E722: Bill Gurley Benchmark, SV leader & investor (Uber, Twitter, Snapchat) LAUNCH Festival 2017

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Please welcome Bill Gurley. Yeah. He's coming, he's coming. All right. All right, Bill, you just heard that approach. 1,800 investments in seven years.

Yeah.

How many investments have you made in the last seven years?

We do about, as a partnership, we average about two a year.

Two a year.

So 250 to two, what's your... Are you happy to have the Y Combinators and the 500 Startups out there just greatly increasing the base of people starting? Because you have been in venture capital for how many years now?

Almost 20.

Almost 20. So it predates all incubators with the exception of Idealab. It's true. Predates AngelList, syndicates, SeedInvest, crowdfunding, and the proliferation of angels.

What do you think about this massive groundswell in the last, I don't know, I'll call it seven years, eight years?

Well, you and I have talked about this. I think one of the things that led to the creation of that as an investor class when the consumer internet popped up, which really started back in '96, '97, Amazon and whatnot, a dynamic, I think, became apparent to the venture capital community, which is that there's a bit of a hits dynamic with consumer startups where, even if you're a very successful repeat entrepreneur, you may head out to do the next one and fall flat on your face.

Sort of like second albums. Yeah, or second albums or Hollywood films.

And I think that caused the traditional venture industry on the consumer side to kind of go upstream a little bit and wait for some signal. And, you know, it may have happened anyway, but that was fuel, I think, for this community because it left a bunch of early-stage consumer entrepreneurs without capital.

It hasn't changed your business all that much, has it? Because you still make Series A investments pre-traction. You still believe in that?

We do, and there's a huge dichotomy that's developed, I would say, between consumer and enterprise. I think backing repeat entrepreneurs in the enterprise space is near risk-free. Because what happens in enterprise is you get three or four customers, your product team starts listening to the customers, and you're off into the races, and then you're selling the product. And that's a systematic thing. With consumer, it's not like that. But look, this, this is, this is a reality in the industry today. I think our approach to venture capital is one I call of stewardship, where we take a large principal position—20%, around there, typically—and then we're with the company for its life, which lately has been extending beyond a decade even, right? Um, and, and we're there in the trenches, and, and that's why I call it this notion of stewardship, um.

I think I've come to—and we're exclusively focused on that window, kind of A, sometimes B, but always with the board seat, always in this principal role. And I think some of the best angels have come to appreciate that role we play in a symbiotic way.

Yeah, I mean, if you're an angel in 150 companies like I am, or 1,800 like Dave is, you know you're not going to be able to do what you do, or Roelof does at Sequoia, or Khosla does, or whoever. You have to be there through the company, the hard times, and the good times as well. Yeah, and that's why 14 instead of—you couldn't do it that way. A lot of hits in this last class: Uber, Snap, this hacker company. HackerOne. HackerOne. I keep hearing more and more about that. Explain to people what HackerOne is and why this is so special.

So HackerOne is a really cool company that, I think, once you hear about it, it sounds obvious. So Facebook, Microsoft, Google, and, I believe, Firefox, Mozilla have been running bug bounty programs for like over a decade where they pay hackers to discover vulnerabilities. It's super logical because it's crowdsourcing, right?

They tell you about it privately.

They don't post it on the web. There's a whole series now of policies around disclosure and what proper disclosure looks like. But it's an enormously obvious idea. Sheryl Sandberg said it's the best security defense that Facebook's ever had. Yet it's not easy for every company in the world to prop this up, because you have to know, is it okay to pay a hacker in Estonia or not, right? There's complications. And it turns out that there are huge advantages to having a rich reputational graph on top of all the hacker community as you start to solve more idiosyncratic problems. And so HackerOne's a marketplace that takes all the greatest hackers in the world on one side and puts all the companies on the other.

And so, in like two and a half years, we now have over 800 customers. So there were four bug bounty programs three years ago. Now there's 800. Now there's 804, or whatever.

And in a way, you've given an outlet to somebody who, previously, their outlet would be to hack a system and then offer a ransom before going public with it. You've actually taken those people and said, 'Hey, here's a white-hat way to deploy your amazing skills.'

