Bill Gurley, Benchmark Capital (full version)

Is it easier and cheaper to launch a startup or idea or at least get a product out there that people can test with? Unquestionably, that's definitely true. You know, do I think there's a place in the world for seed funds or angel funds? I think that's been proven, you know, and different people play the game different ways. Conway—Ron Conway plays it very differently than Josh and the guys at First Round, than Mike Maples. And I think they all are permanent, you know, fixtures in the industry. If you go back about five years, a whole bunch of people said, 'Well, venture's dead because there's infinite angel money and you can start a company for cheap and you won't need venture anymore.' And I think that hasn't played out as a reality.

In fact, starting about a year ago, I think there was probably what you might call an angel glut of companies who had maybe raised one, two. We've seen companies with $5 million of convertible seed money. That's a lot of seed money who can't raise Series A. And what I think has come out of it is that you may be able to start a company for nothing, but if you want to scale a company, you will need capital and you'll need expertise to scale it to the next level. Not every single player. Benioff, who got it up without... venture but most people it turns out have a need for that role if you're trying to scale something you know a long long way I'm the first to argue that if your idea is not something that can generate a hundred million dollars in revenue you may not want to take venture the number one type of acquisition that the big companies like to do is twenty to seventy million dollars and the minute you take venture

They help you raise the B, and all of a sudden everyone's expectation is it's got to be 150 or more. We're not saying yes. And that frustrates the buyers. And so if you have a killer product that might elicit a $30 million exit and you can bootstrap and hustle your way and own 80% of it, you know, 30—80% of 30 million is $24 million. That's a lot of money for an entrepreneur. And I think a lot of people get caught up in the, in the game of venture and trying to build these entities that maybe shouldn't be. I love this story of DPReview, which is a website for digital camera reviews. One guy, one founder, and Amazon bought it—no one knows the exact number, but I've heard anywhere from 40 to $70 million—

for a single guy. And it was a great idea. It was very focused. It wasn't a venture-backed deal. And it worked out very well for that entrepreneur. So I think it's really important for people to know what they're trying to do and to take the right funding for that approach. We have a phrase that not all the partners like to use. Like I say, we're long-term greedy. You know, we're luckily in a business where we're not judged on IRR per se. Like, if there's an opportunity where we can make a 20% IRR, someone might go, 'Oh, you should do every one of those.' But we're limited by the number of board seats we can take. And our LPs are investing in us to get alpha. And so they want the home runs. And so we have to look for opportunities where that can happen.

And we want to enter into every opportunity with that as the hopeful outcome. They don't always end up there, but you want that opportunity or optionality to be there when you start. And so it allows you to be very patient. I often find that over the years, we're way more patient than the people we co-invest with. And we've never once, never in the history of the firm, as I recall, a limited partner calling us and saying, why aren't you getting us liquidity faster? It's not how they think about what we do for them. Most of the return requirements that people have relate to the failure rate. And if you're going to shut down half of them, and it's going to take seven to 10 years, then it just turns out you need the others to do three to five for the math to work out.

It's an interesting time because there's a lot of experimentation going on. There's a lot of the firms that we compete with traditionally have become, quote, "stage-agnostic." So they've got seed divisions, they've got standard investment divisions, they've got growth funds, and they're playing all the way up and down the stack. We've chosen a very different approach, which is we're going to focus in on what we do, which is to invest a decent chunk of money, take a rather large ownership position, take a board seat, and help the entrepreneur build that company. But we're seeing all different kinds of approaches right now. In the long run, we like to believe that this is an artisan business that doesn't scale.

