20VC Bessemer's Jeremy Levine on Why We Are In A Fallow Period For Consumer, Why It Is Bogus That Operational VCs Can Add More Value & 2 Golden Rules To Always Tell Entrepreneurs PreInvestment

In this episode of "20 minutes VC," host Harry Stebbings interviews Jeremy Levine, a partner at Bessemer Venture Partners, a leading venture fund with investments in companies like Skype, Shopify, LinkedIn, and Yelp. Levine shares insights from his 16-17 years in venture capital, discussing his transition from a software startup to venture investing during the dot-com bubble burst. He emphasizes the importance of direct communication with entrepreneurs and being price-sensitive in investments. Levine also reflects on the evolution of his role as a board member, offering candid advice to aspiring VCs on finding unique investment opportunities and the significance of independent thinking. Additionally, he touches on the current state of consumer tech innovation, predicting a decrease in the emergence of new consumer tech companies due to the dominance of platforms like Facebook, Apple, and Google in controlling distribution. Levine concludes with his recent investment in Toss, a viral payment service in Korea, illustrating the potential for consumer tech despite a challenging landscape.

• Harry Stebbings introduces the themed week featuring Bessemer Venture Partners.
• Bessemer has a portfolio including Skype, Shopify, LinkedIn, and Yelp.
• Guest Jeremy Levine is a partner at Bessemer's New York office.
• Jeremy has helped four companies reach billion-dollar valuations.
• He serves on the boards of Pinterest, Yelp, and Shopify.
• Thanks to Byron Dieter for introducing Jeremy to the show.
• EShares and Fond are mentioned as essential services for venture capitalists and companies.

Hello and welcome back to the 20 minutes VC with me, your host, Harry Stebbings.

Harry Stebbings is the host of the 20 minutes VC podcast.

And joining us in the hot seat today from Bessemer, I'm thrilled to welcome Jeremy Levine.

Jeremy Levine is the featured guest from Bessemer Venture Partners.

• Jeremy studied computer science and started at McKinsey.
• He worked in leverage buyout investing before joining a software startup in 1999.
• The startup in New York was an early online advertising company that didn't work out.
• Jeremy decided to return to investing after realizing the difficulty of building a company.
• In early 2001, he reached out to venture capital firms during a tough time when firms were shrinking.
• He joined Bessemer Venture Partners as they were expanding their New York office.

I studied computer science in college and I started my career at McKinsey.

Jeremy's educational background is in computer science, and he began his career at McKinsey.

I joined a few founders. I wasn't a founder myself, but we raised a bunch of capital into the bubble and then shrank the business a bit.

Jeremy's experience with the startup world involved joining founders and dealing with the challenges of a shrinking business.

• Jeremy disagrees with the idea that operational experience is crucial for venture capitalists.
• He argues that many successful VCs from previous generations did not have significant operational experience.
• Operational experience can be valuable for founders, but VCs should not be in a position to control company decisions.
• Good CEOs are decisive, but VCs should support and challenge, not command.
• Founders should seek operational experience in independent board members, not VCs.
• Pure investors bring a different perspective from operators.

I think about that issue in a totally different way, which is there are a bunch of relatively new vc groups who are comprised of partners who created those firms on the heels of highly successful entrepreneurial or operating careers.

Jeremy provides a different perspective on the value of operational experience for venture capitalists.

But the way I think about it is most people, when they run a company, they run the company.

Jeremy emphasizes the difference between a CEO's role in running a company and a VC's role in supporting and challenging the CEO.

You want phenomenal operational experience on your board, but you want it in the form of somebody who sits in an independent seat or seat that's not contractually committed.

Jeremy advises founders to seek operational experience in independent board members, not in VCs who have a contractual right to be on the board.

• Operators immediately focus on solving challenges, while investors may choose to avoid them.
• Entrepreneurs should consider a diverse board of directors with varying skills and perspectives.
• It is preferable for entrepreneurs to have control over who sits on their board rather than being dictated by contractual obligations.

"Whereas an investor, a great investor, looks at the mountain and says, screw this, I'm going to go in the other direction."

This quote illustrates the contrasting approaches between operators who tackle challenges head-on and investors who may strategically choose to avoid them.

• Early in a career, a board member has more time but less experience.
• As experience grows, reliance on others for judgment decreases.
• With more experience, a board member's opinions carry more weight, requiring careful consideration of their advice.
• A board member's relationship with an entrepreneur evolves over time.
• Effective board members often act as armchair psychologists, balancing their approach based on the entrepreneur's current state.

"And so my sales pitch, if you will, to entrepreneurs early in my career was that I had the capacity and the ambition to work much harder than anybody else."

The quote reflects the initial value proposition of a young board member who compensates for lack of experience with hard work and resourcefulness.

"And so you can do more on your own. And also, once you've been part of few successful companies, your opinions tend to carry a little bit more weight."

