20VC Bain's Matt Harris on Why Valuation And Market Size Are Not The Most Important Thing At Series A, Why Backing Sociopaths Can Work & Late Cycle Momentum Investing & The Changes That Will Stay in Venture Forever

In this episode of "20 Minutes VC," host Harry Stebbings interviews Matt Harris, a partner at Bain Capital Ventures, a prominent venture fund with investments in companies like LinkedIn and Lime. Harris shares his journey from Bain & Company to founding Village Ventures, focusing on early-stage fintech investing, and eventually returning to Bain Capital to build their fintech practice. He discusses the importance of ownership over valuation in Series A funding, the strategy of backing improbable ideas to achieve significant returns, and the challenge of balancing time between existing portfolio responsibilities and sourcing new deals. Harris also highlights the emerging trend of software companies integrating payments, exemplified by his latest investment in Finix, despite competing with industry giant Stripe. The episode also touches on the importance of organizational discipline, the role of market sizing, and the necessity for founders to challenge the status quo, sometimes walking a fine line between breaking rules and adhering to laws.

• The podcast host, Harry Stebbings, introduces the episode and expresses admiration for Matt Harris.
• Matt Harris is a partner at Bain Capital Ventures, a leading U.S. venture fund.
• Matt Harris has a background in financial technology and services, with investments in Acorns, Openfin, SIG, Fig Ribbon, and Build Trust.
• Prior to Bain, Matt founded Village Ventures and focused on early-stage fintech investing.
• Additionally, Matt is noted for managing his professional accomplishments while being a father to six children.

"And so with that, I'm very excited to welcome Matt Harris, partner at Bain Capital Ventures, a leading U.S. venture fund with a portfolio including the likes of LinkedIn, Lime, Sendgridjet.com and many more incredible companies."

The quote highlights the introduction of Matt Harris, emphasizing his role at Bain Capital Ventures and his successful investment portfolio.

• Brex is presented as a corporate card for startups, notable for reaching unicorn status quickly.
• Brex founders Henrique and Pedro created the company after facing challenges obtaining corporate cards in the U.S.
• Brex offers high card limits and rewards tailored to startups.
• Pilot is introduced as a bookkeeping service that provides detailed financial reports and uses QuickBooks online.
• Dialpad is promoted as a communications platform offering voice, video, messages, and meetings across devices, with voice intelligence for real-time customer conversation insights.
• The ads emphasize solutions for startups' financial and communication needs.

"Brex, the company which built the corporate card for startups and who is the fastest company to reach unicorn status in history."

This quote describes the rapid success of Brex and its relevance to startups in need of financial services.

• Matt Harris began his career in consulting at Bain & Company before joining Bain Capital in 1995.
• Initially involved in private equity, Matt realized his interest was more aligned with venture capital.
• In 2000, Bain Capital seeded him to start Village Ventures, focusing on early-stage fintech investing.
• Matt chose to specialize in financial technology at a time when fintech was not a widely recognized term.
• After running Village Ventures for twelve years, Matt returned to Bain Capital to build the fintech practice.

"And so really that was my entree into venture, was 26-year-old, starting my own firm, raising a fund and trying to figure it out."

The quote outlines Matt Harris's entry into venture capital by starting Village Ventures, highlighting the entrepreneurial aspect of his career.

• Matt Harris discusses the differences between running his own fund and being part of a larger partnership.
• He emphasizes the entrepreneurial excitement and accountability of starting a fund.
• Matt shares that he founded a fund administration business within Village Ventures, gaining operational experience.
• He believes that investors benefit from founding moments to understand the pressures and joys of startups.
• Matt prefers being part of a team and values the resources and brand name of Bain Capital within the fintech space.

"But yet I think it's an important crucible to go through, and certainly was important for me, the sort of starting from scratch experience."

This quote reflects on the significance of the experience of starting a business from the ground up and its impact on Matt Harris's career.

• Matt Harris's investment mindset has been influenced by experiencing the dot-com bust and subsequent economic cycles.
• He started Village Ventures in partnership with seasoned venture capitalists, learning from the macroeconomic environment.
• These experiences have shaped his approach to investing and navigating market fluctuations.

"2000. And as I mentioned, we started the firm in partnership with these two. Even then, very tenured venture capitalists Mark Nunnely and Paul Mater."

The quote mentions the influential venture capitalists who partnered with Matt Harris at the start of Village Ventures, suggesting the importance of mentorship and collaboration in his career.

• Matt Harris reflects on the advice received during the dot-com bust, emphasizing the severity of market downturns.
• He acknowledges his cautious approach due to the cyclicality of finance and technology, which has led to missed opportunities during the prolonged bull market.
• Despite market dips, the trend has been a quick recovery, challenging the traditional belief that what goes up must come down.

"This is nuclear winter. This is not a blip. This is not necessarily something that you can just ride out. You have to rethink your strategy."

This quote highlights the gravity of the dot-com crash and the need for a strategic pivot during such downturns, which was a formative experience for Matt Harris.