And that if you want someone to help you and trust you in taking this company to the next level, that you want what is an artisan. Like if you were going to have surgery, you'd want the best surgeon. And that the kind of Walmart Supercenter approach of providing every service under the sun isn't what you're really looking for in that advisor. I think eBay gave us an appreciation for network effects and marketplaces, and the fact that you could do that digitally. You know, I think it kind of back-ended into it a little bit. So there was a group of people, you know, my partners included, and it also involved Thomas Layton, who is a guy that's been at EIR at Benchmark around OpenTable, where we

surmised—and this was really early because this was like '98, '99—we surmised that there might be a way to get a network effect, that if you could build a system on one side and have a consumer on another, and if you get those things tipping into each other, that whatever the sales economics, the kind of—the how hard the business was early wouldn't be reflective of how hard the business is later because the system would reinforce itself. And that thesis was tested quite a bit when the—when the bubble burst because all these companies were spending way too much money, and capital all of a sudden became scarce instead of plentiful. But slowly, that started to prove out. Once that proved out, I think, was when the conviction really came that there might be an opportunity to do this in other fields, and so we started looking. I started developing a thesis as to what made for an interesting marketplace opportunity versus not

and, you know, it evolved over time as all these theories do. There is an enormous amount of money that has historically gone into the, quote, "Yellow Pages." And if you include Yellow Pages and like remnant local cable and local newspapers, it all adds up like its peak, which, you know, we're past now, but its peak was like 80 or 90 billion dollars, mostly advertising of some shape or form. And we all know that those vehicles are in rapid decline, the vehicles that were carrying this ad basis. And so it's easy to have conviction that if you can add value in there somewhere, that there's going to be compensation for it. And that's how it kind of all came together. Well, it started actually as a fax.

That's how old it is. So it was an idea stolen by a guy named David Coursey. So when I arrived on Wall Street, there was this guy that was ridiculously outspoken named David Coursey, who was belligerent almost. He would make up nicknames of famous executives in high tech, and the buy side loved him for his irreverence. And he had this thing that would go out once a week, and he retired about six months after I took over the same beat he had. And that was, I just copied him. So it started as a fax, and then it became an email, and then it became, you know, a blog, like over the years. It used to be when I was a sell-side analyst, it was very frequent. Later it slowed down. But as a sell-side analyst, it became very clear to me that having influence was as valuable as anything.

And whereas prior to me being on Wall Street, they actually restricted the research and how much you pushed it out. And it became very clear to me that having a broad distribution actually gave you more throw weight to do more things. Anytime you sit down and write something... There's an interesting Bezos interview on Charlie Rose where he talks about—he requires his executives to write six pages of prose to bring into each meeting, and then everyone reads it. And he argues that going through the thought process of organizing something into that long of a narrative actually requires you to sit down and think about it a lot more detailed than you would putting three bullet points on a PowerPoint slide.

And I think it serves that purpose for me when I'm thinking about where we're going to invest, how we're going to invest, how we're going to advise the companies I work with. If I can get some time away where I can sit down and really think about it and put some stuff down, then it helps my thinking internally. Now, there's an obvious other benefit, which is entrepreneurs read what I write, and if it's helpful to them, then that makes it easier for me to network with them. Sometimes we get inbound opportunities that come as a result of something that we've written, and so it serves multiple purposes. I think almost everything that I write about is at least six months in the making. So it's kind of at the end of me maybe having used it for my own personal uses, and I've thought through something in a very detailed way and come to some kind of conclusion that I feel will offer something to the community that will be perceived as valuable.

Pointed out that my blog posts are somewhat analytical, and I think, having come from Wall Street and someone who understands finance and understands investing and has kind of a—I have a knowledge of the history of investing, I've read a lot of Buffett and Graham and Dodd and those kind of things, and I do feel like there is a need for me to provide analytical clarity. And I also think there's a certain amount of credibility that comes from that. There are a number of venture capitalists who make a living by offering what some people might define as glorified cheerleading. They go, 'Hooray, hoorah!' which is something that's often labeled as the bankers doing. And I think for certain entrepreneurs, that's what they want, you know, just someone to pat them on the back.

