Editorial Team

The Braintrust: Mark Suster (Upfront Ventures) on Black Swans

The entire goal of our Braintrust series is to give our users in-depth and incisive looks at the world of FinTech. That’s why this week’s interview was an especially exciting one. This is an unprecedented moment, which means it’s a time to lean on experienced, insightful voices. Mark Suster is one of the most trusted thinkers in the world of VC and, incredibly, during our 30-minute call, he succinctly explained what this moment might mean for VCs and FinTech startups, and also for the economy as a whole.

Suster is the managing partner at Upfront Ventures, where he’s been a VC since 2007. Before that, he founded two startups: BuildOnline and Koral, with the former acquired by SWORD Group and the latter by Salesforce. Suster believes in investing early in companies and has had a knack for identifying successful founders over his 12+ years in the venture space. He writes about his experience as a founder and VC on his widely read blog, Both Sides of the Table.

We asked Suster about the shape of this current Black Swan Event and what it means for the future of the FinTech space.

Unifimoney: This last decade, the number of VCs has exploded and for the majority of these newer VCs, COVID-19 is the first Black Swan Event. What are the challenges of facing an existential economic crisis for the first time?

Mark Suster: What’s happening in the broader economy is an unprecedented drop in global demand for assets and, at the same time, an unprecedented drop in supply of the workforce. Those two factors will have an enormous impact on the market. If you look at the 1970s, we lived through a period called stagflation when prices dropped and growth didn’t happen. We have elements of that today. The forecast for Q2 that Goldman Sachs came out with about 40 days ago was that Q2 GDP was going to decline by about 24%. And then two weeks later, they revised it down to 39% quarter-over-quarter. That will be the biggest drop in GDP quarter-over-quarter in history.

If you look at employment, we were at record low unemployment before COVID-19. In five weeks, 26.5 million people filed for unemployment. Let me just give you a comparison: in the entire economic crisis in ‘08-’09, 8.5 million people filed for unemployment. Let me give you another comparison: total employment in California is 17.6 million. More people have filed for unemployment in five weeks than the total workforce in California.

The thing to keep in mind is the United States is uniquely able to weather a crisis and the rest of the world is going to suffer a lot more than us. We can print money, because 70% of international trade is dollar denominated. But if you’re a developing country — if you’re Nigeria, South Africa, Myanmar, Vietnam, Turkey — what choice do you have? Overwhelmingly, westernized worlds are going to have an easier time responding. The most marginalized people are going to suffer the most, as is always the case.

So, that’s the economic backdrop. Bleak, I know. So, what’s the impact on venture capital? To understand the impact on venture, you have to understand what impact on LPs, the people who fund venture capital. If you’re an emerging manager, most of your money typically comes from high net-worth individuals. If you’re a high net-worth individual with your money in real estate and businesses are not paying rent, imagine how you’re feeling right now. If you have your wealth tied up in the stock market, it’s down 20%. You’d tend to retrench, especially from illiquid assets. LPs are impacted. No question.

What I tell people who are trying to raise money — whether you’re an entrepreneur or you’re a VC — is one thing everybody hates investing into is uncertainty. If I felt like we hit a bottom and we’re on the way up and, boy, was that bad and I lost money, but at least I know that 2021 and 2022 look like fine, then I can make investments. But if I don’t know if 2021 and 2022 are going to be worse, I might as well retrench and wait.

So what does all this mean? A very long answer to a very short question, I realize. LPs are going to cut back the number of managers that they back and the number of commitments that they made. So, if I have 14 managers that I invest in, I might go down to 8 or 9. And what does that mean? It means I pick the relationships that I had for the last 20 years. I’m going to cut back on newer managers and not even consider new managers I’ve never backed before.

Unifimoney: On The Twenty Minute VC Podcast, I heard you say that you’ve invested in a handful of companies sight unseen since shelter-in-place went into effect. What traits are you looking for in a startup before investing? What tips do you have for founders trying to pitch VCs via Zoom?

Suster: It depends on your definition of sight unseen. I have never shaken their hand — and I may never do so again. I’ve never physically seen them in person. And I’ve never broken bread with them. That said, we’ve done a series of Zoom calls where I feel like you can develop rapport.

