20VC Benchmark's Sarah Tavel on Why Investing Success Lies In Small Markets Adjacent To Very Large Ones, Why You Have To Be Judicious On When To Pay Up vs Be More Price Sensitive & Why Crypto Investing Is Like The Early Days of AdTech Investing

In this episode of "20 Minutes VC," host Harry Stebbings interviews Sarah Tavill, a general partner at Benchmark, a prominent VC fund with investments in Twitter, Uber, and Snapchat, among others. Tavill shares her journey from an analyst at Bessemer Venture Partners to a key early employee at Pinterest, leading to her roles at Greylock Partners and eventually Benchmark. She discusses the importance of market dynamics over individual team strength, the challenges of excessive capital in startups, and the necessity of maintaining focus on unit economics from an early stage. Tavill also touches on the complexities of crypto investing, emphasizing the need for specialized knowledge and the pitfalls of overfunding. Throughout, she advocates for a founder-centric approach, leveraging board meetings for strategic advantage, and the delicate balance between growth and profitability.

• Harry Stebbings introduces the episode of "20 minutes VC" and invites listeners to engage on Instagram.
• Sarah Tavel, a General Partner at Benchmark, is welcomed back to the show.
• Benchmark is highlighted as one of the world's leading venture capital funds.
• Sarah Tavel's background includes leading investments at Benchmark, being a partner at Greylock Partners, and working at Pinterest during its hypergrowth phase.
• Harry Stebbings mentions sponsors and partners such as Wepay, Buildertrend, Terminal, and Lattice.

You are listening to the 20 minutes VC with me, Harry Stebbings and I would love to welcome you behind the scenes on Instagram at htebings 1996 with two b's where you can both suggest questions and guests for future episodes.

This quote is an introduction to the podcast episode, inviting listeners to engage with the host on Instagram for future content suggestions.

• Sarah Tavel describes her path to becoming a General Partner at Benchmark.
• She began in venture capital at Bessemer Venture Partners, initially for what was meant to be a two-year stint, which extended to six years.
• After leading the Series A investment in Pinterest, she joined the company as an early employee, working on product management and helping scale the company.
• Post-Pinterest, she returned to venture capital and joined Greylock as a General Partner before moving to Benchmark.

So I had an unusual beginning for me, which is that I started in venture actually one year out of college.

Sarah Tavel explains her early start in venture capital, which was unconventional due to its immediacy after college.

• Sarah Tavel agrees with Pat Grady's statement about the decay of functional expertise but believes that executive and leadership experience is timeless.
• She emphasizes that the wisdom gained from scaling a company and overcoming challenges is invaluable and does not decay.
• Operating experience may not help in picking better investments but enhances the ability to be a supportive board member and partner to founders.

But I think that most operating experience, the experience that you get as an executive, as a founder, as a product leader in a company, I think that experience is really timeless.

Tavel argues that the experience gained in leadership roles within a company is enduring and provides essential insights for venture capitalists.

• Sarah Tavel discusses the constant issues that arise in hypergrowth companies and the evolving nature of these problems.
• The challenges faced by companies change as they grow, from finding product-market fit to scaling and hiring leaders.
• The role of a CEO or founder is likened to a game of "whack a mole," where new issues continuously emerge.

Oh my gosh. I mean, Harry, there's moments in any company, it's a constant process.

Tavel describes the ongoing and dynamic process of addressing issues within rapidly growing companies.

• Harry Stebbings presents the potential downsides of investors having operating experience.
• The conversation shifts toward exploring the challenges that may come with having a background in operations when making investment decisions.

The transcript ends before Sarah Tavel or Harry Stebbings can elaborate on the potential drawbacks of investors having operating experience, so no quote or explanation is provided for this theme.

• VCs with deep operational experience can over-insert themselves in company operations.
• Successful former operators as VCs might think they can do the CEO's job better, creating dysfunction.
• Humility in VCs regarding their operating experience is crucial.
• VCs may project their own expectations onto a company, leading to misalignment at board meetings.

"And the danger when you're the CEO of a company is that you have someone on your board who basically thinks that they can do the job better than you can. And that's an incredibly dysfunctional relationship to enter into."