But there's another type of entrepreneur who wants to be pushed, who wants someone to think about things differently than they have, who wants to have someone who's going to help them maybe implement something they didn't before. And I think those are the types of entrepreneurs that I gel best with. Seven's the years that I've heard it takes to train a venture capitalist. But look, we certainly believe that venture is a young person's game. Kevin Harvey joined the venture business about that time. Peter Fenton also joined at about that age. And so across our partnership, the majority of the partners joined at about 30 years old. And there's a number of reasons why I think youth plays to an advantage.

One, it's a hustle game. You're never finished. There's always some other piece of rock you could turn over, executive you could try and recruit. And so you're never done. And so being able to hustle is a young person's business. There's also this generational thing, right? The majority of the great companies in our world were started by someone very, very young. And certainly, not in all cases, but in a lot of cases, being somewhat close to that generation, sharing similar likes, and being empathetic and understanding of the product offering—which may have a generational component as well—it's important. It's important to the game. And so I tie that in with what you said, where it takes seven years to train somebody.

You wouldn't want to start at 55 training someone for a new career. And as they say, you want to bias young. Ironically, when I got out of business school, I was at the University of Texas in Austin. And while I was there, I went and talked to some of the Austin Ventures partners. And I said, 'I want to get into venture. What should I do?' And they said, 'Go work for 20 years and then get in.' And it's ironic when I think back to that moment in time because we have kind of the exact opposite process. The biggest takeaway after 13 years? You know, there's a lot of luck involved. I think you'll hear other venture capitalists say that. There's a lot of near misses, and it can be humbling. I'd say it's probably the most humbling job anyone could have because failure is built into the system.

You have to really be passionate about working with startups. You have to show a ton of enthusiasm. You have to be an optimist. Pessimist is no place for venture because so many of these things will sail close to death and then rise up again. and you won't be there for those opportunities you got to be very comfortable in sales i think that's the one thing that's probably not talked about much i often hear people describe venture and they think about sitting around in boardrooms thinking up cool strategies that's probably five percent of the business at best Most of the time you're on the phone trying to sell something. You're trying to convince, you know, to close an investment opportunity.

You're trying to close an executive. You're trying to close a biz dev deal. You're trying to close a follow-on financing. And you're selling. And so if you can't sell, it's probably not a good industry to be in. I think our view fundamentally is that... It's a services business. Venture capital is a services business, right? We're not the one in the cockpit. We're not the one driving the car. We're there as an advisor. And if you're in a services business, your reputation is everything. And so we like to talk internally that we need to be the most impactful, most helpful person on every company that we work with. And the test for that is, if you go talk to the entrepreneurs, what are they saying?

And so my advice to any entrepreneur would be to cold call, you know, the people that that venture person's working with. You know, not even ask for an introduction. I would cold call them because the lists are everywhere, right? You know what boards people are on. You know what boards they've been on in the past. And I would just start making phone calls. Because, you know, one of my partners said people call it like a marriage. And the problem is you can get a divorce in a marriage. He says it's more like having a child with someone because, you know, once you're together, you're together for a very, very long time.

And it's a critically important decision that you're making.

I mean, I certainly think that the thing that people judge venture firms most by are the ones that, you know, the home runs that go out of the park and roll down the street. It's how the business works. And there's one of the LPs who used to give a presentation where they showed the top 10 funds of all time. Not the venture firms, but the specific funds. And then they took the top performer out of those funds, and they all fell out of the top 10, or maybe one of them stayed. So it's not even a home run business, it's a grand slam business. And I think we're always looking for those kind of things. And it does carry a lot of weight. It does take you a long way. And you obsess about it. And that's when I said earlier, you asked me about venture, and I said luck plays a role.

Like, you know, waiting around to hit the one out of, you know, 10,000th pitch and getting it right, that's a tough game to play. And it's really easy to miss. And a lot of the ones that become those breakout players break any rule set you may have created. And so there's this, you know, you asked about me being analytical and writing things down, but ironically, you've got to constantly challenge yourself as to which of these rules am I going to break so that I won't miss the next one? Like, which of these rules we've held as truths are going to fall away and where are the new truths going to be? And it's an odd game. It's why having a... a strong, broad partnership—and we like to think, with our model and equal partnership, it's the best fit to get that much.

