Invention and innovation are key economic drivers and the basis for many tech-based start-ups. Easier access to venture-capital funding allows today’s entrepreneurs to succeed with an idea, but little to no hard assets. The Wall Street Journal reports that money raised by venture-capital firms hit $32.97B in 2014, a 62 percent increase over 2013, and the highest total since 2007, making the U.S. venture-capital industry envied throughout the world as an engine of economic growth.
With such an influx of ideas and capital, what happens next? How do investors decide which opportunities and entrepreneurs to back? Fresh from their talks at the 2015 LA Tech Summit, Dana Settle and Mark Suster, two influential Los Angeles-based venture capitalists, tell CSQ what drives their decision making.
Mark Suster is a two-time entrepreneur turned VC. He joined Upfront Ventures in 2007 as a general partner after selling his company to Salesforce.com. Mark explains, “To sell anything – and raising money is selling – you need to do two things; build rapport and have a narrative. Eighty-five percent of all companies that come in are ruled out for not establishing these two elements. You need to have a connection, people buy from people they like, trust and respect. Too many people, including successful entrepreneurs, get in pitch mode. They’re in their own heads and don’t realize you cannot build trust through PowerPoint slides. The best VC meetings are discussions or debates.”
Suster offers some pointers on conveying a narrative. “Put your idea into context, someone isn’t thinking about what you do so they won’t have the context to get excited. You need to explain why this is a good idea, why it’s a big opportunity, why other people haven’t done this yet, why you are likely to succeed where others haven’t. You need to create an emotional connection. That’s the start of the buying process.”
Dana Settle is a founding partner with Greycroft Partners and heads the firm’s Los Angeles office. Greycroft invests from two funds, enabling them to support entrepreneurs at any stage, from inception through IPO. When evaluating business proposals and meeting with investors, Settle agrees with Suster in that 70 percent of their decision making rests on the team. “It’s about the people,” she says, “and what that boils down to is having an unfair advantage, which means having some unique insight, a way of looking at something different than the rest of the world. It can come from being the earliest to understand the platform, having unique experience in the space, and having complete passion and conviction around something that other people just don’t get yet.”
Like CNN, BuzzFeed, and Huffington Post, Buddy Media’s founders saw an opportunity earlier than the rest of the market and came to Greycroft in 2007 with a plan to build software and services on top of Facebook. Dana explains, “In 2007, MySpace was the largest social networking site, but Facebook was on the road to becoming an influential advertising medium. When Buddy Media’s software launched in 2009, the company rapidly scaled into the world’s dominant social media management platform.” Greycroft invested a total of $2.69M. Buddy Media sold to Salesforce.com for $800M.
Suster and Settle have collaborated on five projects. They successfully took a chance on investing $1.5M, in the founding team behind Maker Studios when it was a 12-person shop with no revenue. Since 2009, Maker has grown from small offices above a taco shop in Venice to a 70,000-square-foot production home in Culver City with more than 50,000 individual content contributors. Suster believed in the power of online video long before it was widely embraced, explaining, “In today’s world, especially early stage companies, they’re not just looking for money, they’re looking for assistance in recruiting a team, marketing, pricing, hiring engineers, how much capital, when should I pivot, and so on. You can be any kind of VC, but you have an advantage as an investor if you’ve walked in the shoes of the entrepreneur.” The pair’s collective investing knowledge and operating experience were as valuable as their capital, Maker Studios was acquired in March 2014 by Walt Disney Co. in a deal that could net $950M if financial milestones are met.
“In the late ’90s,” Settle points out, “a lot of venture funds grew to a much larger size, and to a point where they had to make much larger investments in order to make their fund models work. During that time, the industry became less collaborative, and that’s largely why we started Greycroft [in 2006], to bring back this notion that you should be collaborative, you should syndicate one-hundred percent of the time, you should bring the best people around the table to support entrepreneurs and see a funding event as an opportunity to bring a good network of people together.”
When it comes to the advantages of investing in Los Angeles, Settle and Suster express similar sentiments. “Los Angeles is the second largest city in the country, and the creative capital of the world,” states Suster. “There is a large pool of creative and diverse people. We graduate more people from the top 25 engineering schools than anyone in the country. We need to create companies to keep that talent in LA.” Suster’s Upfront invests 50 percent in Los Angeles–based companies primarily focusing on video-based startups.
Even with the smartest, most creative people in the room, mistakes and obstacles to success are expected. Suster’s YouTube Channel, Bothsides TV, and blog BOTHSID.ES (bothsidesofthetable.com) house invaluable insight and guidance for entrepreneurs while making clear that even those experienced in business have difficulties. In a recent blog post, Suster describes a sizable negative surprise that led to a few tough weeks at work. “I’m always reminded that in tough times some people pull up their socks and help get the job done while others turn to being critics.” Thus, he reposted a bit of sage advice. “Remember, it’s better to create something and be criticized than to create nothing and criticize others.” — Ricky Gervais (@rickygervais) November 22, 2015.
Good advice for VCs, for entrepreneurs, for business, and for life.