Fireside Chat With Bill Gurley (Benchmark) | Disrupt NY 2013

Please welcome Benchmark Capital partner Bill Gurley and TechCrunch founder and CrunchFund partner Michael Arrington.

This is a different and better venue than last year. So thanks for coming out to New York. No problem. I want to start with something that Eric and Chris were talking about. They were saying they're comparing New York to Silicon Valley. It seems like you have some interesting thoughts on that. What do you think about New York?

Well, I agree. We've recently done two investments in New York in the past couple of years, first dibs and more recently, sale through. And we're spending a lot of time here and very excited about what everyone's doing. And I think Chris is right. The number of entrepreneurs, the number of engineers, those are fully in place. I think what New York needs to get to the next level, however, is more iconic companies that last over a very long time. Mike and I were talking about Seattle as contrast. So now that Boeing left, the four pillars of Seattle, Microsoft, Amazon, Costco, and Starbucks, they were all venture-backed. And so you have- So Costco and Starbucks took venture capital? They did. They did.

When was that? My partner, Bob Kagle, missed the—he had to present at TVI and that didn't— Starbucks or Costco? Starbucks. Okay. That's why Howard ended up on the eBay board through that relationship. Okay. Anyway, these four pillars of the community are all formally venture-backed, and now you've got companies like Expedia and, hopefully, Zillow, so others that are becoming a part of the ecosystem.

Wait, did you just include Zillow as one of the iconic? I do.

I think they will be.

And are you an investor? I am. Okay. Just hadn't heard of them growing at the same level that Microsoft and Amazon had.

Looking into the future.

Are you saying that New York doesn't have those?

DoubleClick, which David Rosenblatt ran and Kevin Ryan founded, obviously, was the big one that we think about in terms of exits here. And then recently, there's this great company in Connecticut that we weren't in but is fantastic called Indeed that had a great business model. Huge consumer brand was starting to work and they sold it. And I think in general, in the venture business, we have this problem, this kind of anti-IPO attitude that I think prohibits companies from hitting the long ball. But it seems like maybe that's even more acute here.

Yeah, and so does that make you shy away from the New York market? You said you've done two deals recently, but is that part of why you don't have—

It's certainly a concern. Look, I mean, the venture business, not that anyone should be empathetic of the venture business, but the venture business is dependent upon there being these huge home runs in the portfolio. And if the system dynamics somewhere prevent those companies from having that optionality, then that's not great. Do you think the system dynamics prevent... that optionality? Potentially. You think something about the culture here stops companies from becoming iconic? I think, well, first of all, you just don't have the precedent. So you need companies to set leadership points so that others can follow. Two, I think, you know, I formerly worked on Wall Street years ago, and I think the Wall Street mentality is still prevalent in different places.

And I consider that a very anti-loyal mentality. You know, people just trade firms constantly, yeah, um, and they're really into cash comp and they don't think about equity. So if you come into startups with that mentality, it's not—it's not perfect, all right, but I hope it'll all change. Would you look at the, uh,

Look at the—I don't talk too long about this, but the—the sort of macroeconomic forces going on. I've been fascinated by watching what's happened in Cyprus and in Europe in general, the massive liquidity that the Fed is putting into the system. How does that affect your thinking on our world? Is it at all?

Well, I mean, at first blush, if I were to just read unemployment data, what's going on in Europe, the Middle East, and Cyprus, I'd be scared to death. Part of me that causes me not to think about that much is all the great investors that I've ever studied have felt macroeconomics is one of the most silly, waste of time, because the number of variables are so hard to predict. And the one thing that's propping up US equities right now is interest rates being so low. Anytime interest rates are super low, equities perform well. That's happened here, the IPO market's open, and so people are seeing liquidity. And in our world, that unemployment issue isn't there, right? It's the opposite.

Are you saying if interest rates were to go higher, which eventually they must, that that will have a negative impact on the venture community? I think it will.

Okay. The venture community has long been a trailing indicator to the NASDAQ because it's a cyclical business.

