20VC 13 of the Great Investing Minds on When to Pay Up vs When To Remain Disciplined and Walk Because the Price is too High The Ultimate Guide to Price Sensitivity

Summary Notes


In a dynamic discussion on investment pricing strategies, top investors like Marcello Claw, Bill Gurley, Michael Eisenberg, David Tish, Cyan Bannister, Frank Rotman, Jeff Lieberman, Justin Fishner-Wolfson, Luciana Lixandru, Zach Weinberg, Jeff Lewis, Nick Shalek, and David Z weigh in on the delicate balance between price sensitivity and opportunity. They explore scenarios where paying a premium is justifiable for potentially massive markets, like those dominated by giants such as Amazon and Google, while emphasizing the importance of discipline in less expansive markets. The conversation also touches on the evolving venture landscape, where traditional ownership models are contested against the backdrop of high growth potential and the necessity to adapt to founders' market conditions. They collectively underscore the significance of quality asset selection, the potential for long-term value creation, and the need for investors to remain agile, often bending their own rules to seize exceptional opportunities.

Summary Notes

Pricing in Venture Capital

  • The concept of price sensitivity is crucial for investors, especially in venture capital.
  • Investors must determine when to stretch on price and when to remain disciplined.
  • The decision is often based on the potential market size and opportunity of the company in question.
  • Marcello Claw highlights the importance of distinguishing in advance when price matters and when it does not.
  • The example of passing on Nubank due to price and later realizing the opportunity was a mistake illustrates the challenge of pricing decisions.
  • For most investments, price matters, but for a select few with immense market potential, it's less significant.

"The key is to determine in advance if it's a company where price matters or it doesn't."

This quote emphasizes the strategic importance of identifying whether the price is a critical factor before investing in a company.

"For some companies with an immense opportunity, think of Alibaba, think of Facebook, think of Google, think of Amazon. Whatever it was worth coming in at almost any price because the market was so large."

The quote suggests that for companies with massive market opportunities, the entry price is less important because the potential returns are so high.

"Now, other companies, we've done incredibly well because we've learned to make that distinction where price matters and where it doesn't."

This reflects on the learning curve and the importance of discerning when to focus on price and when to prioritize market potential in investment decisions.

Venture Capital Market Dynamics

  • Bill Gurley discusses the venture capital market's nature, emphasizing its unpredictability and the influence of market forces.
  • The venture capital industry is subject to frequent resets and cycles, making long-term investment strategies essential.
  • Historical data suggests that missing out on certain peak years could significantly impact overall returns.
  • The concept of "Thelma and Louise attitude" in venture capital is mentioned, implying a bold, all-in approach.
  • Despite market conditions, there is a belief in conservative investment principles, though practical alternatives may be limited.

"The problem is it's a highly distributed field of players. There are thousands and thousands of VCs and way more of that of entrepreneurs, and we don't get to decide. The market does that via supply and demand."

This quote explains the decentralized nature of the venture capital market and the role of supply and demand in determining investment dynamics.

"I think you have to invest as a venture capitalist over the cycle, like over a 20 or 30 year period."

Bill Gurley suggests a long-term investment approach to navigate through the various market cycles effectively.

"There were several firms in Silicon Valley that in the 96 time frame said, this is all crazy. This is too expensive. And they pulled out and they missed the best three years in a 20 year window of return."

This historical example serves as a cautionary tale about the risks of pulling out of the market due to high prices and potentially missing out on significant returns.

Ownership and Price Discipline

  • Ownership stakes in companies are a critical factor in venture capital investments.
  • Even if paying a higher price is necessary, optimizing for ownership is a strategy some investors use.
  • The goal is to avoid being the highest bidder by offering unique value to founders.
  • The venture capital market is contrasted with public markets, where capital is a commodity, and insight is the differentiator.
  • In venture capital, relationships and the ability to add value beyond capital are seen as key to successful investments.

"Bill mentioned the early stage point, the thing at Olive that guides us, which one of the things I learned at benchmark is that ownership still matters a lot."

This quote by Harry Stebbings underscores the importance of ownership in early-stage investments and how it guides investment decisions.

