20VC Benchmark's Bill Gurley on 5 Traits Benchmark Look For When Adding To The Partnership, Why The Abundance of Capital Is Today's Biggest Challenge in VC & The Right Way To Think About Market Size When Assessing Opportunities

In this episode of "20 Minutes VC," host Harry Stebbings interviews Bill Gurley, a renowned general partner at Benchmark, a venture capital firm that boasts a portfolio featuring industry giants like Uber, Twitter, Dropbox, and eBay. Gurley shares his journey from a top-ranked Wall Street research analyst covering companies like Dell and Microsoft, and being the lead analyst on the Amazon IPO, to becoming a venture capitalist. He emphasizes the role of luck and opportunity in his career, his approach to venture investing, and the importance of being prepared and speaking judiciously as a board member. Gurley also discusses the challenges of the current venture landscape, marked by an abundance of capital, and the potential pitfalls of overemphasizing TAM (Total Addressable Market) in early-stage investing. He highlights the importance of Benchmark's equal partnership model in facilitating generational transitions and maintaining a reputation for supporting founders through both successes and failures.

• Harry Stebbings introduces the podcast "20 minutes vc" and promotes behind-the-scenes content on Instagram.
• Harry recalls his aspirations to interview top venture capitalists, including today's guest, Bill Gurley.
• Bill Gurley is a general partner at Benchmark, a successful venture fund with investments in companies such as Uber, Twitter, Dropbox, and more.
• Before venture capital, Bill was a top-ranked research analyst on Wall Street, with coverage of tech companies and the lead analyst role on the Amazon IPO.
• Harry thanks Bill's partners for their question suggestions for the episode.
• Harry promotes mParticle, Calm, and Botkeeper as essential tools for customer data synchronization, sleep aid, and bookkeeping automation, respectively.

You are listening to the 20 minutes vc with me, Harry Stebbings, and you can see all things behind the scenes from us on Instagram at H. Stebbings 90 96 with two v's.

This quote introduces the podcast and the host, Harry Stebbings, who also highlights a way for listeners to engage with behind-the-scenes content.

Now Bill is a general partner at Benchmark, one of the most successful funds of the last decade, with a portfolio including the likes of Uber, Twitter, Dropbox, Wework, Snapchat, Stitch Fix, eBay and many, many more incredible companies.

This quote highlights Bill Gurley's position at Benchmark and the fund's impressive investment track record, setting the stage for his expertise in venture capital.

And before entering the world of venture, Bill spent four years on Wall street as a top ranked research analyst, including three years at CS first Boston where his research coverage included such companies as Dell, Compaq and Microsoft.

The quote provides background on Bill Gurley's experience as a research analyst before his venture capital career, underscoring his deep understanding of the tech industry.

• Bill Gurley shares his unconventional path to becoming a general partner at Benchmark.
• Luck and random opportunity played significant roles in Bill's venture capital career.
• Bill's interest in venture capital began in business school but was advised to gain more experience first.
• Exposure to Compaq's success and the world of stock trading sparked Bill's fascination with tech investing.
• Bill's career as a sell-side analyst at Credit Suisse First Boston came by chance and led to a network in the tech industry.
• Frank Quattrone's offer to introduce Bill to venture capitalists in Silicon Valley was pivotal in his transition to venture capital.
• After a short stint at Hummer Winblad Venture Partners, Benchmark approached Bill with an irresistible offer.

It's actually an unusual story that I think exposes how much luck is involved in some of these things as well as just random opportunity.

Bill Gurley emphasizes the role of luck and opportunity in his career path, suggesting that success in venture capital can come from unexpected places.

I got a call one day from Frank Quattrone, the legendary Frank Quattrone, and he said, we're leaving Morgan Stanley and starting a new investment bank, and we'd like you to be a part of it.

This quote details a critical moment in Bill Gurley's career when Frank Quattrone offered him an opportunity that would eventually lead to a venture capital position.

• Bill Gurley discusses the influence of financial market cycles on his investment approach.
• He studied the history of financial markets and booms and busts before entering venture capital.
• Silicon Valley's tendency to quickly forget risk is unique, according to Bill.
• Bill observes that risk aversion increases suddenly during market busts, whereas risk-taking builds up slowly during booms.
• Venture capital is inherently cyclical, with unavoidable boom and bust cycles due to its structure and capital flow.
• Howard Marks, a bond investor, commented on the challenging cyclicality of the venture business.

Silicon Valley is an interesting place because I've never been around a group of people where risk is forgotten so quickly.

Bill Gurley points out the quick forgetfulness of risk in Silicon Valley, implying that this cultural trait can lead to repeated cycles of boom and bust.

You're going to have boom bus cycles, always.

This quote from Howard Marks, as recounted by Bill Gurley, emphasizes the inevitability of cyclical patterns in the venture capital industry, influencing investment strategies.

• Venture capital investment cycles are characterized by long-term commitments and significant returns often realized at the end of the cycle.
• Firms that become conservative too early may miss out on substantial gains, as seen in the late 1990s.
• The importance of staying invested through the entire cycle to capture all potential upside is highlighted.