Yeah. Actually, talking about that, something we talked about backstage, which is fascinating, is you and I are, to some extent, children of the '90s. And we saw what happened in '99 with the crash. We saw that in 2008, when things went sideways a little bit, that VCs generally freaked the hell out, right? I mean, just RIP Good Times. Everyone was like, 'Take all the money you can, fire everyone.' Are you still seeing that? What do you think about how that affects the thought process of entrepreneurs and VCs today? Is it still haunting us?

I think what Michael's saying is we're old. So yeah, for the very first time, we're meeting with entrepreneurs that were basically in high school in the late 1990s or younger. They don't have any institutional memory of what everyone went through. And in many ways that can be a positive, right? One of the reasons young people are so successful as entrepreneurs is that they don't bring any biases to the table. They don't know about the reason why they shouldn't be successful. But we could get to a point, depending on how things flow and how much money is available, where people start doing things that they shouldn't do because they don't have that historic memory pattern.

And we're not there yet? You know, I haven't seen it.

I would say on a couple of fronts, you know, the late-stage private market continues to be the most frothy thing I've seen since the late '90s. And I thought it was going to go away when you had these iconic IPOs that ended up trading at a fraction of their private rounds. Yeah, but it hasn't. It's just if you have a hot company that's in the select chosen one, you've got people knocking on your door begging you to take money.

Yeah. And that's a bad thing? You think it's the valuations are too high, or just too much money?

I think historically it's shown over time to become a bad thing. You know, one of the things that's going on in the enterprise side is companies are going public with huge losses. You know, like Workday, for example, or ServiceNow. And the entrepreneurs in the Valley see that and they say, 'We should be doing that, too.' So the playbook changes on the field. You combine that with unlimited access to capital and someone's going to push it too far.

And that hasn't happened yet, though.

No, but it feels like the pieces are in place for that to happen. And on the consumer side, the equivalent of that that happened in the late '90s is where you can spend variable money fast, which is typically marketing, right? And so if you have unlimited access to capital, you can keep raising $50, $100 million. And you have a place. It's kind of hard to spend $100 million in hiring. Like, you just can't go hire enough people quickly.

But on marketing, you can just plow it in. I remember sitting in board meetings for a company—I was their lawyer in the '90s—and John Fisher from Draper Fisher Jurvetson. And by the way, I'm only saying his name because everybody was saying this, but he was saying, like, raise as much money as you can and spend it as fast as you can. And basically, if you have to spend $10 in marketing to get $1 in revenue, that makes sense. And it did make sense for a window of time. Then we haven't seen anything like that now.

No, but I see stuff that's similar. I think this whole LTV model is a real house of cards. It's just an excuse to spend. A what model? A lifetime value model where people say, as long as we're—we're paying below our lifetime value and cost of capital. But the numbers can be run in a whole bunch of different ways. We don't need to go into it in detail. But people typically fool themselves into thinking that these things are good investments. And over time, the five variables in that LTV model actually tug at one another, which makes it tough. If you raise ARPU, churn goes up. There's no magic in this thing.

All right. Your current fund, Seven, is about $400 million. And you guys are clearly one of the top VC firms. And yet you have not done things the way other top VC firms have done. You've played with expansion, but you pulled out of that a long time ago into other offices. You haven't gone into big mega funds. You don't have your own hedge fund. Why is that? Was that a good decision? You continue to do it.

Yeah. So, you know, part of that—part of ending up there—was through learning. So in the late '90s, early 2000s, we actually tried to expand internationally. We opened something called Benchmark Europe, and—and they've done fine. I mean, they've had several IPOs. They've had a lot of liquidity. But what we found is that, rather than spending time doing what we love to do, which is help young entrepreneurs build great companies, we were now on the phone managing this global, international finance company and being worried about what they were doing. And then we—we messed some stuff up. A very high-profile European startup that—that I wanted to invest in, I tried to hand off the entrepreneur to the European partner, which I found out later was viewed as a diss by that particular entrepreneur.