"The second way I think about is if I need to be the highest priced bidder on the company, on the founder of the CEO, I'm doing something wrong."

Harry Stebbings expresses that if an investor needs to rely solely on offering the highest price, they may be lacking in other areas of value proposition.

Relationships and Networks in Venture Capital

  • Relationships are crucial in venture capital for accelerating entrepreneurs.
  • Building strong relationships with founders is part of a venture capitalist's job.
  • Adding value to a company before investing is important.
  • Accelerating a business can involve enhancing its reputation, ensuring follow-on capital, or securing business development partners.
  • Opting to prioritize reputation over immediate financial gain is a long-term optimization strategy.

"I still deeply believe that relationships matter more than anything in this business, and networks matter more than anything in order to accelerate those entrepreneurs."

This quote emphasizes the importance Harry Stebbings places on relationships and networks in the venture capital industry, highlighting their role in supporting and accelerating entrepreneurs.

"I prefer to optimize long term on reputation rather than optimizing on dollars."

Harry Stebbings expresses a preference for building a long-term reputation over short-term financial gains, suggesting that a strong reputation can be more valuable than immediate monetary optimization.

Investment Decision Making and Price Awareness

  • Being price aware on a portfolio level is crucial for venture capitalists.
  • Individual deal prices are not the sole determinant in the decision to invest.
  • Market dynamics control pricing, not individual investors.
  • Portfolio entry points increasing significantly may indicate a need for price awareness.
  • Discipline at the portfolio level is more important than on a per-deal basis.

"It is important to be price aware on a portfolio basis, and I don't think on a deal by deal basis, price is a determinant of making a decision."

Bill Gurley discusses the importance of being aware of pricing from a portfolio perspective rather than focusing solely on the cost of individual deals.

"If I look at a fund and I say our entry point is up three x from our last fund, that's a problem."

Bill Gurley points out that a significant increase in the entry point for a fund compared to previous funds may indicate an issue, suggesting a need for understanding portfolio pricing.

Market Reckoning and Investment Discipline

  • The venture capital market will face a reckoning based on returns.
  • Discipline in investment is critical to achieving good returns.
  • Understanding the economics of a deal, including dilution and potential outcomes, is essential.
  • Being price sensitive can lead to better returns.
  • Fear of missing out (FOMO) can lead to poor investment decisions.
  • The ultimate value of companies is finite, not infinite.
  • Fund managers are ultimately judged by their returns.

"What's going to happen is there's going to be a reckoning, and there always is."

Speaker C predicts a future market correction where returns will be scrutinized, leading to increased discipline in the venture capital market.

"To be able to get those kind of returns, you've got to be more price sensitive."

Speaker C underscores the importance of price sensitivity in achieving high returns, suggesting that a lack of sensitivity can negatively impact investment success.

Venture Capital as an Asset Class and Founder's Market Dynamics

  • Venture capital is a relatively small asset class compared to others.
  • The distribution of outcomes for venture-backed companies is wide.
  • Price discipline has diminished in favor of founder-driven market dynamics.
  • Founders often dictate investment terms due to high demand for their businesses.
  • Investors must consider intrinsic value and potential future value when assessing a company's worth.
  • Conversations with founders about valuation often involve aligning perspectives on the company's current and future value.

"Outcomes are bigger than anyone expected them to be and should factor into what a company is ultimately worth."

Frank Rotman discusses how the potential outcomes for venture-backed companies have grown, affecting their valuation and the consideration of their worth.

"It's about comfortable being uncomfortable. It's about conviction. It's about knowing when to bend your own rules."

Frank Rotman talks about the challenges of investment decision-making in a rapidly changing environment and the need for flexibility and conviction.

Investment Pricing Strategy and Conviction

  • Deciding whether to pay a higher price for an investment involves assessing the company's growth and momentum.
  • Companies with extraordinary growth can justify a higher price.
  • The speed at which companies can grow today is unprecedented compared to the past.
  • Investment decisions may require bending established rules due to market shifts.
  • Positive outcomes from paying a higher price can validate the decision, but it is still a risk.

"Higher price for a lot of the companies that we ended up paying up for. So far so good."