"I think that my deep and abiding fear and recognition of the cyclicality of finance and the cyclicality of technology has actually cost me a lot of money."

Matt Harris expresses regret over his cautious stance, which led to missed investment opportunities during the recent bull market, suggesting that his pattern recognition did not align with the market's behavior.

• Matt Harris discusses the difficulty in determining if the market is experiencing late cycle momentum investing.
• He has questioned this for several years, suggesting that the definition of 'late cycle' may have changed.
• Despite skepticism, he acknowledges that the market may be recognizing the transformative potential of high-growth technology companies.

"The only thing that keeps me from enthusiastically saying yes to that is that I've said that very same, enthusiastic yes four years in a row."

Matt Harris expresses his hesitation to declare the market as being in a late cycle, given his past predictions have not been realized.

"Perhaps what's happening in technology is actually so important that the future earnings streams associated with some of these sectors and some of these companies are just so meaningful and transformative."

This quote suggests that the significant impact of technology advancements might justify the high valuations and persistent bull market.

• Matt Harris emphasizes the importance of maintaining a consistent investment cadence, regardless of market conditions.
• He refers to 'time diversification' as a strategy to mitigate the unpredictability of market timing.
• His firm aims for steady investment pacing, acknowledging that market outcomes are uncertain.

"Our goal has been to invest $300 million a year."

Matt Harris outlines his firm's strategy for steady investment pacing, which is designed to remain consistent irrespective of market fluctuations.

"It is impossible to know, except in long retrospect, whether 2019 was a great year to be investing or a horrific year to be investing."

This quote underscores the challenge of market timing and the rationale behind a steady investment approach.

• Matt Harris discusses the relative importance of Series A valuations versus ownership stakes.
• He suggests that achieving a significant ownership percentage is more critical than the entry valuation if the company succeeds.
• The shift in economic value from investors to founders is seen as a natural consequence of the current market.

"We don't obsess about series A valuation, do obsess about series A ownership."

Matt Harris clarifies that his focus is on securing meaningful ownership rather than getting a low entry valuation.

"If you own 20%, 25%, 18%, something meaningful of a company that ends up being important, then it doesn't really matter whether your entry price was 20 post or 40 post."

This quote explains that significant ownership in a successful company outweighs the cost of entry, as the returns will be substantial regardless.

• Matt Harris acknowledges the difficulties a company may face in raising a Series B round after an inflated Series A valuation.
• He notes that while some Series A rounds may reach extreme post-money valuations, his firm avoids participating in those.
• A reasonable post-money range for Series A is essential to not constrain the company's ability to raise future capital.

"Our view is that the expectation that the Series B will therefore be at 250,000,000, it may well happen, but it is surely an unfair expectation on any founding team."

Matt Harris expresses concern over setting unrealistic expectations for a Series B round following an inflated Series A valuation.

• Matt Harris discusses the feasibility of obtaining high ownership percentages in competitive markets, emphasizing discipline in investment decisions.
• He mentions the firm's reluctance to co-lead Series A rounds and their respect for seed investors' rights.
• Despite market competition, achieving desired ownership levels is possible through a disciplined approach.

"It has proven to be feasible for us, and it requires discipline."

This quote highlights that while challenging, obtaining significant ownership stakes is achievable with a disciplined investment strategy.

"We definitely walk away from deals based on ownership, and that happens frequently, far more frequently than walking away based on valuation."

Matt Harris points out that his firm prioritizes ownership over valuation, often leading to walking away from potential deals if ownership targets are not met.

• The dynamics of the venture capital business make collaborative Series A investments challenging.
• There is a focus on maintaining ownership stakes and honoring commitments to seed and angel investors.
• The struggle lies in executing a two-handed Series A due to limited room for existing investors without sacrificing ownership.

"So I feel good about our discipline in terms of maintaining our focus on ownership. I feel good about our practice of continuing to honor seed investors and angel investors, and where we've struggled is a two handed series a which is just very difficult at this point."

This quote highlights the importance of discipline in maintaining ownership stakes and the difficulties faced in Series A rounds when collaborating with peer investors.

• Probable ideas often fail to generate significant economic moats or profit pools.
• Improbable ideas, by contrast, have the potential to create higher value and impact.
• The venture exit landscape has shifted with higher potential value creation, raising the ceiling for successful ventures.
• Improbable ideas are used as a criterion to identify companies with the potential to "put a dent in the universe."

"Improbability is one of those criteria that for us have helped to define which companies have a chance, which companies are actually going to potentially put a dent in the universe, to quote Steve Jobs, and which companies are more kind of the work a day."

Matt Harris explains that improbable ideas are used to identify companies with transformative potential, as opposed to those with more modest, workaday goals.

• Organizational discipline is critical but does not negate the need for a grand vision.
• Entrepreneurs often start with improbable ideas and use organizational discipline to realize them.
• A unanimous vote for a deal within the partnership can be a yellow flag, prompting reevaluation to avoid consensus-driven investments.

"But her and many others started with something deeply improbable. So how do you know the difference? I think you need to have, we have a rule internally that if everybody votes for a deal, we need to pause and rethink it."

