April 28, 2021
This week we’re having tea with Leo Polovets, co-founder and General Partner at Susa Ventures. Before joining Susa Ventures, Leo was the second engineering hire at LinkedIn and built the first versions of products like LinkedIn Jobs and LinkedIn Groups.
This interview has been lightly edited for length and clarity.
Tips for sending a cold intro
How founders can think about and pitch valuations
If seed-stage founders should pay themselves a salary
Towards the end of my time as an engineer, I wanted to start my own company. But I didn't know what it took to start a company from day one. I had always seen them from day 200.
I had friends that were angel investors. They were thinking of starting an angel or a venture fund. They wanted a technical person on their team. One of them invited me to try it out. I was like, "I'll do it for a year. I'll learn about early-stage startups, the things they do well, the mistakes they make, and then I'll go start my own company."
I ended up liking it and I've just been at Susa Ventures ever since its inception, eight years ago.
It depends on the demo. Sometimes the product is amazing. Sometimes it doesn't need to be amazing because you're making a customer more efficient by digitizing some process. There, the product is less important than your understanding of the customer and what they want.
There are other cases. For example, I work with a company that does website personalization. In a few clicks, they start personalizing any website's content. They have this demo where they log into a site, do a few different clicks, and say, "Your homepage looks different now." Personalization is stark and effective. Just with that two-minute demo, everyone they've talked to is excited.
It's a mix. Introductions and networks are big for every investor I know. Even the ones that take cold emails, messages, and DMs.
We are receptive to cold emails. There are a lot of people that are talented, hardworking, and smart that we can't reach through our secondary connections.
Featuring highlights is important. Some personalization is important, too. I get a lot of emails that are not personalized at all. An email where somebody is like, "Oh, I read this tweet where you said you like this product. That's exactly what we're building. Let's chat," works a lot better.
It's more about relative performance to other companies. For example, if you've raised $4 million, hitting $50k a month in revenue is not impressive. If you bootstrap to $50k a month, three months after launch, that's super impressive.
The things that stand out could be team quality, traction, or growth. Maybe you're in an industry that's exciting and you have experience there. Coming from an engineering background, I spend more time on product-market fit. My partners tend to be more team and market-size oriented.
The biggest issue I have is when a pitch is not succinct. If you have a 45-minute meeting, and you spend 42 minutes going through your deck and your story, it’s really hard to figure out what to do from there. I may have a lot of questions, but there was no time to ask any of them.
Whatever length your pitch meeting is, whether it's 30 minutes or an hour, spend a third of the time doing an overview. Leave a lot of time for questions and make it interactive. First, the investor wants to learn and ask questions. Two, you can see if they are the right investor for you. Are they asking good questions?
The other thing is being honest and not overselling nor underselling. Investors want to see, "Would you be good to work with? Are you trustworthy?" But then, as a founder, you're going to be selling not only to investors, but also to customers and employees. Investors want to see that you're confident.
I like both. I like decks beforehand, just so I can skim through them. Just thinking about the deck and doing a bit of research will give me questions that I want to hit during the meeting. Decks often don't capture the story that well, so it is always good to hear the founder describe it.
Following-up is worthwhile. If you haven't heard from somebody for a few days, it's good to check-in. Check-in one more time if it's been a few more days. And then write that off.
Figure out how much capital you need. Maybe you have a plan for your business for the next 18 or 24 months. You have some spending plans and conservative revenue assumptions. Whatever amount of money that is, try to raise that plus about 20% cushion.
I wouldn't give a valuation out when you're trying to fundraise. If you go too high, you'll turn off a lot of people. We also get the opposite.
Stating a fundraising amount and then letting the market set the terms, which you can always negotiate with, is the best strategy.
Historically, around 70%.
If something can return roughly half the fund or more, that would be interesting. We have a $90 million fund. Checks are a million and a quarter on average. I want to see at least a $45 million return in a best-case scenario. That's roughly 40x, ignoring dilution.
This is where valuations matter. If you're investing in an $8 million post, and you can afford to keep dilution at bay for a few rounds, a $300-$400 million exit is meaningful to the fund. But if we're investing at a $20 million post, and we can't afford to avoid dilution for long, then you need a $1.5 billion exit for the same impact.