And you didn't get the deal. Did not get the deal.

And that's when you fired the partner. No, no, no.

But that was us stumbling on ourselves. So fast-forward to today, they renamed themselves Balderton Capital, and we went back to really just being an artisan business focused on what we do: a smaller fund, early-stage investing. And as you point out, it's an interesting contrast where most of our peers have not only scaled internationally—India and China—but late-stage funds, seed-stage funds. And we're getting positive reinforcement from our model of staying focused.

The other thing you've done differently—I know there are other examples, but not many—is you have a fully equal partnership. So you have six partners, and they're all equal in terms of the management fee and the carry. And that means that if you're hiring a partner, it's for real. It's not just a baby partner that maybe leaves or maybe grows into a bigger role. That's right.

Is that a hindrance? We love our model, and I think it's almost all positives. There are a couple of negatives. We don't have a farm team, so we don't develop talent. So because we're going to make someone equal, we're able to go get incredible people, like when we got Matt Cohler three years ago. But sometimes we're forced to poach. I came from Hummer Winblad. Peter Fenton came from Accel. But it's the kind of model that can attract someone from another firm. So it's good. Yeah. And so why aren't other firms doing it? So a lot of firms are set up hierarchically where the name brand that's on the door, you know, gets a higher share of the economics than the junior person that's coming in. And that means every time you're raising a new fund, there's a competition and a negotiation to see what those splits are going to be in the future, which just leads to politics and could lead to you hiding.

Like if you had a great deal flow and you're trying to outperform, you know, your partner. You want to hoard rather than help. And so we thought that this team orientation would be much better served if you took all that off the table. And it creates enormous peer pressure. I remember when I joined the business and Bob Kagle had just invested in eBay and you're all getting paid the same. And you're feeling like, well, I need to get busy, right? I owe something to the center here. Yeah, but that worked out really well.

Was it a 5,000% return? I don't know the exact number. You know exactly how much. I don't know the exact number. How much, we can figure out right now, how much money did you put into eBay, which they never spent. I think six. Six million dollars. Yeah. And then how much money, or if you want, you can just count like how many jets did you buy. I haven't bought a single jet. It was something like 5,000% return, right? Maybe, I don't know. Yeah. And why aren't you comfortable talking about it? It's like, you know, it's hitting a home run, right?

Yeah, it is. I just, you know, I think that the venture business is one where, you know, you have to get out there and earn it every day. And so, you know, it's for us, I'm just constantly of the mindset of what's the next eBay and are we going to be in front of it or not?

And so what drives you once you have, you know, so much money that, you know, maybe, you know, you have more money than, say, the average U.S. state has in GDP. You obviously aren't trying to make more money. It's, it's there's something else driving you. And what is it that gets you up in the morning?

You, I've often said that if I lived in a Communist society where we got paid the same, I'd probably do this job, you know, if I had a choice. And I just have immense appreciation for disruption. I just—I think it's so cool that you can build something out of nowhere and completely change an industry. And for me, the economics of doing that are just a very efficient scorecard as a way to prove that you were successful at doing that. I love hanging out with entrepreneurs. They do something I don't think I could do personally. So this is the only way for me to be a part of the system. What is that thing that they do? You know, leadership. It's like showing up every day and managing hundreds of people and the all-in commitment that that requires.

Yeah.

Most VCs I know think that they could absolutely do what the entrepreneurs do. They almost see them as... Is that right? Well, sure. I, for example, often think that I could do that job as well. It's just that's a humbleness you don't see in billionaires that often.

I don't have that conviction myself.

I think I'd be pretty shitty at it, actually. So you're in Uber, and they've had some good news today, well, recently, about being able to work with taxis in New York. Yeah. What do you think about Uber and some of your other recent investments?

Well, Uber's probably the highest, fastest-growing company we've ever been involved with. Really? Including eBay? Yeah. Uber's growing faster than eBay. I think it is, yeah. I'll go double-check that and send you an email.

