Matt Turck (FirstMark Capital) on investing in five unicorns, and the VC “luck”

Matt Turck, Partner at FirstMark Capital has invested in five unicorns during the past years, including the last one, Ada. To learn more on how he made this possible and how he is managing its investments, STATION F's team discussed with him.

You've invested in 5 unicorns... How do you spot the best startups?

Frankly, I do a lot of legwork. My approach to venture capital is pretty thesis-driven, so I do a lot of upfront work, meet as many people as I can in my areas of interest, do a lot of industry analysis (annual landscapes, S-1 teardowns, etc on my blog). I also run a couple of large meetups, including Data Driven NYC which has become the largest community in the US around data and AI. Those communities have been an incredible source of insights and connections for me. All of this enables me to have a prepared mind, so I can get to conviction quickly on an investment opportunity, and move very fast when I need to, which is often the case in the current market.

There’s a danger in being too thesis-driven, though. In a weird way, you can end up knowing too much, for example in terms of what ideas have failed again and again in the past, or what competitors are currently doing, etc. You can end up becoming finicky and cynical when you meet young companies that are just getting started. It’s really important to preserve the ability to suspend disbelief. I try hard to approach every opportunity with an open mind, and focus on what a startup could become if things went right, rather than the many reasons why it could fail.

And also, occasionally, you need to be ready to throw all that thesis work out of the window real quick when you happen to meet founders that truly blow your mind, even if they operate in domains you spend less time in. So it’s pretty nuanced - lots of work upfront, but remaining opportunistic and intellectually flexible.

Is there a part of “luck” in investing in those successful deals?

Absolutely! Venture capital is definitely a “better be lucky than smart” business. You can do everything right, and still be outperformed by an investor who just happened to be at the right place at the right time. And because it’s such a power law business, one single lucky, stellar investment can dwarf 10, 20, 50 smart and thoughtful investments with average outcomes.

But obviously it’s not like playing the lottery either. The best VCs tend to have a long list of strong investments, not just one lucky one, so they’re definitely doing something right.

What does it look like to accompany unicorns as an investor?

There’s a strange, counter-intuitive dynamic that happens when you sit on a number of boards: your best performing investments tend to be the ones that require the least amount of your time, while the ones that struggle require tons of time and attention, just because there are so many problems to fix. If you don’t pay attention, you could find yourself paradoxically being less “on it” for your best investments - I’ve been in board meetings where things are going great and people around the table are just a little too happy; you can tell it’s everyone’s “easy board” where they don’t need to have the hard conversations, etc.

Over the years, I’ve learned that this can be pretty treacherous. Fast-scaling, unicorn type companies need tons of help and attention as well, just of a different kind. The old VC adage around “doubling down on your winners” applies not just to money, but also time and effort. So I try to do that. Thankfully at FirstMark we have this whole Platform effort we’re pretty proud of, with a team that focuses on recruiting and making introductions to potential customers and partners - that really helps a ton, because unicorn companies by definition are scaling fast and are in huge need of talent, expertise and customer connections. Making some intros early in the life of the company is one thing, but scaling your effort as the company grows is something else, so it really helps to have a whole team of people dedicated to it.

Have you seen specific changes in the ecosystem since your first investment in a unicorn?

For sure. As an industry, we’re all living through a giant experiment right now: scaling the pace of tech startup creation to unprecedented levels. You see it everywhere, at every stage: hundreds of startups per YC class where there used to be dozens, seemingly a new growth deal announced every day by the likes of Tiger Global, tons of unicorns, tons of SPACs, tons of new public companies. Many incredibly competitive financing rounds, ever rising valuations… for most of its existence, venture capital was considered a cottage industry that simply could not scale. We’re about to find out if it does.

And if you had to name the next unicorn?

