20VC Investing; A Game Of Access Or Picking, Why Technical DD At Seed Is Irrelevant & Why A Contrarian Mindset Does Not Always Lead To Optimal Returns with Leo Polovets, CoFounder & General Partner @ Susa Ventures

In this episode of 20 Minutes VC, host Harry Stebbings interviews Leo Polovets, co-founder and general partner at Susa Ventures, a seed fund investing in potential unicorns like Robinhood and Flexport. Polovets shares his journey from engineering at LinkedIn and Google to VC, emphasizing the importance of critical thinking over contrarianism in investment decisions. He discusses valuation sensitivity, the myth of paying any price for the next big startup, and the minimal impact of being slightly off in valuation across a portfolio. Polovets also touches on the challenges of the Series A crunch, the irrelevance of technical diligence for early-stage startups, and the significance of assisting founders in reaching the next funding round. The conversation includes insights on founder traits, capital efficiency, and the value of maintaining founder equity. Additionally, Stebbings highlights Foundersuite and Greenhouse software as essential tools for startups and investors.

• Harry Stebbings introduces the podcast "20 minutes VC" and invites followers to join him on Snapchat.
• Leo Polovets is welcomed as a guest on the show.
• Leo Polovets is a cofounder and general partner at Susa Ventures, a seed fund on the West Coast.
• Susa Ventures has invested in companies like Robinhood, Flexport, Andella, LendUp, and Cadium.
• Leo Polovets has a background as an engineer at LinkedIn and Google, and as an angel investor.
• A thank you is extended to Chad Byers for introducing Leo Polovets to the show.
• Foundersuite and Greenhouse software are mentioned as useful tools for startups and hiring.

"Having had his partner Chad Byers on the show many months ago, I've become immensely excited by the SuS Adventures portfolio."

This quote indicates the host's enthusiasm for the investment portfolio of Susa Ventures and sets the stage for the conversation with Leo Polovets.

• Leo Polovets describes his accidental entry into venture capital.
• His background includes being one of the first engineers at LinkedIn and working on payment fraud detection at Google.
• He joined Factual, a company providing location data, before venturing into VC.
• Polovets was approached by friends to join a seed fund as a technical evaluator.
• He initially saw VC as a learning opportunity for starting his own company but ended up loving the VC job.

"I think like many of your guests, I ended up stumbling into it by accident."

Leo Polovets explains his unexpected transition from engineering to venture capital, which was not a planned career move.

• Leo Polovets discusses the role of being contrarian in VC.
• He emphasizes the importance of critical thinking over simply being contrarian.
• Polovets believes both contrarian and consensus approaches can lead to successful investments.
• The challenge lies in building a reputation and brand that allows access to coveted investment opportunities.

"I would say I'm not against being contrarian, but I definitely don't think it's the only path to success."

This quote summarizes Leo Polovets's stance on contrarian thinking, highlighting that success in VC can come from various approaches, not just contrarianism.

• Harry Stebbings questions the common belief that venture capital is about contrarian thinking, suggesting instead it's about access.
• Leo Polovets responds by proposing two thought experiments to illustrate his perspective on the access versus contrarian debate in venture capital.

"I fundamentally don't think that venture is a game of contrarian thinking. I think it's a game of access."

This quote underscores Harry Stebbings' stance that success in venture capital is less about having unique insights and more about securing opportunities to invest in promising companies.

"So if you had a fund that just did that, where all you did was follow on to these other top funds, that would be an amazing investment vehicle, and there's nothing contrarian about it, all you do is just follow the good investors."

Leo Polovets uses a hypothetical scenario to argue that following top investors rather than adopting a contrarian approach could still lead to a highly successful investment strategy.

• Leo Polovets discusses the pitfalls of overpaying in venture capital investments and the importance of valuation discipline.
• He challenges the notion that investors should pay any price to get into potentially successful companies, highlighting the impact of overpaying on fund performance.

"But I think the problem is that for a lot of VCs, almost every company you see, if you're investing, you have some kind of belief that it could be the next Uber or Facebook."

Polovets points out that venture capitalists often believe in the high potential of many companies they invest in, which can lead to a pattern of overpaying.

"So I think very seldomly you kind of pay any price to get in, but usually you should try to have."

This incomplete quote suggests that while there are rare cases where paying any price might be justified, generally, investors should exercise financial discipline.

