20VC Betaworks' John Borthwick on Why The VC Model Is So Inefficient, Why Venture Fund Cycles Are Too Short & Why Frontier Tech Could Only Have Been Disappointing Over The Last Year

In this episode of "20 Minutes VC," host Harry Stebbings interviews John Borthwick, CEO of Betaworks, a New York-based startup platform known for building products like Giphy and Dots, as well as investing in companies such as Tumblr and Medium. Borthwick discusses his journey from selling his first company to AOL and becoming SVP at Time Warner Inc., to founding Betaworks with the aim of creating a startup platform capable of building, investing in, and accelerating multiple companies around a specific thesis. He shares insights on the changing VC model, emphasizing the reduction in company creation costs and the need for VC to adapt to support early-stage companies. Borthwick also touches on the future of technology, including AI and mixed reality, and the importance of long-term capital investment. The conversation concludes with Borthwick's vision for Betaworks and its role in fostering innovation at the intersection of media and technology.

• Harry Stebbings is the host of the 20 minutes VC podcast.
• Harry can be found on Snapchat and writes on Mojitovc.com.
• He invites listeners to share their thoughts and feedback.

"Hello and welcome back to another week in the wonderful world of venture capital with the 20 minutes VC and your host Harry Stebbings at h stepbings with two b's on Snapchat, and found writing a lot more these days on Mojitovc.com."

This quote is Harry introducing himself and his podcast, as well as inviting listener engagement through his social media and blog.

• John Borthwick is the founder and CEO of Betaworks.
• Betaworks is a New York-based startup platform with a studio, fund, and accelerator program.
• John has a history of entrepreneurship, including an acquisition by AOL Time Warner.

"Today's guest has been an individual I've immensely respected and admired for many years, and so I'm very honored to be joined today by John Borthwick, a founder and CEO CEO at Betaworks."

Harry expresses his respect and admiration for John Borthwick, setting the stage for the interview.

• Betaworks is known for creating products like Giphy, Dots, and bit.ly.
• The company has made investments in Tumblr, Medium, and Kickstarter.
• Betaworks also runs a thematic accelerator program for frontier technology sectors.

"They have a studio where they've built products including Giphy, Dots, bit Ly, and more. They have a fund with prior investments including Tumblr, Medium, and Kickstarter."

Harry outlines the three main functions of Betaworks: building products, investing in startups, and running an accelerator program.

• John was previously an SVP at Time Warner Inc.
• His previous company, WP Studio, was acquired by AOL Time Warner.
• His experiences led him to the creation of Betaworks as a startup platform.

"Prior to Betaworks, John was an SVP at Time Warner Inc. Following John's previous company, WP Studio, being acquired by AOL Time Warner."

Harry provides background information on John's career prior to founding Betaworks.

• Betaworks is envisioned as a platform that can build or invest in multiple companies simultaneously.
• John was inspired by the studio model and applied it abstractly to Betaworks.
• The company focuses on building, investing, and accelerating startups around a specific thesis.

"So I view Betaworks as a startup platform...abstractly thinking about betaworks as a startup platform where we build and we invest and we also have now an accelerator program here."

John explains his conceptualization of Betaworks as a startup platform that engages in various aspects of company development.

• Time Warner operates as a holding company with a corporate structure consisting mainly of lawyers and accountants.
• The divisions are responsible for product and distribution creation.
• John learned about media business, distribution, creation, and marketing during his time there.

"I think that time water is a company. It's in essence a holding company... I learned a ton about the media business, media distribution, media creation, media marketing."

John shares his insights from his role at Time Warner and how it operates as a holding company with a focus on media.

• Betaworks partners with VCs for its business lines: building, investing, and accelerating.
• John has struggled with the traditional VC model despite its effectiveness in certain areas.
• He believes the VC industry has not adapted well to market changes over the last 5-10 years.

"The three business lines that we have at betaworks, we build things, we invest and we accelerate...I've always struggled a little bit personally with the VC model."

John discusses the business lines of Betaworks and his personal skepticism towards the traditional VC model.

• The VC model excels at efficiently executing a small number of tasks.
• John observes a significant drop in the cost of company creation and the testing of ideas.

"But let me start out by saying is it's an incredibly effective tool at doing a few things, maybe one thing incredibly well."

John acknowledges that while he is skeptical, the VC model is very effective at certain aspects of startup funding and development.

