20 VC Niko Bonatsos on Startup Valuations

Summary Notes


In the 10th episode of the 20 minutes VC, host Harry Stebbings interviews Nico Bonatsos, a principal at General Catalyst Partners, who shares his journey from engineering in diverse fields across the globe to becoming a venture capitalist by serendipity. Nico discusses lessons from his startup's failure, emphasizing the risks of being first to market, the dangers of platform dependency, and the importance of wisely chosen co-founders. He reveals his investment strategy, focusing on founders with a reality distortion field, differentiated products, and compelling metrics. Nico also addresses the fear of missing out on investments, startup valuations without revenue, and the importance of location, predicting the rise of global innovation beyond Silicon Valley. He advises aspiring VCs to network, be opinionated, and maintain relevant connections. Nico's best life advice is to remain intellectually curious and continuously learn, which he considers crucial for a successful career.

Summary Notes

Introduction to Nico Bonatsos and General Catalyst Partners

  • Nico Bonatsos is a principal at General Catalyst Partners.
  • He has been involved with investments in companies like Snapchat, Spoon, Rocket, and Tunein.

On today's show, I'm hugely excited to welcome Nico Bonatsos. Nico is principal at General Catalyst Partners, where he has been involved with investments in the likes of Snapchat, Spoon, Rocket and Tunein.

The quote introduces Nico Bonatsos and his role at General Catalyst Partners, highlighting his involvement in significant investments.

Nico Bonatsos' Background and Entry into Venture Capital

  • Nico grew up in Greece and has a background in electrical and computer engineering.
  • He has a diverse experience in various types of engineering across the world.
  • His work and study experiences include computer engineering in Tokyo, manufacturing engineering in the UK, and biomedical signal processing research at Harvard.
  • Nico moved to Silicon Valley to study at Stanford and did research in cloud computing.
  • He co-founded a social networking company that failed due to platform risk.
  • Joining General Catalyst was a matter of being the right person at the right time and was not initially planned.

So I lucked out to join a venture capital firm called General Catalyst right when we were starting the office here in California in late 2010. And the last four plus years I've been a VC.

The quote explains how Nico Bonatsos joined General Catalyst Partners coincidentally, marking the beginning of his venture capital career.

Lessons from Startup Failure

  • Being first to market does not guarantee success.
  • Taking platform risk is a serious gamble and can lead to loss of control over one's destiny.
  • It's crucial to choose teammates, co-founders, and early team members wisely.

Being first to market doesn't really matter... taking platform risk is a very serious gamble... pick your teammates and co founders and every single one of your early team members very wisely.

The quote summarizes the key lessons Nico learned from the failure of his startup, emphasizing the risks of being first to market, platform dependency, and the importance of team selection.

Preferences on Founding Teams

  • Data suggests that companies that become unicorns or achieve $10 billion plus market cap typically have a founding team of two to three co-founders.
  • A diverse team with complementary skills can achieve more, faster.

Historically, if you look into the data, the companies that have built unicorns or that have built tech products and companies that have become $10 billion plus market cap enterprises tend to have a team. Founding team of two to three.

The quote highlights Nico's preference for founding teams based on historical data and the benefits of having co-founders with diverse skills.

Lead Actor Dynamic in Startups

  • Startups often have a "lead actor" dynamic similar to music bands.
  • The team structure can vary: senior co-founder with junior co-founder, or solo founder with early contributors not given the title of co-founder.
  • The optimal number of co-founders, according to data, is two to three for the best outcomes.

"That said, there is always a lead actor. It's like all the music bands, right? One person is a lead, and you know that."

This quote emphasizes the commonality of having a prominent leader within a startup team, drawing a parallel to music bands where one member often stands out as the lead.

Criteria for Evaluating Startup Potential

  • Nico Bonatsos considers the founder's ability to create a "reality distortion field" and envision a detailed future.
  • He looks for a differentiated product that stands out from others in the market.
  • A specific metric that indicates strong engagement, rapid growth, customer retention, or revenue per visit is significant.

"Once in a while, you get to meet an individual that can create the reality distortion field and can paint a very detailed version of the future."

This quote highlights the importance of a founder's vision and charisma in convincing investors of the startup's potential future success.

Fear of Missing Out (FOMO) in Investments

  • Nico Bonatsos admits to experiencing FOMO when it comes to missing out on startup investments.
  • He rationalizes that missing opportunities is either due to improper evaluation or losing to another firm.
  • Success in venture capitalism doesn't require investing in every opportunity, just a few successful ones.

"But for sure, if I don't miss stuff, it means that number one, I'm not looking into the right opportunities."

The quote suggests that missing out on some investments is an indicator of exploring a wide range of opportunities, which is necessary for finding successful ventures.

Valuation of Startups Without Revenue

  • Valuation of companies like Snapchat without reported revenues is based on strategic value to investors with deep pockets, market interest, and growth rate.
  • High demand from investors can drive up a company's valuation.
  • Growth is considered the most crucial factor, especially for early-stage companies.

"It's a function of a few things. The first one is how strategic of an asset this company is for a bunch of folks with deep pockets."

This quote explains that part of a startup's valuation is determined by its perceived strategic value to potential investors, particularly those who have significant financial resources.

Venture Capital Investment Criteria

  • In venture capital, investment decisions are often driven by market trends, growth potential, and strategic interest.
  • Traditional valuation frameworks, like revenue per user and monetization potential, are used but are secondary to market and growth considerations.
  • An MBA or connections with bankers can be helpful in valuation, but early-stage investment is predominantly driven by market dynamics.

