20VC Matrix’s Ilya Sukhar on How The Seed Ecosystem Could Be Optimised, Why The Bar For The BreakOut Series A Has Risen & The Art of Effective Referencing

In this episode of "20 Minutes VC," host Harry Stebbings interviews Ilya Sukhar, General Partner at Matrix Partners, discussing his journey from a successful founder and angel investor to a venture capitalist. Sukhar, who sold his company Parse to Facebook for nearly $100 million, has an impressive angel portfolio including investments in Scale, Checker, Algolia, and Airtable. At Matrix Partners, Sukhar focuses on early-stage investments, emphasizing the importance of patience, high-bandwidth communication with founders, and the right fit between investors and entrepreneurs. The conversation also touches on the evolving seed ecosystem, the challenges of transitioning from angel to VC investing, and Sukhar's personal growth, including becoming more effective with his time after fatherhood. Stebbings and Sukhar also highlight the significance of thorough referencing for both founders and investors.

• The episode features Ilya Sukhar, a General Partner at Matrix Partners.
• Ilya's background includes being a part-time investing partner at Y Combinator and head of developer products at Facebook.
• He has an impressive angel investment portfolio with companies like Scale, Checker, Algolia, Airtable, and GitLab.
• The episode also discusses Brex, the corporate card for startups, Pilot for bookkeeping, and Dialpad for team communication.

"I'm thrilled to say after two years of persistence and stalking, he caved in and to do the show. And so with that, I'm very excited to welcome Ilyasukar, general partner at Matrix Partners."

The quote expresses the host's excitement about finally having Ilya Sukhar on the show after persistent efforts over two years, highlighting Ilya's significance in the venture capital industry.

• Ilya Sukhar's career transitioned from startup founder to General Partner at Matrix Partners.
• He initially planned to start another company after leaving Facebook but found himself more drawn to supporting founders and investing.
• The role of a VC appealed to him due to the deeper relationships and commitment involved compared to angel investing.

"I came out of Facebook actually thinking I'd start another company... it sort of dawned on me that's a career path that's open to me."

Ilya reflects on his post-Facebook plans and how he realized that a career in venture capital was a viable option, allowing him to continue working closely with founders.

• Ilya immigrated from Russia to the San Francisco Bay Area as a child.
• His family's experience in the Soviet Union and their journey to the United States shaped his worldview and career choices.
• Ilya's parents achieved the American Dream, transitioning from manual labor to programming jobs, which influenced his appreciation for opportunities in America.

"We landed in San Francisco and I got to know... I basically got to see my parents live the american dream."

The quote highlights the personal impact of witnessing his parents' journey and success in America, which deeply influenced his values and career path.

• Ilya Sukhar's investing mindset evolved from being an angel investor to a venture capitalist.
• He learned to navigate the dynamics of investing other people's money and making decisions with a team at Matrix Partners, rather than independently.
• The transition to VC required adapting to a more involved decision-making process and a deeper commitment to the companies he invests in.

"It's a really different experience to make a decision in that context versus you have a meeting with a founder, might check the product out, maybe talk to a customer, whatever, but you're kind of making that decision on your own, and you can do that in a matter of hours, maybe."

Ilya compares the quick, autonomous decision-making process of an angel investor to the collaborative and thorough approach required as a VC, emphasizing the depth of commitment in the latter role.

• VC engagement with founders is crucial, especially when leading funding rounds.
• Boardroom presence is a key consideration for VCs when deciding to invest.
• VCs must be prepared to support companies through challenges.

"At the end of the, say YC is not in the boardroom, angels aren't in the boardroom. It's typically the people who are leading the rounds later."

This quote emphasizes the transition of influence from early-stage supporters like YC and angels to VCs who lead later funding rounds and often take board seats.

"What is it going to be like to be in that boardroom, to be along the ride, to be there through thick and thin, things go sideways and we have to really work through some big challenges."

This quote reflects a VC's consideration of the long-term relationship with founders and the importance of being a supportive partner during difficult times.

• VCs look for coachability, listening skills, and likability in founders.
• High bandwidth communication and shared values are important.
• The founder's reasons for choosing a particular VC are scrutinized.

"It's, do I feel like I have a high bandwidth type of communication going with this person? Do I feel like we have the same values?"

The quote highlights the importance of effective communication and shared values between VCs and founders.

"Are they picking me for me as opposed to other things?"

This quote indicates that VCs value being chosen for their unique contributions rather than just financial terms.