You get enough diversity of thought that you can start to see what's coming next. And another reason to bring in young people, by the way, because you need to figure out the rules down the way. I tweeted today, you know, you should never do a 10% layoff. I read about someone doing a 10% layoff, and you should never do 10 because it's not consequential enough to really affect your burn rate. And yet you go through all the pain as if you had done 30 or 40. So you accomplish nothing, and you'll end up having two or three more. We like to say that good judgment comes from experience. It comes from bad judgment. And I've seen it. The wave that crashed in 2000, I don't know if we'll ever see again because I don't know that we'll ever be that high so that you have that big of a fall.

You brought up OpenTable. When the wave crashed, we were doing $100K a month in revenue and burning $1.1 million a month. And all of a sudden capital availability looks like non-existent. That's a tough spot to be in. We had sales teams in 20 cities. Prior to that, the companies with that would reach a million a quarter were going public and the burn rate didn't matter. So the whole world had come to accept that as a reality. And you have to make very tough decisions. And we were lucky enough that a guy on the board, Thomas Layton, agreed to come in and be interim CEO, which he held for six and a half years. And he took it from 100K a month and burning 1.1 to 20 million run rate and cash flow positive at the time that we recruited Jeff Jordan in to take over for him.

He was transformational, but it was by making a ton of hard decisions and focusing. And it was very hard on the team. There were multiple layoffs. We didn't do it all at once. We had to take it down. And those lessons you learn through those things, I think, sit in your brain way more than anything else could. We're in an interesting time today where a lot of the entrepreneurs weren't around for '99 or 2001, and so they don't have any muscle memory as a result of it. Well, it was interesting because I think, you know, I had, I worked on four IPOs in, like, from 2005 to 2009, and I think those were really enjoyable times working with those entrepreneurs because they had that muscle memory. And so there wasn't a tough education process.

I even remember when the Sequoia deck came out in '08 around the financial crisis, most of our companies self-adjusted. I had CEOs calling me up saying, "We're going to lay off 30%. Are you okay with that?" I'd say, "Okay." Like, because there was so much muscle memory from that moment in time. So I'm sure as we move outside of that, you know, sure, there's going to be danger. I mean, I think you look at Groupon, right? I mean, you... It had to take a 12-year gap before someone would say it's okay for a startup to burn $150 million, $200 million in a year. No one would have tried that in '01 or '02. So yeah, we're going to learn lessons over again. History, it happens all the time.

History repeats itself.

I have a theory on how this all played out. And it starts in late 2008, early 2009. So we're coming out of a financial crisis, the global financial crisis. And a very, very smart man, Yuri Milner, makes a bet on Facebook at a price that seems fairly high. Now, he's paying a discount, actually, from where Microsoft, because he came in after Microsoft, but he started acquiring the stock below $10 billion, and he acquired 10% of it. Um, that turned out to be ridiculously prescient, and as the years went on and we moved past the financial crisis, I think everyone saw what he did. They tied it in with this theory that companies are going public later, and it became—everyone became convinced that there was this arbitrage where you could buy late-stage private

and make the returns that other people had made in the public market after companies had gone public, like Amazon or Microsoft or those kind of things. And it turned out that that theory—and I think partially this was enabled by SecondMarket and SharesPost, who were also promoting that as a reality. So all of a sudden, there were a number of funds being raised where people were telling people they had proprietary access to deal flow. There were growth funds being raised. This was also simultaneous with a move by the LPs coming out of the financial crisis where they said, 'We're going to cut back our commitment to venture, and we're only going to give it to the top quartile.' They cut back the units, but they didn't cut back the money, so they gave more money to the quartile. Then the top quartile decided they were going to raise growth funds and industry funds and sector funds and mobile funds and green tech funds, and all of a sudden there was a ton of money, so

