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

25:21And so, yeah, I would agree. And I think this arc has changed over time. And say more about how you think about what makes a SUSE a 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.

25:56So 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 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.

26:46You'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 Mamoun and Ilya, them saying this major minor concept. I think we think about it extremely similarly.

27:24So 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.

27:58I often find it funny when people say, well, venture capital, it's like a very easy job. And like I will say being an entrepreneur is 10 times harder. But I also don't think it's a coincidence that the best venture capitalists of all time were the hardest working people of all time, right? Like Vinod and John Doerr 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. A hundred percent. I've always marveled at how hard these already, you know, people who already made it work.

28:34They work harder than the people who are trying to make it often. It is interesting. I mean, 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 believe that you don't believe 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 return on a multiples basis. But because it's much bigger AUM, the expectations of return, they find LPs who are aligned with that. and overall they'll make more money just because of the sheer amount of dollars.

29:14Is that a right characterization of these firms that just become tens of billions AUM? 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 five to 10 million and have it be meaningful for their fund. If you are an LP that has to deploy a hundred to 500 million, we can't absorb that amount of capital in our strategy.

29:53So you inherently have to go to a firm that's raising 500 to$2 billion funds that can absorb a hundred million dollar check. They now know that by doing so and playing the fund math game of the scale of that capital, then 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.

30:30Even 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, if it's 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 look at the leaked returns. I mean, the returns were insane. And it comes back to the people running those businesses have to decide how they want to spend their day.

31:09And 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 an internal North Star.

31:50And 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 like, 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?

32:25What 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.

33:05I 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. If you talk to the best founders, they'll say that their investors are annoying. They're constantly in the way. I hate the board, et cetera. I find weak founders actually try to involve investors more. The vast majority of investors actually don't think great tactical advice.

33:45I'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 I've been there on our calls and I've listened, but I actually haven't done too much. He goes, 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.

34:17And how do 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 the right moment, you stepped in 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.

34:48Don'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, Eric, and you're saying, hey, we're thinking about doing X, Y, Z, I can say, I've seen this 10 times.

35:22Here are the decisions made. Here are how they played out. Now go make the best decision for your business. That's really the framework 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 the one that we believe in. Yeah. Going back to the benchmark of seed, I've heard the argument before that sometimes seed firms have to become multi-stage firms, even just to become good seed firms, because multi-stage firms can just bid up or just have more resources or more respect and can compete with seed firms at seed better than seed can.

36:00Of 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 think about that? Yeah. Any early stage investor that says signal risk and all this stuff, they're just lying to themselves. 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 you.

36:46You'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 multistages can't. 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 check head-to-head against a multistage firm. 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 fund, and we're going to lose deals over that.

37:16We'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 time is they actually raise dedicated seed funds and staff them with dedicated seed folks. But if you talk to the really senior your people at those firms, they'll sometimes say, I have no idea what our seed fund's doing.

37:42I don't know the deals they're in. And I suspect that the evolution in pendulum might swing back and again. And so as a seed manager, we're just here getting knocked back and forth by multi-stage 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 zero to one, i.e. to 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?

38:18You have to be able to do that. You mentioned, you know, you've talked to, or, you know, upon reflecting on the founders, you backed over the past decade that the best ones require the least help. I'm curious if the best ones 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.

38:58Flexport 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 it was obviously the right decision. Ryan's gone on to become a really good friend and now I guess investor himself.

39:31But that deal I think was probably hot-ish. And so 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 not only include hot, not hot, but you actually look at, there's top deal 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 less than half.

40:13And so, I mean, Sam Leston'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. You can't build a portfolio that way. And so we're probably going to be a far more price discipline 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.

40:46And now they're at 3 billion plus something. But that's outlier for everyone that you can't build a practice on that. Yeah, certainly. I mean, one of my favorite quotes is, I think it's a John Doerr quote or something. He's 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. It's your job to figure out which ones are which. um like most great companies post seed are expensive um it's very rare that there's kind of a hidden gem at the b 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 um and he's and he's 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.

41:42So they then raise the series A, then raise the series B, et cetera, go public. And 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, 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 any more 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?

42:19What do you make of this kind of this argument? So I agree. I 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, predictable to go manufacture a multibillion dollar outcome with this machine. I still think it's exceedingly hard and rare. Now, we had 1 ,250 unicorns, so that is quite a few, right? And many of them are not great companies. But I still would push back on the notion that it's fairly easy to go manufacture these things. The thing that I vehemently agree with is that actually conceptualize what a great company is, a great business, a great business model, a great unit economics.

43:01You think of the perennial tech elite of Facebook and these kind of 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 for 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.

43:44And 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 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.

44:26and 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'll 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 Zapier, the founder of Zapier was just on a podcast. I forget which one I was listening to, but obviously their path was crazy, right?

44:57Raise 1.3. Now, 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 overfund in venture never had demonstrable product market fit. They had to push sales and marketing so hard to grow the 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.

45:34Say more about what predictions do you have for the near term, three to five years of venture, whether it's macro and how that might impact venture or just where you think venture is going. So I think there's a couple of vectors here. The first is I'm a big believer that venture is going to go into this bifurcation in terms of stage. So you're going to have these on the high end, these multi-stage asset management firms. I always laugh with friends like Andreessen is now one of the best 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?

46:09You'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 discipline 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.

46:39And so that's kind of like thesis number one. I think thesis number two is what we talked a little 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 specialists over generalist. And then my last big prediction, and this is on one hand sad, but one hand is the reality, is I think venture has finally made it to where private equity and other asset classes did.

47:22It 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 oversupply of capital. And I think the power law will get even greater. The top decile that used to do X, I think it'll be the top 5 % that'll generate the same X in the future. And so I think those are the three big trends we think a lot about here and how it impacts us. Fascinating.

47:57So specialists over generalists, and in conclusion, we're kind of wrapping up a bow a bit. You guys could have taken either path in dairy. 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, 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.

48:27I think of it as our, what are the things that are North stars back to your question? One, 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 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, specialists, investors, and strategies. And that's how we think about the world. 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.

49:08So 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, you know, again, this will be a test, but it'll be interesting to see how the ecosystem evolves with this concept. And so if you were starting SUSE in 2023 without 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 it in terms of the firms you invest in? Or how would you start from scratch today in this market?

49:44I would do what probably K9 is doing, what he's been doing for a long time, what Manu has 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. She makes a lot of noise on the internet and I 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.

50:23She works 20 hours a day. So she's doing a more generalist, larger fund strategy, meeting tons of companies, less specialized in a specific sector because 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 Sousa 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 and proving the track record again. The thing I always say about, and I talk to first fund managers all the time.

50:56I talked to one 10 minutes before this. And the key is like, just grind as hard as you possibly can in fund one, get as luck 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.

51:34I'm excited to get the markets 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 guys at SUSE 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.

52:08You'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 Econ 102. If you liked the episode, please leave a review in the Apple Store or rate us on Spotify.

52:28Thank you.