20VC Benchmark's Sarah Tavel on Why Chasing GMV Will Lead To The Wrong Direction, The 2 Crucial Tipping Points For Marketplace Adoption, Why UGC Plays Are Like Marketplaces & How To Determine Between Existential and NonExistential Risk

Summary Notes


In this episode of "20 minutes VC," host Harry Stebbings interviews Sarah Tavill, a general partner at Benchmark, discussing her journey from an analyst at Bessemer Venture Partners to becoming a pivotal figure at Pinterest and later a partner at Greylock. Tavill shares insights on marketplace dynamics, emphasizing the importance of focusing on a constrained problem to achieve dominance rather than chasing Gross Merchandise Volume (GMV) at all costs. She advises founders to prioritize customer satisfaction and retention over rapid expansion and to utilize 'tipping loops' for growth. Tavill also addresses the challenges of time management and the pitfalls of rapid fundraising rounds, suggesting that building strong founder-investor relationships is essential for successful board dynamics. She concludes by stressing the strategic advantage of staying underestimated in a competitive venture landscape.

Summary Notes

Introduction to the Podcast Episode

  • Harry Stebbings introduces the episode of "20 minutes VC" and the guest, Sarah Tavel, general partner of Benchmark.
  • Sarah Tavel's background includes being a general partner at Greylock and the first PM at Pinterest.
  • Acknowledgment of Jonathan at Chainalysis, Bill Gurley, and Chaitan Purigunta for their question suggestions.

This is the 20 minutes VC with me, Harry Stebbings, and wow, I'm so excited for the show today, joined by a master of marketplaces, one of my favorite writers in the venture space also. And so with that, I'm thrilled to welcome Sarah Tavill, general partner of Benchmark.

Harry Stebbings expresses enthusiasm for having Sarah Tavel on the podcast, emphasizing her expertise in marketplaces and her reputation in the venture space.

Sponsorship Mention

  • Hello Sign's success as an esignature solution and its acquisition by Dropbox.
  • Pendo's expansion in Europe and the release of a product designed for startups.

But before we move into the show today, I want to take a moment to mention hello sign, a great example of a company that found success in building a product focused on user experience.

This quote highlights the importance of user experience in product success, using Hello Sign as an example.

Sarah Tavel's Venture Capital Journey

  • Sarah Tavel's early career in venture capital, starting a year out of college.
  • Her experience at a strategy consulting firm and interest in investing.
  • Introduction to venture capital through a friend's suggestion and the Vault Guide to Venture Capital.
  • Sarah Tavel's hiring by Bessemer Venture Partners due to her diverse experiences.

So there's an early class of us who got into venture pretty early on in our careers. For me, it was a year out of college.

Sarah Tavel discusses how she and others entered the venture capital industry early in their careers.

Transition to Pinterest and Return to Venture Capital

  • Sarah Tavel's investment in Pinterest at Bessemer and subsequent move to work at Pinterest.
  • Her realization that her impact was greater at the board level, leading to a return to venture capital with Greylock.
  • Her decision to join Benchmark due to its structure and team dynamics.

And I loved the company so much that I ended up deciding or really calling Ben the CEO and asking for a job one day because I realized that I would always regret it if I didn't throw my hat into the ring and work there.

Sarah Tavel explains her passion for Pinterest and her proactive approach to joining the company, highlighting the importance of seizing opportunities.

Benchmark's Influence on Venture Capital Partnerships

  • Benchmark's equal partnership model has inspired other venture capital firms.
  • Harry Stebbings discusses the impact of Benchmark's partnership structure on his own firm and others.

I mean, it's an incredible partnership and it's actually inspired so many other partnerships.

Harry Stebbings acknowledges the influence of Benchmark's partnership model on the venture capital industry.

Understanding What Matters in Hypergrowth Startups

  • Sarah Tavel's learning from her time at Pinterest: distinguishing between minor issues and existential threats.
  • The importance of focusing on the core aspects of a startup's success and not overreacting to non-critical problems.

There are bumps in the road that happen all the time. But you have to just maintain focus on the things that really matter, because if you get those things right, nothing else matters.

Sarah Tavel emphasizes the need to concentrate on the fundamental factors that determine a startup's success.