What Yuri did was very contrarian. For me, the opposite end of that was the Groupon Series G, and I always go back and I look at that S-1 because it's an amazing list. It is the very top list: public funds, late-stage funds, and Sand Hill Road funds. It's not like it's the lower tier; it's the top. And they're all doing it simultaneously. There's a great, great article that shaped a lot of my investment thinking by a guy named Howard Marks, where he highlights this from like 20 years ago, and he highlights that, you know, of course you don't make money if you make an inaccurate prediction, but the only way you really make money is to make a, a non-consensus accurate prediction. Like, you can't make money with a consensus accurate prediction. And so you see that amount of groupthink, and it didn't end well, and I'm not surprised now.

I think if you look back, you could say over the past two years, the most reckless investment behavior we've seen since the bubble was the late-stage private market of the past two years. And you look at what happened this summer with Groupon, Facebook, Zynga, and you've got public stocks trading below where private trades went down. And you say, 'Hmm, maybe it's corrected itself.' Now, the problem with that is that one of the reasons why Benchmark's not convinced you can scale the venture business, it's got really low barriers to entry and high barriers to exit. So these funds have been raised, they don't go away. And so there's still a lot of money out there. Now, hopefully, some of this money's acting in a more sane or

Kind of structured and organized thinking as opposed to what has been in the past. But I don't know. I agree with your comments about Groupon and whether it's a tech company or a marketing company. I think I bring a different perspective to the venture industry, having been on Wall Street, and just that I've studied public companies and I've spent a ton of time with the buy-side, and I think I know what they're looking for. And one of the things they care a ton about is that a company has differentiation, sustainable competitive advantage, and that they're doing something that can't be copied. And so I remember when Groupon was getting all these raves, there were a few people that were speaking out saying, "I don't, kind of, get it."

What are the barriers to entry? And some of the press, especially the Valley press, would say, "Oh, you guys don't get it. You keep talking about barriers to entry." Everyone would just pooh-pooh the notion that that mattered. And I've watched, you know, prior to any of the daily deal sites, there was this book, the blue book called Entertainment Publications, that had coupons in it. It was a crappy business. I think IAC paid like $150 million for it and bought it. It's just asking any retailer to not only give you a discount but also to pay you—that's egregious. Like, how could that be sustainable? So I'm surprised. I'm surprised by some of these things. And had they not had access to so much venture capital, they would have never got to the size they got to.

So people say, "Well, but look at their $2 billion run rate." Yeah, but they spent a billion and a half to get there. And there's this thing on the... on the balance sheet that's called retained earnings, except on their side, it says "accumulated deficit," and they're negative $900 million, right? And so, you know, until you've earned back the cash that it took to create the business, you haven't really created any cash flow at all. And so, anyway, it's—it's been a very interesting time, you know, and I think—I think that's always going to happen. We're going to have things pop up that get mimicked and that have waves where people aren't thinking fundamentally. And if you trade them quickly, you could make a lot of money.

They're not buy-and-hold situations. There are two major trends right now which are great for venture capital. I'll offer a third one that I also think contributes. But the two really big ones are the smartphone transition, including the tablets and everything. It's just massive. Like, you have... you're pushing computing so far out into the field, and you've standardized, even with two operating systems, it kind of doesn't matter, you've standardized what's possible. I mean, we were talking earlier about local. The things you can do now that I can write an app instead of building a dedicated embedded device that would have cost two grand, it's night and day. And I got all kinds of examples where our startups are using smartphones to extend a marketplace deeper into the workflow of the people that use it, all because of smartphones and smartphone applications.

And one of the reasons that trend is so important is incumbents have a hard time flipping to the new model. They just don't know how to do it. And history's shown that over and over again. I mean, it was true back in the days when we went from DOS to Windows. There were certain app vendors who just couldn't. And anytime a new thing like that happens, there's an opportunity for a startup to jump ahead of the incumbent. And so that's such a big shift. The number of units, the programmability, I think it's going to impact embedded systems and enterprise systems just as much as it has on the consumer side, and that's just starting to play out. So that's huge. The second thing is SaaS. So like I said, we spent 40 years cramming technology into the enterprise.

