20VC Why Raising A Fund Is Like Raising A $25m Seed Round with No Product & Why Not All LP Money Is Equal with Chad Byers, General Partner @ Susa Ventures

In this episode of the 20 minutes VC, host Harry Stebbings interviews Chad Byers, General Partner at Susa Ventures, who shares his journey from growing up in Silicon Valley's tech scene to becoming a prolific angel investor and establishing Susa Ventures. Chad discusses Susa's recent $50 million fund raise, their investment focus on companies with strong defensibility through data network effects or economies of scale, and their unique approach to LP relationships, viewing them as strategic partners rather than just capital providers. Byers emphasizes the importance of hands-on involvement with startups and the firm's long-term vision to cap fund size while increasing operational support for portfolio companies. He also touches on the challenges of fundraising as a new VC firm, the evolution of the industry, and the strategic shift towards maintaining a higher reserve ratio for follow-on investments.

• Host Harry Stebings introduces himself and invites followers to see behind-the-scenes content.
• Harry welcomes Chad Byers, General Partner at Susa Ventures, to the show.
• Susa Ventures recently announced the raise of a new $50 million fund, Fund Two.
• Chad Byers has a background in enterprise software, fintech, healthcare, marketing, product management, and has been an angel investor in over 30 companies.

"We are back at the 20 minutes VC with your host Harry Stebings, and you can follow me on Snapchat at htebbings to see everything that goes on backstage, from content creation to VC offices to live interviews."

This quote introduces the podcast host and encourages listeners to engage with additional content.

"So joining me today, we have Chad Byers, general partner at Susa Ventures."

This quote introduces the guest of the episode, Chad Byers, and his role at Susa Ventures.

"Last week they announced the raise of fund two, a new $50 million fund."

This quote highlights the recent achievement of Susa Ventures, raising a significant new fund.

• Chad grew up in the Bay Area, exposed to technology, entrepreneurship, and venture capital.
• He shares a story about his early experience with tech, selling Beanie Babies on eBay at age 11.
• Chad tried early versions of Google and was fascinated by technology from a young age.
• After college, he gained operating experience at tech companies, including Silver Spring Networks.
• Chad's experience at Silver Spring Networks was transformative, witnessing its growth and IPO.
• He moved to New York City, worked at an ad tech company, and began angel investing.
• Chad met the team that would become Susa Ventures through angel investing and decided to start their own fund.

"Yeah, I mean, I guess the starting point for me was really growing up in the Bay area and being fortunate to be raised in sf and then moved down to the Bay Area near Stanford University."

Chad Byers describes his early exposure to the tech industry due to his geographic location.

"I remember being one of the first sellers on eBay during the Beanie baby craze in the late 90s."

This quote illustrates Chad's entrepreneurial spirit from a young age.

"So after college, I knew I wanted to get some operating experience. I knew I wanted to work in tech."

Chad Byers explains his desire to gain hands-on experience in the tech industry post-college.

"We were all operating different companies, we were all doing some small angel investing, and as a group really thought about, hey, this is something we're all really passionate about."

Chad Byers recounts the origins of Susa Ventures and the shared passion that led to its creation.

• Angel investing allows for more flexibility and does not require a cohesive investment thesis.
• Angel investors use their own capital and do not have to report to anyone else.
• Chad and his partners wanted to build Susa Ventures as a startup fund, embracing the challenges of institutionalizing the fund.
• The professionalization of the fund was an exciting challenge for the team.

"When you're angel investing, a lot of things are different. Your tolerance is probably a little bit different. You don't really need to have as much of a cohesive story and thesis around how you're investing."

Chad Byers contrasts the informal nature of angel investing with the structured approach required in venture capital.

"But for us, all of us having run companies, wanted to build a startup fund, right? We've always thought about the fund as a startup and for us, like, institutionalizing, it was really the only way to go for us."

This quote explains the team's mindset toward creating a structured, startup-like venture fund.

• The venture capital industry is evolving with many starting as angel investors and scaling up to more institutionalized funds.
• Building a portfolio and track record as an angel investor can lead to the establishment of a professional venture capital fund.
• Chad Byers agrees with the notion of this being a natural progression in the industry.

