Gurley Sees Cloud Investment Opportunity, Likes GrubHub

Our next guest has put money in the hottest areas of technology today: cloud, social media, the internet. His investments include Twitter, Quora, eBay, OpenTable, Yelp, to name a few. Bill Gurley, Benchmark. We've known you for a long time, and you're on the cutting edge still. But the technological environment is changing so much, day by day. We tell these stories here every day. So I want to just talk about some of the current topics out there right now. App stores. We're seeing a battle of app stores. We're seeing an Android app store at both Google, from Google and from Amazon now. When you're looking—and of course the Apple App Store, a huge success—when you're looking at funding companies and you look at the environment for apps, where is there an opportunity to make money?

Well, so a couple of things. One, the more closed the system is, the tougher it is for a startup to be successful. And so if you look solely at the iPhone as a platform, there have been, you know, the largest successes are companies like Angry Birds where, you know, they've got one hit product.

Yeah, they don't have recurring revenue. I mean, it's a difficult thing to build a company upon. So I think certainly the Android platform looks more open. But I would say in general, these are better tactical tools for someone with a broader strategy. Our company, Zillow, has a website. They have mobile apps. Those things all interact together. OpenTable, Yelp, both the same thing. So I don't know that you can target that platform solely as your only way of doing things. So you look at your companies and say, 'Get out there on the Android, get out there on the iPhone, get everywhere you can,' as opposed to find a company that's good on the iPhone. And look, it's the bright white space, right? It's the blank canvas right now.

If you can get an app out there, a lot of us believe that it's stickier than a website. It's harder to transition. If you get a user to download that app, you've probably got a more locked-in user. And so this is a great place for new companies. It's like the new frontier. So the OpenTable app makes OpenTable own the iPhone, for example? For that user, right? It's a lot tougher competitive dynamic for someone else to have to need to go download an app than maybe just to click on a new URL on a browser.

Bill, I want to ask you about the proposed AT&T T-Mobile merger. How do you think that will impact innovation, and does it help or hurt the wireless sector?

Well, from a venture capitalist standpoint—so this is purely looking at it from a venture point of view, startup point of view—having more oligopolistic behavior within that industry is going to, from my perspective, lead to less innovation, not more. It had already become very difficult for us to seed ventures where the primary customer was the carrier. And so now to have three instead of four, you just increase the market power of those players. And once again, it just becomes a more stodgy oligopoly. There was a very famous journalist this morning who tweeted that he was at some conference and he was surprised that the Verizon CEO seemed kind of indifferent to this merger. I guess the journalist wanted him to be more afraid.

My point of view is he's probably thrilled to death that this is happening because, you know, it's what you look for. There's less competition.

I believe the Verizon CEO said also that Verizon is not planning to buy Sprint, which was some of the speculation out there.

As I said before, it's already to the point where most venture capitalists won't touch a wireless equipment investment simply because there's too much market power from the providers that are out there. So it may marginally not be that big a deal. Who was the famous journalist, Ryan Seacrest?

It was Mossberg. Oh, Walt Mossberg, famous, beloved journalist here.

I wasn't going to mention the brand.

We love mobile. So let me take you further down to some other areas you're looking at investing. How do you look at the cloud? And what do you see the opportunities are in the cloud very specifically?

Right. So this is, to me, one of the most investable themes of our time, simply because we spent the last 30 to 40 years putting computing technology inside the enterprise. And we're going to spend the next 10 pulling it out. There's almost no reason whatsoever for a company, especially a small company, to have any compute infrastructure in the building other than laptops or cell phones.

I guess the iPad's kind of part of that, right? It seems like a front end of something.

No question. And in fact, I think you will see tablets, maybe more likely Android than iPad because they're going to get to cheaper price points, become part of the compute infrastructure for businesses. I think you're going to see them on host stands of small businesses. I think you're going to see them used in workflow applications. You're going to see them used out in the factories. I think you're going to see a ton of that.

You probably haven't heard of this company. It's one of our investments. I have not heard of Grubhub.

Grubhub. They're out of Chicago. It's like OpenTable, but it's for takeout and delivery. So there's 7,000 restaurants on this product. If you go on your iPhone, you go on your iPad, you pull up their application, you can choose from Chinese, pizza, you know, burrito.

And you see a pizza delivery app as a cloud company?