Frank Rotman reflects on the outcomes of paying higher prices for certain investments, indicating that so far, the companies they've invested in have performed well.

"They were the companies that had massive momentum on their side."

Frank Rotman justifies paying a higher price for companies with significant momentum, suggesting that this momentum can be a critical factor in the company's future success.

Investment Focus on Asset Quality

  • Bill Gurley emphasizes the importance of asset quality in investment decisions.
  • He highlights the significance of profit potential beyond just revenue, especially in SaaS companies.
  • Gurley notes the variability in cash flow margins between different SaaS companies.
  • He points out that markets often value all revenue and cash flow streams equally, which he believes is a mistake.
  • Gurley sees an opportunity in recognizing the relative quality and pricing of assets that others overlook.

"So we spend a lot more thinking about the quality of an asset and the future potentiality of the asset."

This quote explains that Gurley and his team prioritize understanding the intrinsic quality and future growth potential of an investment, rather than just the current financial metrics.

"One SaaS company will have a 50% cash flow margin, the other will have a 20% cash flow margin."

Here, Gurley is explaining the disparity in profitability between different companies within the same industry, which can significantly impact their long-term value.

Market Valuation of Different Assets

  • Gurley discusses how market conditions can lead to a compression of the spread between average and great assets.
  • He mentions that in certain market conditions, assets can be overvalued, but there are still opportunities to be found.
  • The consumer internet space is described as particularly varied, with companies in different sectors having different margin structures and economic moats.
  • He suggests that discerning sustainable economic advantages in companies is key to successful investment.

"I think in times like this, we typically average assets get priced way up, great assets get priced up, but the spread between those assets probably compresses."

This quote indicates that during certain market conditions, the difference in valuation between average and great assets narrows, affecting investment strategies.

"So I think there's even more opportunity within that to figure out which ones we believe will be the winners and have sustainable advantage and ultimately sustainable economics."

Gurley points out that the real opportunity lies in identifying companies that will maintain a competitive edge and sustainable financial performance over time.

Investment Strategy and Pricing

  • Harry Stebbings expresses enthusiasm for combining different perspectives on investment strategy.
  • Justin Fishner-Wolfson of 137 Ventures discusses the importance of price in investment, particularly when the discrepancy is significant.
  • He explains that price is only a concern when investments perform well, as a company that fails renders the initial price irrelevant.
  • Fishner-Wolfson argues that venture investors must consider their cost of capital and not overpay, given the high growth and uncertainty in the companies they invest in.
  • He also touches on the topic of ownership percentage versus cost of capital, suggesting that traditional VC focus on ownership may be outdated.

"So it only matters when things go well. And so then the question is, can you invest at prices that ultimately hit your cost of capital?"

This quote underlines the idea that investment pricing is critical when the company succeeds and must align with the investor's cost of capital to justify the investment.

"I think a lot of this has to do with heuristics that were created a long time ago."

Fishner-Wolfson is suggesting that the industry's focus on ownership percentages is based on historical heuristics that may not always apply in the current investment landscape.

Early Stage vs. Growth Stage Investing

  • Luciana at Sequoia differentiates between early stage and growth stage investing strategies.
  • In early stage investing, the focus is on the company and founder rather than pricing dynamics due to the significant upside potential.
  • Luciana acknowledges that this view might undermine her negotiation position in future early-stage investments.
  • For growth stage investments, she emphasizes the need for discipline regarding pricing due to comparatively limited upside.
  • She asserts that the right company selection is crucial regardless of the investment stage.

"With growth, I do think it's different. With growth, I really think you need to stay sober."

Luciana contrasts the approach to early-stage investing with growth-stage investing, where pricing becomes more important due to the reduced potential for upside.

"I think selecting the right company in the early stages is all that matters."

This quote emphasizes Luciana's belief that in early-stage investments, the primary focus should be on choosing the right company, as it is paramount for long-term success.

Funding Round Objectives and Outcomes

  • Zach Weinberg at Operator Partners discusses the objectives and expected outcomes of funding rounds.
  • He questions how much operational runway a funding round will provide and what accomplishments are expected within that timeframe.
  • Weinberg is interested in the expected valuation multiples in subsequent funding rounds as indicators of growth and value creation.
  • He gives specific examples of desired outcomes, such as funding a company at a certain valuation with the expectation of a significant increase in the next round.