"The vast majority of the average returns, over a multidecade window, are right at the end of the cycle."

This quote emphasizes that the most significant returns in venture capital tend to occur towards the end of investment cycles, suggesting the importance of sustained investment to capture full returns.

• Capital in venture funds is typically committed for ten years, raising questions about the impact of market crashes on fundraising.
• Market downturns lead to increased risk aversion among principals.
• High burn rates in companies could pose significant challenges if capital becomes scarce.

"The risk aversion of the principles happens very quickly."

The speaker is noting that the individuals in charge of making investment decisions become more conservative in response to market downturns, which can affect the flow of capital to startups.

• In venture capital, the potential reward often outweighs the risk, leading to asymmetric risk and reward.
• The cost of missing out on a highly successful investment like Google can be exponentially greater than the loss from a failed investment.
• Price sensitivity may be less relevant if a company has the potential to deliver outsized returns.

"If I decide not to invest in Google, that error in decision making cost you 10,000 x or whatever, 1000 x, whatever the number was."

This quote illustrates the concept of asymmetric risk, where the opportunity cost of passing on a highly successful investment far exceeds the potential loss from a failed one.

• Venture capitalists may overemphasize Total Addressable Market (TAM) analysis, especially for early-stage companies.
• Technology can expand markets beyond initial estimates, as seen with Uber and cell phone adoption.
• Considering what could go right rather than focusing solely on potential risks is a valuable perspective.

"I've grown accustomed to saying to myself, hey, what could possibly be true that would know those types of tam analysis to be wrong?"

The speaker suggests that TAM analyses can be flawed and that it's important to consider how new technologies could disrupt and expand markets beyond current predictions.

• The brand power of a venture firm can positively influence fundraising for its portfolio companies.
• Benchmark's commitment to board involvement and fiduciary duty is recognized and valued by other investors.
• The role of venture firms in governance and support is critical to their reputation and the success of their investments.

"The companies we invest in definitely benefit from a brand halo."

This quote indicates that the reputation of a venture firm can enhance the perception and success of its investments, making subsequent fundraising easier for portfolio companies.

• Board members should be well-prepared and informed for meetings.
• Over time, board members learn to speak less and contribute more effectively.
• Writing down thoughts during meetings and deciding what needs immediate discussion versus follow-up can improve boardroom dynamics.

"Anytime I have an idea that pops into my head during a boardroom, I'll write it down, and then I'll ask myself, does this need to be discussed right now?"

The speaker is sharing a personal strategy for boardroom participation, emphasizing the importance of discerning when to share ideas and when to reserve them for later discussion.

• New board members should be aware of their circle of competence and contribute meaningfully when appropriate.
• Speaking too much can be counterproductive; listening and understanding the dynamics are crucial.
• Recognizing when to provide input and when to defer to others is part of effective board membership.

"Know your circle of competence. Right. And so if there is a point that is going to be super helpful and you're the right person to make it, then you certainly should."

This advice to new board members underscores the importance of understanding one's own expertise and contributing when it adds value to the discussion.

• Venture portfolios contain companies with varying degrees of success, some delivering significantly higher returns than others.
• Time spent on successful companies can seem more beneficial from a short-term and selfish perspective.
• Working with struggling companies can be mentally taxing, especially during difficult times such as layoffs.
• A venture capitalist's reputation is built over decades and is crucial for future investment opportunities.
• Founders often ask to speak with CEOs of companies that did not succeed, which can impact a venture capitalist's reputation positively or negatively.

"I mean, there are companies in any venture portfolio, they're going to be delivering 100x more return than another one that you might be working on."

This quote highlights the disparity in potential returns between different companies within a venture portfolio and the implications for time allocation.

"Your reputation is going to be a part of what allows you to win or not win investment opportunities in the future."

The quote emphasizes the long-term importance of a venture capitalist's reputation in securing future deals, suggesting that reputation management is a key component of successful venture capital practice.

• Benchmark's investment decisions are made collaboratively, with a focus on intuition, especially for early-stage investments.
• The competency and capability of the founder are heavily weighted in these decisions.
• Benchmark's structure, with equal economics for investment partners, promotes a collaborative environment where every voice matters.
• Knowledge of each partner's weaknesses and tendencies can help the team avoid bias and make better decisions.
• The majority of the partnership agreeing is sufficient to move forward with an investment.

"The vast majority of investments we make are very early stage, and as a result, it's not the type of situation where you're going to have ten people dive into spreadsheets and present all these arguments."

This quote describes Benchmark's focus on early-stage investments and the reliance on intuition over extensive quantitative analysis in their decision-making process.

"If a majority of the partnership wants to move forward, we move forward."

This quote explains Benchmark's democratic approach to investment decisions, where a simple majority can determine whether to proceed with an investment.

• Partner selection is a critical aspect of maintaining a successful venture capital firm over time.
• Criteria for selecting partners include youth, curiosity, business judgment, an investor mindset, and passion for venture capitalism.
• The industry has changed, with fewer people today being passionate about a career in venture capital compared to 20 years ago.
• Selling is a significant and often underestimated part of venture capital, which can influence partner selection.