Role of a Board Member

  • Distinguishing between existential and non-existential threats as a board member.
  • The board member's role in maintaining perspective and supporting the startup through growth and challenges.
  • Sarah Tavel's view on great board membership, likening it to finding the right marriage partner.

The existential means if we don't figure these things out, then we're over. Let's close shop.

Sarah Tavel explains the gravity of existential threats to a startup and the board member's responsibility in addressing them.

Role of a Board Member

  • Board members are there to help founders become the best versions of themselves.
  • They provide feedback, push for growth, and assist in strategic decision-making.
  • Board members aim to help founders see future challenges and opportunities.

"I'm there to help you as the founder, be the best version of yourself, so that you can build the best company that you can build."

The quote highlights the supportive role of a board member in guiding founders towards personal and company growth.

The Pitfalls of Chasing GMV

  • Chasing Gross Merchandise Volume (GMV) can distract from the goal of market dominance.
  • GMV growth can lead to spreading resources thin and losing focus.
  • Dominance in a marketplace is achieved by creating a superior customer experience.

"The challenge with chasing GMV is that it actually points you away from that place of dominance."

The quote emphasizes that pursuing GMV growth can be counterproductive to achieving a dominant market position.

Marketplace Dominance Strategy

  • Marketplaces are considered magical due to profitability and network effects.
  • Dominance requires making customers prefer your marketplace over any substitutes.
  • Founders should focus on a constrained problem to increase chances of marketplace dominance.

"You can't get to dominant number one position unless you've tipped the market."

This quote explains the importance of creating a marketplace so compelling that it becomes the default choice for users.

Presenting to Investors

  • Founders should focus on a constrained market but also show the potential to scale.
  • The starting point should allow expansion into larger markets.
  • Investors need to see both the focused approach and the big vision.

"Everybody wants to win the ocean, but again, I don't believe you can win the ocean by going after the ocean right away."

The quote suggests that winning a large market starts with dominating a smaller, focused segment first.

Example of Marketplace Expansion

  • Hipcamp started with a narrow focus and expanded by increasing use cases.
  • Starting with a small market can lead to gradual growth and eventual dominance.

"So hip camp, which is one of the first investments I made at benchmark, Alyssa, the CEO, started off going after really just land for campers."

This quote provides an example of a marketplace that began with a focused niche and expanded successfully.

Customer Retention as Success Metric

  • Retention is the best measure of customer satisfaction in marketplaces.
  • Founders should analyze the entire customer experience to understand retention.
  • The "happy path" hypothesis should be tested and correlated with actual retention data.

"Ultimately, the best measure of whether you're making your buyers and sellers happy is, do they stick with you?"

The quote underlines retention as the key indicator of a marketplace's success in pleasing its customers.

Sacrificing Unit Economics for Growth

  • Being "long-term greedy" involves making strategic decisions for future dominance.
  • Lower take rates can be a tool to improve customer experience and gain market share.
  • The strategy of sacrificing short-term unit economics must still consider the viability of the business.

"Essentially, I always think like you have to be long term greedy, not short term greedy."

The quote advises on the importance of making decisions that prioritize long-term success over immediate gains.

Impact of Capital Oversupply

  • Excess capital allows companies to operate with poor unit economics temporarily.
  • This can distort competition, especially against public companies with stricter economic expectations.
  • The food delivery ecosystem is an example of this dynamic at play.

"You had Doordash in particular, that was able to raise an incredible amount of capital, and they were competing against Grubhub and Uber Eats, both of whom were at that point, public companies."

The quote illustrates how an abundance of capital can give certain companies a competitive edge, allowing them to prioritize growth over unit economics.

Market Leadership and Unit Economics

  • The current challenge for startups is the competition to spend more for market leadership without regard for unit economics.
  • Companies like DoorDash used a strategy of spending to gain market leverage, then renegotiating contracts to improve unit economics.
  • Being underestimated allows startups to avoid competitors and gain market share without attracting attention.

"It almost feels like a game of chicken sometimes, of who can spend the most money and care the least about the unit economics in order to get to that market leadership point."

This quote highlights the competitive environment where startups are pressured to spend heavily to achieve market leadership, often neglecting unit economics until a dominant position is reached.

"The second that there are multiple competitors going after your opportunity, the unit economics just degrade, because you have this inevitability of people being able to raise a lot of cash and then using that cash to subsidize their unit economics and try to gain market share, which just leads to this incineration of capital on all sides."

