[credit provider=”GRP Partners”]
At 5:45am Pacific time we get a Twitter DM from Mark Suster to set up a phonecall so we could interview him at 6am while he’s driving to a board meeting. That’s some pretty good hustle. Suster is a pretty interesting VC because he isn’t afraid to talk straight and stir up some controversy so it was a pleasure talking to him.
He’s also invested in interesting companies in hot areas, like Ad.ly, which does advertising on Twitter, and GOGII, which is a highly popular messaging app.
So we had a chat about all that, plus what it’s like to be a VC blogger, why Los Angeles is awesome for startups (it’s not just the weather) and which huge tech company he thought would crash and burn.
Here’s the highlights:
- Want to raise money from Suster? You have to have “street smarts”, be product-oriented and oh yeah, be going after a huge flippin’ market.
- LA is awesome because it has CalTech and has built great companies like Overture.
- Silicon Valley is hypocritical about advertising.
- Ad.ly is great and Twitter is great and everything is fine between Twitter and (most) apps.
- GOGII is flippin’ huge and the reason most people don’t know it is because journalists are dopes. (Our word not his.)
Here’s the whole Q&A, edited for clarity.
Business Insider: What kind of companies do you look for?
Mark Suster: In many ways, I’m simpler than most VCs. 70% is people, and 30% is market.
I’m looking for really high potential people. It’s a cliché but it’s true: I’m looking for passion. When I see young men in their early 20s doing mum blogs, I don’t think they’re in it for the passion.
BI: Does that come from experience?
Suster: Oh yeah, I’ve seen that 5 or 6 times. Plenty of entrepreneurs just look for ways to make money, instead of things they’re passionate about. I never backed something where there wasn’t passion.
Other things I look for in people: street smarts, detail-oriented, a natural leader who can attract people. For example, I meet plenty of people who tell me: “When I raise money I’ll hire people.” I’m looking for people who have already done that. And they tell me it’s not possible to get people who already have jobs to quit them to join you when you don’t have any money. Well you know what? Some pull it off.
I’m also looking for people who are very product oriented. My ideal team is engineers, a CEO who doubles as a product manager–and nobody else.
The other 30% is the market. If there’s a great team but I don’t believe in the market I’m not interested either. They have to have identified a big enough problem and have a good solution. I want them to have either share of wallet or share of mind.
And finally, I’m a huge believer in the lean startup philosophy.
BI: So, no $41 million for a pre-launch photo-sharing app?
Suster: (Laughing) Not a chance!
And finally, I only invest in areas where I have strong competence and I can have value. Areas I know about, have relationships in, and am passionate about too. I want to be able play with their product and their competitors’ products, to debate product choices, to go see consumers with them.
Too many VCs make investments in domains they don’t care about. How can you invest in a blog platform if you don’t blog?
BI: What specific areas are you interested in?
Suster: Performance-based marketing. Around the world, only one tenth of ads are measurable, meaning online. So there’s a large market out there to be disrupted.
I’m also interested in the disruption of the TV market.
Very interested in mobile apps and mobile social games.
And finally I’m always willing to invest in SaaS. I was an entrepreneur for a decade and both my companies were SaaS companies.
BI: Flipping it around, why should entrepreneurs take money from you?
Suster: You should only take money from an investor, including me, who you believe can help your business. What matters isn’t the brand of the firm, but the particular person. It’s the partner who makes the investment as much as the firm, and that particular partner ought to know about your industry, be passionate about, have relationships and knowledge.
For example, if you’re working on the disruption of TV, well, I produce a TV show every single week called This Week in VC. I’ve got my hands dirty.
Also, take money from someone who likes to invest at your stage. If you’re an early stage company and you’re talking to a partner whose investments are late stage, you’re likely to be wasting your time.
I’m also a big believer in local VC.
Up Next: Why LA And Blogging Are Awesome
BI: Speaking about that, you’re based in LA. Tell me about the local startup ecosystem. What’s it like?
Suster: LA is the second largest metropolitan area in the US. We have 16 million people. We have a diverse set of industries. We have some of the best institutions like CalTech. We have produced some of the biggest, most important successes of the internet: of $30 billion in advertising, $23 billion comes from Google and all of it comes from an idea originated in LA by a company called Overture. For years Silicon Valley thought it was a terrible idea. Silicon Valley has an allergy to advertising. But Google copied Overture, after saying they’d never do it. Google won, sure, but the idea started with Overture in LA, and they sold for $1.5 billion.