Well, I think once again, as the compute infrastructure moves into the cloud, there's no reason for these small businesses to own anything like a server. And so once it goes into the cloud, then all of a sudden everything gets connected. I'll give you a great example. There's a public company that went public this summer called RealPage out of Dallas. They provide software to the property management community. That used to be a business that was very fragmented where people would buy like an NT server and run a piece of enterprise software. Now it's all SaaS. It's all in the cloud. Software as a service, all in the cloud. Once it's in the cloud, they connect to Zillow. They connect to Rent.com. They push the listings out.

They communicate with the end user of the apartment. And so this workflow that starts to be connected from the cloud to the small business, to the consumer, to the smartphone app, that's all white space in a bunch of different verticals. And to me, that's a really exciting market right now.

So Benchmark is a big investor in the cloud, in social media, in the internet. What do you think is the most overlooked sector out there?

You know, for me, it might be local. So if you look back about three or four years, I think a lot of small businesses were very reluctant to come to the internet. And it may be Facebook, actually, that had this huge penetration of the internet into American homes. It may be Yelp, which forced small businesses to kind of reckon with their online profile. But we have a number of investments from Yelp to OpenTable to Zillow to Grubhub to UberCab where all these companies build this technology to connect these small businesses. And we're seeing unbelievable interest from these small businesses in being online and having an online presence. I think that day and age where they stop worrying about the Yellow Pages entirely and say, 'I've got to be online,' I think that's right now.

An early investor in Twitter, Quora, eBay, OpenTable, Yelp. Twitter, Yelp—both companies have some fantastic private market valuations. And I'm curious what you think. You wrote this great blog post last fall about the desire of entrepreneurs to have IPOs. What do these fantastic secondary market valuations do to that desire, that dream?

Well, certainly I think one of the reasons that these opportunities popped up was the lack of these companies pursuing an IPO earlier in their life, and therefore it created this. They had reached a level of maturity where certain new types of investors wanted in, and it wasn't quite public, and so there was this demand that was kind of unfulfilled. I think the buy-side has been longing for more IPOs for five years now. They haven't had much growth from the big companies, so they've been looking for a product. They want something with high growth. They want to invest in the new trend that's not there. So that created this opportunity. The other big thing that happened, a very smart Russian named Yuri Milner came in and bought Facebook at what now appears to be a very cheap valuation.

One-tenth the valuation a year later. You have one guy being very smart at what may have been a market bottom coming out of the 2008 financial crisis doing something smart. Now you fast-forward to today, there's new entrants coming into this late-stage private market from all directions. There's people we used to compete with in early-stage capital that are investing at this level. There's public funds coming downstream. There's new funds being created. There's the traditional late-stage. And so now instead of one person, Yuri, there's 20 all rushing to buy this stock with very limited information. I mean, you could have more financial information on a thinly traded pink-sheet Canadian public company than you have.

Yeah, that's not good. These might be the least informed investment actions in our history. And so I don't know that you can pay too much attention to the price because they're very uninformed. They're trade-by-appointment. I don't know that I would equate them to true public market valuations. And right now they're all being hyped and everything. So the opportunity for them to be above reality is certainly there.

So when you see some of these rising valuations, I believe Twitter was just valued at $7.7 billion and Facebook and Groupon really going higher and higher, does that concern you and does it make you more reluctant to do deals?

I think it's distracting to the management of the companies that are trying to run their business. In fact, some of these companies are intentionally trying to limit this activity and they're not able to. And so it can be very distracting. You have people calling, you know, one of the benefits of being a private company is you don't have to tell people exactly where your numbers are. You get to focus internally on what you're doing. Public, which is what many of these companies are, is the worst of both worlds. You don't have the legal protection of being a public company, you don't have the kind of rules about information dissemination, yet you still have the interest. So you have people calling you all the time trying to figure out stuff, you don't quite know what you should disclose because there's not, you know, precedent for this, and so I think the worst part is it's very distracting to the management teams.

So for a company like Twitter, which obviously has the users and the growth, we've seen it evolve very quickly from a social network to more of a news network. What is Twitter ultimately going to become and how is that going to make money?

Yeah, well, I think Twitter was misunderstood for many years by the popular press because it was compared to Facebook. Facebook's a one-to-one communication network and Twitter's a one-to-many network, you know, communication that are a lot more like a media company. It's really kind of the successor to RSS that leverages the social graph, that leverages humans to be out there and find what's interesting. So, you know, for me, when I wake up in the morning, instead of picking up a paper, I look at the Twitter feed.

All right. All right, Bill, very interesting. We can talk to you so much more, but we've got to go to break here. Bill Gurley of Benchmark Capital, thank you so much for joining us.