This morning's interview is with Mark Suster, a venture capitalist at GRP Partners (www.grpvc.com). GRP has just recently closed on a new $200M fund, and Mark has been one of the more active venture capitalists in the Los Angeles area in recent months. Mark has also been quite active mentoring entrepreneurs. We caught up with Mark to hear about what kinds of investments GRP is looking at nowadays, his view on the software-as-a-service market, and how best to approach him with a pitch.
It looks like GRP has been making lots of early stage investments lately--can you talk a little bit about your investment preferences and what you are looking at nowadays?
Mark Suster: Let's start at the 50,000 foot level, then I'll segue into that question. The company was founded by the head of the North America investments for Carrefour, the second largest retailer in the world, the head of the retail banking practice at DLJ, the investment bank. We've been investing since 1982 in brands you'd know--Starbucks, Costco, Dick's Sporting Goods, Petsmart, and Office Depot. In 1996, they spun out from those entities and created GRP, taking our retailing experience, and seeing that retailing was moving online and invested in retail as it moved online. We invested in Overture, which was sold for $1.2 billion to Yahoo, we did CitySearch, we invested in the largest travel site in Europe, called LastMinute.com, and also CyberSource--a number of very early stage, Internet companies. In 2000, we set up our second fund--worth almost $400M--and for that vintage year, that fund is one of the top tier performing funds in the entire country. The reason I point this out to you, is it's enabled us to raise a fund in a market--where I'm sure you're aware--that most funds have not been able to raise new funding. Our brand new fund is a $200M fund, and we think that's the perfect size for a new fund. When we were investing in firms in the late 90's, and even 2000/2001, it cost a lot more to build a business than these days. So we think we're the right size for the market in 2009.
We have thirteen-plus companies which have gone from inception to selling for North of a billion dollars, including the last company we sold, in October of 2008, BillMeLater, which we sold to eBay for a billion dollars. That was quite a prominent exit for us. The new fund is focused entirely on technology companies. A large amount of this new fund, somewhere between 20 and 30 percent, is focused on technology in the financial services sector. When you look into our past investments, BillMeLater was sold for over a billion, DealerTrack's IPO exited north of a billion, and we've also have several investments which are very profitable, but still privately held, all in the financial area. Those companies are doing phenomenally well, and in a normal market was IPO.
So we're focused on technology, and financial services. We're also looking at technology in the retail sector, or which touch the retail supply chain--things like out of home advertising, software to optimize the retail supply chain, and other related areas because we know the retail sector so well. If you look at one of the subsectors of retail, the auto industry, we've been making bets into revolutionizing the auto industry. You know Zag, herein town, and more recently our new car investment, TrueCar. Obviously, this being LA, we're also very interested in digital content and distribution. We've invested in a fantastic company called Mobiclip, which provides high throughput video with low battery consumption on mobile devices. They've signed a global distribution with Nintento to power Nintendo Wii and DS, and also have distribution deals with major labels.
My own background, is I built and sold two software-as-a-service companies. As a result, I'm looking at a lot of software-as-a-service companies, and have run a number of SaaS companies. Some of our companies are quite large--Qualys has somewhere around a 50-60 million run rate, and is quite big. I sold my last company to Salesforce.com, which is well known in that space.
I'm spending a lot of time in the performance-based marketing area, which is the theme of RingRevenue. The world is moving from CPM deals to stuff that is more measureable--whether that is cost per lead or cost per action. We're a very big fan of CPA businesses, and RingRevenue hit my sweet spot.
What's your thoughts on the local venture market?
We'd like to be one of the most prominent investors in Southern California. We have a regional focus here, and the market is underserved in venture capital, yet it's the second largest metropolis and DMA in the country. There's lots of great tech talent, innovation, exits for companies, and big enough companies. I think because we're a Hollywood town, people haven't taken it all that seriously. We're taking it seriously. To answer your earlier question, if we're getting involved in earlier stages, is GRP wants to do A round investments. An A-round investment in the late 90's, or even in 2005/2006, or 2007, was a $5-8M check. That as unhealthy. An A round investment in this market is a million to $4 million. That's the sweet spot for what I personally am looking at. We'll even write a half a million check. Like any good firm, we'd like to have diversity. That said, my partners are looking at scaling deals, and are looking at later stage as well, and we wouldn't mind putting $6-8M checks in a more proven firm, and where we could do what we did at several other firms, creating billion dollar exits.
We've heard quite a bit about your mentoring efforts here, can you talk about that?