• Operating experience can influence a VC's approach to engagement with founders.
• VCs with operational backgrounds may prefer to be more hands-off but seek founders who desire close collaboration.
• An engineering mindset can align VC and founder problem-solving approaches.

"I try to self select into situations where the founder does really want me involved, where I think they want to have a tight feedback loop."

The quote describes how the speaker prefers to invest in founders who value their involvement and seek a collaborative relationship.

"There is an engineering mindset to solving problems that I think I really resonate with."

This quote reflects the speaker's preference for working with founders who have a similar problem-solving approach, often found in those with engineering backgrounds.

• The seed ecosystem may not be fully serving startups due to changes in product viability and market expectations.
• Building an MVP is taking longer due to higher competition and more complex product requirements.
• Founders may be ill-prepared for the extended time needed to reach a significant milestone.

"I think the place where the seed ecosystem is not serving the founders well is more often than not, if you optimize around that trajectory, you're probably not going to succeed on your first try."

This quote suggests that the traditional seed funding trajectory does not align with the current realities of startup development and may set founders up for failure.

"They'd be better off understanding how long it's going to take, seeing the typical trajectory for companies that have really broken out today and planning for that."

The speaker advises that founders should have realistic expectations about the time required to build a successful product and plan accordingly.

• There's a debate on whether to have multiple seed rounds versus a larger early series A round.
• The goal is to balance founder dilution with the need for sufficient funding to reach significant milestones.
• Seed rounds are evolving, and the bar for a series A has risen due to larger funds and more capital available.

"At the end of the day, just like any other fund, we're shooting for 20% to 25% ownership."

This quote shows that despite different funding strategies, VCs target a specific ownership percentage to justify their investment.

"I think the other kind of story here is that the breakout series a is that the bar has risen."

The speaker notes that the expectations and requirements for a series A round have increased, affecting how seed rounds are structured.

• Price sensitivity is an ongoing learning process for VCs.
• The cost of investment impacts potential returns.
• VCs must balance the desire for reasonable valuations with the potential of missing out on high-quality investments.

"I'm always learning, I think, by default in my angel investing. And here at Matrix we think price matters, right? If it's twice as expensive, then your total returns are capped at half."

The speaker acknowledges the importance of price sensitivity, indicating that a higher investment cost can limit the return on investment.

• The importance of ownership over valuation in early-stage investing.
• The impact of power laws on investment returns.
• The necessity for investment discipline to avoid capping expected returns.
• Matrix Partners' investment focus on seed and series A rounds without increasing ownership in later rounds.

"It doesn't really matter if I invested at twelve pre or 24 pre. The power laws just dominate in such a dramatic, dramatic way."

The quote emphasizes that the specific valuation at investment does not significantly affect returns due to the outsized impact of successful companies, illustrating the power law distribution in venture capital.

"I care a lot more about ownership that I get when I look at my angel portfolio."

The speaker values the percentage of ownership in a company over the valuation at which they invest, reflecting a long-term approach to angel investing.

"We do seed in series a, we really don't do any series b's at this point, and certainly nothing later."

This quote outlines Matrix Partners' investment strategy, focusing on early-stage investments and not pursuing increased ownership through later-stage funding rounds.

• The Y Combinator (YC) ecosystem's influence on the speaker's investment philosophy.
• The belief in the potential of young, inexperienced founders who can build great products.
• The importance of being on the same wavelength with people you work with.

"Paul Graham's fundamental innovation and how he changed our entire world is he bet on folks that others weren't willing to, the kind of young hacker who can build and learn everything else."

The speaker credits Paul Graham with pioneering the practice of investing in young, inexperienced founders, implying a similar approach to their investment strategy.

"This business is only fun if the people you're working with are on the same wavelength."

The speaker values working with people who share a similar mindset and approach to business, indicating a preference for alignment in working relationships.

• The critical role of referencing in hiring and investing.
• The low default level of referencing effort in the ecosystem.
• The necessity of contextual understanding in assessing references.
• The balance between taking references seriously and understanding their limitations.

"I think that is just an incredible way to learn more about a candidate, learn more about the person you're about to bring into your organization and invest in and put a lot of energy into."

Referencing is highlighted as a valuable tool for gaining insight into potential hires or investment opportunities, beyond what is presented in a resume or by the candidate themselves.

"Are they outperforming the rest of their team? Are they a great team builder? Are they a great recruiter, irrespective of kind of what roles they're in?"

This quote suggests specific criteria the speaker considers when evaluating candidates through references, focusing on performance, team building, and recruiting abilities.

