Executive Interview: Benchmark Capital (with Brad Gerstner)

I think there's something I'm supposed to read here. Read the introduction? Okay. Hi, y'all. Good morning. Well, I'm psyched to, this is my 19th Phocuswright. I think this is the 24th year of Phocuswright. And I'm psyched to have one of my very good friends, one of the world's best venture investors, and somebody who's never been to Phocuswright, join me on stage for a fireside chat about all things internet, venture, and travel. He's the author of the aptly named blog, Above the Crowd. He is big, but certainly no dinosaur. He is a proud Florida Gator. Welcome Benchmark Capital's Bill Gurley. Bill, we're the first ones. It looks like people are still rolling in from last night. Welcome. Thanks. I'm psyched you're here.

Bill's heard Rich Barton and I talk about Phocuswright for probably 15 years, but never been here. But it's not because he hasn't been investing in travel. Bill has led the Series B in Uber, has been very active in Uber, OpenTable, Grubhub. So he has a lot to do with online travel, even though most of it hasn't run through Phocuswright. So today, the format is a fireside chat. We want to cover some things related to travel, but we want to broaden the conversation to the big trends we see shaping internet marketplaces from AI to virtual reality. So let's start with Uber. Travel is inherently about managing how people get from one place to another. Arguably, Uber is the largest travel startup since Booking.com, which I know you're quite familiar with.

Talk to us just for a second about why Uber is three times as large as United Airlines today from an enterprise value perspective, and why you're bullish about the future of Uber.

Yeah, so, I mean, I think the thing that's most powerful is simply how fast the whole category has grown. And I think any time investors see something with that kind of remarkable breakout growth, they assume that broader things are happening. And just to put it in perspective, this is an unofficial tally, but I tried to add up all the ride-sharing companies globally, and I think it'll be close to $100 billion in 2018 for a category that didn't exist, you know, eight years ago, seven years ago. And so it was funny because when we first invested—we did the Series A, by the way, not to be—oh, there you go, better—you know, everyone simply thought it was a ride-sharing alternative. And then for a long time they thought it was a taxi alternative.

And now, you know, we're getting to the point where, you know, I meet people routinely who have given up car ownership, and that's something in, in America, I think that's really hard for people to get their head around. You know, we've been building and building and building the entire country around the notion of car ownership for like 100 years. Right. And cities like this one, L.A. and Houston, there are four or five parking spots for every car. And if you go on Google Earth and just look down upon it, it's remarkable how much space has been used for parking. And the irony is when you use lots of space for parking and most businesses are required to append parking to buildings when they build them, you spread the city out and you create sprawl.

You make it very inefficient. And then the jobs get further away. And then guess what? In order to have a job, you got to buy a car. Right. And so the whole thing, and, and, you know, you'd be surprised, there, there are condominium builders today that are lobbying with Uber, with city governments to remove these parking requirements. And so we may actually get to a place where there are denser cities and there's demographic shifts as well. If any of you have a young child that just recently turned 16, they don't run to the DMV anymore to get their driver's license. And driver's license at age 18 is dropping precipitously. And car ownership from 18 to 30 is dropping. And so, you know, when you have that type of substitution, you're not merely taking away the car or the price of the car.

It's the price of the gas, the price of the registration, the price of Jiffy Lube, the price of the maintenance. All those dollars that the consumer was spending get redirected in a different way, which is pretty powerful.

Along the lines of cities and mobility and the transformation going on, anybody who's been down in Santa Monica or Venice Beach the last couple of days has seen scooters everywhere. You haven't invested in the scooter companies—Lime, Bird, Spin, Jump, etc. Talk a little bit about why they're the same or different, how they play into this trend, maybe why you haven't invested, and how you see their role in a company like Uber.

There's a lot of excitement around the notion of scooters. There's some fundamental differences in how those businesses are being built. The first and primary one is that they're just leaving their shit all over the sidewalk. And that's... That is a transgression against the city that's gonna invite regulation 10 to 20 to 100 times more. There was a joke on Twitter about a guy starting a new e-commerce company where he just put all the merchandise on the sidewalk and you walk up and scan it. And I thought that was funny just because it highlighted, like, you're using other people's property. And I think that's a problem. I think it's also very nascent. We're learning a lot about injury, which is starting to show up.

We're learning a lot about durability, which is starting to show up, safety. And I also think people haven't thought through all the demographic stuff. You have to cut it by age, geography, like topology. Have you ridden a scooter up California Street in San Francisco? Yeah, big hills. Weather—I mean, Minnesota, what do the scooter companies do from November to March? And like, you know, there's a whole bunch of cuts like that. Houston, everything's 20 miles away.