• A decade ago, there was a linear relationship between the stages of company creation and the need for capital.
• For software companies, this relationship has changed to a curve, with early stages requiring less capital and scaling stages needing significant capital.
• The need for capital intensifies at the point of massive scale for growth, marketing, and distribution.
• Venture Capital (VC) is effective at providing capital at the scaling stage.
• Early stages are now supported by various platforms, reducing early reliance on VC funding.
• The VC model is monolithic and excels at later stages but struggles with early-stage investments.
• The VC industry is experiencing mediocrity and a lack of transparency in returns, indicating a period of change.

"So what there was is that ten years ago is there was pretty much a linear relationship between these two things. As you moved through the progressive stages of company creation, you just needed more capital. And it was fairly linear."

The quote explains that previously, as a company progressed through its development stages, the need for capital increased consistently.

"But then when you hit scale, when you hit massive scale, you need capital, and you need capital for growth, marketing, for distribution."

Here, the speaker highlights that once a company reaches a certain size, the demand for capital spikes, particularly for growth-related activities.

"But what does VC do? Well, VC does that piece incredibly well. It's a very good instrument at investing at that stage."

This quote emphasizes that venture capital is particularly adept at funding companies that are scaling up and require substantial capital for growth.

• Many investors may think they are early-stage but actually focus on later stages with small seed investments as an option for later involvement.
• The early-stage market is dynamic, with companies rapidly pivoting and evolving.
• VCs need to be able to engage with these fast-changing early-stage companies.
• Once a company demonstrates success, VCs compete to invest as growth can be rapid due to existing infrastructure (e.g., AWS, startup hubs).
• The example of Giphy is cited to illustrate rapid user acquisition once a company takes off.

"Would you agree with Charlie O'Donnell from Brooklyn Bridge, who said to me the other day that actually a lot of investors are much later stage than they think, and they just have these small pools of capital at the seed stage and it's really just an optionality play for the later stage where they follow in with reserve funds."

The speaker is acknowledging the trend of investors positioning themselves in early stages when they are actually more focused on later stages, using early investments as a strategic option.

"So somehow the vcs need to be able to touch that. And then once they actually hit the ground and start running, when these things actually get working, then the vcs have to scramble to get in there and the companies can reach remarkable scale remarkably quickly."

The quote discusses the necessity for VCs to connect with early-stage companies before they rapidly scale, which requires quick action from VCs to secure investment opportunities.

• Betaworks operates as a startup platform with a flexible source of capital, distinct from traditional VC funds.
• Balance sheet capital at Betaworks allows for a long-term perspective but has scaling limitations.
• Startup platforms like Y Combinator, AngelList, and Techstars combine accelerators and funds.
• Media platforms such as SaaStr by Jason Lemkin are expanding into VC with a focus on community, media, and capital.

"I mean, I think that the way that I think about betaworks as a startup platform is that having a flexible source of capital to do later stage investing is sort of an important piece of that puzzle."

This quote indicates that Betaworks sees value in having a flexible capital source to invest in later stages, which is part of their strategic approach as a startup platform.

"They also have a VC fund."

The speaker notes that many startup platforms have expanded to include VC funds as part of their business model.

• Early VC funds were structured as LLCs using balance sheet capital, but faced limitations.
• Balance sheet capital is challenging to scale due to valuation and fundraising issues.
• Limited partnerships with a time lifecycle and fixed equity cut have become standardized in VC.
• Transparency in VC valuations could benefit the industry despite the opacity being partly justified by the long lifecycle of investments.

"I mean, I think that interesting, if you roll the clock back at the early VC funds, is that they were actually llcs that invested off a balance sheet, and then they reached some inherent sort of glass ceilings or knocked up against some."

The speaker is explaining that the original structure of VC funds as LLCs had limitations, leading to the adoption of the limited partnership model.

"I think that the inherent challenges with balance sheet capital, I would say the first thing is that once you have a set of assets, how do you value them and how do you raise ongoing money into that entity?"

This quote addresses the difficulties in valuing assets and raising additional funds when operating with balance sheet capital.

"I think that it went maybe a little bit too far, because that's the standard way of valuing these portfolios."

The speaker is commenting on the criticism of VC portfolio valuations, suggesting that while the process is not perfect, it follows industry standards.

• VCs often demonstrate a mixture of conviction and business model considerations when deciding whether to sell a company.
• Offers for company acquisitions can test VC's long-term commitment versus immediate financial gain.
• Fund cycles may be too short given the extended time to exit and the transformation technology drives in society.
• There is a trend towards longer privatization periods for companies.
• The need for longer fund cycles aligns with the fundamental and prolonged impact of technology on society.