"It is a dangerous trap to hear the loudest voice and overrotate on it."

The speaker warns against giving too much weight to a single negative reference, advocating for a balanced view that takes into account the broader context.

• The effect of becoming a parent on time management and prioritization.
• The increased importance of who the investor does business with due to limited time.
• The development of patience as a virtue in both parenting and venture investing.

"And so I think that has made me a much more effective allocator of my own time and a more effective prioritizer of my own time."

Becoming a father has led the speaker to become more judicious in how they allocate their time, reflecting a shift towards efficiency and selectivity in professional commitments.

"I'm much more patient now because I realize that everything good takes time."

The speaker has learned the value of patience through parenthood, applying this lesson to the long-term nature of venture investments and the need to wait for outcomes without undue stress.

• Having a family, particularly children, can provide a sense of calm and grounding.
• Family life can influence and benefit one's professional career.
• The speaker reflects on the wish to have had children earlier due to the positive impact they've had.

"And I do think having a daughter who when I come home at night, runs up to me, wants all my attention, wants me to sing the itsy bitsy spider a thousand times in a row and won't let me go, it helps with that because I think it is sort of, this is kind of a calming grounding effect of it that is helpful, I think, in my professional career."

The quote emphasizes the speaker's belief that family life, especially interactions with his daughter, has a calming and grounding effect that is beneficial to his professional career.

• Recommends "The Stranger" by Albert Camus for non-business reading due to its philosophical nature and extensive analysis available.
• Suggests "When Genius Failed" about the rise and fall of Long-Term Capital Management, highlighting the perils of letting ambition and big checks cloud rationality.

"The most interesting business book I've read recently is a book called when genius failed, which is about the rise and fall of a fund called long term capital management."

This quote reveals the speaker's interest in a business book that narrates the story of Long-Term Capital Management and serves as a cautionary tale about the potential consequences of unchecked ambition in the financial sector.

• The speaker has struggled with insomnia for much of his life.
• Post-Facebook, the speaker focused on finding a solution for insomnia, avoiding sleeping pills and typical advice.
• A blog post on the speaker's website details a scientifically-backed solution for insomnia.

"I think I have a pretty good solution that's backed by science about how to get insomnia under control."

The quote indicates that the speaker believes to have found a scientifically supported solution to manage insomnia, which is detailed in a blog post on his website.

• The speaker believes they sold Parse too early but doesn't dwell on it due to the benefit of hindsight.
• At the time of the sale, the venture market didn't appreciate their business as it does now.
• Facebook presented a vision that did not materialize, but the speaker acknowledges the potential of what they had built with Parse.

"Yeah, we sold early. I think we had a lot of momentum, something great going."

This quote is an admission of selling the company Parse earlier than perhaps should have been done, acknowledging the momentum and potential they had at the time.

• Patience is a challenge due to the lack of immediate feedback, which differs from the speaker's experiences in programming.
• The speaker is starting to see signals of improvement in the venture role but must remind himself to remain patient.

"It's hard to know if you're pointing in the right direction if you're getting better as an investor."

The speaker is expressing the difficulty in measuring success and improvement in the venture capital industry due to the long time frames involved.

• Importance of communication bandwidth with founders is crucial.
• Working with builders and early-stage company aspects like product building, recruiting, and fundraising are key areas of focus.
• Backing people with a natural affinity for these aspects is beneficial.

"I do love working with builders and I love thinking through all the things at the early stage around building the product, but there's so much more to building a company."

This quote highlights the speaker's passion for working with builders and the multifaceted nature of building a company beyond just the product development.

• Focus and ruthless prioritization are essential for success.
• Mark Zuckerberg's management style involves setting a few big priorities every six months and realigning the company's efforts around them.
• This approach contributes to Facebook's nimbleness and success despite its size.

"I think my biggest takeaway was the importance of focus and ruthless prioritization."

The speaker identifies focus and prioritization as key factors in Facebook's success, learned from observing Mark Zuckerberg's management style.

• The speaker's recent investments are not yet public, but he discusses a past investment in Fivetran.
• Fivetran impressed with its solution to centralize organizational data into a cloud data warehouse.
• The founders' journey and the product's ability to simplify a complex ecosystem resonated with the speaker.

"A company called Fivetran, which is a company that hooks up to all of the data sources inside an organization."

This quote explains the speaker's excitement for an investment in Fivetran, a company that effectively centralizes data from various sources into a single cloud data warehouse.