Although, let's be fair, Google and Facebook, they did it first. Sure. That had already happened. But this provided a scalable way for everyone to get into it. And yeah, we just announced Intel and Microsoft this week.

It's an interesting segue into what's happening with our government and our lives. We're all being hacked. Have you been hacked? Because I know that a lot of these Gmail accounts got hacked. I know Google executives. Probably, but not so much.

Not that you're aware of.

Yeah, I think that's probably everybody in the audience has been hacked and unaware of it. What do you think about what's happened in the election and the hacking claims and Russia's involvement? I'm just curious. I don't mean to get political, but on a technical basis, it does seem like

a foreign government has interfered. It's, well, it's pretty frightening from any perspective. I'm good friends with Michael Lynton, the CEO of Sony Pictures, where, where they had their entire email server put out, you know, for, right, for everyone to see. And I think by Kim Jong-un. Any company, you know, under the sun wouldn't want that, right?

Like, every email. You got dragged up in that because he was on the board of Snapchat.

Yeah, I didn't. But my partner, Mitch Lasky, and he were sending emails. So, yes. Yeah, so it's pretty scary. I do think that this HackerOne approach or this bug bounty approach is interesting because it's the first real offensive approach. Most of the companies in security are defensive. So you're just piling up, building walls, you know, hoping to stop everybody. And this is a little more leveraged, or I'd say a lot more leveraged, actually. I don't have anything particularly interesting to say. Scott McNealy famously said, 'There is no privacy. Get over it.' Yeah, your privacy is an illusion. That's pretty scary.

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We sit in America in the most litigious country of the G20, I would argue. And I think it's one of the least appealing parts of the United States is how much our government has reinforced the notion of litigiousness. And hopefully no one here has ever been in a situation where every email they have ever written is torn over by someone coming after you, but it's very easy to put things out of context and put you in a position that's completely unfair from what was going on. And so I think the rise of the amount of data that's out there, combined with that society that promotes litigious behavior, is really scary. So I would support strong encryption because of that.

Current administration may feel differently.

I understand. This isn't my area of expertise.

Yeah, we're dancing around it. Hey, tell me about the Snap investment, or Snapchat, parent company Snap, obviously an incredible IPO, pretty fully valued as a company, but I would say that's a big debate, but I think the more interesting discussion is—

just how unique this, uh, Evan Spiegel is. Tell me about him and the investment. Yeah, so when we first, um, stumbled upon the opportunity years ago, um, there was a lot of—there's a lot of noise, and they even wrote this in the S-1, there was a lot of noise that suggested the company was all about sexting and that that was the only reason, that because of the ephemeral messaging app that scared the bejesus out of parents. And we spent more time with, with Evan. He had a very passionate view that social media, as it was defined prior to that moment, was intrusive. And maybe it goes back to what we were talking about. And we started talking to some of the kids that were using it, and this very prescient 14-year-old told us, 'Facebook to us is like LinkedIn to you.'

And the argument being—and you shivered—yeah, but it's like, it's permanent, it's out there, we, we, we're not comfortable expressing ourselves there. And that was completely and 100 congruent with what Evan's passionate view was, which is that people wanted to share in a way where they felt safer, right? Um, and, and it, you know, I, I think it's interesting. I think a lot of—everyone's, whether it's people or companies, your greatest strength is your greatest weakness. And one of Facebook's greatest strength was this growth hacking concept. And what growth hacking did was cause them to push the boundary of sharing, right? And I bet most people in this room have no idea where the actual boundary of who sees your Facebook post is or not.

Well, they changed the rules three or four times and they didn't inform people, and received a 20-year audit, $20 million fine from the government.

But people don't know. People still don't know. They just don't know. I mean, there's a place you can go and set it and whatnot.

Have you seen that page?

I have.

It literally looks like mission control for the Mars mission.

But look, when you push the edge of viral loops, you're going to create that situation. And like I said, strengths are weaknesses. And so the opportunity came up. Evan also, you know, as we've watched him evolve, you know, really was the first one to exploit AR, augmented reality, with the geofilters and whatnot. And those features were in the phone for like two or three years. And all of the king's horses and all the king's men, and all the greatest companies, and in all the startups, no one did it like Evan did it first, which is pretty genius. And so now we're in a situation you've talked about a lot where, where he's so innovative that his competitors have started just copying his work.