This quote highlights the potential conflict between a CEO and a VC who believes they could perform the CEO's role more effectively, leading to a strained working relationship.

"And there can sometimes be this inclination to project onto the company that you're meeting with what you know is possible if you were the one executing."

The quote discusses the risk of VCs imposing their own success metrics and expectations onto the companies they invest in, which can cause misalignment and dysfunction.

• Sarah Tavel agrees with Andy Radcliffe that the market often trumps the team in determining a startup's success.
• Founders are critical in the initial assessment, but market dynamics are decisive.
• Markets are dynamic and influenced by technology and trends.
• The best investments are often a combination of great founders and evolving markets.

"I just think that markets end up having their own physics where you can't change those physics, regardless of how great the founder is."

This quote emphasizes that market forces are beyond the control of even the most capable founders, and these forces ultimately dictate the success of the business.

"The ones that I end up investing in then are the ones where I end up believing that it is that elusive and rare but deadly combination of a great founder going after a changing, evolving and great market."

Sarah Tavel explains that the best investment opportunities arise when a talented founder is positioned in a market that is both changing and has potential for growth.

• Investing in large markets can be challenging due to strong incumbents and thin margins.
• Focusing on a niche market with the potential to expand into a larger market is preferred.
• Successful companies often start in smaller markets and expand over time.
• Founders should be able to unlock new opportunities within their market.

"But when you are going after a small market that is adjacent to a big market that could eventually eat into a bigger market, that is the seam that I think we look for."

Sarah Tavel explains the strategy of targeting smaller, niche markets that have the potential to grow and eventually tap into larger markets.

"Because when you think about many of the biggest unicorns that I think about now, today, all those companies looked small in the list, even Uber in the beginning, they all looked like they were going after something small in the beginning."

The quote illustrates that many of today's successful companies started by targeting smaller markets before expanding and becoming dominant players.

• It's essential to build a strong foundation in the initial market before expanding.
• Expansion should be driven by customer demand and natural adjacencies.
• Companies often fail by trying to capture too much market too soon without perfecting their core offering.

"I'm always a believer in building a very strong foundation, and so you want to feel like you've built a strong foundation in the place where your product burns the most brightly, that beginning market that you've gone after..."

Sarah Tavel advocates for establishing a solid base in the initial target market before considering expansion into adjacent markets.

• The "right" amount of capital in the market is not absolute and varies over time.
• There appears to be an excess of capital in the market, which could impact returns and company outcomes.
• Companies should be cautious about raising too much capital, as it may not always yield positive returns.

"It does feel like there is a lot of capital in the market. Certainly it feels like an excess supply."

Sarah Tavel expresses concern over the current abundance of capital in the market and its potential negative effects on investment returns and company growth.

• Capital enables growth, team building, and market competition.
• The ultimate goal is to create a self-sustaining, profitable company.
• Raising excessive capital can lead to a lack of focus and discipline, impacting profitability.
• Companies should balance growth with profitability to avoid overextending themselves.

"Ultimately, the goal of any company, at least any venture funded company, should be that you want to build a self sustaining, independent company."

The quote underlines the end goal of venture-funded companies to become profitable and independent, which requires disciplined investment and spending.

"And so when companies are able to raise a lot of capital easily, they naturally take on more of a growth orientation... And the danger when the music stops is that..."

Sarah Tavel warns that companies focused too heavily on growth due to easy capital may struggle to adapt when market conditions change, highlighting the risk of aggressive expansion without a clear path to profitability.

• Companies face a significant risk when they approach the end of their capital, especially if the capital markets shift or they're unable to raise funds at higher valuations.
• Transitioning towards profitability can be extremely challenging for companies in this situation.

"hat you start to realize that you're getting close to the end of your capital. The capital markets have changed, or you just aren't able to continue to raise money at an ever increasing valuation. And then you try to turn the wheel towards profitability and find that that's really, really hard to do. That's a dangerous place for a company to be in."

This quote emphasizes the precarious position companies find themselves in when they are running out of capital and the difficulty of pivoting towards profitability under such circumstances.