In a strange way, I actually think you have some advantages right now, because every VC is stuck at home. Every VC is in sweats and a t-shirt and every VC is game on for four 20-minute conversations. Before they were racing between meetings or catching airplanes or at hotels late at night or going to dinners. They have a lot more time. And I think it’s a great time to build relationships.

So, what tips do I have? Start the process early. Probably the most famous thing I ever wrote was a blogpost called ‘Invest in Lines, Not Dots.’ The metaphor is: you got an x-axis and a y-axis, and x is time and y is performance. When I meet you, you’re a dot. That dot could be high on the y-axis or it can be low on the y-axis, depending on how things have gone so far. But it’s a single moment in time. And then I meet you again, and you told me you were going to do certain things — you were going to grow revenue, you were going to add to your team, you were going to do whatever — and you either did it or you didn’t. And now I start to form a pattern. And then the next time and then the next time after that.

So, even though a lot of people advise against it, including VCs, I actually think the smartest thing is to get in early. Investors don’t really know why they make the decisions they make, but fundamentally, they’re investing in something that’s irrational: that you’re going to create something incredibly invaluable from nothing. To do that, I need to build rapport with you. That’s why the in-person thing seems like it’s a requirement. But you can build rapport and you can establish trust over video.

An investor’s buying trust — trust in you that you are smarter, more thoughtful, harder working, a better leader, more driven, more resilient, and more able to adapt than 99.9% of the market. If they buy into that, then they’re making a bet on you. They can look at past performance. They can look at spreadsheets and gross margins and how you’re performing. But any valuation that they’re paying is irrational relative to today’s performance. The whole bet is on tomorrow. And so my advice is: get in early, establish a rapport, build the relationship, establish trust, and sell the vision of why you can build something enormous and differentiated and defensible.

Unifimoney: The job of a VC is to project, but COVID-19 was an unprojectable event. How does an unexpected crisis like the one we’re in alter your view of the FinTech sector for the next five to ten years?

Suster: Well, I think a Black Swan event was always likely. Bill Gates has been warning about pandemics for the last five years. I became concerned about pandemics in 2008–2009 after reading a book called Genghis Khan and the Making of the Modern World, which talked about the global trade system, the Silk Road, and how the Khan Dynasty created global trade which enriched the world and uplifted many 13th- and 14th-century citizens out of poverty. But then, the global order collapsed and people stopped trading, and the Silk Road shut down. The reason it did was the Bubonic Plague. That led to the Dark Ages and we had hundreds of years of global instability. So, this is not something that’s never happened before. We have better tools to respond to it, but I have expected deglobalization now for the last several years.

I’ve been heavily influenced by a writer named Peter Zeihan who wrote an incredible book prior to COVID called Disunited Nations talking about why the world was moving away from globalization and what impact that would have on various countries. His view was that the resource that people were going to have to compete over the most was access to oil.

I didn’t know the Black Swan would be a pandemic. I theoretically knew it was a risk, but who could know that it was imminent. But whether it was a nuclear war started by North Korea, whether it was instability caused by Russian interference in our democracy, whether it was some Brexit-like condition, whether it was the rise of populism, there are a lot of factors in the world that are hard to predict that could have led to a Black Swan.

And by the way, COVID may not be the only Black Swan. The more troubling thing for me globally is that autocracy is back. And it’s not just back in China, where they’ve thrown out the need for people to be reelected, and Xi Jinping now has a lifetime appointment. It’s in Russia, where Putin pretty much now has a lifetime appointment, in Turkey, and in Hungary. This is a global phenomenon. I would love to say that the United States is an aberration — that our voter disenfranchisement is a one-time event that will go back to some normal democracy, that our undermining of the media, our undermining of institutions like courts, our partisanship is a blip because of Donald Trump. But it’s not. It’s a global phenomenon. World order has been steady for 75 years, but throughout human history, those 75 years are more an aberration than the norm.

So, anyway, your question was different. Your question was about VCs and FinTech. Look: VCs like to invest in disruption. Disruption via things that can be built that are fundamentally different in the future than they were in the past. They like to invest in large markets. And FinTech is amongst the largest markets that exist. So, people will continue to invest. Digitization has brought new tools and new ways of creating offerings in the market: from crypto currencies, to new tools for measuring, managing and trading your assets, to new forms of payment systems that change how businesses interact. I think you’re going to see more investment in FinTech, not less.