20VC Benchmark's Peter Fenton on The Single Question That Defines The Art of Early Stage Venture, Marketing Timing Risk, Why The Oversupply of Capital Is Good & His Biggest Lessons from 12 Years On The New Relic Board



In a candid conversation on "20 Minutes VC," host Harry Stebbings interviews Peter Fenton, a general partner at Benchmark, discussing Fenton's profound influence on the venture capital landscape and his role in the success of companies like Snap, Twitter, and eBay. Fenton shares insights from his early investment in New Relic, emphasizing the importance of product innovation, market timing, and creating a supportive board environment that fosters open dialogue and vulnerability. He also highlights the significance of establishing a strong, trusting relationship between investors and founders, which can lead to better decision-making and company growth. Additionally, Fenton touches on the challenges of capital allocation in today's market and the potential impact of capital oversupply on innovation.

Summary Notes

Introduction to Peter Fenton and Benchmark

  • Harry Stebbings introduces Peter Fenton as a returning guest and a general partner at Benchmark.
  • Benchmark is highlighted as one of the great venture firms with a notable portfolio.
  • Peter Fenton's career and track record are recognized, including his presence on the Forbes Midas list.
  • Peter Fenton's previous role at Accel Partners and board positions are mentioned.

"His career and thinking inspired so much of my journey and it's just such a pleasure to welcome back Peter Fenton to the hot seat today."

This quote expresses Harry Stebbings' admiration for Peter Fenton's career, which has been an inspiration to him.

Harry Stebbings' Endorsements

  • Harry Stebbings endorses several products and platforms, including AngelList's fund admin platform.
  • He speaks highly of the founders of Digits, Jeff Cybert and Wayne Chang, and their financial software product.
  • Cooley, a global law firm specializing in startups and venture capital, is also endorsed for its history and services.

"I just love using Angelist's fund admin platform to manage my investments."

Harry Stebbings shares his personal endorsement of AngelList's platform, indicating its usefulness in managing investments.

The Origin Story of New Relic's Series A

  • Peter Fenton recounts the origin story of New Relic's Series A funding round from 2008.
  • The story begins with a golf course meeting with Lou Cerny, founder of New Relic.
  • Despite neither being avid golfers, a conversation about a new company idea unfolds.
  • Lou Cerny's enthusiasm for Ruby on Rails and his financial independence are highlighted.

"He starts to share with me his ideas about a new company, and one of the things that Lou had earned after Wiley was economic freedom."

This quote explains how Lou Cerny shared his new business idea with Peter Fenton, emphasizing Cerny's financial freedom post-Wiley.

Peter Fenton's Influence on New Relic's Corporate Structure

  • Peter Fenton challenges Lou Cerny's initial desire to operate without investors or a board.
  • Fenton argues that a broader ecosystem of support would amplify the company's impact.
  • The conversation leads to considering a corporate structure for New Relic.
  • Fenton emphasizes the importance of a company's scale and the attraction of top talent.

"Why would you ever want to fall short of global scale?"

Peter Fenton challenges Lou Cerny's initial approach, suggesting that a global scale should be the ambition, which would require a more traditional corporate structure.

Building Trust and Safety with Entrepreneurs

  • Peter Fenton discusses the importance of creating trust and safety with entrepreneurs.
  • He acknowledges the challenge of establishing trust within a governance structure like a board.
  • The role of vulnerability in building relationships is emphasized, citing Brene Brown's work.
  • Fenton stresses the importance of treating bad news as an opportunity for learning and growth.

"When I work with my founders, I want to make sure that that vulnerability is not only tolerated, but it's critically important as the fabric of our connection."

This quote underscores Peter Fenton's approach to fostering a relationship with founders where vulnerability is a key component of trust and connection.

Observability Market in 2008

  • Peter Fenton reflects on the observability market in 2008 when New Relic's Series A took place.
  • He discusses the perception of the developer tooling market as limited in potential.
  • Fenton highlights the importance of unlocking consumption and tapping into latent demand with a compelling product experience.

"So much of the art of early stage venture is to ask the question of can you unlock consumption?"

Peter Fenton describes a core venture capital strategy of identifying opportunities to unlock consumption in markets that may not initially appear attractive.

The Theory Behind APM (Application Performance Management)

  • APM was created to address the billions of dollars of software written each year that was frustrating users with issues like slow response times and site blackouts.
  • The goal was to provide developers with awareness of how their products perform in real-world situations.
  • The market for APM was initially small, with Wiley as the market leader making $200 million in revenue.
  • There was skepticism about whether APM companies like New Relic could become significant, revenue-generating enterprises.
  • The investment hinged on whether the potential energy in the market could be unlocked and monetized through the product experiences of companies like New Relic.

"So the theory behind APM application performance management was that there were billions and billions of dollars of software written every year. They were going into the world and torturing their users, either by slow response times, you have everything from lag to brownouts to full blackouts of sites going down, and that developers were being blocked from seeing that in the world."

This quote explains the motivation behind the development of APM, highlighting the need to solve common software performance issues and provide developers with insights into their products' real-world performance.