We care less and less over time. Occasionally, it matters. For example, if you're building a product that needs machine learning engineers, you probably need a presence in the Bay Area. Maybe you can recruit them if you're in the middle of America or another country, but it's a lot harder. For most projects, a lot of the team can be distributed.
The one caveat is we're more helpful in certain areas. If a founder is in at least the US, maybe in the Bay Area or New York, we have a much stronger network there.
We've invested a lot in the US and Canada, a bit in Mexico. We're open internationally. It’s less about where the team is based and more if they're targeting a market that we don't understand.
If you have an amazing 10-year vision, but you don't have a great plan to get there or make progress in the next year or two, it's hard to invest.
Painting this pitch of, "We're going to be a tiny company in a year and a half," is not as exciting as saying, "Here's our vision, and then here's the first couple of steps to get there."
We try to, both for personal and financial reasons. All of us want to be involved in things that make the world better, and also make money doing it.
On the financial side, companies that have social missions have a much easier time with fundraising, recruiting, and getting PR. If you have a good mission, it's not just something that you and the investors are excited about. It's also something that increases your chances of having a great exit.
Founder-market fit is good. We do a lot of B2B investing. Sometimes, you meet somebody who says, "Oh, I'm building this product for corporate legal departments, but I spent my last 20 years working for companies that all service this customer, or where I was a customer." They just have such a depth of knowledge.
Founder charisma or ability to sell is another one. Again, because we're thinking, "Will the person be able to recruit well? Will they be able to fundraise well in the future?"
High grit is another one. For founders, there's a lot of stress. People that have high grit are willing to work through tough times.
Lastly, I like people that are thoughtful and have gone through the idea maze in their heads. In case people don't know, an idea maze is the mental exploration of different paths you can take to success. Some of them work and some don't.
The best founders have a clear vision of, "I'm going to take this route." If the investor asks, "Why don't you go here?", these founders say, "No, that won't work for this reason."
We don't have a bias against solo founders. We care more about founding teams having the right combination of skills, knowledge, and experience. If the solo founder has all of those things, that's great.
On the flip side, sometimes you have three founders, and if they’re all engineers, we'll still be wondering, "are we comfortable with that gap?" It's more about required skills versus how many founders are there.
Let's say we're doing a monthly 45-minute call. For 5-10 minutes, we'll talk about how the business is going. Then, we see areas where we can help and if the founder has questions. We'll share some resources and make introductions to people. We've also been doing boot camps for founders around things like pricing and PR.
Each company has a set of skills they need to succeed. A lot of times, the high-level ones, like sales and engineering, are taken care of by the founding team. But when you look at PR, marketing, pricing, and accounting, there are gaps. We help people fill those gaps.
Yes. The question is how much. Something around $100k is common, but I've seen $30-40k, especially if you're a single founder. Not a solo founder, but unmarried, out of college, and used to living in a dorm. For people with large families, I've seen things go up to the $150-170k range.
Series A and later, you can get a market salary. It's the seed and pre-seed stages where the runway is so critical and you don't have much money. Let's say you raise a $2 million seed round. The difference between three founders each taking $125k vs $70k a year could cost you five extra months of runway. That's meaningful when you're looking for product-market fit. The difference between 18 and 23 months of runway could make or break the company.
Have a good roadmap and financial plan. Have some set of milestones you want to hit for your next round. How much time does the cash in the bank give you, how are you going to spend it? You can't hire everyone you want to hire on your seed round. There's a lot of participation involved. When people go from raising a $500k pre-seed to a $3 million seed, they can burn quickly just because they have 5-6x more money.
Grow slowly on the team side until you have product-market fit. It's really easy to over-hire. Maybe you hire a sales team prematurely before your product is ready to sell. And then you end up burning time and capital. Spend frugally until you're confident that you have product-market fit.
Start building good relationships with your new investors. They're going to be supporting you for one or two years, maybe 10 years. They're going to be trying to tee you up for a great Series A with following investors. If a founder raises money and they go quiet for four or five months, it's hard to build those relationships afterward.
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The Mercury Team