20VC Bill Gurley and Michael Eisenberg on The First Signs of an Impending Bust, What Happens with a Market Crash, How Do Public Markets Impact Private Valuations & The Biggest Lessons from 20 Years Investing in Venture

Summary Notes


In this episode of 20 VC, Harry Stebbings is joined by venture capital legends Bill Gurley of Benchmark and Michael Eisenberg of Aleph to discuss the parallels between today's market and the dot-com bubble era. Gurley and Eisenberg explore the current investment landscape, noting the broader speculation, larger scale, and the potential impact of Federal Reserve actions. They also touch on the influx of 'tourist' investors in VC, the global expansion of venture capital, and the challenges of capital allocation in both public and private markets. The conversation delves into the importance of price discipline, the risks of oversupply of capital to startups, and the dynamics of board management during market downturns. Both Gurley and Eisenberg emphasize the enduring value of relationships in venture capital and the need to play the long game, investing across cycles while maintaining ownership stakes and a focus on accelerating portfolio companies.

Summary Notes

Introduction to the Episode

  • The episode of 20 VC features a discussion on the comparison between current market conditions and those of the 1999 dot-com bubble.
  • Harry Stebbings hosts the show, and the episode features guests Bill Gurley and Michael Eisenberg.
  • Bill Gurley is a general partner at Benchmark with a successful venture career.
  • Michael Eisenberg, previously a partner at Benchmark, co-founded Aleph, an early-stage fund in Israel.

"This is 20 VC with me, Harry Stebbings, and you might remember last month we did a show with Arthur Patterson."

The quote introduces the podcast and the host, Harry Stebbings, while referencing a past episode that discussed market conditions in the '80s, setting the stage for the current discussion on the dot-com bubble of '99.

Comparing Current Market to the Dot-Com Bubble

  • Bill Gurley acknowledges similarities to the 1999 dot-com bubble but notes significant differences in speculation scale, amount of money raised, and burn rates.
  • The current market has a broader range of speculation, with entrepreneurs having more cash to challenge incumbents.
  • There is skepticism about market cycles due to Federal Reserve actions in 2008 and 2020, leading some to question if a market reset is possible.

"Things are clearly more like 99 today than they were five years ago."

Bill Gurley compares the current market to that of five years ago and the 1999 dot-com bubble, emphasizing the increased scale and speculation in today's environment.

Michael Eisenberg's Perspective

  • Michael Eisenberg shares a similar view to Bill Gurley but provides historical context from his early venture career.
  • He highlights the influx of new investors in venture capital and the international expansion of venture capital as a financing model.
  • The global diffusion of venture capital and its impact on traditional industries could lead to varied outcomes in the event of a market correction.

"Now you're in hundreds of spots around the world with venture capital as an accepted financing model globally."

Michael Eisenberg points out the global acceptance and spread of venture capital, contrasting it with its previous concentration in Silicon Valley and Israel during the late '90s.

Market Size and New Industries

  • The discussion includes the argument that market sizes are larger than anticipated, with the existence of trillion-dollar companies.
  • There is a debate on whether the current investment environment reflects supply meeting demand or an imbalance.
  • Five new game-changing industries are being invested in simultaneously, compared to singular shifts in the past.

"There's kind of five new fundamentally game changing industries to invest in."

The quote reflects the optimism of some investors who believe that the current market offers multiple significant opportunities for investment, unlike the singular technological shifts of the past.

Signs of a Market Crash

  • Bill Gurley suggests that signs of a market crash may not be immediately apparent, and that some sectors may already be experiencing a downturn.
  • The conversation touches on the concept of capital scarcity and whether the Federal Reserve would intervene in the event of a market downturn.
  • Michael Eisenberg adds that complex economic systems make it difficult to predict the exact outcomes of market interventions.

"Right now, people were forwarding around some charts on twitter that showed a lot of the non SaaS, non Fang, mid cap public companies, they're already average cut in half right now in the past six months."

Bill Gurley provides evidence that some public companies have already seen significant valuation drops, suggesting that a market correction may have already begun.

The Impact of Market Corrections

  • The guests discuss the potential for market corrections to affect public and private valuations, with historical examples of Cisco's acquisitions before and after the dot-com bubble.
  • There is a concern about the potential for a scarcity of returns due to the influx of capital into the market.
  • The pandemic's effect on traditional indicators like office rents in San Francisco is noted, with Tel Aviv experiencing a surge in office rents.

"I'm looking at the list of Cisco's acquisitions... You get to 800 million at the end of March 2000, where Cisco buys site path. We then see 6 billion on May 5... And then we never see the billion dollar number again."