I mean, I think you and I both agree that last-mile mobility will change. Scooters will likely have a role, bikes will have a role, other form factors will have a role. Ultimately, I guess my opinion is that the large marketplaces—like, the value is in the marketplace, and the large marketplaces, i.e., Uber, are likely to subsume whatever ultimately works there?

Potentially. Plus, I mean, at least right now, there's a remarkable amount of fragmentation because the licensing is being done on a city-by-city basis. But look, there's a reason scooters are in Santa Monica and Waymo's in Phoenix. Like, those are the easy—like, that's where it's going to work the best.

You know, we're investors in United Airlines. When I look at the scooter companies, they have CapEx as a percentage of revenue that looks a lot like an airline, as opposed to Uber that doesn't have tremendous overhead in CapEx. So I think that, again, to the startups in the crowd, one thing that I know you and I have discussed over the years—you've been pitched every "Uber of X" that there is to be pitched. You haven't invested in a lot of Ubers for other things, whether it's for boats or whether it's for scooters, et cetera. The one thing I point out with the scooter companies is although the business models look similar, from my perspective, they're incredibly dissimilar because of the capital intensity.

And once again, I think people are just starting to figure that out. There have been some recent articles that have popped up where you get—because you have to understand the durability, you have to understand the depreciation, you have to understand the loss, you have to understand the maintenance. All that stuff's very different, and elements that are persistent in that world.

Right. Going back to Uber, you know, so Uber by my accounting is larger than every other ride-sharing company in the world combined. It's from, you know, it's persistent from, you know, Delhi to Paris, Rio to San Francisco. Three years ago, two or three years ago it launched Uber Eats. Previously to Uber you had been involved in Grubhub. Uber Eats has very quickly become the largest food delivery business in the world. Talk to us a little bit about, you know, did you think Uber Eats would be as successful as it is? And what does that tell us about the power of Uber as a platform?

Well, yeah, so I think there's a couple of different elements there. I think there's one element of execution that they've done that I give all the credit to Jason Droege, who runs that group, which we can come back to. And then the second element is what you're talking about, which is like, is there like a wallet-like angle to what Uber's doing? So can they make it super easy to switch to them and you don't have to re-enter the credit card and re-sign up? They know your address. I think that's true. I think there's an element of their ability to serve you in that way because they already know you, they already have your credentials. Going back to this other thing, I think there's a trend which we could get into if you want, which is, if you think about the funnel, and I know the travel community thinks a lot about the funnel, companies like Google, I think Trip was originally thought of as top of funnel,

And then what's down the funnel is where typically companies that have more real assets are creating the experience for the customer. One thing I noticed that Amazon did with Prime that I think has created a real problem for Google is remarkably optimized the bottom of the funnel so amazingly well through Prime that people skip the top of the funnel and come to them. One of the things that's happened with Uber Eats along these lines is the team really focused on time of delivery, which I think of as optimizing the bottom of the funnel. This is the hard stuff because it's not just about writing an app, it's about coordinating with suppliers and these kind of things. And so I've seen studies people have done where they've looked at all the competitors on time of delivery, but it's remarkably different.

It's remarkably better. And I think the world's starting to figure that out. It's so much better that just like how Uber competes with car ownership, Uber Eats is starting to compete with the grocery store. Right, right.

And I noticed the other day Dara said—Dara, who this crowd's certainly familiar with, said, you know, he had an expectation they would move into grocery delivery, which would be a natural extension. I saw a note yesterday, 40% of the people of the new customers of Uber Eats have never used Uber. So they might self-reinforce in both directions, which is a pretty remarkable platform. And if you think about two former great travel execs in Dara and Barney, both of whom Bill and I have known for years, who are now leading Uber, and they're bringing a lot of the intelligence about the funnel, about loyalty, that we've seen at Booking and Expedia and other travel companies over the years to Uber, and I think the transformation is exciting to watch.

Although I did see this on Twitter yesterday. It said, you know, 'I love the instructions now at airports to find your Uber: take the rope swing across to level two, rappel down to the ground floor, cross the snake pit, and you'll see the signs.' Which gets back to this question about regulation. You know, I got in a cab at Newark on Monday and took it into the city and it was just a horrific experience. And yet the city still is making me cross a snake pit to get to your Uber. Um, is Dara making progress on, you know, from your perspective on the relationship with cities and what more needs to be done?