"Youth is something that I've spoken about quite a bit. I think venture capital bends towards youth."

The quote reflects the belief that younger venture capitalists may have advantages, such as being closer to the networks where big outcomes originate.

"I think you need an investor mindset. Not everyone either likes to or decides that they want to think like an investor."

This quote highlights the importance of having an investor mindset, which involves understanding the history of investing and maintaining a certain level of skepticism.

• The current abundance of capital in the market makes strategic decision-making challenging.
• Traditional financial models, like the Discounted Cash Flow (DCF), do not function properly in negative interest rate environments.
• This abundance of capital leads to strategic questions that are unprecedented in the history of business.

"The most challenging part for me has just been this abundance of capital."

This quote identifies the speaker's personal challenge with the current state of the market, where excessive capital complicates the investment landscape.

• There is a debate on whether technology's integration into all parts of the economy represents a 30-year transformational shift.
• Some believe this shift could make the economy invincible to macro cycles, while others, including the speaker, are skeptical.

"My gut is what you just said, that there's no way it's unavoidable."

This quote conveys the speaker's skepticism about the idea that the technological transformation could make the economy immune to macroeconomic cycles.

• Venture capitalists often convey optimistic messages about the future to appeal to potential founders.
• Belief in technology and a positive outlook are commonly adopted stances among venture capitalists.
• Despite potential downturns, venture capitalists may maintain their operating principles to capitalize on possible upsides.

"Anytime a venture capitalist opens their mouth, they're probably sending a message to the founder they haven't met yet."

This quote indicates that venture capitalists are always aware that their public statements can influence their reputation and appeal to future entrepreneurs they may want to work with.

"The best way to protect against the downside is to enjoy every last bit of the upside."

Here, the speaker suggests that by fully embracing the positive aspects and potential gains of a venture, one can mitigate the impact of potential negative outcomes.

• "Complexity" by Mitchell Waldrop is a highly influential book on complexity theory and multivariable nonlinear systems.
• Understanding complex systems is crucial for evaluating economies, opportunities, and investments.
• The book's impact is likened to the lasting effect of music from one's youth.

"It's called complexity by Mitchell Waldrop, and it's about the rise of the Santa Fe Institute... it just had such a profound impact on how I see different models and systems and economies and opportunities and investments."

The speaker credits this book with significantly shaping their perspective on analyzing and understanding complex systems relevant to their work in venture capital.

• A profound affection for helping founders realize their dreams is a key motivator.
• The speaker would choose venture capital as a profession even if all jobs paid the same, indicating intrinsic motivation.

"I have a profound affection for the art of helping founders realize their dream and imagining with them a future that we then bet on and help make come true."

The speaker expresses a deep passion for the process of supporting and working with founders to achieve their visions, which drives their work in venture capital.

• Missing out on investing in successful companies like Google at an early stage is a notable regret.
• Price sensitivity has sometimes led to missed opportunities.

"I had a meeting, or my firm, benchmark, had a meeting with Larry and Sergey where they said, will you invest at 100 pre? And we should have said, yes."

Reflecting on past decisions, the speaker acknowledges that not investing in Google early on was a mistake and serves as a lesson for future investment opportunities.

• Discussions about the potential upside of an investment are critical when deciding whether to stretch beyond pre-set investment limits.
• Regrets in venture capital often stem from missed opportunities rather than overpaying.

"We start internally having as intense and as quick a discussion as we possibly can about how much upside is really in the situation."

The speaker describes the internal process of evaluating the potential return of an investment to make informed decisions about when to exceed initial price limitations.

• Regret is acknowledged in venture capital, particularly regarding missed opportunities.
• Due to the asymmetry of outcomes, more focus is placed on missed gains than on losses.

"We do dwell on the decision errors that led us to miss big winners."

The speaker admits that the venture capital firm spends time considering what went wrong when they miss out on significant investment opportunities.

• Benchmark's equal partnership model and hands-on due diligence by partners are points of pride.
• The model facilitates generational change and attracts top talent due to its welcoming and inclusive structure.

"The founding partners put together this crazy idea of this equal partnership... it's amazingly helpful for generational change."

The speaker is proud of the equal partnership model at Benchmark, which has proven beneficial for the firm's longevity and ability to attract and retain talented partners.

• Good Eggs, an online company with a purpose-built distribution center for direct-to-consumer retail, is a recent investment.
• The CEO's leadership and the company's supply chain optimization were key factors in the investment decision.

"We put some money in a company called good eggs... He's a perfect fit for the role. He's got great leadership skills, incredible external presenter and communicator."

The speaker explains their enthusiasm for investing in Good Eggs, highlighting the CEO's capabilities as a significant reason for their confidence in the company's potential.

• The host expresses personal joy from having Bill on the show, indicating a high level of satisfaction and enjoyment from the conversation.
• Bill Gurley's presence on the show is seen as a highlight among many episodes.

"And I have to say, and I really probably shouldn't say this, but of all the episodes I've done, that probably has to be the one that's delivered one of the greatest moments of joy for me."

The host conveys that the episode with Bill Gurley stands out as a particularly joyful and memorable experience in the history of the podcast.