Right, it's almost like he's Bob Dylan and Zuckerberg is... Who was the act? Donovan?

Or somebody came after Dylan and was just like a complete... The Byrds covered a lot of Dylan's work.

Well, The Byrds did an homage, but Zuckerberg's just stealing at this point. I mean, if you look at... I'm just going to chronicle it briefly. He created ephemeral messaging, which is now in, I think, two out of three of the Facebook cluster of products. He created Stories, which is probably the biggest innovation of all. That's now been wholesale copied on a pixel-by-pixel level. I mean, a photocopy in Instagram, Facebook, and I don't know if it's in WhatsApp, but I think it's in Messenger. It might be WhatsApp. The only thing that Facebook, and they stole the filters, obviously, and they did all that in a very pixel-by-pixel way, not in one product, but in three or four products. What happens to a startup that is under assault with every feature being copied?

And even Zuckerberg wrote his own Poke to try to... People forget that's failure.

But now he's being successful with it. This isn't the first time it's been done. I mean, Microsoft, I think, was famous. And if you lived through the browser wars, you know, IE versus Netscape, it was a very similar situation.

How does this end? Is it an Apple ending where Evan can fight off... you know, Bill Gates? I don't know. And this is TBD, TBD. He's going to have to keep innovating.

Yeah, absolutely.

Do you think that that stuff is actionable when people steal that level?

I don't know. I don't know. I don't—I don't know enough about copyright. Yeah.

It just felt to me like the lawsuit was going to come at some point.

I haven't been privy to any conversation like that.

How did you get your first job in venture capital? We've known each other for a long time now. I don't actually know.

Yeah, it's a long story. I was an engineer, comp sci undergrad. Where? University of Florida. And then I went to Compaq, which was this famous PC company that no one knows the name of anymore, in Houston, and after about three years I got kind of bored and I went to business school. And part of it was also because I learned that the managers had options and the engineers didn't back then. Right.

Yeah, exactly. So I went to business school, thought about getting into venture, then was shut down. I made some calls and whatnot and became fascinated... Who shut you down? Why would anyone take my call? I was just a business school kid that had done engineering for two and a half years. Who did you apply to? I went and talked to Austin Ventures and whatnot, because I was in Austin. Got it. And they just said, go get a lot of work experience. They said 20 years, actually, which I thought was ironic. Or I think it's ironic today. But anyway, I fell in love, I started trading stocks and I started reading a lot of financial press and there was this amazing team at Goldman Sachs that was covering the tech industry and so I knocked on doors and got meetings with them and I knocked on some other doors.

As a day trader?

No, this was—I was trading, but I wasn't a day trader. I had read Peter Lynch, so I was in that mindset. Gotcha. But I knocked on doors until I got a job as an equity research analyst and had amazing luck, really, in that world and was successful quite quickly. And one day got a call from Frank Quattrone who said, 'You know, I'm leaving Morgan Stanley, we're building a new team.' And I said, 'I don't really want to be a sell-side analyst forever.' And he said, 'What do you want to be?' I said, 'I want to be a venture capitalist.' He said, 'I'll move you out here. You work for me for a couple of years and I'll introduce you to every VC that I know.' Really? True story.

True story.

Wow. So you worked for Frank Quattrone. For 13 months. For 13? So a couple of years turned into a year.

One of the amazing things of that moment in time was we did lead the Amazon IPO. Wow. Yeah. In that 13 months.

What was the footprint of Amazon when you guys led the IPO? How many employees, revenue, just ballpark stuff?

That's in the S-1, so you'd have to go back.

Just tell me, give me a little color on Bezos at that time.

It was fairly early because I think it was a single warehouse because Scott Cook and I did a presentation about why the employees should not watch the stock price every day at Jeff's request. And so, I don't know, several hundred. I mean, it wasn't that big.

It was still considered a bookstore, in fact.

Yes, yeah. We talked about in my first initiation report, we talked about other categories, but most of the TAM calculus was done around media, not around what they're doing today.