"Yeah, I mean, no question, that's the way to go. And I think the simplest reason for why that's the case is as an angel, you can build an actual portfolio and track record, right?"

Chad Byers acknowledges the progression from angel investing to venture capital as a natural evolution based on the ability to build a track record.## Fundraising for Venture Capital

• Fundraising for venture capital funds is a complex and often challenging process.
• The process involves raising money from limited partners (LPs) to create a portfolio of investments.
• To convince LPs, it can be beneficial to provide a portfolio of existing investments that align with the stated investment strategy.
• Establishing a track record with angel investments can serve as proof of concept for the fund's strategy.
• Fundraising for a first-time fund is especially challenging due to the lack of an established track record and team cohesion.

"When you want to go institutionalize that and finally go raise money from LPs, there's a portfolio of companies that those LPs can look at."

This quote highlights the importance of having a portfolio for LPs to evaluate when raising capital for a venture fund.

"So we took some investments we had made the year before, put them in the fund at cost, even though some of them had some markups."

This quote explains the strategy of incorporating previous angel investments into the fund to demonstrate the fund's investment thesis to potential LPs.

• Fundraising for Susa One was particularly difficult due to the founding team's lack of previous collaboration and the absence of a tangible product.
• The team approached fundraising by targeting high net worth individuals and family offices, a common strategy for early-stage venture funds.
• Despite numerous rejections, persistence and portfolio development during the fundraising process were key.
• Strategic pitching to institutions during the first fund, even with expected rejections, laid the groundwork for future relationships.
• The transition to Susa Two was marked by a more successful fundraising experience, attributed to the establishment of a proven thesis and successful investments.
• Existing investors from Fund One played a significant role in the capital raised for Fund Two, with a major institution anchoring the fund.

"We were trying to raise a $25 million seed round with no product."

This quote illustrates the challenge faced when fundraising for Susa One, likening it to a startup seeking seed funding without a product.

"We went from trying to raise our seed round with no product to trying to raise a series A with what I consider product-market fit."

This quote contrasts the fundraising experiences between Susa One and Susa Two, highlighting the development of a successful investment thesis as the 'product' that achieved market fit.

• New funds and teams often face skepticism and a higher rate of rejection from potential investors.
• Geographic distribution of the team can be a deterrent for some institutions that prefer teams located in the same place.
• A multitude of reasons can be cited for rejecting a fund, but newness and team distribution were particularly common for Susa One.

"Initially, throw a bunch of reasons on a wall, and we got every single one. But probably the most common ones were new fund, new team."

This quote summarizes the broad range of objections encountered when fundraising for a new venture fund, with emphasis on the novelty of the fund and team as key issues.

• Strategic LP relationships are crucial for the success of a venture fund.
• LPs are not just sources of capital but can also provide expertise, mentorship, and additional resources.
• A good fit between an LP and a venture fund is characterized by the value beyond capital that the LP can bring to the table.
• Susa's LP base is intentionally built, with a mix of late-stage VCs, private equity managers, and well-known operators, all of whom add strategic value.

"Our LP base is 100% strategic to us, and we built it very intentionally."

This quote emphasizes the deliberate strategy behind selecting LPs that can contribute more than just capital to the venture fund.

• Establishing mind share is about becoming a recognized and respected entity among entrepreneurs and other venture capitalists.
• Being thesis-driven is one of the key approaches to standing out in the competitive VC landscape.
• The question from Michael Kim at Sendana highlights the importance of mind share for new entrants in the VC community.

"How do you look to establish the mind share with entrepreneurs and other VCs for Susa?"

This quote, a question from an LP, addresses the challenge of gaining recognition and influence within the entrepreneurial and VC communities.## Thesis Driven Investment

• Susa Ventures believes in the importance of defensibility or moats for long-term business value.
• The best moats are considered to be built with data network effects or economies of scale.
• Susa Ventures aims to specialize in being the "moat guys," focusing on these aspects to build defensibility.

"So we strongly believe that for businesses to create long term value today, you have to have some form of strong defensibility or moat." "We think the best moats today are built with data network effects or economies of scale."