Michael Eisenberg uses Cisco's acquisition history to illustrate the impact of the dot-com bubble on company valuations and the subsequent change in acquisition behavior post-bubble.

  • In the late 1990s and early 2000s, significant acquisitions occurred, with companies punching through the $250 million to $400 million range.
  • A period followed with multiple billion-dollar acquisitions over one and a half years.
  • These acquisitions continued even after the dot-com crash, indicating a resilient M&A trend despite market downturns.

"99, 2000, you see the first punch throughs of 250,000,000 to 400 million. Then multiple billion dollar acquisitions over a one and a half year period, and the number for five years."

This quote highlights the scale of acquisitions during the late '90s and early 2000s, emphasizing the growth and investment in the tech sector during this period.

Late Stage Private Rounds and Capital Dynamics

  • Tiger has created a competitive environment in late-stage private rounds by adopting a bold investment strategy reminiscent of SoftBank.
  • Traditional venture firms and hedge funds have shifted to a venture model where they are less concerned about daily market valuations.
  • This shift has resulted in faster fundraising rounds and a tendency to become valuation agnostic due to the potential for outsized returns.

"There's one thing, idiosyncratic thing that's been happening with late stage that could get specifically to your question, Harry, about these decacorn rounds and what there appears to be a rather competitive environment going on between the different top players in the late stage private round, provoked mostly by Tiger."

This quote explains the competitive dynamics in late-stage funding rounds, with Tiger's aggressive strategy influencing other players and changing the investment landscape.

Capital's Influence on Company Strategy

  • Large capital reserves can overwhelm a company's cap table in a down market, giving investors like Tiger an advantage.
  • Secondary transactions have become more common, allowing founders to take money off the table earlier, which may affect their decision-making during tough times.

"What we often don't pay attention to is if you got the largest war chest at the table, you've got a shot to overwhelm the cap table in a down market."

This quote discusses the strategic advantage of having significant capital during market downturns, which can affect control and decision-making within a company.

Impact of Capital Oversupply on Startups

  • There is a concern that the influx of capital is moving down to earlier funding stages, distorting the growth and execution plans of startups.
  • Startups may prematurely scale functions like sales and customer success without proper revenue or a playbook, potentially leading to negative outcomes.

"My challenge and my concern is that that's actually been moved further and further down the stack towards the a and the b, where they've all been compressed sooner and sooner."

This quote expresses concern about the impact of capital oversupply on early-stage startups and the potential for it to harm their development and execution strategies.

Venture Capital Investment Philosophy

  • Some investors use capital as a weapon by targeting opportunities where capital can provide a competitive advantage.
  • The shift in investment strategies has led to a search for opportunities where capital can be effectively utilized, such as expanding a salesforce in enterprise software.

"I think there are some investors that are intentionally executing, knowing that capital is a weapon and they're taking on opportunities where capital can gain advantage, which are very different types of businesses from what the venture industry has favored historically."

This quote highlights the strategic use of capital in venture capital investments and the shift towards opportunities where capital can be a differentiator.

Price Discipline in Venture Capital

  • The venture capital market is driven by supply and demand, and individual concerns or predictions have little impact on the broader market trends.
  • Investing across cycles is essential, and trying to predict market tops can lead to missing out on significant returns.
  • Ownership percentages still matter in venture capital, and relationships and networks are crucial for accelerating entrepreneurs.

"The market does that via supply and demand. And so you have to play the game on the field."

This quote emphasizes the importance of adapting to market conditions in venture capital rather than trying to impose individual investment philosophies against market trends.

Liquidity and Exit Strategies

  • Liquidity opportunities for angel investors may differ from those of venture capitalists with large ownership stakes.
  • Taking money off the table can affect pricing and is typically not feasible for large shareholders unless there's strong conviction about overvaluation or limited growth potential.

"I personally think it's very different if you're running angel strategy where your ownership positions aren't as large, because the liquidity opportunities are much better."

This quote discusses the different considerations for liquidity events based on the size of ownership stakes and investment strategies.

Long-Term Reputation and Stakeholder Relationships

  • Maintaining a long-term perspective is crucial for venture capitalists (VCs) when it comes to stakeholder relationships.
  • Selling a small amount of stake as a large stakeholder can be seen as reputation negative.
  • The importance of being present for the win and the long-term impact on reputation is emphasized.
  • The example of Zynga is mentioned, suggesting that insight into a company's true nature is important for timing decisions.

"Probably a small amount if you're a large stakeholder, I think that's reputation negative over the long term and not consistent with playing the long game alongside founders."