That has become a much easier game these days, given how many unicorns there are. Just look at any top tier VC portfolio, take their Series B or Series C companies, look how quickly they’ve raised their recent rounds (as an imperfect but somewhat reliable measure of momentum) and voila, you have a reasonably good list of soon-to-be unicorns. Getting to a $1B valuation used to be an incredibly rare achievement (hence the unicorn name), but it’s becoming more of a regular milestone for the best companies, as they get to a certain scale. I certainly don’t want to trivialize it, as it’s still a very big deal and a tiny percentage of startups ever get there. But when it comes to really standing out, $5B is the new $1B.

In your opinion, is the “building unicorn” trend healthy?

There’s a bear case and a bull case for this. The bear case is that tech valuations, and asset prices in general, have been artificially inflated by the macro-economic environment, in particular the historically low interest rates around the world. This could all collapse quickly if interest rates go up due to inflation concerns, and massive amounts of money move from equities to debt markets. We certainly got a taste for what that might feel like in public equity markets recently.

The bull case is that we are at a very unique moment in time, which is the deployment phase of the Internet, globally. As software eats the world, everyone (including founders and VCs) are surprised by how big many of those tech startups have become. When FirstMark invested in 2010 in a tiny Canadian commerce platform company called Shopify, I don’t think anyone around the table would have predicted, in their wildest dreams, that it would become a global platform for entrepreneurship with a $150B market cap. Today, in our portfolio, we are seeing companies grow faster than ever, as everything compounds -- infrastructure, talent, capital, all of it is available and plentiful for the best companies.

If you lean towards the bull case, as I do, then all those unicorn (and decacorn etc) valuations feel a tad bit less frothy. You can certainly question whether Company X or Company Y is over-valued, but directionally as a group, there’s a real argument for why valuations should be higher than they were in the past - it’s a much bigger market opportunity.

Interestingly, both of the above cases could be true. It’s possible that the market could be impacted in the short term by macro factors, although in the long term it feels pretty clear that technology is going to win at a massive, global scale.

Could you tell us about one deal you absolutely failed? One you were really convinced about but which dramatically failed?

Yes, here’s one story of a company that pretty much disappeared overnight. At FirstMark, we had invested in a company called Aereo that was taking on the cable industry by enabling people to watch TV over the Internet. It was hard not to love that company as the cable industry in the US has historically been terrible, extracting high prices and delivering very poor customer service. Aereo was doing great, and had smartly positioned itself legally in anticipation that cable companies would sue. However, after years of legal dealings, it ended up getting shut down by a US Supreme Court decision. Basically, one day we had a fast-growing, well-funded company, and then the next day it was dead. It would have absolutely been a huge home run, had it survived. That was probably the most dramatic and brutal failure we’ve experienced as a firm. Regulatory and legal risk is no joke.

How are you managing investments in Europe? What trends do you see here?

At FirstMark, we’re very bullish on the European tech ecosystem and we’ve been working with European entrepreneurs pretty much from inception of the firm. We love European startups with global ambitions, and we have a strong thesis about how New York (and the East Coast in general) is a particularly attractive landing spot for those companies when they expand to the US.

Just to take the example of France, we work with Dataiku, Ledger, Dashlane, Sketchfab and, most recently, Pigment - all of which are active both in France/Europe and in the US. My most recent investment is Synthesia, a London-based company started by Danish, German and Spanish co-founders.

The big trend I’ve seen in Europe has been the obvious explosion, but also normalization, of the market. As recently as a few years ago, a key reason for US VCs to invest in European startups was that they could find much more attractive valuations. That valuation gap between the US and Europe has largely disappeared, at least for the most attractive investment opportunities. There’s now tons of VC money in the European ecosystem chasing a still comparatively small number of startups, even if that number is growing rapidly. Things are frothy in the US, but in some ways they are even frothier in Europe, it seems. Or at least I’ve seen some pretty crazy deal dynamics happening in Europe. But it’s all very exciting, and great companies are getting built all around Europe right now. We’re really looking forward to doing more.