• Understanding unit economics from the beginning is crucial, even though they will change over time.
• Early measurements of metrics like LTV over CAC and net revenue expansion may seem meaningless at low ARR, but they instill discipline and understanding necessary for long-term profitability.
• The practice of measuring these metrics is vital because it leads to improvement and prevents operating blindly.

"Oh, yeah. I mean, you have to know from the very beginning what your unit economics are. [...] It's that classic. If you don't measure it, it won't improve. Like the worst thing for an operator is to be flying blind, I think, for such a core, fundamental part of their business."

Sarah Tavel stresses the importance of being aware of unit economics from the outset to avoid operating without crucial financial insights, which could lead to business failure.

• There is a significant price inflection point between seed and Series A funding rounds.
• Valuations and expectations for milestones have changed drastically over time across all stages of investment.
• The increase in valuations is particularly noticeable when a company is performing well.

"I would say the same feedback that your seed investors gave you on the step up from the c to the a, we're seeing the a to the b, and I got to imagine it's the same for every subsequent round. It's just if you have something that's working, I just continue to be surprised by what valifications those companies are able to get in the private markets."

Sarah Tavel reflects on the evolution of valuations and the significant increase in prices for companies with strong performance, particularly at funding milestones.

• Hindsight can make any successful investment seem worth the initial price, but a disciplined approach to pricing is necessary.
• Investors should be judicious about which companies they are willing to pay a high entry price for.
• Paying a high price might be justifiable for companies with strong network effects and growth potential.

"Sure. I mean, look like Hindsight's 2020, and in the great companies, you wish you would have paid any price to get into them. [...] Kind of the way I think about it is that when there is a company that has the potential for a clear network effect and something's really working, so much so that you feel like that company can really get away from you in terms of growth, then paying what does feel like a crazy price on the entry. I would do that ten times out of ten, but you really have to be honest with yourself when the company doesn't have that type of kind of winner take most dynamic."

This quote discusses the balance between the benefit of hindsight and the reality of making investment decisions, highlighting the importance of discernment when it comes to high valuations and the prospects of a company's growth and network effects.

• Experience has led to a better understanding of what to focus on during board meetings.
• Effective board members prioritize a small number of key issues rather than getting caught up in every detail.
• The ability to focus and drive home important points is a skill that develops with experience.

"And what I've noticed and what I try to practice myself is that the really experienced vcs, experienced board members, come into the board meeting knowing exactly the one issue that they really want to make sure that they get across. And that's the goal for them. Of the board meeting."

Sarah Tavel reflects on her growth as a board member, emphasizing the value of focusing on critical issues and the importance of clear objectives for board meetings.

• Successful founders use board meetings to challenge strategic thinking rather than for status updates or seeking permission.
• VCs can provide a broader perspective due to their exposure to a variety of startups and industry insights.
• Great CEOs leverage board meetings for productive discussions that benefit from the board's collective experience.

"Yeah, I think that the best founders really do know how to use the board and make it productive. [...] And so the great ceos take advantage of that in the board meeting, and I think they end up feeling like the board meeting was a productive and constructive use of their time, not a waste."

Sarah Tavel explains how adept founders effectively manage their boards by engaging them in strategic discussions, thus making the most out of the collective expertise present at the table.

• The role of a VC is enjoyable but challenging due to the numerous ways time can be spent.
• The lack of a feedback loop makes it difficult to assess the effectiveness of time spent and investment decisions.
• Excelling as a VC requires constant learning, staying informed, and making few but impactful investments.

"I think that the most challenging part of the role is just being great at it. [...] And you're constantly having to be really pushing your own thinking and keeping your ear to the ground, I guess you could say, to try to find those one or two investments you do every year and hope that you find them."

In this quote, Sarah Tavel describes the difficulty in mastering the VC role, which involves strategic time management and the pursuit of a small number of significant investments each year.

• Crypto investing is currently challenging and reminiscent of early ad tech investing, where distinguishing between opportunities is difficult.
• Deep knowledge of the crypto space is required to make informed investment decisions.
• The high valuation and commitment levels in crypto, often based on white papers or decks, add to the complexity of investing in this sector.