The quote highlights the negative impact on reputation for a large stakeholder selling a small amount of their stake, which is not aligned with long-term collaboration with founders.

Venture Capital Deployment Pace

  • There is a shift in the venture capital industry towards faster deployment cycles.
  • Some stakeholders view traditional two and a half year fund cycles as outdated compared to the new norm of twelve-month cycles.
  • The debate is whether to adapt to the faster pace or maintain traditional deployment strategies.

"It's twelve months now. So the question that I have for both of you is, when it comes to deployment pace on the fun cycle, bluntly, should you play the game on the field or should you stick to your knitting and do what you said two and a half, three year deployment cycles?"

This quote presents the current debate on whether VCs should accelerate their investment pace to a twelve-month cycle or stick to the traditional longer cycles.

Venture Capital's Core Game

  • Venture capital is fundamentally about relationships, networks, and accelerating portfolio companies.
  • The speaker argues that the true "game" of venture capital is not rapid capital deployment but fostering growth and going public or being acquired.
  • Time is a limiting factor, and taking time to build relationships and reputation is advised for long-term success.

"The game on the field is finding an amazing founder, getting large ownership stakes, and then helping those companies accelerate out to the next bunch of rounds and staying alongside until it goes public or got bought."

This quote defines the core objectives of venture capital as building relationships with founders, securing significant ownership, and supporting companies until a significant liquidity event occurs.

Time Diversity in Investment Portfolios

  • Time diversity in investment portfolios is seen as beneficial.
  • Rapid fund spending can lead to a lack of diversity in entry prices, sector bets, and other factors.
  • A poorly performing fund can adversely affect the ability to raise future funds.

"Having lived through cycles before, you spend a fund in nine months, you've got no time diversity on that time diversity can affect entry prices, it can affect sector bets, it can affect a whole bunch of things."

The quote emphasizes the importance of time diversity in a portfolio and the potential negative consequences of spending a fund too rapidly.

SPACs, IPOs, and Direct Listings

  • There is a discussion about the merits and challenges of SPACs, IPOs, and direct listings.
  • The traditional IPO process is criticized for being disingenuous and broken.
  • SPACs are seen as offering more control to founders and CEOs, but also as a vehicle for speculative, pre-revenue companies to go public.
  • The perspective from which SPACs are evaluated (banks, entrepreneurs, common shareholders) can significantly alter the perceived benefits.

"SPACs came along and I think offered something not nearly as good as a DL, but a little better than an IPO, in that it gave the founder and the CEO more control."

This quote suggests that SPACs provide more control to founders and CEOs compared to traditional IPOs, positioning SPACs between direct listings (DL) and IPOs in terms of desirability.

Challenges in the Venture Capital Industry

  • The biggest challenges faced by VCs include dealing with downturns, maintaining steady hands at the board table, and the impact of inexperienced investors during turbulent times.
  • The importance of having experienced and steady co-investors is highlighted, particularly during challenging periods.
  • The speaker expresses concern about the composition of board members and their ability to provide stable guidance.

"Who's around your board table and who your co investors are matters a huge amount."

This quote stresses the importance of having the right co-investors and board members who can offer stability and support, especially in difficult times.

Partnership Dynamics in Venture Capital Firms

  • The dynamics within VC partnerships can significantly affect decision-making and board management.
  • Equal partnerships are praised for creating a safe and collaborative environment.
  • Information disparity between board members and partners can lead to challenges, particularly when junior members are involved in capital deployment.

"One thing I'll say is, I think I've been very lucky in that the last couple of places I've been, three places I've been, have been equal partnerships."

The quote highlights the speaker's positive experience with equal partnerships in venture capital, which are believed to foster a more supportive and collaborative atmosphere.

  • Adapting the VC mindset to market trends is crucial for continued success.
  • The speaker reflects on the need to question one's mental model when unexpected types of companies succeed.
  • The risk of missing out on a successful investment is considered greater than the risk of losing money on a bad one.

"If this continues, like, for ten more years, my mindset is probably not optimized for execution in that world because I would say you might need to modify yours, because the world's playing at a different pace, with a different game on the field."

This quote expresses the challenge of adapting to a rapidly changing investment landscape and the potential need for VCs to adjust their strategies and mindsets accordingly.

Reflections on Missed Investment Opportunities

  • The speakers discuss their experiences with missed investment opportunities and the reasons behind them.
  • A common theme is the failure to fully appreciate the potential upside of certain investments.
  • The importance of being imaginative and recognizing asymmetric risk in venture capital is emphasized.