Google AdSense also got started in Los Angeles: the company was called Applied Semantics and bought by Google.
Local internet: CitySearch was the original local company, and Yelp copied CitySearch.
Take affiliate marketing: we had CommissionJunction, PriceGrabber and Shopzilla.
The original behemoth of social networking was MySpace, also Los Angeles.
The biggest outcome to date in the mobile gaming space was Jamdat for $680 million, and that was in Southern California.
Why do I tell you all these things except for reminding everyone of how powerful SoCal has been to create the internet ecosystem? Because each of these companies has produced a second time or third time entrepreneur, which is creating a tremendous ecosystem.
BI: Why did you start a blog? Is that just self-promotion or do you actually learn? Do you get dealflow?
Suster: I started a blog as an entrepreneur and loved it. I was finding myself in meetings literally every day, giving entrepreneurs one-on-one advice and saying to myself: I can only take so many meetings. Why don’t I just take this advice I’m saying every day and write it? That way, when people ask me questions I can point them to the blog.
The second thing is that I’m passionate about writing. It’s a creative outlet for me. I enjoy it. It’s not labour. If I could spend more time writing I could. I never write during the day. I blog at 10pm. Other VCs tell me they don’t have the time, but it comes out of my personal time.
I started it for these two reasons, but it turned out to be something completely different: a phenomenal marketing tool. The way I speak on my blog is exactly how I speak and think in real life. If you like what I write, you know who I am. If you don’t like it, you know not to work with me, which is probably a good thing. That level of transparency maybe makes it easier for people to approach me.
Another great thing is that when people read stuff they disagree with–they tell me! And I learn from that.
I also learn from being active in social media. I learn from looking at what blogs get traffic and which ones don’t. I learn from seeing how social media brings traffic. What headlines work and don’t work. I can try out analytics. I compare Tumblr and WordPress and Posterous.
I think of it as being someone who works with clay. If you’re a potter or a sculptor and you don’t work with clay every day, you can’t understand it. How can a VC understand your business if they’re not using social media every day? I’m not saying every VC has to have a blog but if they don’t use some form of a social media then how can they invest in it?
It’s great to learn. So for example, I invested in social media analytics company Awe.sm and I know exactly my clickthrough rates are.
From my tweets, I get about a 4% clickthrough rate, and that’s of my whole audience, so of people who read me it may be more like 12-15% on any tweet in the morning, between 8:45 and 9:45. That’s amazing! Ads on the web have much, much lower clickthrough rates. I know to send things at 5:30 and 8:30 because 5:30 is 8:30 on the East Coast and people view twitter largely in the morning, lunch and end of the day. If I send a second time I still get the same CTR. How many VCs have that kind of data?
Now my blog gets around 400,000 pageviews a month and it’s become marketing, a sounding board, a way to get my hands dirty, and still be a creative experience.
Up Next: The Hottest Companies Mark Suster Is In
BI: You’re also an investor in Ad.ly, which does celebrity endorsements on Twitter. What do you think about what’s been happening on the Twitter platform and what’s going to happen? Are they going to crush everyone?Suster: I’m very, very long on Twitter. I am long because Twitter has network effects. It’s an open platform–
BI: Is it an open platform if Twitter can shut you down overnight?
Suster: By open, I mean that Twitter’s data is open as opposed to being behind a firewall. When you publish on Twitter it’s open for anyone to see for the vast majority. There are tremendous businesses that can be built in the future with Twitter.
I haven’t said this publicly, but I’m still very interested in investing in the Twitter ecosystem and looking very hard at one company in the Twitter ecosystem.
Let’s look at what Twitter has actually said. They said they don’t believe third parties should build clients. They’re not saying they’ll shut you down, only that if you’re going to build clients they’ll hold you to a much higher standard. They haven’t said anything other than that so far.
I have assurances from Twitter that the kind of businesses that I’m looking at they’re interested in seeing third parties develop.
BI: Like what?
Suster: Things like analytics, analytics, data-oriented businesses, industry solutions, higher value analysis on the dataset. They’re very open to it and even encouraging it.
BI: But what about Ad.ly? Twitter wants to own advertising on its platform, right?
