E429: Mark Suster – I will invest more in YouTube

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Mark Suster has the monkey off his back. Nearly seven years into his career in venture capital, he’s seen some amazing returns this year. AOL acquired Gravity for $90m. Apple picked up Burstly, the company behind Test Flight). Not least: Maker Studios sold to Disney for $500m.

In this candid interview Mark goes long on both Maker – despite the popular perception that it was quickly running out of steam – and YouTube, even as it stands by its 55-45 revenue split with content creators. Who will be next out of the gate with video? His top picks are Amazon, followed by Twitter and Facebook in a tie.

Plus, when to bootstrap, and a little history lesson on surviving hard times, informed by the financial crisis and Genghis Khan (no, really).

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Highlights:
00:33 – cold open
1:23 – intro
2:58 – MS: I’ve been a VC since 2007. Going on 7 years. I actually didn’t write a check for a year and a half. I spent 2007 and into 2008 working on my craft. 2008 – Lehmen Bros – I started wondering instead of stocks if I should buy guns to protect myself
4:08 – JC: People don’t remember exactly how bad it was. What’s the effect on a VC?
4:20 – MS: First of all, it wasn’t the first correction I’d seen, nor the first you’d seen. We’d both lived through 2001.That extended for a couple of years. Having lived through those periods, it changes you. If you want to build a real company, you have to think of it on a 7 to 10 year trajectory…you’re going to have a recession. Plan a business that will work in good times and in bad.
5:30 – JC: what should be in that plan?
5:31 – MS: avoid fixed costs you can’t get out of. What I like to tell people is raise money when it’s available. It’s hard to understand if you’ve only been an entrepreneur since 2009.
6:45 – MS: The funny thing about funding is that the funding flows and shuts off immediately. Black Swan. Understand that when it shuts off, nothing gets through (3 months, 6 months, 2 years).
7:39 – MS: What happens to VCs? If you did large investments at huge checks, high prices, you do triage.
8:07 – JC: Save the kids.
8:12 – MS: Sophie’s Choice. Raise new funds. If you’ve raised a new fund, you’re fine. We didn’t have a bunch of new investments.
8:40 – JC: Terrified or scared? I was terrified.
8:45 – MS: I could see Doomsday scenario. Let me talk about a high class problem. The FDIC will insure $100k. The people I knew were figuring out how to move their money around. If you want to understand history, I like Genghis Khan and the Making of the Modern World.
10:40 – JC: When we come back from the break, I want to have an honest discussion about Maker.11:30 – Walker ad read -12:49 – JC: The last year or two, the YouTube ecosystem has been feast and famine. Massive views and brands being built. Challenged on revenue front. Tell us about Maker nad how it could thread the needle.
13:20 – MS: First, people get caught on “are you losing money?” there’s a tension between growth and profit. Investors only care about growth and margin. Uber must be on a tear, growth-wise.
14:25 – MS: Why is there tension between profit and growth? To get growth, you often have to invest ahead of time in engineering, etc. At Maker we have 50 engineers. Do the math. We had to hire a direct sales team. Whole talent development team, production. The company was on a 9-figure revenue run rate. I believe it’s the fastest company growing in LA. I think it will hit a scale that will astound people. What determines whether you can grow crazy fast is whether you have access to capital. We had crazy
16:40 – JC: Why sell the company if growing this well?
16:55 – MS: In every company, it’s management’s decision to sell and investors serve at the pleasure of the management. Here’s a company that acquired Marvel, Pixar, etc. It owns some of the best assets in the world and when that company says “we’ve decided that shortform video is tremendously important to the future of the company,” you take the call.
18:05 – JC: Let’s talk about the YouTube relationship. It felt like YouTube didn’t want the MCNs to exist anymore. Creator Playbook, Tentpole events, etc.When you’re an investor and you see YouTube stealing…what are board meetings like?
19:35 – MS: I look at it differently. YouTube bought Next New Networks. They want to serve creators directly. YouTube has no problem if 50% of our business is on YouTube. You need to fish where all the fish are, and they’re all on YouTube.22:40 – JC NewRelic ad read -24:40 – JC: You sound magnanimous. You were frustrated with YouTube.
24:53 – MS: I’m always nuanced, so let me say I will invest more in YouTube.
25:10 – JC: Why did other people say “No effin’ way?”
25:25 – MS: If you don’t have a strategy, it’s hard to build a business. But that’s true of any startup.
26:05 – JC: Who would you most like to see get into the vidoe business and take YouTube headon?
26:15 – MS: I said that I thought Google was suffering from innovator’s dilemma.…..28:00 – JC: Don’t you think they should have given a better deal to Maker than anyone off the street with a cat video?
28:15 – MS: I think one should get volume discounts. The norm in the industry is 70-30. There are all sorts of reasons, and that’s their prerogative…they’ll hold their ground until they have competition. I believe it’ll be here in the next 2 or 3 years.
29:28 – MS: The next obvious competitors are Twitter and Facebook in my mind. Twitter has hired Baljeet. They have a team of people both in music and video that understand the space.
29:52 – JC: NFL, etc.
30:04 – MS: Think about why video-based retail. […..] If you put something in YouTube, it’s in a YouTube wrapper. It’s only a matter of time before that video is outside of its wrapper on FB or TWitter and they are going to sell the pre-roll.
31:28 – JC: Ellen. What impact would she, moving to Twitter’s platform, have?
