm going to drop this the same day we dropped the blog post. But no, I'm excited to tell this new story and this new direction. I'm excited to get the market's feedback. Investors whom I love their opinion, like yourself. I'm excited to see how it resonates with entrepreneurs because at the end of the day, that's really why we did it and all that really matters. And we've already been talking to LPs and it's resonating on just the clarity of the product and allowing people to choose, and so I've appreciated you having me on. This is awesome. We think about this all day anyway, and so it's always fun to jam.

Yeah, no, you. You guys at SUSE are are some of the best in the business, not just in terms of the returns, but also just in terms of the pay it forward nature. You've been helpful to me and us in terms of introducing companies or LPs, and I'm really grateful. Thanks for making time to chat with us today on the podcast.

Thanks for having me, man.

Turpentine VC is a podcast from Turpentine, the network behind Moment of Zen and Econ102. If you liked the episode, please leave a review in the Apple Store or rate us on Spotify.