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Seems like it. I mean, I think post-Jobs, most people I know would say that. And if you look at, I mean, you have to look at not only the combination of the execution of core Amazon, but then the launch of AWS, which is pure genius and should have been launched by 40 other companies, IBM, whoever, the world should have thought of that. It's remarkable.

The e-commerce bookstore created the technology platform of the entire internet.

I would say, of all the people I know, he's certainly the most strategic thinker I've ever met. And yeah, if you have a chance and you haven't seen it, the interview he did at Code a year and a half ago or something that's on the web, it's an hour and 20 minutes, like spectacular. Like you have to watch every minute.

And tell me about your first couple of investments as a venture capitalist. Do you remember the first one? I remember the first one. You always remember your first one.

It's ironic because it was '99 or so, and I was literally thinking about SaaS really early. And I wrote a blog post about why I thought all software would move to the cloud. And these two entrepreneurs that were at Williams College reached out to me, and they were building an HR platform. And this company was called Employease. And it was, you know, 15 years before Workday and seven years before Salesforce. And we ended up selling it to ADP for like 150 million or so. So it was a success. But when you look at those two outcomes, clearly we got something wrong on a relative basis. And I think the takeaway for a group like this is, you know, had we targeted sales instead of HR, it would have been a wildly different outcome as Marc did.

And, you know, the sales executive has a green light on any purchase in a company. The HR executive does not. They had a product where you could put it on a credit card. Our product required—

Yeah, PO and approval of the CEO for a less strategic function in this company, right? And so, you know, learning, learning moment. One of the things we both—we share a couple of passions: poker, NBA, books, and startups. I was just thinking on my way over here, probably why we get along. I think we get along. And tell me about the books that have had the most impact on you. You read probably two books a month, something in that range?

I try to, yeah.

And you're nonfiction, like me. You read any fiction? Mostly. Mostly nonfiction.

A little bit, but mostly nonfiction, yeah. Right. I think any successful person you meet, you'll hear does a lot of information gathering and just stays curious, and books are a great way. Today we have podcasts that, you know, I use video a lot more than I used to because that's accessible too, and you can be on a bike or whatever. For entrepreneurs, I actually have a set of books I always recommend. All right, here we go. So the first one, which will sound boring, is Competitive Strategy by Michael Porter. All entrepreneurs have been taught to vilify the MBA. This is a strategic error to think that understanding business is a bad idea. And so Competitive Strategy is the most efficient short-form MBA that you can get.

It was written 30, 40 years ago, but it's very good. Crossing the Chasm, especially if you're doing any enterprise work. Innovator's Dilemma is fantastic and is really the core essence of why startups have an advantage.

Unpack that one for a second on the Innovator's Dilemma. Where do you see that in practice?

Products that are able to be disruptive get over-designed, they get over-feature-rich, they get complex, they get heavy. And if you can design a product that exploits a desire of a subset of the customer base that doesn't want that complexity but wants this element, this feature, you can, you can bust in. And I've seen that over and over and over and over.

What's your favorite example of that? You have a couple? There are tons. Yeah, okay.

Let me keep moving. There's a book by Jerry Kaplan called Startup, which is about a massive failure in the Silicon Valley that had all the best investors, all the best executives. Which startup? It was Go Corp. It was the first pad before its time. And it's just spectacular because on the way home from work every day, he had a tape recorder and he'd left himself notes. So it's remarkably detailed. But we spend so much time analyzing success and sometimes it's just good to read how hard it can be and why it can be so hard. And so that one's a real-world account that I love. And then more recently, you and I have talked about this. Phil Knight's new book, Shoe Dog, is just fantastic.

From the '60s to the '70s to the '80s. It's unbelievable. Flights to Japan, double-crossing, sales, everything.

It just shows how much grit matters, how much you gotta just leave it out there on the field, how tough it is even for the successful companies. And it's, you know, you shouldn't head into entrepreneurism thinking it's a hayride. Like, it's hard.