Suster: This may surprise you, but before we invested in Ad.ly we actually did due diligence. We asked Twitter if it was OK. And Twitter said to us upfront that they’re totally ok with an endorsement model for celebrities and even regular people.
Here’s why: let’s take Snoop Dogg. If he has 2 million followers or whatever and puts out an ad in his Twitter stream and people get pissed off, they’ll just unfollow him and nobody else has to see any ads from Snoop, so it’s not spamming. It’s a self-correcting mechanism. So it doesn’t harm the user experience on the platform.
We promised Twitter when we created it that we would have our own policing mechanism. We will only allow a certain number of ads per day. We do quality control on the ad copy. We’re focused on high value brands like Sony, AT&T and Universal and we put out high quality ads and we don’t want to have spam. Twitter’s OK with it because if it’s someone other than Ad.ly doing it there’s a bigger chance it will be spam.
What Twitter doesn’t want to see is a company that’s going to send zillions of ads to a timeline of people who aren’t already following it.
You know, Silicon Valley is often very hypocritical about advertising. People go on Twitter and say “buy my book” — that’s an ad! They’ll drive traffic to a website that has ads all over it. They’ll thank their sponsors with a link. Scoble has Rackspace in his Twitter avatar, that’s an ad.
Silicon Valley has always had an aversion to advertising but the truth is: it drives a lot, if not most of the innovation on the internet, as it has on television and in film, and by and large most people prefer ads rather than paying for products, and that’s why it works.
At Ad.ly we do celebrity endorsements, which is a category larger than all online advertising in the US combined. Online advertising in the US is a $30-35 billion market, and endorsements are a $50 billion market. Why do brands spend $50 billion every year? Because it moves product, whether Silicon Valley likes it or not.
One of the mottos at Ad.ly is “data beats emotion.” People get their knickers in a twist because of they say they don’t want ads in the stream and all that stuff, but here’s an example. Take an ad that Charlie Sheen tweeted out. With one tweet within 40 hours with one tweet they delivered 500,00 clicks, 1 million uniques, and signed up 150K paying customers.
Where else are you going to see those kinds of numbers?
The great thing about social media is that I choose to follow you, so as long as the ad is authentic, my chance of interacting with it is off the chart.
BI: Another company you’ve invested in is GOGII, which makes the popular texting app TextPlus. What’s going on with messaging apps?
Suster: Messaging apps are a perfect example of the press getting it wrong. Everyone is talking about these group messaging apps.
Let me tell you something: group messaging is a feature, not a company.
We have years of data on this, and group messaging is a minority of text usage. It’s 20%. Textfree has had that feature for more than two years and people are talking about these new startups because they hired a good PR firm.
Textplus has more than 8 million monthly active users. Not 8 million downloads, monthly active users. The app has been downloaded 14 million times. We sign up 100,000 new customers every single day. We’re generating 35 million texts per day. We’re the third largest generator of text messaging in the US behind Facebook and Twitter. We’re 30 times larger than the nearest competitor. We will have $10 million in revenue this year but the new startups have no revenue.
Group texting is not where the money is.
What excited me about the team is that they worked for 10 years as senior execs at Activison and left 10 years ago to create a mobile gaming company which was the biggest winner of mobile gaming 1.0: Jamdat, which was sold for $680M to EA.
They didn’t create a group texting platform, because they looked at what young people actually do, and what they do is texting. And they said later on we’re going to add games. Young people text one hour a day. What other app do people use on average an hour a day?
And once we have that, wouldn’t it be nice if we then introduced games?
I’m passionate in this area because we believe we invested in the most talented team, and yet the press is not getting it.
BI: Finally, what’s the craziest idea you’ve seen that succeeded?
Suster: Hmm. Here’s the one I got wrong the most: I never believed that Netflix would be a big success.
I never believed it. I thought: OK, I know why Netflix can beat Blockbuster, but why the hell would you invest in a business producing physical DVDs when you know the market is going to move video on demand. Reed Hastings is obviously smarter than I was.
The beauty of that business is that to secure the streaming rights he had to have a lot of money. To have that he had to get tons of revenue, and to do that he had to build the DVD business, realising that it wouldn’t go away overnight. So he built this huge business that allowed him to build the streaming content business later.
And the user experience on Netflix is so phenomenal that they now control a lot of the streaming market. It’s a wonderful service and I believe the company has a wonderful future.
Suster: Thank you.