"We're looking for things where the multiple on the next round, not because I care about the markup at all, but because it shows real growth and real value creation, is more than like two x."

Weinberg explains that he looks for investments where the next round's valuation multiple reflects genuine growth and value creation, rather than just an increase in paper value.

Venture Math and Valuation Sensitivity

  • Venture capital requires winners to compensate for the losses from unsuccessful investments.
  • Being valuation reasonable is important, even if it leads to passing on overpriced investment rounds.
  • Correct pricing is crucial, especially when doubling down on a high-conviction investment.
  • High ARR (Annual Recurring Revenue) multiples indicate a need for extreme conviction in a company's potential.

"Your winners have to win big, and they have to pay for all the losers, because there's quite a few."

This quote emphasizes the necessity for significant wins in venture capital to cover the inevitable losses from other investments.

"Getting that pricing right is actually really important."

The importance of accurate pricing is highlighted, especially when increasing investment in a company one is already familiar with.

Investment Philosophy and Price Sensitivity

  • Initial investment can afford less price sensitivity, especially with smaller ticket sizes.
  • High conviction and thorough due diligence are required for investing at high valuations.
  • The distinction between 100x and 150x ARR multiples is less significant if the company is expected to be transformative.

"Less price sensitivity, I think, is okay."

This quote suggests a more flexible approach to price sensitivity when making an initial investment in a company.

"You have to have extremely high conviction and to have done your diligence and really believe this set of entrepreneurs, this company is going to transcend."

The need for strong belief in a company's potential and team is highlighted as a justification for investing at high valuations.

Asymmetric Bets and Non-consensus Investing

  • Investing in exceptional people who can change an industry is key to making asymmetric bets.
  • Successful investing often requires a contrarian viewpoint to achieve exceptional returns.
  • Constantly updating one's perspective on a company's potential is a critical skill for investors.
  • Belief in a company's long-term potential is more important than short-term valuation concerns.

"The only way to earn exceptional returns, if you want to generate several multiples of whatever LPs trust you with, the only way to do that is to be contrarian, since otherwise returns get competed away."

This quote underscores the necessity of having a unique investment perspective to achieve outstanding returns.

"One of the hardest things I found in tech investing is updating your priors."

The challenge of reassessing and expanding one's view of a company's potential worth is discussed, emphasizing the importance of adaptability in investment strategies.

Price Discipline and Identifying "Wonderful" Companies

  • Price discipline is necessary, but flexibility is possible when identifying potential market leaders.
  • The right team and potential for a "winner takes most" outcome are critical factors when considering investment flexibility.
  • Investing at various stages can yield strong returns, particularly in consumer, SaaS, and enterprise sectors.

"Does this show the potential to be a winner takes most or winner takes all kind of business?"

This question reflects the importance of identifying companies with the potential to dominate their market, which can inform investment decisions despite high valuations.

"You can invest at different points along the stack than we used to think and have great returns."

The evolving landscape of investment opportunities across different stages is acknowledged, suggesting a more dynamic approach to venture capital.

Utilization of Tools for Efficiency and Management

  • Notion is praised as a comprehensive tool that consolidates various functions, potentially replacing multiple other tools.
  • AngelList is highlighted as an effective platform for managing investments and supporting founders with startup creation.
  • Squarespace is recommended for building an online presence with mobile optimization, email campaigns, and SEO tools.

"More than 70% of companies who start using notion stop using two plus other tools."

The efficiency and effectiveness of Notion as a multi-purpose tool for businesses is highlighted, suggesting its value in streamlining operations.

"Whether you're running SPVs, a traditional venture fund like me, or a rolling fund, AngelList has you covered."

AngelList is promoted as a versatile platform suitable for various types of investment management, emphasizing its utility for investors.

"Squarespace is the all in one platform to build a beautiful online presence and run your business."

The all-encompassing features of Squarespace for business management and online presence are touted, including its ease of use and effective SEO tools.

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