"I went to the VCs and I said, okay, as CEO, it was my responsibility to say, we have an offer. I went to them and we had an offer for this particular company, and they said, no way, no how, are we selling? We're in this for the long haul."

This quote illustrates the initial stance of VCs prioritizing long-term investment over immediate offers for acquisition.

"The acquirer came back and upped it by 5%. They said, sell now."

This quote shows the point at which VCs' resolve breaks in favor of a financial incentive, revealing the balance between conviction and the business model.

"Do you think then fund cycles are too short with the current ten to twelve years, should they be longer?"

This is a question about the adequacy of the duration of VC fund cycles in relation to technology's impact on society.

"I think that they have to be longer."

This quote conveys agreement with the idea that fund cycles should be extended to match the longer-term technological transformation.

• The past 5-8 years have seen significant advancements in app development due to the App Store.
• Apple has been successful in creating a distribution funnel for mobile applications.
• Frontier technologies like AI, chatbots, mixed reality, and self-driving cars are expected to have a long development horizon.
• There is skepticism around new tech categories, which can lead to a more efficient market for capital and entrepreneurship.
• Unexpected applications can act as catalysts for mainstream adoption of frontier technologies.

"We've had this credible five to eight years of app development and of businesses that have developed these incredible services, franchises, offerings on mobile."

This quote highlights the rapid growth and success of mobile app development and business models in recent years.

"It is going to take five to ten years for us to figure out how to talk to machines and that components of that relate to NLP, NLU, AI, chatbots, verbal computing, Alexa, and things like that."

This quote indicates that the development and integration of advanced technologies like AI and chatbots into mainstream use will be a prolonged process.

• The transition of frontier technologies into the mainstream may be influenced by several factors including compute power, technical ability, and consumer education.
• Unexpected implementations of technology can surprise and accelerate adoption.
• Examples like Pokemon Go and Snapchat's face tracking have advanced mixed reality more than anticipated.

"I think it's all of the above and a few more."

This quote suggests that multiple factors contribute to the mainstream adoption of new technologies.

"I would say that the single biggest step forward for mixed reality in 2016 was Pokemon go and was Snapchat's face tracking."

This quote highlights specific examples of how unexpected applications can drive technological adoption.

• The venture capital industry can exhibit herd mentality, but skepticism can drive market efficiency.
• Capital efficiency is important for the success of winners in the tech industry and can be a distraction for others.
• The discussion touches on Adam Smith's invisible hand theory in the context of technology and market dynamics.

"I think it's driving efficiency in the market, and I think that once capital really starts flowing in, then it becomes incredibly useful for the winners, but it becomes a real distraction also for a lot of people."

This quote discusses the impact of market efficiency on the tech industry, particularly for successful companies.

• The technology industry's impact on marketplaces, monopolies, and oligopolies may require rethinking classical economic theories.
• The structure of companies is changing due to innovation, data, and networks.
• Transaction costs have dramatically fallen, altering the essence of corporate entities.

"I think Adam Smith would have taken a few steps back and maybe written a few other chapters, because I think that the market, the whole essence of the economy, is being transformed."

This quote suggests that the evolution of technology and networks has fundamentally changed the economy in ways that Adam Smith's theory did not anticipate.

• The quick-fire round is intended to provide rapid, personal responses to various prompts.
• Speaker B expresses hesitation based on a past experience with a similar format.

"That sounds good. I'm hesitating only because I did this once with somebody, with Howard Linsen, and he said, I'm going to give you five names of people who know either hedge fund managers or porn stars, and you have to tell me which one are they?"

This quote sets up the context for the quick-fire round, with Speaker B recalling a previous, somewhat uncomfortable experience.

"So my favorite book right now is King Lear, and that sounds God."

This quote reveals Speaker B's current favorite book and suggests a deeper personal exploration, possibly related to understanding human intelligence and genius.

• John Borthwick expresses admiration for Shakespeare's works, which he describes as "remarkable genius."
• He shares his awe for "King Lear" after reading it as an adult.
• Borthwick's initial reluctance turned into amazement by the play's depth.

"So these are works of remarkable genius. I'm just like, in complete awe."

This quote highlights Borthwick's reverence for Shakespeare's literary genius and the profound impact the works have on him as an adult.

"And leah in particular, which I just went into, I have to admit, I went into it like, oh, my God, really? Am I going to do this? It was July, and I was like, oh, God, really? And I was just blown away."

Borthwick conveys his initial hesitation to read "King Lear" during the summer but ends up being deeply impressed by the play.