We're going to spend the next 10 yanking it out. It's just so wholesale that you're moving systems outside. We have a company that I think you're familiar with called New Relic that started in our office. You know, it's the leading system management play from a SaaS perspective, and none of the legacy guys have one built ground up that way. And the number of interesting things you can do once you start with that, and if the platform's transitional and different enough, it's just fantastic. And so those two themes are really deep and long for the venture industry as a whole, not just for Benchmark. And then there's a third thing, which is for the first time in my recollection of the high-tech business, we have multiple Goliaths.

There's usually been one, maybe two, that demand the most attention. When I got into venture, every startup presentation ended with, 'What are you going to do when Microsoft does this?' right? And that was, you know, it was just this weight that hung over every startup. Today, you know, you could argue there's between five and seven monoliths that matter. And interestingly, they're not... At least with Wintel, you had Microsoft, Intel, and Dell, and Compaq all fairly aligned to the same initiative. Here, they're all like butting heads. They're all knocking heads. And I think that creates... I think it should create a rather healthy M&A market, but I also think it helps create opportunities because you look at...

The Yelp and OpenTable integration with Apple, if there were only one monolith and there weren't five, that probably doesn't happen. You know what I'm saying? So those opportunities are enabled by the fact that there's multiple Goliaths out there. I'm really enamored with what I might call marketplaces or local marketplaces. I think that there's just some super interesting things that the smartphone and tablet... I'll give you an example. So we're an investor in a company called Grubhub that is automating takeout and delivery at local restaurants. And the company's a pretty significant scale, although people may not know that. And this summer they released a product called OrderHub, which is just an Android tablet that sits in the restaurant so that the orders happen wirelessly and show up there as opposed to being printed out or on a fax.

And that was pretty interesting, and we took that to our top restaurants and they were enamored with it. Now the price point of delivering that local embedded system, both the installation and the app and all that, is so low compared to what it was before. You'd never done it before. And then a few weeks ago, we released a product called Track Your Grub. Now, this is an app for the drivers that work for the restaurants, and it allows the consumer to see their food coming to them on the way. Now, we also offer a God View on that tablet that I talked about where the restaurant can see their drivers in the field. Now, none of this would have been possible if it weren't for first the iPhone and then the Android.

You wouldn't attempt that. It would be way too cost-prohibitive. And now, all of a sudden, it's possible. And you can wow the consumer, and you can help the restaurant operate more efficiently. And it all kind of comes together. A lot of my marketplace companies that I'm working with are spending as much R&D money on workflow systems for the supplier side as they are on the consumer side. So, and I put all this in a big bucket I call 'painting the white space,' and it's just imagining a metaphor of a canvas and you're putting technology where it wasn't before, because that's really what venture is all about, like applying it to the next edge of where you could go. And it's exciting. I mean, we're seeing—I mean, Uber is just an amazing example of that where...

Prior to the smartphone, there's nothing to do. You're just not going to do it. You're not going to go install $700 embedded systems designs in every car and the wireless and build the contracts. You're not going to do all that. And then overnight, you can do something where you take an industry that had zero visibility, tons of waste, and you have perfect information, and you can start automating and optimizing what they do. And it's amazing because the consumers love it. And guess what? The suppliers, it's like win-win. You created something out of thin air. And it's just magic to watch that stuff happen. And it's fun. I like to say if I lived in a communist world where all the salaries are the same, I'd still try and be a venture capitalist.

Because I love being there in the... We're not driving, obviously. Entrepreneurs are. But just being a part of betting on something early. And, you know, OpenTable when it was in 10 restaurants and seeing it now in 20,000 and seating 10 million diners a month, that's very rewarding to me to be a part of.