Well, bloggers are writing that around right now. But eBay grew pretty fast.

I know. I know. This thing's growing pretty fast. Okay. It's an incredible model. A lot of the companies today, especially on the consumer internet, you build a viral system first, you get it big, and then you hope to append a business model.

Would that be like Snapchat, for example?

Or Instagram, or Pinterest, or Twitter. There's a lot of them. Yeah. Uber had a business model day one, the very first transaction. It just makes a much bigger difference in terms of how quickly the revenue can go out of the gate. I guess eBay had that also. Yeah. And then Travis has just done an amazing job of scaling globally, you know, everywhere he is. And he had an incredible commitment to the user experience, which I think paid off for him in the long run. So, you know, it's one of those companies where zero marketing is being spent, yet the top line is going like this, you know. And that, for me, you know, that's part of my distaste for that LTV model. The great ones, the companies that are,

some of the best companies of all time in the industry, the consumers just go there because the product's that good. Yeah, there's no one spending 50 hundred million dollars in marketing to make it happen.

Yeah. What about Twitter? Do you think Twitter, and I don't want you to speak for them, but do you think their destiny is to become a public company, one of the iconic brands you talk about, or do you think Google just has to buy them and preempt anything?

I can't speak for Google, so I don't know if they feel that way or not. My own view, and Peter Fenton, my partner, is on the board, so it's kind of a view from the side. They've just had a really incredible couple of years here where, you know, the management team's come together and is really working well together. The business model's come together, and I think they found endemic ad units that fit nicely within the product. The community continues to reinforce the brand. You know, I was at the Warriors game last night, and when they announced each player, they put their name on the Jumbotron and underneath it, their Twitter handle. And to have a company who gets so much self-promotion, you know, and then for every person that develops a following, they now have sunk costs.

They're now caught up in the system, right? They have a reason to perpetuate what's going on.

No, I'm not. The next speaker on this panel is one of the owners. Yeah, okay. So you were just pointing to that. They can direct questions to him.

What about Quora? Is it a company without a foundation that's going to sort of drift off, or do you see something solid there?

So I think you have a team there that has a very long-term orientation, that has a very good vision of where they want this thing to be, and that understands that there are system dynamics taking place. Because they're trying to build a network effect system. They're trying to build a content asset that's gonna keep getting better and better. And they're gonna keep stitching it in a way that makes it more and more useful. And so we're still very excited about what they're going to accomplish. The numbers are growing and growing and growing. It's not one of these things that's just gonna take off overnight. I think it's more methodical in how they're playing it out. We still feel good about it.

Yeah. I mean, I assume they have little revenue at all right now. So they're burning your money mostly, right?

Well, and Adam put his own money in, too, which is...

Yeah. All right. What about some of the other companies you've invested in? Do you want to talk about some of them? Nextdoor, Grubhub, a dog walking company?

Yeah, so let me start with, well, just let me talk about Nextdoor. So this is a company I'm really excited about. It started out as an EIR in our office. So Nextdoor has built a social network for your neighborhood. And if any of you are members there, I think we're at 11,000 neighborhoods in North America right now. And these things are built in a way that we only let someone start a neighborhood if they apply and pass the application. And then they're required to get 10 users. We put in place a lot of friction to ensure that there'd be quality. And what we're seeing is just unbelievably high content. So 20, 30 posts a day in many of these neighborhoods. And the quality of the content is very high.

It's very utilitarian as opposed to other social networks where you see chatter and social activity. Here it's about recommendations and crime and safety and—and, you know, 'Watch out for this,' and, 'Can I borrow that?' and, 'I've got this for sale.' And it's just... Do you participate in your neighborhood? I do. I do, in the Portola Valley neighborhood. Yeah.

And what is a neighborhood? Is this 10 houses? Is this 20?

Is it 50? It's anywhere from 100 to—I think the largest is Potrero Hill, which is 5,000. But it's—I'd say the average is 200, 250. All right.

