20VC Benchmark's Peter Fenton on How To Differentiate Between Good & Great VCs, Why Ownership Is A Bigger Determinant Of Returns Than Valuation & What Makes A Truly Exceptional Board Member

In this episode of the 20 minutes VC, host Harry Stebbings interviews Peter Fenton, a general partner at Benchmark and a top-ranked venture capitalist on Forbes' Midas List. Fenton, who has served on the boards of Twitter, Cockroach, Optimizely, New Relic, and Zendesk, shares his journey into venture capital, starting from his childhood exposure to entrepreneurship through his father, to his early career at Accel Partners, and his philosophy on investing and board membership. The conversation delves into the current state of the tech industry, the challenges of new company distribution, the importance of company purpose, and the dynamics of board meetings. Fenton emphasizes the significance of founders with a clear vision and the potential to make bold, transformative decisions, as illustrated by his recent investment in Zenly, a social mapping app that leverages low-power GPS technology to connect friends. Throughout the discussion, Fenton advocates for a Socratic approach to board governance, fostering trust and engagement, and the importance of looking beyond valuation to the broader potential of startups.

• Harry Stebbings expresses his excitement and honor to interview Peter Fenton, a general partner at Benchmark.
• Peter Fenton is notable for his position at Benchmark and his previous role at Accel.
• Fenton is recognized for his influence in the VC industry, as evidenced by his ranking on Forbes Midas list.
• Acknowledgment of Jonathan Abrams for introducing Peter Fenton to the show.
• Promotion of eShares and Fond as essential services for VCs and employee engagement respectively.

Today is a very special episode here on the 20 minutes VC with me, Harry Stebbings at H. Stebbings on Snapchat. Now, I always consider myself truly lucky to do what I do here, but today is one of the episodes where I'm just very, very honored and grateful to have the opportunity to interview such a special individual.

This quote opens the episode, setting the tone of excitement and gratitude for the interview with Peter Fenton.

• Peter Fenton grew up in Silicon Valley and was influenced by his father's role as a startup CEO.
• Early exposure to the venture capital industry through his father's experiences.
• Fenton's education was driven by curiosity, which was later identified as a key trait for his career in VC.
• The competitive spirit is highlighted as another defining trait for venture capitalists.
• Fenton received advice to start practicing in the venture business early in his career.
• He acknowledges the continuous learning curve in venture capital.

Well, I was born in the Silicon Valley and my dad had been a startup CEO for the bulk of my childhood. Through that I had a window into just the opportunity and really, I think maybe best ever potential enablement of humanity, of entrepreneurship.

This quote provides insight into Fenton's formative years and the influence of his father's entrepreneurial career on his own path.

• Venture capital in the late '70s to mid '80s was in its early stages with a mix of people from operational and financial backgrounds.
• Fenton's career in VC started at the age of 26 with Accel Partners and continued at Benchmark for over ten years.
• He reflects on the venture capital industry as one with an infinite learning curve that requires will, tenacity, and curiosity.

And at the time, this is in the late seventy s to mid eighty s, the venture industry was very much in its beginnings. And there was a mixture of people who had some operating experience, but it was just as likely you'd run into someone who had a financial investor background.

This quote provides context on the state of the venture capital industry when Fenton was first introduced to it, highlighting its nascent stage and diverse backgrounds of its professionals.

• Harry Stebbings brings up the topic of tech cycles and references an article by Elad Gil on the end of cycles.
• Peter Fenton discusses the difficulty in defining the end of a tech cycle and points out the importance of recognizing unique entrepreneurial visions.
• He notes the challenges new companies face in achieving rapid adoption due to changes in distribution channels, such as the congested App Store.
• Fenton suggests that despite these challenges, there is potential for products that meet unmet human needs to gain broad uptake.
• The investment in Zenley is used as an example of potential remaining in the social tech space.

It's an interesting lens. As you look at our investments, as they cluster around trends or sectors or phenomenon, I think we end up putting a little bit more structure on the phenomenon than reality merits meaning.

This quote emphasizes Fenton's view that while investments may seem to follow trends, each company is unique and should not be oversimplified as merely part of a broader trend.

• Smartphones have enabling features that could change social interactions.
• Zenly utilizes the location variable with low battery consumption for social connectivity.
• Knowing friends' locations and who they are with is a primitive truth of existence.
• This information leads to habitual usage as seen in Zenly's core demographic numbers.
• Zenly's approach nurtures a primal human interest and need, developing into a significant application.

"And in the case of Zenley, it's the location variable, which, with both ubiquity and their innovation on having a very low battery consumption to signal where you are, that you have a chance to build a social layer, a human communications layer, on top of place."

The quote explains Zenly's innovation in using location services efficiently to create a new layer of social interaction based on users' locations.