Well, first of all, I think, um, there's, uh, he's unquestionably making progress. We gave him a tough hand to start, right? Like when we turned it over to him, the reputation wasn't in a great place there. Um, he's a remarkable diplomat and I think we'll do wonders there. You know, the issues like in a, as I'm sure a ton of people in this room know, the issues in an airport are different from a regulatory issue at a city or some other level. There's microeconomic issues happening right there. And so that actually may require like monetary negotiation.

I.e., airport authorities get a lot of money from cab companies and they expect to get a lot of money from anybody who replaces said cab company. Absolutely.

We have so much I want to cover. You know, they're telling me I only have 15 minutes. We may, you know, extend it unilaterally. But I want to shift gears to when I think about the largest companies to come out of travel, again, post-booking. If you think about Booking.com or Priceline, went public first day, kind of got to a $10 billion valuation in the heyday of 1999. By 2003, was back to a $250 million valuation. $250 million in 2003, 2004, and today the company's enterprise value is $120 billion. So $250 million to $120 billion, and all of the value creation inured to the benefit of public market investors in Priceline. Uber is likely to go public, many analysts are speculating, early next year at $100 billion.

All of the value creation has inured to private market investors like you. You have been very vocal that you think startups, many of whom are in this room, overstay their welcome, don't go public soon enough. Talk to us a little bit about the changing landscape, who's capturing the value, and why you think there is a healthy discipline in going public.

So obviously this is all a result of the money that's out there in the ecosystem in the past five to ten years, which most kind of global investors would say is tied to low interest rates, hyper-low interest rates, tons of speculative capital, tons of speculative capital. People try and jump the line and there's a ton of really notable firms. The biggest one, of course, being SoftBank, that have decided they're comfortable crossing that private-public line and investing in private companies. And the view that the money's accruing to a particular investor class isn't something I've ever thought about. I can see how from the top that becomes a really important conversation. What I've noticed over the years, and I've been investing for 20 years, I was on Wall Street for four years before that, is that the...

intensity of focus of the company just gets so much better when the company's public. And Mark Zuckerberg came out and said he wished he had gone public two years before he did and that he was getting the wrong advice about being afraid of this thing and that it made him better. Barton's a big believer of this as well, that that the capital markets help hone your game, you know. And I've often used the example of football. So, you know, playing on Saturday is different than playing on Sunday, right? And imagine, if you will, the week before the draft, the quarterback that's expected to be picked number one does an interview and says, I'm dropping out of the draft. And they say, why? He goes, well,

The intensity of playing on Sunday is going to be ridiculous. They're going to watch every single play. They're going to keep every stat of everything I do. And I just won't be able to improve my long-term game under that scrutiny. Right now, if someone did that, it sounds absurd and silly. There are top CEOs at large private unicorns making that same statement every day. And the buy-side's listening. So when those people finally do give up and decide they have to go public, they're going to go talk to the buy-side. Buy-side's going to say, 'I thought you were afraid to be public. Why are you so afraid? You want to back the guy that's afraid?' Yeah, I don't either. The other thing is the minute you give options to employees, you're on the clock, you're in the game.

You've made a decision that the value you're giving to this employee to come to work for you is something that is important to get to them at some point in time. So you're in the game. If you don't want to be in the game, get off the field. But the game always gets harder.

I just find it interesting that oftentimes these companies use as an excuse for not going public that their long-term prospects are better as a private company, but yet I look at the examples like Priceline, that's gone from $250 million to $120 billion, or Facebook, that went from $17 billion as a public company to $450 billion.

Or let's talk about Benioff. Marc shares the exact same views that I do on this topic. I've never seen Reed Hastings complain about being public. You know, Bezos. Bezos is a master of the public markets. This is to his advantage.

So next year we're likely to have a couple big IPOs. Airbnb is likely to go public. Uber's likely to go public. Morgan Stanley's out with a report this week that Airbnb's growth, room-night growth, has slowed to single digits. Company certainly hasn't confirmed or denied that. Do you think—Uber's reportedly still growing at over 40%—if you stayed private and your growth rate is slowing into the single digits, has the board done a disservice to a company like that for staying private too? Yeah, I think it's possible. I mean, I think you look at maybe—first of all, I want to say that I think—I was going to mention Dropbox. I want to say I think the

Drew taking Dropbox public and Daniel taking Spotify public have had a huge impact on this issue in Silicon Valley, and I think there's a lot of momentum now, which is why you're starting to see—

Momentum, the pendulum swinging back toward companies getting rational and going public earlier in their growth cycle.

