203. Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit (Leo Polovets)

203. Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit (Leo Polovets)
Nick Moran Angel List

Leo Polovets of Susa Ventures joins Nick to discuss Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit. In this episode, we cover:

  • Give us an update on your investments at Susa since we last chatted?
  • How has the thesis at Susa evolved over the past couple of years?
  • Do each of the GPs at Susa have specialty areas of focus?
  • This year Susa closed on 2 new funds – Susa III a $90M early stage fund, along with your first opportunity fund to which investors committed $50M. What was the elevator pitch to LPs and what worked well in the first two funds that resonated with LPs, leading to the successful raise?
  • What would you have done differently in Fund I and Fund II if you could go back?
  • What it takes to raise a Series A… often founders will have a singular focus on the vanity metrics — they assume if they hit $2M in ARR they’ll attract the A round at an attractive multiple from Tier 1 investors. But, we’ve seen this play out and it’s not all that’s required. Why is a singular focus on ARR a poor approach to raising money?
  • Leo, you have an original framework here focused on de-risking the the major risks centers facing a startup. What are the high-level principles?
  • The 9 risk centers that you’ve identified include Product Market Fit, Product Quality, Team, Recruiting, Sales, Market, Funding, Short-term Competition, and Long-term Competition — can you pick one of these areas and walk us through an example?
  • What are the common mistakes founding teams make with regard to these risks?
  • Talk a bit about the balance between testing and execution?  How should founders balance figuring out the best path forward with running fast in the direction they think is best?
  • Increasingly our founders have been sending us dealflow, operating as scouts, making angel investments in early stage companies. Where do you stand on this — distraction that should be avoided or net benefit to those involved?
  • In what ways have you changed most as an investor since the early days?
  • One piece of advice for founders — what is it?

Guest Links:

Key Takeaways:

  1. Since Leo was last on the program, it’s been a very eventful 4 years for Susa – they wrapped up their first fund, raised 2 additional funds, doubled their team, brought on a new partner and made about 15 investments.  
  2. The thesis at Susa has evolved from companies that had competitive advantages primarily in data, to companies with competitive advantages in general. They’re drawn to startups that, regardless of what they’re building, as it grows over time, it gets harder for somebody else to catch up. 
  3. Part of their pitch to LP’s that lead to the successful raise was their concept of viewing venture as a flywheel. The goal is to invest in great companies, build relationships and develop strong references, as a result those founders introduce them to the next generation of great companies.
  4. If Leo could go back and do one thing differently in Fund I and Fund II, he wishes the check sizes were a bit bigger. He feels that those slightly bigger investments in the first couple of years, would have been really meaningful now, six or seven years later. 
  5. Having a singular focus on ARR is a poor approach to raising money because usually the numbers an investor throws out, is a proxy for something they’re looking for a founder to prove, within that time frame. This put’s the founders mindset on hitting a magic number, when really they should be focused on the fundamentals that will create the outcomes. 
  6. De-risking is essential to startups in general, not just for fundraising but for building successful companies in the long run. A key principle is determining what your key risks are and accurately self assessing yourself on each one. 
  7. The biggest mistake Leo see’s founders make is only working on the areas that they’re good at, while neglecting the important areas of the business that they’re not so good at. Spending time on those neglected areas is important and what ultimately creates successful founders and great companies. 
  8. Leo shares the importance of the “explore vs. exploit” framework. Maintaining a balance between exploring: gathering further information to broaden your perspective, and exploiting: executing based on the knowledge you currently possess. 
  9. Leo believes there’s a lot of value in periodically spending time outside of work to meet people or do things unrelated to your startup. It creates a good foundation for your future where you have more connections and resources in case specific challenges or opportunities come up. 
  10. In the beginning of his career, Leo approached venture a bit like value investing, predominantly focused on the near term numbers. Over time, he’s realized this approach is a very short term analysis and what really matters is the companies potential for greatness in the long run.
  11. One piece of advice Leo has for founders is to spend some time getting to know investors and picking your partners carefully. Being that these are long term relationships, picking a partner after one meeting is very risky. It’s important to slow down and really gain conviction that you’re making the right choice.