• Single apps on iPhones have the potential to become global networks.
• WhatsApp and Telegram are examples of messaging apps that expanded beyond the Apple ecosystem.
• Snapchat has replaced the camera for heavy users by integrating into a network with a social graph.
• Zenly's take on maps and 'find my friends' could lead to a new wave of product development.
• The success of such apps is not just social but a combination of factors coming together at the right time.

"You could look at messaging and say, okay, well, WhatsApp or Telegram have clearly been the open version of iMessage. I think the cameras, now, in many cases, for most people who are heavy users of Snapchat, like myself, the camera has been replaced by Snapchat because it's plugged into a network."

This quote highlights the evolution of apps like WhatsApp, Telegram, and Snapchat that have grown to serve broader functions beyond their original scope by leveraging network effects.

• An investor should fall in love with the team, opportunity, and potential.
• Belief in the potential and setting a high execution bar are essential for success.
• While aware of risks, investors should focus on what could go right, not obsess over potential problems.
• The clarity of a company’s purpose and direction is critical in the early stages.
• Losing clarity or becoming reactionary to competitors can derail a company's mission.

"So when I look at an investment like Zenley and we go into an investment, any new investment, we of course have risks in our mind around things that could go wrong. But we don't obsess on them in a way that's like staring at the guardrail when you're driving."

Peter Fenton emphasizes the importance of focusing on the potential success of an investment rather than being overly preoccupied with what could go wrong.

• The authentic purpose of a company is vital and requires constant focus.
• Docker serves as an example where revisiting the company's original purpose led to a transformation.
• Clarity of purpose and product integrity are defining elements of great company cultures.
• Venture capitalists provide counsel to ensure companies do not drift from their essential elements.

"And that provoked a transformational idea in his thinking around software containers, and he completely reinvented the company."

Peter Fenton describes how Docker's return to its foundational purpose resulted in a significant pivot that transformed the company’s trajectory.

• Valuation should not be the sole reason to turn down a company; it's a mental trap.
• Investors should understand the full irrational potential of a company.
• Fund returns are defined by involvement in significant companies, not by the initial valuation.
• Ownership stake is a more significant determinant of returns than valuation.
• A fair trade considers the full potential and possible future states.

"But in hindsight, it wasn't the valuation that drove the return."

Peter Fenton discusses how valuation is not the key driver of investment returns and how focusing too much on valuation can detract from understanding a company's full potential.

• Ownership stakes offered to investors during early-stage funding rounds have decreased over time.
• This decrease is considered a healthy development, creating a more competitive environment that benefits entrepreneurs.
• Entrepreneurs can now shop around for fair market prices and also seek out extraordinary investors.
• The decision to invest is less about the price and more about the investor's passion and belief in the company's potential.
• A good investor-entrepreneur fit is characterized by inspiration, optimism, and a bias towards building the business.
• Valuation is sometimes used as an "escape hatch" when other critical variables for a good partnership are lacking.
• Investors should focus on a company's full potential and be willing to adjust valuation if they have strong convictions.

"I think that it becomes a more competitive environment. I think it's better in that ways for entrepreneurs, they can both shop the market for what's a fair price, but then within that, they got to recognize that they can shop the market for who's an extraordinary investor."

This quote emphasizes the shift towards a more dynamic and competitive market for early-stage investment, which empowers entrepreneurs to seek not just financial backing but also a partnership with investors who provide exceptional value.

• Assessing the value of market creation is a significant challenge in the investment process, especially when the market potential is undefined.
• The quality of the entrepreneur is pivotal in market creation, as exemplified by Evan Spiegel of Snapchat.
• Entrepreneurs with a unique perspective and a deep sense of purpose can redefine markets and create value in previously undefined spaces.
• Investing in narrow, ill-defined markets can lead to significant success as these markets may become substantial over time.
• The success of Snapchat is attributed to the founders' vision and understanding of unmet needs, such as the desire for ephemeral communication and privacy in social interactions.
• The product design, like the mass BCC feature of Snapchat, reflects the depth of product thinking by the founders.
• Valuation negotiations consider the potential risks and rewards, with both parties compromising to reach a fair sharing of value.

"It centers almost entirely, at least in my case, on the quality of the entrepreneur."

Peter Fenton highlights the importance of the entrepreneur's qualities when evaluating investments, especially in the context of market creation, where the market is not yet well-defined or visible.

• Being a great board member involves asking tough questions and applying critical thinking.
• Over time, one can develop from a less effective board member to one who employs the Socratic method, asking fewer but more impactful questions.
• A great board encourages diverse perspectives, leading to a more dynamic and revealing discussion.
• The evolution of a board member includes learning to unlock the potential of the board itself, engaging all directors, and fostering a high-functioning board dynamic.
• Board meetings should be interactive and engaging rather than presentations, with a focus on written prose for pre-reads instead of PowerPoint slides.

"I then, in a way that was, I think, nothing less than transformational. Became a student of great board members and interviewed a number of the people in the venture business who I really respected and entrepreneurs, and said, what does it look like to be extraordinary at this?"