It's very hard. You and I are co-investors in Uber. We can't get into all the details that they're working through right now, but I know behind the scenes you've been working hard. You're a board member there, an angel, and we think that there's gonna be, I think, some good resolution there. But I wanna talk to you about disruption in general and founders in general. We've seen the aggressive founder and the people who are willing to maybe reinterpret some regulations and maybe fight for change. Disruption is kind of an overused word, but really be hard-driving. When does too much grit cause a problem, and what's your advice for young founders as to figuring out when they're in the Theranos,

sort of disaster, which kind of feels like a fraud at this point with multiple shareholder lawsuits and everything. And then you have the sort of peeling back a little bit, Zenefits, maybe bad behavior, or Airbnb and Uber reinterpreting local laws that are 100 years old. And then people who maybe just fail because they never take any bold steps. I'm sure you've given this a lot of thought.

Yeah, it's hard. One of the traits that you will see in successful entrepreneurs is an incredible storyteller. And I've even written a blog post on this notion, like storytelling—if you want to recruit, if you want to close partnerships, if you want to raise money, like all these things require the ability to sell people on your idea, your vision—that same type of salesmanship gone too far can get you into trouble. Right. So if you, you know, start fooling yourself,

Well, in the Theranos case, that seems the case.

Some people are capable of self-delusion. Right. And it's a powerful tool, but it can go awry. And I think at the end of the day, you have to hold yourself accountable for knowing what's real, what's true, and not crossing that line.

Let's talk about...

And the way it's starting, by the way, on the regulatory side, sure, one thing that's important to think about is, um, I, I have a very strong belief that democracy and capitalism will kill each other if you give them enough time. And they're separate things. They're separate things. People confuse America with being like, they think capitalism and democracy are the same thing. But China's capitalism without democracy, like, they're two separate things. Right. And what happens is capitalism and democracy evolve over time, especially in the US federal system. The most regulated industries become the ones that are least capitalistic. And so finance, telecom, healthcare are completely—there's this notion of regulatory capture.

If you understood how the healthcare system works, it's not a capitalist thing at all.

No, it's the opposite because you have no—you've talked about this and you've written about it many times—you have no buyers.

There's no buyers.

There's no buyers. So the buyers cannot distinguish. In fact, the costs—the buyers and the consumers don't actually know the cost.

That's right. They don't. And so anyway, it's so messed up. But anyway, so incumbents write the regulation. I don't think people realize this. If they're drafting a new federal law, like, the lobbyists from the companies being regulated are on M Street talking to the congressmen about what to put into the bill. In some cases, writing it. Yeah, in some cases, writing it. So regulation protects the incumbent. It makes it very hard for an entrepreneur to break in. And some of the stuff, like, Uber saw in Miami, there was a rule that... In several governments, they had written rules that you couldn't have a car show up within a two-hour window of when it was ordered. Right. By law. By law. And then there was this notion of return to garage, where after you dropped someone off, you couldn't pick up another passenger unless you drove back home to your garage.

Sounds good for traffic and the environment. That's a law. Those were laws. Who do you think wrote those laws? Exactly.

And also Tesla couldn't have, in certain places... Oh, the dealership thing. A dealership.

It's nuts. It's nuts. It's absolute nuts. And yeah, some of that needs to change. So you have to fight that fight. I think so, if you want to disrupt in those worlds. Yeah.

The most disruptive?

I would love to see—everybody keeps talking about other uses of blockchain. I would love to see someone create—we have notions like Glassdoor that create more transparency on culture. Are you an investor in that one? We are. I would love to see someone—

I would love to see someone put more of a flashlight on the lobbying efforts, the government. A Glassdoor of lobbying. Yeah, I mean, Citizens United makes it difficult because you don't know who funded the entity that funded the entity. But the minute a check goes, it should just blow up on a website somewhere.

The minute.

Yeah, hey, let's talk about autonomous cars for a second, or autonomy. And I'm respectful of your time, I'm keeping an eye on it. We've got maybe 10 minutes and I'll let you go. In what year do you think the majority of rides in a city will be completely level four or five autonomous, no steering wheel in the car. So in what year? What country? In a major American city, will the majority of rides.

25-plus years.

25-plus years.