32:25 – MS: Not an if, it’s a when. Competition is good for all of us. Competition drives innovation. Imagine a world in which there was only an iPhone and no Android. Apple is like China. For the most part, the leadership is benevolent, but on the other hand, they don’t like fart jokes, women in bikinis,… it’s a dictatorship. But I’d rather live in a messy democracy w/ more respect for individual rights.
34:15 – JC: Chatroom Question
34:30 – MS: I’ve invested in tools company that works inside the YouTube ecosystem. I believe that more is going to go up on Facebook, etc. Epoxy.tv. Epoxy takes your video and distributes it across all the platform. We also have a twitter product. You don’t want them to have to watch just one.
37:30 – JC: It was great for you to get Maker done
37:45 – MS: I would call the exits doubles. Gravity acquired by AOL. I would say I’ve had exits but Maker has returned significantly more than all the investments I’ve done in 5 years. Someone asked me on @quora “Is MS a good VC?” That’s the difference between that and Secret. I can respond. Upvote, downvote. I answered it 4 years ago. I said “What does it take to be a good investor? I think I’m good at helping get downstream investors onboard…” Great returns come in years 7, 8, 9, and 10. People market their singles and doubles, but
40:00 – MS: What LPs should care about is IRR. …..
42:17 – MS: If you tweeted a negative article about Mitt Romney but weren’t negative in the tweet, we would know it. We raised $42M
43:20 – JC: Secret
43:25 – MS: Secret allows you to post stuff but some people say it’s not. Tie it to mobile phone number. What i don’t like is that if you spend time on Secret, there’s a lot of misogyny there, there’s a lot of anti-gay stuff. I find it a terrible world to live in that people slander you and you have no retribution.
45:25 – JC: Nothing to stop people from doing this on the open web. When it’s shared amongst your phone book, it takes on a life of its own.
45:50 – MS: At least on Quora, I have the opportunity to refute it. You can’t stop this stuff from being posted. I flagged it and a few more people flagged it and nothing happened. In their defense, I wrote a harsh post about it. They didn’t attack me. They also wrote a feature
47:00 – JC: I think Secret is fighting for their lives because most people don’t think it should have been built. For adults, it’s fine. But for kids, I called them out about that. I had Whisper on the show. You can’t be a kid in the system.
47:40 – MS: The company only has 6 people and they’re going to ramp up, and I think they will. I hate apps like this. It brings out our worst self.
48:15 – JC: What you build represents you. Why would you build this? What is the need?
49:08 – MS: Silicon Valley has this perception where we’re above it all. But there are people that are the same as everywhere else…if you see someone in a grocery store and they cut you off and they say sorry. You see the same person in the car, you’ll risk your own life to flick them off.
50:00 – JC: I challenged them publicly about the suicide issue….
51:00 – MS: I was bullied, but I have platform and a thick skin.
52:00 – JC: If you’re building a product and you feel it necessary to hire someone who handled the suicides at a previous company, might you not consider not building that product?53:31 – MS: EntrepreneurShit. What I’ve tried to do is to give the realism of startups. I wrote the Yo-Yo Life of the Entrepreneur. I talked about how much weight I’d put on and how much drinking I’d been doing. I am a stress eater. We all deal with stress in different ways. We need to be open about the stresses and how difficult it is. Very few startups are total glamour. It’s a lot of co-founder fighting. Instill a sense of realism in the entrepreneurs.
56:20 – MS: The job of the CEO is to be chief psychologist. People will fight. I’ve noticed with some of my companies in super stressful times that I’ve had to pull them out emotionally and lift them up.
57:33 – JC: What’s the most common fight between co-founders?
57: 40 – MS: Most don’t know each other well. Say you’re all 29, what happens: depression, babies, etc. Some people with high risk tolerance and others who want to make $2M. Co-Founder Mythology. I argue that you should hire your co-founders. You can bring someone but you’re still in charge and you control voting.
1:00:52 – video question
1:01:35 – Should someone w/ a function team, product, clients go to accelerator or funding?
1:02:00 – MS if you don’t know if there’s market fit, you’re far better getting seed money. If you build something small and get $1M, you can sell for $3M, you can make some money. If you know, in your bones that it’s going to be big, VC.
1:02:40 – JC: What do you wish you’d known when you started?
1:02:50 – MS: Easy to write checks, but […..], you think “it’s easy,” but it’s hard to sell your company and make money. Overestimated how easy. Entrepreneurs have lots of power to drive up prices to get involved.
1:04:00 – MS: Fred Wilson said you can’t simply be out of market when you think prices are high.
1:05:30 – JC: AngelList. Just did my Syndicate. How do you view the entry of whoever is doing this? What effect do you think this willh ave?
1:06:00 – MS: I think it’s super healthy. If there are people like you who are willing to fund at the early stage, I don’t mind paying up in the next round. I think people like you and me are very complementary. You’re going to write many checks. You don’t have time to deal with conflicts that arrive. I have 8 to 10 personal investments at a time and I spend a lot of time.
1:07:00 – JC: You overlap on boards now?
1:07:10 – MS: If you overlap a fund, you have fees from Funds 1 and 2. Second, you have crossover. VCs try hard not to do that. You may have conflicts.
1:09:33 – MS at a big fund, a junior VC is making 600 or 700k. At a smallish fund, they could be paying themselves $150k. i often back people in their 40s, but I think it does favor young people. For me personally, if you can’t hit the 3-pointers anymore, at some point, you become a better coach. I try to spend my time coaching. Smart people come tell me how they want to change the world. I get paid to network, to travel, etc. You’d have to be a big baby to complain about being a VC
1:12:03 – close

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