These quotes highlight Susa Ventures' investment philosophy, emphasizing the need for businesses to have defensible qualities, particularly through data network effects and economies of scale, to ensure long-term value creation.

• Susa Ventures values having a low partner-to-company ratio, aiming for 6-8 companies per partner.
• They bring an operating model from late-stage venture to early-stage investments, with heavy involvement.
• The goal is to maintain high bandwidth to be operationally involved in their portfolio companies.

"So we strongly believe that you have to have a lot of free time to get extremely involved in these businesses." "We wanted to bring the same operating model you see in late stage venture. With the amount of involvement bcs take to early stage, we thought there was a hole there."

The quotes emphasize Susa Ventures' commitment to being highly involved in their investments by maintaining a low partner-to-company ratio and providing the operational support typically seen in late-stage ventures to early-stage companies.

• Susa Ventures positions itself as a product market fit investor.
• They prefer investing in companies that already have a product in customers' hands.
• The focus is on whether the product solves the pain points of customers.

"So we are product market fit investors." "We like to invest in something that's already in customers hands."

These quotes underline Susa Ventures' investment strategy of focusing on companies that have already achieved product market fit, ensuring that there is a tangible product that addresses customer needs.

• Helping founders is considered the best way to build a brand and mind share.
• Word of mouth marketing is seen as the strongest form of marketing.
• Susa Ventures' reputation for being helpful is confirmed by their Anchor LP's positive feedback from portfolio company founders.

"You have to be helpful, right. The best way to build a brand, in our opinion, is not to do tons of fancy events or do pr, all these other things. It's to build word of mouth marketing." "Is Susa Helpful? Like what do they help with? Are these guys going to be here to stay with the type of stuff and support they can do?"

These quotes stress the importance Susa Ventures places on being helpful to founders as a means to build a strong brand and reputation through word of mouth, rather than relying on traditional marketing or public relations efforts.

• Brand can be a form of defensible intellectual property for startups.
• Susa Ventures acknowledges the power of brand but prefers other forms of defensibility.
• Examples of companies with strong brands include Coca Cola, Nike, and Apple.

"So there's no question they can be." "We just probably aren't the best investors for that type of defensibility."

These quotes show that while Susa Ventures recognizes the potential of brand as a defensible asset, their focus and expertise lie in other areas of defensibility, such as data network effects and economies of scale.

• Specialization in data and network effects is not just about competition but being the most helpful investor for data-centric businesses.
• Susa Ventures believes their expertise can provide significant value to companies building defensibility through data.

"It's probably more so that we actually believe for businesses that are building defensibility through data and data network effects, we can be the most helpful."

This quote indicates that Susa Ventures' specialization in data and network effects is driven by the belief that they can offer substantial support to companies focusing on these areas, rather than just using it as a competitive edge.

• Fund reserves are allocated for follow-on investments in portfolio companies.
• Susa Ventures learned from fund one to adjust their reserves strategy to maintain desired ownership levels.
• In fund two, they adopted a ratio of one dollar upfront to two dollars for follow-on.

"What we learned in fund one, which is really important to inform what we did in fund two, was that these companies that grow really quickly for us, it was companies like Robinhood where we invested at seed, and a year and a half later they had raised a $50 million Series B was our pro rata in these companies, was getting pretty large pretty quickly, and that our reserve strategy just really wasn't the right one for the firm we were trying to build and the ownership we were trying to maintain."

The quote explains the rationale behind Susa Ventures' adjusted reserve strategy, highlighting the need to adapt their approach based on the rapid growth of their investments and the desire to maintain a certain level of ownership in their portfolio companies.

• Opportunity funds and SPVs (Special Purpose Vehicles) are used to capture pro rata in later-stage rounds.
• Susa Ventures has observed this trend but has not yet adopted it due to mixed feelings in the LP community.

"They're kind of, if you think about it, it's a more structured way of doing what a lot of folks were doing, which are called SPV special purpose vehicles."

This quote describes the shift towards more structured opportunity funds as an evolution of the use of SPVs, indicating a trend in the VC industry towards formalizing investment strategies for later-stage funding rounds.

• Susa Ventures has a clear vision for its future.
• The discussion on the vision was not completed in the transcript.