"Pretty much it's 50 50, if it's healthy, sustainable growth, that it's going to work out."

This quote emphasizes the importance of healthy, sustainable growth in the success of a startup, suggesting that there is a balance of risk and potential in venture capital investment decisions.

Importance of Location for Startups

  • Silicon Valley has historically been the birthplace of many high-value companies, but it does not have a monopoly on innovation.
  • Starting location for a startup is becoming less critical, with many great companies expected to originate outside Silicon Valley.
  • Despite this, Silicon Valley continues to attract startups due to its risk-tolerant investors, access to capital, and experienced talent pool for tactical roles.
  • Companies often relocate to Silicon Valley to raise funds, hire experienced personnel, or access early customers.

"If you look back into the data, yeah, like the companies that have become $10 billion plus in market cap tend to have come out of Silicon Valley."

This quote acknowledges the historical trend of successful companies emerging from Silicon Valley, but also suggests that this trend is changing.

Emerging Growth Areas in Venture Capital

  • Asia and Israel are noted for their strong and continuous new venture creation rates.
  • There was notable excitement in the venture space in Brazil.
  • With millions of developers and widespread adoption of iOS and Android, opportunities for starting and scaling new ventures are available globally.
  • The local ecosystem's strength is less important, as developers can quickly create apps and potentially build successful businesses.

"A lot of new venture creation in Asia very strong."

This quote highlights Asia's significant role in new venture creation, indicating it as a key growth area in the global venture capital landscape.

Advice for Aspiring Venture Capitalists

  • Networking with venture capitalists (VCs) is crucial, as many VC job opportunities are not publicly advertised and are filled through personal networks.
  • Building trust and impressing VCs is essential for breaking into the industry.
  • Attending startup events and obtaining referrals from founders or executives in a VC's portfolio can be effective strategies for networking.
  • Being opinionated and establishing a personal brand in a specific area of expertise can also be advantageous.

"The first thing is to know VCs who are hiring managers, because especially in the top funds, all the positions are not really advertised."

This quote underscores the importance of personal connections in the venture capital industry, as many hiring decisions are made through internal networks rather than public job postings.

Building Visibility and Networks in Venture Capital

  • Establish a public log of thoughts and opinions on platforms like Twitter, LinkedIn, or Quora.
  • Doing a podcast can attract the attention of venture capitalists.
  • Building a network that venture capitalists value, such as college networks, can be crucial.

This could be Twitter, this could be anything that is visible to that world. It could be like typing stuff on LinkedIn groups or Quora, stuff like that, doing a podcast so that the venture capitalist or somebody that she or he knows will pay him.

The quote emphasizes the importance of having a visible online presence where one can share thoughts and engage in discussions, which can lead to recognition and opportunities within the venture capital community.

And the third thing is build a network that vcs would be like, shit. We need to have access to that network.

This quote highlights the strategic advantage of having a network that is appealing and valuable to venture capitalists, which can be a significant asset.

Intellectual Curiosity and Continuous Learning

  • Being intellectually curious and a continuous learner is key to maintaining expertise.
  • The tech environment, especially in Silicon Valley, offers numerous opportunities for growth.

For me, the biggest one is to try and constantly be intellectually curious and every single day continue to be a learning animal.

Nico Bonatsos stresses the importance of intellectual curiosity and the pursuit of learning as foundational for a successful career, especially in dynamic fields.

The Future of Education Technology

  • Education technology will allow learning for anyone, anytime, with access to top resources.
  • It will not replace schools but complement them due to government ownership and potential political risks.

To be great because regardless of how old are you, where you leave who you know, how much money you have, you are going to be able to learn whatever you want, your own pace with the best and the brightest, and do that 24/7.

Nico Bonatsos expresses optimism about the democratization of learning through education technology, making it accessible to all.

I don't. I think it's going to complement the school experience in life.

This quote indicates that while education technology will enhance learning experiences, it won't completely replace traditional schooling systems.

Excitement for Mobile Technology

  • The growth of smartphone ownership presents massive opportunities for mobile-delivered services.
  • The potential increase from 2 billion to 5-7 billion smartphone owners is particularly exciting.

I continue to be Uber excited about anything that can be delivered through a mobile device, frankly.

Nico Bonatsos conveys his enthusiasm for the future of mobile technology and the opportunities it presents for delivering services and content.

Investment Decision Factors for Startups

  • Venture capitalists seek to invest in companies and markets that are at an inflection point.
  • The goal is to invest where the market is rapidly opening up, ensuring immediate value appreciation post-investment.

Because the company and the market they're going after is not at an inflection point.

This quote clarifies that Nico Bonatsos, as a venture capitalist, looks for the potential in the market and the company's position within it when deciding on investments.

Show Engagement and Feedback

  • The host encourages listeners to engage with the show's resources and social media.
  • Listeners are invited to suggest potential venture capitalists to feature on the show.

Now for all the resources mentioned in today's show, head on over to www.thetomentyminutevc.com and please do like us on Instagram at the 20 minutes VC and do follow us on Twitter at 20 minutevc.

Harry Stebbings provides information on where listeners can find additional resources related to the show, and encourages engagement on social media platforms.

Think of this show, and I'd also really like if you would like to suggest a potential vc you'd like to have on the show, please do send in your names.

Harry Stebbings invites feedback on the show and suggestions for future guests, fostering a sense of community and listener involvement.

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