• Leo Polovets emphasizes the need for maintaining discipline when it comes to valuations and investment decisions.
• He describes his process of benchmarking valuations against comparable companies to ensure discipline in his investment approach.

"I'll have some number in my mind. And so if they're ten or 20% away, that's fine. But if I was thinking it should be a $6 million pre, and they said they're raising at a $12 million pre, that's usually when either I'll walk away or we'll try to have a negotiation."

Polovets explains his approach to valuation, where he has a preconceived notion of what a fair valuation might be and is willing to walk away from a deal if the founder's valuation expectations are significantly higher.

• Leo Polovets discusses how to communicate valuation disagreements to founders in a respectful manner.
• He believes in being honest and transparent when discussing valuation concerns with founders, using market comparisons to support his stance.

"I really love your company. I think you and your co-founder are a really great founding team. I have an issue with the price, which is on the market with other companies."

Polovets shares an example of how he might express a valuation disagreement to a founder, emphasizing the positive aspects of the company while stating his concerns about the price.

• Leo Polovets analyzes different fundraising strategies for founders, including raising large sums at once versus raising smaller amounts at increasing valuations over time.
• He argues that while staggering fundraising might seem advantageous due to increasing valuations, it can have hidden costs and risks that may not be immediately apparent.

"But doing the fundraising in different stages has several major costs and risks."

Polovets outlines the disadvantages of staggered fundraising, such as consuming more founder time, creating uncertainty with runway, limiting the ability to make larger investments, and potentially leading to more dilution if things don't go as planned.

• Leo Polovets shares his thoughts on the optimal runway period for startups, suggesting that 18 months or more is generally good.
• He advises startups, especially B2B companies, to consider their sales cycles when planning their runway.

"So I would say 18 plus months is good. It varies a little bit."

Polovets recommends a runway of at least 18 months, acknowledging that the optimal length can vary based on factors such as the company's sales cycle.

• Startups selling to banks or Fortune 500 companies may experience long sales cycles of one to two years.
• It's suggested to raise more funding for runway in cases of long sales cycles to avoid excessive dilution.
• Dilution is a major constraint, and balancing it with the need for time is crucial.
• There is a point where dilution can become "ridiculous," meaning too much of the company is given away for extended runway.

"But sometimes you might have sales cycles that are a year or two years because you're selling to banks or Fortune 500 companies. So in that case, you probably wouldn't want to raise for more Runway in general."

This quote emphasizes the challenge of long sales cycles when dealing with large corporations and the potential need for more funding to sustain the company during these periods.

"And so you want to maximize how much time you have. But at some point, the dilution just gets so ridiculous that you can give away half your company for three years of Runway."

The quote highlights the delicate balance between extending the company's runway and avoiding giving away too much equity, which can be detrimental in the long term.

• Bridge rounds are raised when a startup hasn't hit its targets within the expected timeframe.
• Tim Chang's view that bridge rounds indicate a lack of product-market fit is discussed.
• Bridge rounds are not always a sign of failure; they can address remaining risks.
• Good bridge rounds occur when a startup has nearly met its goals and needs a slight extension.
• Bad bridge rounds happen when funds are spent without addressing key risks.
• Investors consider the financial sense of bridge rounds based on the risks addressed by the startup.

"He said, let's be honest, a bridge, a, c, two, whatever you want to call it, it just means you haven't reached product market fit."

This quote reflects Tim Chang's perspective that bridge rounds are indicative of a startup's failure to achieve product-market fit.

"And so I think what happens is seed stage, you raise some money and implicitly or explicitly, you have three or four risks that you want to address."

Leo Polovets explains that seed-stage funding is meant to address specific risks and that a bridge round is justified when most risks have been addressed except for a few.

• Leo Polovets shares his thesis on technical due diligence at the seed stage.
• Initially, the focus was on the quality of technology and the CTO.
• It was realized that early-stage code is often provisional, and technology is rarely the cause of failure.
• The emphasis shifted to assessing the strength of founders and their ability to recruit and possess broad skill sets.
• Technical due diligence is now less about technology and more about the team's capabilities.

"It's funny, actually. One of my most popular blog posts of the last year or two was I wrote this long post on why I don't really do technical diligence at this point."

Leo Polovets discusses his stance on technical due diligence, indicating a shift away from its importance in early-stage investments.