What do you talk about in your neighborhood? Like, you know, like... It's not like, 'Can I borrow a cup of sugar?' There is some of that.

I mean, the modern-day equivalent of a cup of sugar is an extension ladder, right? Because they cost a whole bunch of money and you need them once every three years.

But have you ever said, like, 'Hey, I'm building an airstrip on my land, if anyone minds'?

There's a lot of political discourse, whatever that might be for that neighborhood, right? Yeah. What counts as political discourse in Woodside is people arguing over whether there should be as many bikes on the road or not. Whereas in Potrero Hill, it's a little different, right? But people definitely talk about those kind of things as well. But did you build an airstrip in your house? I don't own a plane, and nor do I own an airstrip.

So what about this dog walking service? It's called Swifto. I asked you about it backstage, and you kind of changed the subject, which tells me I definitely want to bring it up out here.

So that's a company that my partner, Michael Eisenberg, funded in New York that was originally trying to do something more like TaskRabbit or Exec that had pivoted into focusing in that area. So when we invested, that wasn't the theme, but that's what she's doing now.

All right. I don't know if we have the ability to take questions, but we have a couple of minutes. Are there microphones out there? And if not, people could yell it out and I could repeat it. So if you have a question, raise your hand. We can take one or two. Yeah, back here. So, the topic of Nextdoor—there have been a lot of problems in the hyperlocal space. What makes you think it'll work?

So we're working with a team there that worked on the original Epinions product. And I've come to believe that the nuances that are necessary to make these UGC communities work, there's a list of 10 or 15 things that you have to know how to do. And it turns out the majority of people don't know how, including really large companies like Apple and Google, because it's really hard. And it requires a lot of hand-holding and hand-stitching and building in place a network effect where the atoms start to bounce into one another. And that mindset was in place from the very beginning at Nextdoor. And we've had the ability to watch other UGC communities like Yelp that we're involved with and how they spin those things up.

All the friction was part of it. Rather than opening everyone's door, we didn't want people going into a ghost town. We really worried about quality. You're going to see some new features over the next year that are going to make it even more obvious. I think our leadership position, based on what I know and where we are, is going to make it very hard for anyone else to come from behind.

One other thing I wanted to ask you is—and I forgot to ask this earlier on—is, in sort of the state of the venture market today, and we talked a little bit about this, but where is there too much money, where is there too little, you know, why, what's...?

We'll try to do it quickly. I mean, I do think that there was a rush of angel money three or four years ago. There was a period where there was this talk of super angels and how this was going to mean the end of the venture business, and even our LPs were asking, 'Does this mean the end of the venture business?' And that, you know, died down and went away. But what happened afterwards is what people are calling the Series A crunch, where there were so many new angel companies started relative to history, and then they use the metaphor, 'a pig through a python,' right? It starts working its way. It's a pig through a what? Python. That's just a metaphor people use when something big gets caught in a narrow system.

And so that eventually got to where the angels did one. And the pigs are the startups in this case. Come on now, that's not what I meant.

No. Okay. So, so the angels did one round and then they did a second one. Yeah. Sometimes as a convert. And so like now there's $5 million in, in like convertible debt. And then they go try and raise, you know, their first A round. Yeah. And that's been difficult, one, because of the number of companies that are out there. And two, I would also say because of the large amounts of angel money that are in place. Well, it's like a Python can only swallow so many pigs. That's right, right. Come on. So is that, is that something that's correcting itself and these companies are going out of business? I think so, a little bit, yeah. And some of them are getting funded, and some of them are figuring out another way, and... but I don't think it was like... if you look at the, at the venture capital amount into Series A, that hasn't changed that much. So it was more about the supply of the input rather than the, the actual amount of money that's going out.

And then the other thing worth mentioning is, I said it earlier, but the amount of dollars available to successful late-stage private companies is unbelievable. And the behavior that you'll see for the competition in those dollars is very reminiscent of the late '90s. All right, Bill, thanks very much. All right.