This quote signifies the shift in a board member's role as they gain experience, becoming more autonomous and influential.

• Each VC-entrepreneur relationship is unique and cannot be standardized.
• Transparency and honesty are critical in the relationship.
• Board members should be informed immediately of bad news to provide assistance.
• Board members commit to providing unfiltered feedback to entrepreneurs.
• Relationships with entrepreneurs vary in terms of frequency of contact and personal closeness.

"You have one obligation to me. If you take capital from Bessemer and have me on your board or not on the board, and that is anytime something bad happens, I expect and deserve to be told immediately."

This quote emphasizes the necessity of immediate communication of bad news from entrepreneurs to board members to facilitate timely support and advice.

"But my commitment back in exchange for knowing when anything bad happens right away is to always call it like I see it and not to mince words."

The quote reflects the reciprocal commitment of the board member to provide candid feedback, regardless of whether it may be difficult for the entrepreneur to hear.

• The consumer tech landscape is entering a less fertile period for innovation.
• Two massive waves, the mainstreaming of the consumer Internet and the adoption of smartphones, have passed.
• Skepticism towards consumer tech innovation may be due to the end of these significant growth periods.

"I feel like we have entered within the past couple of years what is likely to be a much more fallow period for two reasons."

This quote suggests that the speaker anticipates a slowdown in consumer tech innovation, setting the stage for the explanation of the underlying reasons.

"The first, of course, was the arrival and going mainstream, if you will, of the consumer Internet."

By citing the mainstreaming of the consumer Internet as a past wave of innovation, the quote provides context for the current skepticism in the consumer tech landscape.

• The Internet's growth has led to the creation of new economies and companies as populations cross certain user thresholds.
• The shift from desktop to mobile web opened up new application possibilities that didn't work on desktop.
• There's a lack of a clear 'third wave' in technology to drive a new set of investment opportunities.
• Virtual reality, augmented reality, and consumer drones are candidates for the next wave but are not mainstream yet.
• The lack of a mainstream platform limits the emergence of exciting new companies.

"Then, of course, the second, more recent wave was the shift from the desktop web to the mobile web, which enabled a whole bunch of other new kinds of applications that wouldn't really work in the desktop web, but became really powerful in the mobile web."

This quote explains the transformative impact of the transition from desktop to mobile web, highlighting the historical context of how technological shifts create new opportunities for applications and businesses.

• Great consumer businesses historically leveraged existing platforms like Google or email for growth.
• Email-based viral distribution and SEO have become less effective as distribution channels.
• Consumer distribution is now controlled by a few companies: Facebook, Apple, and Google.
• These companies may stifle the growth of new startups that gain traction on their platforms.
• Free distribution for consumer applications is now limited to truly viral, often communication-based, applications.

"And today, virtually all consumer distribution is controlled by only three companies, Facebook, Apple and Google."

This quote emphasizes the current landscape of consumer distribution, where a few large companies hold significant control, presenting a challenge for new startups to achieve widespread visibility without being inherently viral.

• The number of new, great consumer tech companies emerging is predicted to decrease.
• The focus of venture capital might shift towards consumer tech businesses that require paid distribution.
• E-commerce and other commerce-oriented businesses may become more interesting for consumer tech investment.
• These businesses can afford marketing costs because they directly generate revenue from consumers.

"But when you can get a consumer to open up his wallet, the consumer's worth so much more to you that you can afford to spend money on marketing."

This quote suggests that businesses with direct consumer revenue models have the potential to justify marketing expenses, indicating a shift in investment interest towards these types of companies.

• The predicted fallow period in consumer tech may lead to fewer investments in that sector.
• There is still interest in other tech areas that offer investment opportunities.
• Investment pace is influenced by general sentiment and availability of capital.
• Venture capital investment has increased substantially since 2013, leading to inflated prices and potentially unsustainable growth.
• The industry's returns may decline if the great investments do not compensate for the less successful ones.

"But I don't think that will necessarily slow down an overall investment pace because there are other phenomenally interesting areas of the tech world that create or that generate interesting opportunities, even if they're not consumer related."

This quote indicates that despite a potential slowdown in consumer tech investments, there are other sectors within the tech industry that are generating interest and could maintain the overall investment pace.

• The venture capital industry has seen an explosion in invested capital, leading to funding of marginal companies and inflated company valuations.
• The expectation is that the market will correct when there is less capital available, leading to more competitive pricing.
• A reduction in capital would likely lead to better investment discipline and potentially higher returns for successful investments.

"And so I'm looking forward to the day when there's not so much capital around because competition stinks."

This quote conveys an anticipation for a market correction where less available capital would lead to less competition and potentially more disciplined investment decisions.