Matt Harris discusses the balance between organizational discipline and grand vision, and the internal rule to reassess deals that receive unanimous support, to ensure they are not overlooking potential issues.

• Market size is not the most important factor at Series A; it can be misleading.
• Successful companies often start by addressing a small problem that leads to larger opportunities.
• Inventing a market for an underserved segment can be more valuable than targeting a large existing market.

"Strict market sizing, I think, can be an unbelievable mistake and can be, frankly, very distracting for companies to be wallowing around in this huge tam versus this sense that actually, I'm nailing something for a relatively small group of customers."

Matt Harris argues that strict adherence to market size assessments can distract from the true potential of a company that starts by addressing a niche problem.

• Founders who are willing to disrupt and break rules (but not laws) are often behind transformative companies.
• An element of rule-breaking is seen as fundamental in the venture capital industry.
• Backing 'timid' founders may limit the upside potential of investments.

"We are not looking to back timid founders. We are looking to back founders, of course, that have a deep sense of fiduciary, and founders that are not going to break any laws. But if we only back founders who are unwilling to break rules, then I think we're giving away a lot of the upside of our industry."

Matt Harris explains that while they do not support illegal activity, they look for founders with the audacity to break industry rules and challenge the status quo, as this is often where significant upside lies.

• Matt Harris recommends "Third Plate" by Dan Barber.
• The book discusses food systems, their impact on climate change, and possible actions to address issues.

"Third plate by Dan Barber. It's a book about our food systems and how they're impacting climate change and what we can do about it."

The quote explains the content of the book "Third Plate" and its relevance to contemporary issues like climate change and sustainability in food production.

• Matt Harris suggests two hiring strategies to improve gender diversity in venture capital.
• Achieving a minimum of 50-50 balance of men and women at lower firm ranks.
• Including minorities in the gender diversity discussion.
• Lateral hiring of senior investing talent is equally important.

"We need to at the lower ranks of our firms, we need to bring in the correct balance. Correct being 50 50 at a minimum of men and women and minorities should be added to this question as well. And we also need to lateral in senior investing talent at the same time."

This quote highlights the dual approach to improving gender diversity: hiring balanced entry-level employees and bringing in experienced senior talent.

• Matt Harris emphasizes the importance of trusting instincts in venture capital.
• Analysis is important but should not override gut feelings.
• Instincts are honed from experience and success in investing.

"Trust your instincts. I think we run into apparel here at bank capital and many firms where we do analysis to convince ourselves in or out of things. And I stand by our practice of doing analysis. But at the end of the day, if it fundamentally controversts your gut, you need to go redo the maths on that..."

The quote underscores the balance between analytical decision-making and instinctual judgment in venture capital investments.

• Matt Harris identifies time management as the biggest challenge in his role at Bain.
• Obligations to founders and growing portfolio demand significant attention.
• Managing the tension between supporting existing investments and seeking new ones is a constant struggle.

"The single biggest, single biggest is time management. We have this unbelievable obligation to the founders, we've already invested in that everyone in the business of integrity takes incredibly seriously..."

The quote conveys the demanding nature of time management in venture capital, especially when balancing existing commitments with new opportunities.

• Matt Harris admits to struggling with balancing a large family and professional responsibilities.
• He advocates for ruthless prioritization and having the courage to decline non-essential engagements.
• Understanding where one's contribution is most needed is key to managing commitments effectively.

"I don't make it work. I mean, it's a hot mess is the actual answer to the question. But I would say what has been helpful is relatively ruthless prioritization..."

This quote candidly reveals the challenges of balancing personal and professional life and the necessity of prioritization to manage a busy schedule.

• Matt Harris reflects on the importance of self-awareness in his venture capital career.
• Early in his career, he felt pressured to conform to social expectations.
• He later realized the value of focusing on his strengths and differentiators.

"I wish I'd known more about myself... I think when I was 26, that's who I thought I should be. And so I endeavored to be that person. And I wish back then I'd said more no to social obligations..."

The quote highlights the importance of self-awareness and the ability to focus on one's unique abilities and interests for career success.

• Matt Harris discusses Bain's recent investment in Phoenix, a payments company.
• Phoenix enables software companies to integrate payment functionalities.
• Despite competition from Stripe, Harris believes in the market potential and the Phoenix team.

"So just this week, we announced an investment in a company called Phoenix, which is a San Francisco based payments company..."

The quote explains the rationale behind Bain's investment in Phoenix and the potential Harris sees in the payments market.

• Harry Stebbings expresses gratitude for Matt Harris's assistance.
• Listeners are invited to follow Matt Harris on Twitter and Harry Stebbings on Instagram.
• The importance of social media presence and behind-the-scenes interactions is highlighted.

"It was such a pleasure to have... You can find him on Twitter at Matt C. Harris. Likewise, it'd be great to welcome you behind the scenes here. You can do so on Instagram at htebings 1996 with two B's."

The quote encourages listeners to engage with the speakers on social media platforms for additional insights and interactions.