This quote explains the negative impact of competition on unit economics, as startups raise and spend large amounts of capital to gain market share, resulting in a significant burn rate.

Round Announcements and Strategic Visibility

  • The decision to announce funding rounds is strategic, balancing the benefits of public visibility with the risk of attracting competitors.
  • Announcing can boost hiring and company profile but also signals to competitors.
  • Sarah Tavel prefers to delay announcements to maintain a competitive edge.

"I'm on six boards, and I've announced two of them. I am a big believer in not announcing again."

Sarah Tavel shares her personal strategy of limited announcements, emphasizing the advantage of being underestimated.

"And there's no single right or wrong answer here, but I really do think that announcing it's putting a rocket on your back and it can be really powerful, but it also does let people know about a market or an opportunity that you're going after."

Sarah Tavel acknowledges the trade-offs of announcing funding rounds, noting the potential for both positive and negative outcomes.

Tipping Loops in Marketplaces

  • Marketplaces have natural growth and happiness loops that can be leveraged for expansion and retention.
  • Growth loops use existing users to acquire new ones, while happiness loops ensure high-quality suppliers are promoted and retained.
  • Founders should identify and optimize these loops to reduce friction and incentivize desired behaviors.

"And so those are kind of the classic growth loops you should be thinking about. But then I also think that there's a second type of tipping loop that I call a happiness loop."

Sarah Tavel differentiates between growth-focused loops and happiness loops, both crucial for marketplace success.

Feedback and Review Systems as Data Plays

  • User-generated reviews provide valuable data for marketplaces but need thoughtful design to avoid becoming meaningless.
  • Combining explicit feedback with implicit signals like repeat interactions can create a robust reputation system.

"I always think that you want to have kind of a combination of two things, which is one, I am a big believer in the human signals that you get and how that creates a texture and a richness to the experience that can't be replicated just with an algorithm as an example."

Sarah Tavel emphasizes the importance of human feedback in creating a nuanced user experience and reputation system.

UGC Sites as Marketplaces

  • User-generated content (UGC) sites function like marketplaces, matching content creators (supply) with viewers (demand).
  • The success of platforms like TikTok and Clubhouse can be attributed to their effective matching and tight community focus.
  • Lessons from marketplace building apply to UGC sites, such as starting with a strong core experience before expanding.

"And TikTok's magic was how effectively they match buyers to sellers in a way, and also give sellers this way of actually activating."

Sarah Tavel compares TikTok's content matching to marketplace dynamics, highlighting the importance of effective buyer-seller connections.

Audio Community Space: Bundling vs. Unbundling

  • The future of audio community platforms, like Clubhouse, is uncertain; they may remain standalone or become part of larger bundles.
  • Specialization and feature development for specific verticals could determine whether a single platform or multiple niche platforms prevail.

"It remains to be seen. It's just so early that no one has been able to say they already have one and they're going to be able to expand."

Sarah Tavel expresses uncertainty about the future of audio community platforms and whether specialization or expansion will dominate.

Consumer Investment Valuation Challenges

  • In consumer sector investments, exit outcomes are often binary and can be significantly large, leading to less concern about early valuation.
  • Investors grapple with the decision to flex on pricing due to potential high returns versus maintaining valuation discipline.
  • Sarah Tavel suggests that the decision to invest should be based on the level of conviction about the company's potential to scale its network.

"The valuation on the early side, it kind of just doesn't matter. And so it's like you pay 50 or you pay 200. If it's going to be a $25 billion company, logically it doesn't matter and you should just pay the 200 and win the deal."

This quote emphasizes that in consumer investments, early-stage valuation may be less significant if the company is expected to reach a very high valuation in the future.

Discerning Company Potential

  • Differentiating between companies with genuine potential and those that only appear promising is challenging.
  • The analogy of a baby cat growing into either a house cat or a cheetah represents the difficulty in predicting which startups will become highly successful.
  • The decision to invest is heavily influenced by the investor's conviction in the company's growth trajectory.
  • Sarah Tavel shares her experience with Pinterest, highlighting the importance of conviction in venture capital decisions.