• Jeremy Levine expresses that he is price sensitive and willing to stretch for a great business.
• He shares an anecdote about investing in LinkedIn, where the price was considered high by others.
• Emphasizes the importance of considering price in early-stage investments.
• Introduces the concept of thinking about investments as if making them 100 times.
• Discusses the significance of aggregate return over individual successes.

"Absolutely. I'm very price sensitive. For a great business. I will stretch really hard and high. I think when we invested in LinkedIn, the two existing vcs thought the price we were paying was so crazy that they invested nothing in the round. I think that round ended up at something like 100 x return."

This quote exemplifies Jeremy's willingness to invest heavily in a company he believes in, despite others' skepticism, and highlights the success of the LinkedIn investment.

"But you can pay for a lot more mistakes with 100 extra turn than you can the 30 x return and therefore it matters. Absolutely."

Jeremy explains that higher returns allow investors to offset more losses, thus making the price at which an investment is made an important factor.

• Jeremy's favorite book is "The Outsiders," which he admires for showcasing unconventional CEOs who were successful by focusing on shareholder returns.
• He mentions that the book is polarizing among CEOs.

"Book is the outsiders. I can't remember who wrote it, but it's a book about unconventional ceos who didn't look like or talk like or smell like classic Hollywood ceos, but were unbelievably successful at what they did because they focused on generating returns for their shareholders."

Jeremy admires the book for its focus on CEOs who defied norms yet achieved great success through a shareholder-centric approach.

• Jeremy believes the search for consumer applications with high DAU/MAU ratios is overhyped.
• He finds narrow verticals in business software to be underhyped, with potential for companies to achieve significant market share.

"Everyone's looking for the next consumer application that has a high dau over MAU ratio, which I think is sort of very much a rear view mirror way of looking at things underhyped."

Jeremy critiques the overemphasis on user engagement metrics in consumer apps as a backward-looking approach.

"I think there's still a lot of grubby business software, particularly software focused on really narrow verticals that's wildly underhyped."

He points out the overlooked opportunity in specialized business software sectors where companies can dominate the market.

• Jeremy reads Dan Primack's newsletter for its blend of entertainment and concise VC industry updates.

"I read Dan Primax newsletter every morning, mostly because he adds a little bit of entertainment up front and then it's sort of like the index of what's happening in the VC industry."

Jeremy appreciates the newsletter for its engaging content and comprehensive coverage of the venture capital industry.

• Jeremy advises junior VCs to think independently and seek out overlooked opportunities.
• He shares his experience with investing in Yelp as an example of succeeding in an area others dismissed.

"But as a junior VC, it's virtually impossible to be successful fishing in a pond that lots of experienced vcs are fishing in because you've got no way to win those opportunities."

Jeremy stresses the difficulty for junior VCs to compete with experienced investors in popular areas and suggests finding unique investment opportunities.

"But if you can come up with your own ideas that turn out to be right that other people are somewhat dismissive of, you've got a shot."

He encourages junior VCs to develop their own investment theses on potentially successful, yet underrated ideas.

• Jeremy has realized that announcing investments can be counterproductive.
• He explains that it attracts attention from other VCs and competitors, which may not be beneficial.
• Jeremy prefers to keep investments discreet, although acknowledges the potential recruitment benefits of public announcements.

"Because the only people who read about new VC investments are other vcs and entrepreneurs and other VCs, if they see you've invested in a company, they either, if they think it was a good investment, will start dogging that company, trying to also invest in it, which isn't necessarily helpful."

Jeremy points out that announcing investments can lead to unwanted attention from other investors, potentially creating competition or interest in similar companies.

"So I have to think about that because several years ago it dawned on me that announcing investments was a bad strategy."

He reflects on his strategic shift away from publicizing investments to maintain a competitive edge and protect the interests of the companies he invests in.

• Jeremy's most recent investment is in Toss, a Venmo-like service in Korea.
• He highlights Toss's organic growth and viral potential due to its nature of facilitating money transfers.

"But it was a company in Korea called Toss, which could be simplistically described as a venmo like service for Korea with unbelievable organic growth."

Jeremy shares his excitement about Toss's growth and potential in the Korean market, likening it to Venmo's service model.

• Jeremy and Harry Stebbings exchange thanks and appreciation for the episode.
• Harry promotes following Jeremy and himself on social media for more insights.
• Harry endorses eShares and Fond as valuable tools for equity management and employee engagement.

"Well, Jeremy, Byron told me it'd be a fantastic episode. You've more than lived up to expectations, so I can't thank you enough for what you've done for me in the show."

Harry thanks Jeremy for his contribution to the show and acknowledges the recommendation from Byron Dieter.

"Also, if you love the show today and would like to see more from us, then you can follow Jeremy on Twitter at Jeremy L. You can follow me on snapchat at hstebbings with two B's or on at Harry Stebings on Twitter."

Harry invites listeners to engage with them on social media for further content and updates.