• Harry Stebbings studied "King Lear" approximately 18 months prior to the conversation.
• He recalls the beauty of the play and specific imagery related to birds and cages.
• Stebbings acknowledges that his memory of the play's details is fading.

"What many don't know is I studied King Lear about 18 months ago when I was still at school. So it was a fond."

Stebbings shares his past experience with studying "King Lear" and his fond memories of the play.

"Yeah, I just remember bird imagery. There's lots of connotations to birds in a cage."

He specifically recalls the bird imagery used in "King Lear," which suggests themes of entrapment and control.

• John Borthwick finds the depiction of madness in "King Lear" to be incredibly accurate and insightful.
• He is fascinated by Shakespeare's understanding of human psychology.
• Borthwick believes that the genius behind Shakespeare's work is unparalleled in Western literature.

"His understanding of human psychology and of madness, and seeing somebody essentially go mad, it's incredible."

Borthwick praises Shakespeare's ability to portray the descent into madness in "King Lear."

• Harry Stebbings humorously compares the genius of Shakespeare to today's innovators like Elon Musk.
• Borthwick and Stebbings discuss the concept of genius across different eras and its impact on society.

"Gift, and now we have Elon Musk. So the world is fine."

Stebbings makes a light-hearted comment about the presence of genius in the modern world, implying that innovative figures like Elon Musk continue to contribute to society's advancement.

• John Borthwick values mentorship and considers his family, including his wife and kids, as mentors.
• He maintains an open mind and learns from every interaction.
• Borthwick is inspired by Jeff Bezos and respects his work with AWS and the Washington Post.
• He emphasizes the importance of learning from various sources and experiences.

"My family, my wife, my kids are. They're all people that I learn from every day."

Borthwick acknowledges his family as a source of daily learning and mentorship.

"I don't know him personally, but I would say that one person who I've been truly inspired by in 2016 is Jeff Bezos."

He expresses admiration for Jeff Bezos, highlighting his achievements and influence as a source of inspiration.

• John Borthwick disagrees with the notion of a consumer downturn in the market.
• He believes consumer adoption of new services and products is increasing.
• Borthwick discusses the shifting balance of power between distribution and product.
• He suggests that distribution, equated to marketing, is gaining importance for companies to grow market share.

"I don't see it as a consumer downturn."

Borthwick challenges the idea that there is a downturn in consumer markets, instead seeing growth in consumer adoption.

"Distribution and product. I think in the last five to eight years, because of many of the reasons we discussed earlier, is distribution has been available through the App Store, and so a lot of power has moved to product."

He explains the shift in power dynamics from distribution to product due to the availability of platforms like the App Store.

• Betaworks sits at the intersection of media and technology.
• John Borthwick describes Betaworks as a hub for entrepreneurs and startups.
• He mentions the introduction of an accelerator program, Botcamp, at Betaworks.
• Borthwick was initially skeptical about the fit of an accelerator program for Betaworks but was pleased with its success.
• He sets a key performance indicator (KPI) for the accelerator program's success based on funding for participating companies.

"So that's the essence of what I'm building here."

Borthwick outlines the core mission of Betaworks as a platform for fostering entrepreneurship and innovation.

"I think that the Barcam program went incredibly well, and we got a lot of interest at the top of the funnel."

He reflects on the success of the Botcamp accelerator program and the high level of interest it generated.

• John Borthwick shares statistics about funding success rates for graduates of accelerator programs like Y Combinator and Techstars.
• He reveals that less than 40% of companies from these programs receive significant funding within a year.
• Borthwick aimed for a higher success rate for Betaworks' Botcamp program and is on track to achieve it.

"So I wanted to, since we were doing a thematic accelerator program, I said to the team, a key KPI we had is that within six months of the close of the program and graduation, which was in September, within six months of that, we want 50% of them funded."

Borthwick discusses the ambitious goal he set for the Botcamp accelerator program to have a high percentage of its graduates funded within six months.

• Harry Stebbings expresses his gratitude to John Borthwick for participating in the conversation.
• He also shares information on how listeners can follow him and Borthwick on social media, and he promotes his new blog.
• Stebbings concludes by mentioning two services, X.AI and Workable, that offer solutions for scheduling and hiring.

"I've had so much fun chatting with you and I can't thank you enough."

Stebbings thanks Borthwick for the engaging discussion and the insights shared during the podcast.

"And if you love the show today, then you can follow me on Snapchat at htebings with two b's. You can follow John on Twitter at borswick, or you can check us out on the new blog mojitovc.com."

Stebbings provides information on how listeners can stay connected with him and Borthwick, as well as access additional content.