Earlier this year, I reflected on the difference between “fund investing” vs “fund management.” It’s a useful post for emerging managers, I’d recommend reading it. The gist of that post is – making investments is relatively easy, but learning to manage a VC fund is very complex and hard to learn.
Susa Ventures recently announced their 3rd seed fund. Susa has been one of a small handful of seed funds I recommend to LPs who are looking for folks who have a plan to build a firm. As a disclaimer, I am friends with Leo and Chad (and we co-invest frequently, or at least try to), and they did not ask me to write this.
I should be clear, not everyone who manages capital needs to build a firm in the traditional way — I do not, for instance. But, institutional LPs like this because their commitments can grow over time and it’s a model they have experience with. As fund formation for small funds has exploded, I get pinged by lots of people who want to be a professional investor with their own fund, and while they can get off the ground with a very small fund, it’s much harder to step back and be intentional around firm building. Susa, I believe, is a good example for folks to study.
Firm Building Done Right — Now, you have to pick great companies, and some of that is just out of an investor’s control. Yet, there are things that are in the VC’s control, and Susa is one of a few firms at seed that’s nailed it a short period of time:
1/ Started Out As An Angel Group – The core group started off writing angel checks and enjoyed each other’s company. I’d guess when they went into LPs, that cohesion was on display and it’s a story LPs can sell well internally, too. They also put their skin into the game early.
2/ Raised A Small Debut Fund – I believe Susa Fund I was $25M. I get pinged by folks who have never invested at all who want to raise over this, with one GP. They had four GPs. Raising a small fund enabled Susa to get into market quickly, get into good deals, and show momentum in raising the next fund, which I believe was $50M.
3/ Had A Clear Plan To Scale The Fund – Now, it helps that one of the fund’s co-founders is the son of a person who started another major VC firm. But the first time I met Chad, years ago, he had a very clear, simple plan to scale the fund. He intuitively understood how to tell a story over many vintages. He will add GPs over time but likely not turn into a mega fund. Many institutional LPs like to back funds which both have a plan to scale and that stick to their knitting — Susa had that plan and (so far) is committed to staking out a position in the market before larger Series A deals.
4/ Reallocated Fees Into Firm Building & Resources – One can do the math on a $25M fund with four GPs. You’re not making money on fees. That fund did really well, and as they went to $50M and now $90M, they’ve added to the team, have a clear market offering, and will likely go down the path of bringing more resources to their investments.
5/ Found Winners And Followed-Along In Them – LPs want to know a fund can pick a few winners, of course; but they also want to know if the firm can follow-on in future investments. This is a difficult thing to do and to get right. It’s hard because there’s competition for good deals, and a seed fund can’t follow-on into every company that progresses, so there’s a higher incidence for an error of omission (and always risk for errors of commission). Susa was able to show early they have the CEO-relationships down in order to keep investing.
6/ Built A Brand, Network, And Market Position – Raising $140M across two funds for a seed fund in this market with great LPs means one thing — the fund is established in the category as institutional, it will be around for a while, and barring any big changes among the GP ranks, will be a stable platform for founders to hang their hat on. That may end up giving Susa a pricing advantage over time, even in an overheated market. All of the GPs are relatively young, have active yet non-overlapping networks, and can now apply the last 5 years of learnings into the next decades of investing.
If you’re an emerging manager and looking for a recipe for how to grow smartly, here’s your example. This isn’t the only example, of course, but it’s the most recent one and illustrates what the bar is for building a team of GPs and limited partners.