But I have to believe that Dropbox would have been better off going public when its growth rate was higher and when it was considered to be a more pristine asset, at which point you then could potentially do acquisitions that reinforce the product. And you bring up a company like Priceline, clearly acquisitions along the way of being public had a huge impact on the long-term growth of the company.

That's right. Related to this, another topic you and I have talked a lot about, and I think relevant to a lot of the companies in this room, but corporate governance—

Hey, by the way, I want to talk about something else. Yeah, let's go. I've always swore I'd talk about this if I got in front of a travel conference. You ask about Airbnb. One of the things where I think they could be spending more money is optimizing this lower part of the funnel thing that I was talking about. If you've got all that capital, why not take $200 million and put digital, you know, locks on your top 20% of your properties, right? So you make that key-exchange thing go away. For the life of me, I cannot understand what is wrong with the hotel industry in the United States when it comes to technology. So I looked this up. There may be some relevant people in the room to have this conversation.

What year do you think Hertz put in Hertz Gold and let you walk past the counter so you didn't have to check in? Ninety-five. Nineteen eighty-nine. Twenty-nine years ago. Twenty-nine. Thirty next year. Last night, I walk in, I don't get to walk past the check-in counter. This is 2018. You walk up and they start doing this. What are they typing? If you walk into Bellagio, they've got 10,000 square feet of check-in people. Have you seen that? Why? It makes no sense whatsoever. There must be a structural problem.

Like, that's amazing.

And then I decided I was going to have breakfast in my room this morning. You know what I do? I pick up a cardboard piece of paper with this hole and fill out little bubbles and hang it on my door.

That's insane. Fresh perspectives.

I agree. I agree. In fact, I was talking with Scott Kirby, the President of United Airlines the other day, and I was talking to the people around me on the plane and asking them if they valued the food. I know on a fully loaded basis what it costs to deliver a meal in the First Class of United Airlines. The cost of the galley, the weight of the galley, the weight of the stove, the cost of the flight attendants to serve said food, and everybody on the plane around me said the food's terrible. And I said, 'Well, what if I gave you a $30 credit instead of having food on the plane?' They said, 'I'd be thrilled.' So I emailed Scott and I said, 'Scott, let's do a deal with Uber Eats or Grubhub. Integrate it in the app.'

People can order their food before they get here. There's Starbucks. They'll like the food better. It'll be handed to them as they walk on the plane. And by the way, you can credit them back 10 or 20 bucks with what you would save. In the case, at least, of the airlines, they have the defense of flight attendants have built into their contracts that you can't take an oven off the plane. So that's a tough one to get through. But in the case of a hotel, I think there is probably other stuff.

You and I have talked about this. My research suggests that the problem might be that the massive split between building ownership and management puts the cost of any type of system investment in this River Styx between the two. That's a problem.

I want to move to a subject that you and I talk about probably more than anything else that I think, you know, not a lot of us. We're in the day-to-day tactics of our businesses. It's hard to telescope out and think about the bigger chapters that we're living through. So let's talk about search, or talk about the internet writ large. You know, the first decade you and I were at this, 2000 through 2012, we never went to a board meeting where we didn't talk about SEO and SEM. I think of that chapter as the chapter of search, all value inured to Google and to vertical search engines, those related to search. 2008, obviously, iOS. By 2012, desktop search goes negative, apps take off, and for the last eight years,

all of the value has inured to the hyperscalers that really are plugged in as an app and have benefited from that ecosystem like Facebook, like Tencent, Alibaba, Amazon, etc. So we're living during this period where we're all sitting on these tiny keyboards typing into two apps and we think that that's kind of where things end. And yet a year ago I heard Bezos and Sundar and Elon Musk all talk about kind of the rise of the smart assistant. You know, what neural networks and AI are going to do to kind of be the next thing. So where are we in the big picture, and how do you think this transition from apps and tiny keyboards to all of us having persistent smart assistants in our lives, if you believe that's where we're going to next, how does that impact the companies in the room?

Yeah. I think that the smart assistant or voice AI is really powerful around when your hands are busy. So when you're cooking and want to set an alarm, when you're watching your TV, when you're driving in your car. I think when you're doing research on a high-ticket expenditure, you're buying a car, you're buying a house, you're planning a large vacation, I don't think that's going to go to voice anytime soon. There's been some wonderful work by this guy that worked at Tencent. Actually, I could send you a blog post where he's just literally counting steps that it would take to use these different mediums, whether it's messaging or voice or search. And it really is highly dependent on the use case.