Especially in America, because of the litigious thing that I brought up. I got it. I mean, look what happened with the one Tesla driver already. We have created a society where you can sue anybody for anything, and these contingency lawyers that are out there can take 30, 40, 50% of the recovery. That's going to happen first in Singapore or China, where you have—and most likely China, I would say, for a couple reasons. One, you have a single-minded government that can make decisions. Implicitly, you have a much higher death rate per mile driven. So, of the million or so deaths per year in automobiles, India and China have way more than their per mile, like by 10x. And so, you have more of an incentive. You have less ability—there's zero chance China can evolve the way America did in terms of cars per household. Zero chance. It's impossible. It's impossible.

But for a billion people, yeah. There's no roads; it won't happen. And you don't have the litigious issue. So, it's just much more likely to happen there, much more likely. And by the way, the other reason I think it's so far off—a couple things. First, for the next five years, you're going to see singular, homogeneous vehicles in a ring-fenced area, because that reduces the complexity by 100x. All the cars are the same, and the grid's known, and there's no outside influence. So, this Disneyland-like thing, you're going to see 100 press releases about some company having a successful win in that kind of limited window before you start seeing things that are broader. It could be an island somewhere.

And then the other thing is, the part that we haven't figured out yet, the last 3%, which is snow, rain, all the really, really hard stuff—it's really, really hard. It's like this in hardness.

Yeah, you understand. Like, they did all their easy stuff: staying in the lane, adaptive cruise control, changing lanes on a highway. I have you—do you have the night, by the way? Night's another thing, you know, nighttime. Yeah, yeah, slightly more complex. Deer. Well, with the Tesla now, if it snows and it can't see the lanes, there's no self-driving.

Right, it turns off. So the idea would be get to work. But then how do you—you asked the question as, right, you asked the question as there's no steering wheel in the car. So that level's not there to that point.

Yeah, so in inclement weather, we would just have all the cars pull over and you wouldn't be able to travel.

Sounds feasible. Hey, you write an awful lot. I'm sorry, when you write, you write a lot of words, and they're brilliant, and it really seems to me that your natural position might not be center or venture capitalist, but I think your natural position might be author.

You think so?

Do you ever consider what jobs, if you had to rank your jobs—author, GM of a basketball team, owner of a basketball team, something like that, coach, whatever—if you weren't a venture capitalist, where would you find the most joy and pleasure?

I don't know. I do really enjoy writing. You can tell. I don't think it has the financial returns.

You might be post-financial return at this point. So I'm sort of curious if you think about it for a second.

I could see much later in life doing more writing. I see that as a possibility.

Write a book, maybe?

Maybe.

Be an author?

Maybe.

All right, before I let you go, we're going to talk about the NBA briefly. Okay. You, based on your Twitter feed, are a big fan, big student of the game.

Yeah.

What do you think about how the game progressed in this sort of Rockets, Moneyball of basketball in the last five years?

Are you a fan of it? I have a strong view on this. I'm not sure why I'm allowed to talk about it, but... I actually think the sabermetrics have improved the game of professional basketball. Sabermetrics. Yeah, the analytical approach that Daryl Morey's doing in Houston, but others are too. And you can read it, it's happening all over, but it caused... the game to spread out, it created way more teamwork. Yes. And passing, ball movement, and the elegance. I mean, we're so lucky here because the perfect, you know, display of it is the Golden State Warriors. But the elegance of the game, I think, has gone up 10x. I mean, I remember when I was young, people that wouldn't watch the NBA because they thought no one played defense and that, you know, and if you—and God forbid those days when Charles Barkley at Houston was just back

backing people down. I mean, what an ugly notion. Yeah, 10 seconds of backing people in, a foul, and a pipe. It's just, I think it's amazing. I just think it's amazing what's happened to the game in the past five years.

You're starting a team now. No, you can't pick Steph, and you can't pick LeBron. Who's your five?

Jeez, because you've got to go—that's not a thing. I'd just take like the next five in the All-Star Game. Then who's your favorite—who's your favorite player now to watch, then, after those two? Uh, Durant for sure. Durant, yeah. Just amazing, right? Yeah. All right, ladies and gentlemen, Bill Gurley.