Mark Suster: I founded a group called Launchpad LA. The objective is to provide more mentoring for startups, and actually getting in and helping them. Matt Coffin, who is one of the prominent angel investors here, and who founded LowerMyBills, has told this story publicly. He was at a point where his business was going well, around 2001 and 2002, and he had raised venture debt, and couldn't raise any venture capital in Southern California, and couldn't raise any capital in Northern California. He eventually found an investor in Minneapolis, and the investor wrote him a term sheet which would have breached covenants in his venture debt, and he thought they'd shut him down. He thought "what am I going to do?" and was able to turn to a guy who had raised venture debt before. That person told him: the venture debt guys don't want to put you out of business, what they really want is warrant coverage, and probably wants those loans paid off more quickly. So, give him more warrants, and close the deal with the Minneapolis investor. He offered it up, and they accepted it straight away. The whole point of this story, is that it's these little, small insights that entrepreneurs need to know. It makes the difference between LowerMyBills being a great success story, and you and I never knowing Matt Coffin. That's what I'm hoping to do.
So, I took ten great entrepreneurs, ten great mentors, and ten great VCs--I say 10, even through there ended up being thirteen of each and create this group. My competition is not Rustic Canyon, it's not Clearstone, or the other venture firms in town. I'd like to see Rubicon Project become a smashing success, which would be a victory for me. What is a net loss for us, is when Sequoia or Benchmark flies down on their corporate jet, meets with a company, and tells them to relocate to Northern California. I'd like to see the community working together. Everyone does seem to be working together, and I don't see that deals are proprietary, and that there are numerous discussion on deals. We just did a deal with Rincon Ventures on a deal in Santa Barbara, and we're partnering with other firms on deals, and we'd like to see more.
You've got lots of experience in the SaaS market with Salesforce.com, what's your opinion on where that market is today--and how do SoCal's Software startups stack up?
Mark Suster: Luckily, there's a very big poster child for software-as-a-service, Salesforce.com. Outside of Google, they've been one of the most successful companies over the last five or six years, in my opinion. That's been a great validation for the industry. Obviously, you've got other people--NetSuite, SuccessFactors, Rightnow--who have been able to IPO, but it's clear that the industry is not big enough yet. However, you don't see any serious companies being launched in the enterprise software space, you don't see firms launched with traditional client/server software. Today, there's only two models--software-as-a-service, and open source. I'll point to Southern California, and there are lots of firms here--for example, Appfolio in Santa Barbara, which has Klaus Schauzer of GoToMeeting there, there's Mindbody Software in San Luis Obispo doing phenomenally well; you've got some great promising open source startups, like Eucalyptus in Santa Barbara, there's a phenomenal company called Magento Commerce being run by a Roy Rubin her ein Los Angeles. So, there's lots of promise here, though perhaps not as many people with the right skills. Why do I say that? Because, who it takes to develops successful software-as-a-service is someone who has come through Oracle, Seybold, to some extent SAP or PeopleSoft.
Normally, I don't do Northern California deals, but I've put an asterisk on deals outside that exclusion zone, which is I know many senior people from Salesforce.com who have left or are planning to leave. I k now them well, worked with them, and they'll call me first--or at least, we're in the top 5 interesting companies they'll call in the space.
Here in Southern California, we do have a ways to go. Most people might not know this, but Sage Software's North American headquarters is in Orange County--who would know that? You never hear that from Sage. I'd love to see more of their presence in this marketplace. In any case, in the future of software, whether Los Angeles can become relevant or if it will continue to be dominated by Northern California, I just don't know.
You mentioned financial services a few times. Can you talk about why you're so interested in that area?
Mark Suster: There's lots of reasons. Some of our biggest success stories have been in financial services. Plus, three of our partners have worked for 20 plus years in the financial services sector, so we have a deep domain knowledge. It's a complicated industry, and it's not that can easily be solved with three bright Ph.D's from Stanford. It requires knowledge of the sector, the regulatory environment, senior relationships in the industry, and a fair amount of trust. As a result, there are few firms who have focused on it, and we we're one of only four firms we've been able to find that have more than 25% of our portfolio in the financial services sector. It hasn't been a crowded market, we've got deep domain experience, and we've been investing in it for a long time. Plus, it's one of the most problematic industries in the country, which spells opportunity. There are phenomenal opportunities in auto lending and in home mortgage lending.
Finally, what's the best way for an entrepreneur to approach you?
Mark Suster: First of all, I'm happy for anyone to email me directly at firstname.lastname@example.org. I also think that nontraditional ways can also be somewhat effective. You can reach me on twitter @msuster, and I respond to almost everyone there. I'm on social networks like Facebook, I also blog now, and respond to all of my comments. At my blog, bothsidesofthetable.com, I am trying to provide entrepeneurs advice on how to pitch VCs, on how to run their business, on mistakes I had made, and what has/hasn't worked, how VCs think, etc. When people write comments, I respond to every single comment. I think I'm fairly approachable, but you might have to fire two or three bullets, because I might not respond, because sometimes I get overwhelmed by email and messages.