And so it might be that, you know, "order my Uber" is something that you do do because you're in your kitchen, you're about to leave, you have a trusted relationship with Uber, you know the price. But for other categories, you know, it's going to take longer. I think that one of the things in between search and browse and what in the future you're talking about is a shift from search and browse to what I call curate and deliver. And so it's one of the things we can do with all this ML and AI is get rid of this remarkable amount of decisions that people have to make. And it's ironic because the whole playbook for search and browse was, let's get as much stuff in the database as we possibly can.

But that creates the paradox of choice, which there's a great book about. And then you're just looking through way too many items. If anyone's done clothes browsing on Amazon, it's just a remarkable, tedious task as you look through all this stuff. And so how do you curate? How do you help get the decision-making down? And I think we're just starting to do some of that. I work with a company called Stitch Fix that's doing heavy curation in women's apparel and now men's.

But using machine learning and AI to drive the curation as opposed to human editors picking out my clothes.

Right. And I don't think the voice thing works until you get trusted curation right.

Got it. On the transactional element, what I think about for folks in this room: if I'm in my office and I need to book a hotel room at Phocuswright, it would be way easier for me to just say, "Okay, Google, book me the JW Marriott at Phocuswright at the lowest price," and just for it to automatically occur. They have my credit card, they have all my information, it automatically occurs. I asked Spencer Rascoff at Zillow this question, you know, six months ago, "What's your greatest fear?" And he said, "You know, that voice leads to the grand disintermediation of all brands." Because I'm not going to say to Google, "Hey, Google, book me the JW Marriott, you know, the Phocuswright conference on Expedia or on Booking or on HotelTonight."

Or let's say a small percentage of people have that level of brand loyalty to do that. And so all of a sudden, you have this reintermediation of the hyperscalers where now they're the only ones who can do voice like that.

But—and I think there's a huge but—you need trust. If you're going to make that voice commitment to pay whatever price that service delivers, you have to have trust. I think a company like Google is a long way from that place precisely because they're so dependent on advertising.

From the place of trust.

Yes. From the consumer's place of trust of whatever. I mean, the first 14 things they serve up nowadays are ads.

Correct. It's a real shame that we don't have more time.

Can you guys give us more time?

By the way, the other thing is it's a very difficult transition for Google, because they've spent their whole life letting advertisers compete with each other in this kind of virtual cage match. So you type a word in, and they all pay. And the more they pay, the more the other guy has to pay. It's like, 'It's not our fault, but you guys fight amongst yourselves.' That doesn't transition well to this voice world, for the reason you said. I don't want to say, 'Hey, book me a hotel,' and say, 'Would you like to talk to Expedia about a hotel?' To me, for example, I think Google has made the investments.

For example, they have a great meta engine, and they can go do the shop in the background. They can come back and they can say, 'Bill, I found you this hotel at the lowest price. It was $274 and it was on Expedia.'

It's the only category they've actually invested in the metadata for the backbone. I would agree with that. So they could do it there.

Um, so we're going to do a quick lightning round. They're telling us we have a minute left. Um, I think, you know, one word at the most. I would prefer if you just said 'long' if you would be long, or 'short' if you would be short the idea. Um, but whatever you want to say. Supersonic flying? Sure. Space tourism? Indifferent.

Elon getting to Mars? Indifferent.

Bitcoin?

Interesting. Cannabis? Opportunity. Venture capital? Good business. SoftBank? Huge. California? Smoky. Google? Don't be politically correct. Mature. Facebook? We're going to keep going until I get through the list. In the hot seat. DoorDash? Third place. China? One word. One word. Wild, Wild West. Long. Recession in the next two years? Hope not. AI? Misunderstood. Hyperloop? Probably not. Higher education? Trouble. Autonomous driving? Long time. Virtual reality?

Short. 2018 Golden State Warriors? Long. Thanks to Bill Gurley for joining us today. Thanks, brother.

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I'm on the road a lot for work. So when I land in a strange place, I stick with what I know and trust. While I love to skip the line, it's always nice to see a friendly face. "Hi, can I help?" "Only if you can find me some nachos. I'm starving." "I hear ya."

"Try Lola's on 5th. Homemade guacamole. It's so good." "Thank you." No one gets me like Hertz. I guess it's in the name.

My meeting ended early, but can I get the earlier flight home? Are there any seats on the 545? That's why I choose loyalty programs that give me the most precious reward. Can I help you, ma'am? Time. I got it. I want to leave the keys and go.

I got it. Dennis, stop the bus.

That's why I joined Hertz Gold Plus Rewards.

Thank you.

Because my real loyalty is to them.