"A cat and a mountain lion look the same as little baby cats. And so figuring out the one that's going to become the cheetah versus the house cat, that's a very, very difficult thing to do."

This quote illustrates the challenge investors face in identifying which startups will grow to be significant players in the market, akin to distinguishing between a house cat and a cheetah when they are both kittens.

Venture Capital Investment Strategy

  • Early-stage consumer investments are seeing high valuations for companies with minimal user bases.
  • Investors must be selective and invest in a few high-conviction opportunities due to the high cost of investment and the risk of burning through funds.
  • Sarah Tavel reflects on the venture capital process as an art that requires knowing when to be flexible and when to hold firm on investment decisions.

"Like the classic earliest stage consumer that I'm seeing right now is a ten to $15 million round for literally single digit, like, thousands of users. And so you can't do a lot of those."

This quote indicates the current trend of significant investment rounds for consumer startups with relatively small user bases, necessitating careful selection by investors.

Reading Recommendations

  • Sarah Tavel recommends the book "Pachinko" by Min Jin Lee for its compelling storytelling and generational family narrative.
  • The book is not a business book but offers a crafted story that is engaging and enjoyable.

"I just read Pachinko by Minji Lee, which is this epic family story of a korean family that migrates to Japan over, I think it was, three or four generations."

The quote suggests that "Pachinko" is a recommended read for its depth and storytelling, providing a break from business-focused literature.

Time Management in Venture Capital

  • At Benchmark, partners do not delegate their responsibilities, leading to intensive time management requirements.
  • Sarah Tavel finds time management to be the hardest aspect of her role, as she is directly involved in activities like recruiting calls and interviews.

"At benchmark, our model is that we don't delegate any part of our job."

This quote explains the hands-on approach at Benchmark where partners are involved in all aspects of their job, which can be time-consuming.

Common Founder Mistakes in Fundraising

  • Founders often mistakenly focus on convincing investors instead of prioritizing their customers.
  • Sarah Tavel advises founders to first convince themselves of their company's path and potential before seeking to convince venture capitalists.

"I think a lot of founders think that raising venture is about convincing the investor."

The quote highlights a common misconception among founders that the primary goal of fundraising is to persuade investors, rather than focusing on building a business that serves customers.

Venture Ecosystem Mechanics

  • Sarah Tavel would like to see less competition in the venture ecosystem to make her job easier.
  • The pace of investment rounds has accelerated, leading to potentially suboptimal board relationships due to insufficient time for mutual understanding.
  • Tavel emphasizes the importance of the founder-VC relationship and the need for time to build it.

"And rounds are just happening so quickly right now."

This quote points out the current fast pace of investment rounds, which may not allow for the proper development of relationships between founders and investors.

Personal Changes from Parenthood

  • Parenthood has drastically changed Sarah Tavel's time management, leading to a more focused approach to work and life.
  • She uses the metaphor of being a "time millionaire" to describe the abundance of time before having a child.

"Before I had a kid, I didn't realize it, but I was a time millionaire."

This quote reflects on the significant impact that having a child has on a person's available time and the need to be more selective with commitments.

Board Membership Experiences

  • Sarah Tavel expresses satisfaction with her board membership experiences and the opportunity to learn from various individuals.
  • She avoids choosing favorites among the board members she has worked with, acknowledging that alignment is key.

"I have the pleasure of working with such wonderful people, and I feel like I get to learn something from everyone."

The quote conveys Tavel's positive experiences on different boards and her appreciation for the diverse learning opportunities they present.

Investment Excitement

  • Sarah Tavel is selective about announcing investments, preferring to stay under the radar when possible.
  • She is particularly excited about founders who identify unique opportunities and have the potential to avoid competition.

"I'm always, always looking for companies that can and will escape competition because I think ultimately those are the companies that most endure and build significant equity value for everyone."

This quote explains Tavel's investment philosophy, which focuses on companies with the potential to stand out in the market and create lasting value.

Venture Capital Insights and Resources

  • Harry Stebbings enjoys discussions on marketplace dynamics with Sarah Tavel.
  • The podcast provides additional resources for listeners interested in venture capital and product development.

"I just so love having Sarah on the show and could talk to her for days about everything marketplace oriented."

Harry Stebbings expresses his enthusiasm for having in-depth conversations with Sarah Tavel on topics related to marketplaces and venture capital.

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