"And it's very rare for me to see companies fail because of the technology. It's almost always the product market fit is not there, or the team isn't able to recruit as much as they'd like, or there were something along those lines."

The quote explains that failure is more commonly due to lack of product-market fit or team issues rather than technological shortcomings.

• Investors play a key role in helping startups reach the next funding round.
• Understanding benchmarks for the next round and assisting startups in meeting them is crucial.
• Follow-on funding is a significant part of an investor's role.
• The ultimate goal is to help founders build a large company, which often involves multiple funding rounds.

"Yes, I think it's probably 80% of how I view my role, in the sense that the ultimate goal is to help a founder build a huge company."

Leo Polovets emphasizes the importance of guiding founders towards building a successful company, which often includes navigating through multiple funding rounds.

• The Series A crunch refers to the difficulty of moving from seed to Series A funding.
• Investors have become pickier due to more opportunities to choose from.
• Some founders may need to demonstrate more traction or validation before raising Series A.
• The Series A crunch has affected some but not all startups in the portfolio.

"I do think investors have gotten more picky at every stage just because there's so many more opportunities for them to choose from."

Leo Polovets acknowledges that the increased pickiness of investors at the Series A stage is due to a greater number of investment opportunities available to them.

"So I would say we've seen it a little bit in our portfolio, but it hasn't dramatically affected the overall portfolio."

This quote indicates that while the Series A crunch has been observed, it has not had a severe impact on the overall performance of the portfolio companies.

• Companies often choose marketing channels based on familiarity or competitor success.
• The book mentioned advocates for finding unique channels tailored to the company's needs.
• A methodical guide is provided to evaluate multiple channels and select the most effective one.
• The problem with common channel selection is the lack of exploration for potentially better outcomes.

And the book kind of claims that that's a mistake, because a lot of times you have to find the undiscovered channel or find the thing that works for your company specifically.

This quote emphasizes the book's perspective that blindly following familiar or competitor-used channels is a strategic error, advocating for a tailored approach to marketing channel selection.

• Desire for a public reputation database for VCs to differentiate between good and bad investors.
• The absence of such a database allows both good and bad investors to participate in funding rounds.
• Bad investors can tarnish the VC industry's reputation due to their actions not being publicly called out.

I would love to see a good public reputation database for vcs.

Leo Polovets expresses a wish for a system that would allow for greater transparency and accountability within the VC industry, potentially improving the overall quality of investor-founder relationships.

• Mattermark Daily is valued for its daily overview of the venture startup ecosystem.
• The blog 25iq by Trent Griffin is praised for distilling the thinking of famous investors.

I really like the Mattermark daily. Another blog I like a lot is 25 iq by Trent Griffin.

Leo Polovets shares his preferred sources for staying informed about venture capital and startup news, highlighting Mattermark Daily and 25iq as insightful resources.

• Flexport's pitch stood out due to its clear articulation of the pain point and market size.
• The founder's credibility and extensive experience in logistics added to the compelling pitch.
• The decision to invest in Flexport was made quickly based on the pitch's strength.

First, he made the pain point just incredibly clear through stories and examples and I think also just he gave a very clear picture of just how large the market was.

Leo Polovets describes the effectiveness of Flexport's pitch, noting the clarity in communicating the problem and the market opportunity, which led to a swift investment decision.

• Talent IQ was chosen for investment due to the founders' exceptional work ethic and humility.
• The company's capital efficiency and significant revenue milestones were also impressive.
• Talent IQ provides APIs for maintaining up-to-date people data, a service seen as valuable.

First of all, the founders are really amazing... And then also, we're just really impressed with how capital efficient they were.

Leo Polovets explains the rationale behind investing in Talent IQ, highlighting the founders' attributes and the company's performance as key factors in the decision.

• Thanks are given to individuals like Chad and Seth who facilitated the interview.
• Promotions for following the hosts on social media platforms are mentioned.
• Foundersuite and Greenhouse software are endorsed for their services to startups and hiring processes.

I want to say a huge thank you to Leo for giving up his time today to come on the show... And if you'd like to see more from us, then you can follow me on Snapchat at hstebings with two B's, or you can follow Leo on Twitter at l. Polavets.

Harry Stebbings expresses gratitude to Leo Polovets for the interview and encourages listeners to engage with them on social media for more insights and updates.