"So I think that crypto investing right now is in a tricky place, is that it reminds me so much of ad tech investing in the early days. [...] And then what's different, though, from Adtech is that, and it makes it even harder, is that you're often investing in a white paper or a deck."

Sarah Tavel draws a parallel between early ad tech investing and the current state of crypto investing, highlighting the challenges of distinguishing between similar-sounding opportunities and the speculative nature of investments based on minimal evidence of execution.

• The crypto space is compared to the early days of online advertising, with uncertainties about profitable models.
• The potential of crypto is acknowledged, but there is a lack of clarity on how revenue will be generated.
• It is a challenging sector that is not suitable for casual investors.

"But we're still so early in the game in crypto that we don't even know what the ad unit will be, where you will make money in the stack."

This quote emphasizes the nascent stage of cryptocurrency as an industry and the uncertainties that come with investing in it, drawing a parallel to the early days of online advertising.

• Specialized knowledge is critical for successful investment in crypto.
• Rapid changes and expanding problem spaces in crypto necessitate full immersion.
• There is a trend where crypto investing is becoming more similar to traditional technology investing.
• Sarah Tavel believes in the value of crypto-focused individuals within generalist funds.

"Without question, things are changing so quickly, and the problem space just continues to expand. That again, if you're not 100% focused on it. I don't see how you can win."

Sarah Tavel highlights the importance of specialization and complete focus in the rapidly evolving crypto space, suggesting that a lack of dedication could lead to failure.

• Sarah Tavel expresses readiness for a quick-fire round of questions.
• She emphasizes the importance of continuous learning and adaptation in the venture capital industry.

"I'm ready."

Sarah Tavel indicates her willingness to engage in a rapid question-and-answer session, reflecting her adaptable and eager approach to discussion and learning.

• "Creating the Kingdom of Ends" by Christine Korsgard made a significant impact on Sarah Tavel.
• The book provided her with a mental framework for understanding relationships and ethical behavior.
• It influences her approach to being a partner to founders.

"The book that had the biggest impact on me is a book by Christine Korsgard called creating the kingdom of ends..."

Sarah Tavel shares the profound influence of Christine Korsgard's book on her personal and professional philosophy, particularly in her interactions with others and her role as a venture capitalist.

• Reed Hoffman's saying about the balance of strengths and weaknesses resonates with Sarah Tavel.
• She applies this wisdom daily, recognizing the trade-offs in organizational decisions and behaviors.

"Every strength has a corresponding weakness and vice versa."

This quote reveals Sarah Tavel's perspective on the inherent balance between strengths and weaknesses, and its application to her daily venture capital practice.

• Sarah Tavel values learning from every board member she works with.
• She believes there is always something to learn from others around the table.

"I'm always trying to learn from all the board members that I work with..."

Sarah Tavel discusses her learner mindset, emphasizing the importance of gaining knowledge from the diverse experiences and insights of board members.

• There is no single correct way to be a venture capitalist.
• Sarah Tavel was advised to embrace her unique approach to venture capital.
• Personal growth in venture capital involves finding one's own path.

"There's no right way to be a venture capitalist."

This quote reflects Sarah Tavel's understanding that venture capital is not a one-size-fits-all career, and success is achieved through individuality and personal growth.

• Sarah Tavel's most recent public investment is in Hipcamp.
• She was drawn to the company's strong founder, demonstrated growth, and market potential.

"The most recent publicly announced investments is a company called hip camp..."

Sarah Tavel explains her rationale for investing in Hipcamp, highlighting the importance of a strong founder, growth indicators, and market trends in her investment decision-making process.

• Harry Stebbings expresses enthusiasm for Sarah Tavel's insights and anticipates her future contributions at Benchmark.
• Sarah Tavel's contact information and additional resources are provided for further engagement.

"So fantastic to have Sarah back on the show there, and I cannot wait to see the many exciting years she has ahead of her at benchmark."

Harry Stebbings closes the conversation with appreciation for Sarah Tavel's participation and looks forward to her continued success and contributions in the venture capital space.