Peter Fenton describes his journey from being a subpar board member to learning from others and transforming his approach to become more effective by focusing on asking the right questions and fostering board engagement.

"So a lot of what I've done on that front is to make sure that we have a frame to engage the board the right way."

This quote reflects Peter Fenton's approach to improving board meetings by encouraging a more interactive format that involves engaging directors in a meaningful dialogue rather than relying on presentations.

• Peter Fenton discusses the importance of board meetings in a company, emphasizing the need for alignment, focus, and resonance among board members.
• The first third of a board meeting should be dedicated to ensuring everyone is on the same page with operating metrics and data.
• The second third of the meeting should delve into the most significant topics.
• An effective board meeting is likened to a band playing in harmony, indicating the importance of teamwork and synergy.
• The importance of the board is not to be overweighted, as much of the company's operations occur outside these meetings.
• Directors should work closely with the entrepreneur, maintaining open communication and allowing for vulnerability.
• Trust and rapport between directors and the management team are crucial for successful board governance.
• Directors must balance being well-informed without meddling or being swayed by political agendas within the company.
• Continuous learning and discipline are key to being extraordinary at board governance.

So the first third of the board meeting, we can all make sure we're on the same page. And then the second 3rd, we can dive into the topics that matter most.

This quote explains the structured approach to board meetings, with a clear division of time between aligning on data and metrics and discussing key issues.

Much of what happens in our companies occurs outside of the board meetings.

Peter Fenton points out that the real work of a company often takes place outside the formal setting of board meetings, highlighting the need for continuous engagement.

I think a huge component of successful board is the trust between the directors and between the management team.

Trust is identified as a foundational element for a successful board, emphasizing the need for honest and open communication.

• Peter Fenton deflects the question about his favorite book, instead advocating for podcasts as a source of intellectual enrichment.
• He suggests having a curated list of 15 to 20 podcasts to listen to throughout the week during various activities.
• Podcasts are seen as a way to integrate learning into daily routines, providing enrichment beyond traditional book reading.
• Fenton recommends podcasts, including the one he's being interviewed on, as valuable resources for the audience.

About 15 to 20 podcasts that I find indispensable in my week.

Peter Fenton explains his personal approach to intellectual enrichment, highlighting the role of podcasts in his weekly routine.

I think by having podcasts as part of your daily routine, it's expansive in ways that I wish for everybody.

This quote promotes the idea that podcasts can broaden one's horizons and fit seamlessly into daily life.

• Peter Fenton discusses teaching his eldest child about in-group and out-group bias, using real-life examples.
• He references an implicit bias test that reveals subconscious biases people carry.
• Fenton shares a personal story about his son's school experience with a refugee student, encouraging his son to be inclusive.
• The discussion underscores the importance of understanding and overcoming biases to foster humanism and objectivity.

I think one of the defining traits of humanism is an eradication of the notion of the other.

This quote reflects Fenton's view on the importance of recognizing and addressing implicit biases to promote inclusivity and humanism.

What I begged of him was to be the one, and we've all felt this in our past, the individual that crosses the divide to grab you and pull you in.

Fenton shares a personal anecdote to illustrate the concept of overcoming biases by actively including others.

• Great founders are described as uncontrollable, preferring bold and risk-taking actions over conservative decisions.
• The ability to envision and pursue seemingly impossible achievements is a trait admired in founders.
• Founders who resist selling their companies early on, in favor of pursuing their vision, are seen as exemplary.
• Examples include Evan Spiegel of Snapchat and the early decisions made by Twitter and Facebook to not sell.
• Peter Fenton seeks founders with ambition, belief, and the capacity to inspire their teams.

The best founders make me feel like, number one, I can never control them, and I never want to control them.

This quote captures the essence of the founder-board member relationship, emphasizing respect for the founder's autonomy and vision.

Most every great company, at some point in its early to midlife, is given a chance to sell. And that's the specific moment where that founder entrepreneur has to say, in a way that defies logic and conservative linear thinking, what might happen, what might go right.

Peter Fenton discusses a critical juncture in a company's journey, praising founders who choose to pursue their vision despite lucrative offers to sell.

• The most recent publicly announced investment by Peter Fenton is in Zenly.
• Zenly's product innovation revolves around low power GPS reporting, which informs users about the location of their friends and their activities.
• The investment was driven by the belief that Zenly addresses a fundamental need for connection and has the potential to become a daily tool for users.
• High user engagement and positive cohort analysis support the investment decision.

Zenly's innovations on low power GPS reporting have opened up this whole field of opportunity.

Peter Fenton explains the rationale behind the investment, focusing on the innovative aspect of Zenly's technology and its impact on social connectivity.

A product that has that kind of dynamic has the potential to be one of those fundamental tools that you use every day.

This quote highlights the potential of Zenly's product to become an integral part of users' daily lives due to its engaging nature.