Market Forces and Ruby on Rails

  • The success of APM relied on external forces such as the emergence of Ruby on Rails, which increased the scale of developers and the need for APM tools.
  • New Relic's approach to APM was considered radically easier and more accessible, with a cloud-delivered, simple deployment.
  • The initial customer base for products like New Relic included smaller companies, leading to questions about the scalability of such businesses.
  • The growth of the APM category was seen as inevitable in hindsight due to the latent demand for improved developer tools.

"And the idea behind APM back to Wiley was we can give people the consciousness, the awareness of how their products do in the wild."

This quote emphasizes the core value proposition of APM, which is to provide developers with the ability to monitor and understand the performance of their applications in real-world scenarios.

Product Experience and Market Transition

  • Great products create a "gut punch" experience that is instantly compelling and memorable.
  • New Relic's product experience was likened to the ease of using Uber or the simplicity of Airtable's database.
  • The challenge was to maintain the immediacy of the product experience while expanding into new markets without diluting its impact.
  • The product's ability to quickly and easily provide value was a key factor in its adoption and success.

"I think the great products are gut punch, where you just say, wow, I can't unsee that."

This quote captures the transformative impact a great product can have on a user, creating an unforgettable and undeniable experience that sets a new standard.

Market Timing and Adoption Risks

  • Market timing involves assessing whether the market is ready to embrace a new product and whether the necessary preconditions for adoption are in place.
  • For New Relic, preconditions like the proliferation of cloud computing and Ruby on Rails were essential for adoption.
  • A cautious approach to capital allocation and growth during uncertain times like the global financial crisis was crucial to navigating market timing risks.
  • The speaker suggests that an oversupply of capital in 2021 may lead to premature investment in markets not ready for economic development.

"For the consumer, market timing typically relates to adoption forces, right? So you're asking the question of will the pull, not you're screaming at the market, but the market grabbing at your products be there?"

This quote addresses the concept of market timing, emphasizing the importance of market demand in driving the success of a new product, rather than just the product's availability.

Oversupply of Capital and Innovation

  • The speaker does not share the fear that an oversupply of capital is detrimental; instead, they argue it can be beneficial for innovation.
  • More available capital leads to more experimentation, which can result in unexpected breakthroughs.
  • The negative effects of too much capital are more likely to manifest in later stages of a company's life, potentially leading to unsustainable business models.
  • However, an abundance of capital can also lay the groundwork for new businesses that would not be possible otherwise.

"No, I don't have that same fear. I personally think that oversupply of capital is historically a good thing for innovation, insofar as it creates higher degrees of entropy."

This quote reflects the speaker's belief that an oversupply of capital, contrary to being a concern, actually fosters innovation by allowing for a greater number of experiments and new ideas to emerge.

Venture Multiples and Capital Allocation

  • There is a concern that the influx of capital into venture markets is leading to a reduction in venture multiples, potentially aligning them with private equity multiples.
  • The speaker expresses curiosity about the impact of increased capital on the valuation and returns of venture investments.

"Totally agree with you in terms of the acceleration around innovation. I mean, one interesting thing is, although brilliant for innovation, for venture multiples, with the increase in price, you see the denigration of venture multiples to what could be, some suggest, like pe multiples."

This quote raises concerns about the potential consequences of an oversupply of capital on venture capital investment multiples, suggesting that the increased cost of investment could lead to lower returns, similar to those seen in private equity.

Financial Commitment and Valuation in Venture Capital

  • Benchmark's investment in New Relic: $3.25 million for 27% of the company with a 20% management pool, Series A investment.
  • Comparison to current investment landscapes: Today, the same amount might be $7-10 million for a historically lower percentage.
  • The importance of focusing on market and entrepreneur character over valuation precision.
  • The potential for radical success if distribution issues are addressed in a market.
  • The impact of a primary, long-term venture relationship on a company's journey.

"We put 3.25 million in to buy 27% of the company with a 20% management pool. That's a Series A investment."

This quote outlines the specifics of Benchmark's initial investment in New Relic, emphasizing the structure of the deal and the type of investment round.

"But if you zoom out, Harry, big picture, if the company works, if it really works, it doesn't matter."

Peter Fenton is highlighting the overarching importance of a company's success over the specifics of the investment valuation, suggesting that the latter can be less significant in the face of true success.

"And I think one of the mistakes we make on valuation discussions for early stage venture is false precision."

Fenton criticizes the focus on precise valuation in early-stage ventures, suggesting that it can be a misguided effort when assessing a company's potential.

Board Management and Investor-Founder Relationships

  • The importance of a transparent, honest, and direct board dynamic.
  • The effectiveness of written narratives over PowerPoint presentations in board meetings.
  • The significance of CFO Mark Sacklib's role in New Relic's financial success.
  • The contribution of board members like Sarah Fryer and Peter Curry to maintaining a culture of directness and vulnerability.
  • The impact of founder Lou's approach to conflict avoidance and seeking board support for personal growth.
  • The ideal board dynamic is collaborative, not dominated by a single individual, elevating collective intelligence.

"The original new rock board stabilized at about three people for, I want to say, the first five years."

This quote describes the early composition of New Relic's board, which was small and not diverse but effective in its operation.