"So where we're headed, we have a very clear kind of understanding of what we want to become."

Although the quote sets up the topic of Susa Ventures' vision for the future, the transcript does not provide further details on what that vision entails.## Fund Growth Strategy

• Chad Byers discusses the end state vision for their fund, which involves a cap of $125 to $150 million, focusing exclusively on early-stage investments.
• Emphasis on a heavy investment into platform and services to support portfolio companies and foster inter-company connections.
• The fund aims to have five to seven general partners (GPs) to provide significant bandwidth per company.
• They are currently in phase two of their growth, having completed a seed round and closed their Series A.
• The fund's strategy includes scaling check size, leading a higher percentage of deals, and increasing ownership percentage.
• A slow and methodical approach is being taken to build the brand, with a 15 to 20-year roadmap to become a top early-stage fund.

"The end state for us is $125 to $150,000,000 fund capped at that size, never getting bigger. Focused exclusively at early stage."

This quote outlines the long-term vision for the fund size and investment focus, emphasizing a cap on the fund size and a dedication to early-stage investments.

"We're in phase two of this. Again, we think of this as a startup, so we've done the seed round, we just closed our series a."

Chad Byers likens the fund's growth to that of a startup, indicating that they have completed early funding stages and are progressing methodically.

• Concerns are raised about the potential complexities in the investment decision-making process with an increased number of GPs.
• Chad Byers acknowledges the need for creative solutions to manage the complexity without hindering decision-making.

"Anytime you scale people, you scale complexity."

Chad Byers expresses the challenge of scaling the team while maintaining efficiency in decision-making, recognizing that more people can lead to increased complexity.

• Chad Byers shares his favorite book, "When Breath Becomes Air," appreciating its perspective on the importance of health and family.
• He speculates that Facebook or Amazon could be the first trillion-dollar company, excluding Apple and Google.
• His must-reads include the Coding VC and Above the Crowd newsletters.

"I think recently it's when breath becomes air."

Chad Byers explains that his favorite book resonates with his personal values, highlighting health and family as central themes.

"So Facebook or Amazon? I don't think it's Apple. I don't think it's Google."

Chad Byers shares his prediction for the first trillion-dollar company, considering market trends and company growth trajectories.

• Chad Byers discusses his primary challenge at Suse: building the firm's internal operations, from hiring to branding and processes.
• He finds this aspect of his work both rewarding and challenging.

"My biggest challenge [...] is probably building the machine that is the firm."

Chad Byers emphasizes that his focus is on developing the operational aspects of the fund, which is crucial for its success and growth.

• Working with founders and being involved in their companies' milestones is highlighted as the most exciting aspect of Chad Byers' job.
• He enjoys witnessing the growth and success of the businesses through the founders' perspectives.

"Just seeing kind of the growth trajectory and stories of these companies through the eyes of the founders is what makes this job exciting to me."

Chad Byers expresses his passion for participating in the entrepreneurial journey and the satisfaction of seeing companies flourish.

• Chad Byers explains their recent investment in Modzi (formerly Pencil and Pixel), led by founder Shanna Tellerman.
• Modzi's innovative technology allows users to remodel their homes using photos to create 3D renderings, which can then be used to visualize and shop for furniture and design elements.
• The investment was driven by the technological approach and the unique user experience provided by Modzi.

"And what she's building is the ability for anyone to remodel their home using their actual space."

Chad Byers describes the innovative service provided by Modzi, emphasizing the technological edge and the practical application for home remodeling.

• Harry Stebings expresses gratitude to Chad Byers for participating in the podcast and hints at exciting developments ahead for Suse.
• Harry Stebings also promotes his social media and newsletter for podcast updates.
• Eve Mattress is mentioned as a sponsor, offering a promotion for podcast listeners.

"What a top man and such exciting times ahead for Susa."

Harry Stebings concludes the interview with appreciation for Chad Byers and anticipation for the future of Suse Ventures.

"They're the makers of the perfect mattress that will allow you to get that perfect sleep and recharge those batteries."

Harry Stebings provides a promotional message for Eve Mattress, tying in the theme of well-being and rest with the podcast's content.