"Lou was very admittedly conflict avoidant. He said, this is one of my issues. I need you guys as my partners to be on the watch for when I'm doing that."

Peter Fenton shares how founder Lou recognized his tendency to avoid conflict and proactively sought the board's assistance to address it, which led to early, beneficial organizational changes.

The Art of Giving Feedback

  • The emotional nature of discourse and the human tendency to be defensive.
  • The necessity of separating emotional responses from constructive feedback.
  • The importance of validation before delivering critique.
  • The dangers of passive-aggressive and aggressive-aggressive board dynamics.
  • Striking a balance between connection, validation, and constructive language.
  • The recommendation of Marshall Rosenberg's book "Nonviolent Communication" for mastering the art of feedback.

"Well, I think we underestimate the social emotional nature of any discourse, because I think we're humans at the end of the day, and we have natural emotional responses to critique."

Fenton acknowledges the emotional aspects of board discussions and the need to consider human responses when providing feedback.

"So a huge part of getting it right is something you can take out of the parenting books."

He draws a parallel between effective parenting techniques and the approach needed to give feedback in a board setting, emphasizing the need for validation and emotional intelligence.

"The one thing this is, I don't know we have time for this in the podcast, but one of my closest confidants got me a copy of Marshall Rosenberg's book, nonviolent communication, and I want to give that to everybody."

Fenton endorses the principles of nonviolent communication as a tool for delivering feedback effectively, highlighting its importance in board and management interactions.

The Weight of Words in Board Responsibilities

  • Peter Fenton discusses the importance of board members understanding their role in influencing the business's outcome and quality.
  • Board members should refrain from providing answers and instead focus on asking questions to stimulate critical thinking in entrepreneurs.
  • The process of asking questions rather than giving answers can be more time-consuming but yields more durable impacts.
  • Directors often fail in this aspect, and Peter admits to his own failures and the ease of giving answers over asking questions.

"If you think your role is to provide the answers, then I think you probably shouldn't be on the board."

This quote emphasizes the belief that board members should guide rather than dictate, encouraging entrepreneurs to develop their own solutions.

"It takes longer to ask the questions and frame it in the right way, but I think it's far more durable in terms of impact on the board."

Peter acknowledges that while it may be easier to give direct advice, the long-term benefits of guiding entrepreneurs through questioning are more substantial and impactful.

Vulnerability and Continuous Improvement

  • Peter Fenton speaks on the importance of recognizing the continuous nature of the craft of business and the dangers of complacency.
  • Acknowledging vulnerability and the possibility of making mistakes allows for growth and improvement.
  • The concept of vulnerability is tied to the idea of not attaching to an egoic sense of self but rather finding joy in the work and its potential for personal and professional development.

"The minute you think that you've figured it out and that you've mastered it, you've shut down your capacity to do it effectively."

This quote underlines the continuous learning process and the importance of maintaining a mindset open to growth and development.

"It's part of growth is that you're in that continual. How could I do better? What might I be missing here?"

Peter highlights the mindset of self-improvement and the constant questioning that leads to personal and professional growth.

New Relic's Potential Outcomes and Success Factors

  • Peter Fenton reflects on the potential reasons for New Relic's failure and success.
  • He envisioned New Relic could become a platform for "conscious software," improving software accountability and quality.
  • Fenton attributes New Relic's success to a sustained commitment to product invention and innovation.
  • He identifies Mark Sachleben as the unsung hero of New Relic, praising his egoless contribution and multifaceted role.
  • A memorable moment for Fenton was instilling confidence in New Relic's board during the financial crisis of 2009, demonstrating the importance of support and belief in the company's vision.

"Tiny market of Mickey Mouse developers that would never have the money to support a viable economic model."

Peter speculated on a potential failure scenario for New Relic, which was based on the assumption of a limited market with insufficient financial support.

"Conscious software, which isn't to say AI, but software that would have wherever code was written, the ability to have awareness for the people who wrote it in the wild."

This quote outlines Peter's vision for New Relic's success as a platform providing developers with insights into their software's performance in real-world applications.

"I think sustained commitment to product invention and innovation unlocked its continual growth."

Peter attributes New Relic's success to its persistent focus on product development and the ability to inspire developers with their offerings.

"Mark Sachleben without question to me is the unsung hero."

Peter recognizes Mark Sachleben's significant yet understated contributions to New Relic, highlighting the importance of key individuals in a company's success.

Reflections on Board Meeting Experiences and Personal Growth

  • Fenton shares a story from a New Relic board meeting during the financial crisis, where he played a pivotal role in boosting morale and confidence.
  • The story illustrates the impact of board support on a company's trajectory and the psychological aspects of navigating tough times.
  • Fenton's recounting of this experience emphasizes the importance of a board's commitment and its role in fostering a company's resilience and success.

"To breathe confidence into that room, into Lou, into the business, to get through that trough."

Peter describes the crucial support provided during a challenging period for New Relic, reinforcing the value of a supportive board in difficult times.

"That sort of durable commitment is what defines the role we like to play."

This quote reflects Peter's view on the enduring nature of the commitment required from board members to positively influence a company's journey.

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