"There's just this failure to imagine how high is up and to recognize that the risk is really missing it, rather than losing $10 million."

This quote captures the sentiment that the true risk in venture capital is not in losing money on a particular deal, but in failing to recognize and seize opportunities with significant upside potential.

Positive Outcomes of Market Busts

  • Market busts can lead to infrastructure improvements and optionality.
  • Busts may reallocate talent and resources to areas of greater need.
  • Despite the negative impact on companies and individuals, the physical infrastructure remains and can be beneficial.
  • A bust can create a more diverse and competitive environment, leading to innovation.

"Yeah, I mean other people have talked about this but if you look back at 2000 time frame a lot of the money that busted went into telecom infrastructure and people argue that we are better off having that stuff built out."

This quote highlights the idea that even though the dot-com bubble burst was devastating for many, it resulted in the expansion of telecom infrastructure which has had long-term positive effects.

"And so even if you have a washout, it's really about optionality. So if you have more people trying more things in more places. The end result of that should be positive shortly."

The speaker is suggesting that increased attempts and ventures, even if many fail, ultimately contribute to a positive outcome due to the diversity and range of innovation it encourages.

Diversification in Investment Portfolios

  • Diversification is seen as a key strategy for investors, especially in volatile markets.
  • Some investors maintain large, diverse portfolios to spread risk.
  • The concept of "dewersification" suggests there is a point where diversification may become ineffective.

"It's all about diversity 500, because if you're in the up, that's all that matters."

This quote emphasizes the importance of having a diversified investment portfolio, suggesting that as long as some investments are successful, the overall portfolio will benefit.

"I mean, there are great investors that use the phrase dewersification, so you can probably get an argument for any point of view."

Here, the speaker acknowledges that there's a debate about the effectiveness of diversification, with some arguing that there can be too much diversification, which they refer to as "dewersification."

Talent Reallocation and Scarcity

  • Market busts can redistribute talent to where it's most needed.
  • The tech industry is currently experiencing a talent scarcity, especially for engineers and product people.
  • Busts may not reduce the cost of talent but could lead to its better distribution.
  • The influx of money into tech has made the industry more attractive to potential employees, drawing them away from traditional sectors like banking.

"A bust in the past and maybe now would reallocate some of that talent around."

The speaker is pointing out that a market downturn could redistribute talent, potentially leading to more efficient use of human resources in the tech industry.

"He told me they can't recruit anyone. They're in line behind all these tech companies recruiting the people out of the best schools right now."

This quote illustrates the current challenge faced by traditional industries in recruiting top talent, as the tech sector has become a more attractive employer.

  • The growth of passive and index investing has concentrated a large portion of investments in top tech companies.
  • There is concern about the effects of a market correction in a landscape where investments are heavily weighted towards a few large companies.
  • The speaker questions the outcomes of a market correction in such a top-heavy investment environment.

"A giant percentage of the s and p and of these buy side assets are in these fang plus companies."

The speaker is highlighting the significant investment concentration in top tech companies, which may pose risks in the event of a market downturn.

"Where does that money go if there's no yield bearing instruments of note out there because the Fed has reduced interest rates?"

This quote raises the concern about where investments will flow if traditional yield-bearing options are not available, especially in a market dominated by a few large tech stocks.

The State of Venture Capital Investment

  • Venture capital has proven to be a strong performing asset class in recent years.
  • Endowments with larger venture portfolios have seen significant outperformance.
  • There is a dilemma for investors with venture capital overperforming and altering their asset allocation models.
  • The venture industry is seen as lopsided, with a few funds consistently outperforming the majority.
  • The increasing number of entrepreneurs is driving demand for venture capital.

"I think most of the endowments that have radically outperformed have larger venture portfolios."

This quote suggests that larger allocations to venture capital in investment portfolios have led to better overall performance for endowments.

"I still think over time, the index will lose money, as it did for a while, kind of the bottom bullet. Half or three quarters won't beat the market return going forward."

The speaker is expressing skepticism about the broader venture capital industry's ability to outperform the market, suggesting that many funds will not achieve returns higher than market averages.

Reflections on the Venture Capital Model

  • Some believe the venture capital model is not broken and does not need fixing.
  • The success of traditional venture capital firms like Benchmark suggests that the classic model still works.
  • There is a belief that the venture industry should not be heavily regulated by the government.
  • The rise of alternative models like operator funds and platforms like AngelList adds to the diversity of the industry without displacing traditional venture capital.

"I think it's an incredible model. I've loved being a part of it for majority of my career."

The speaker expresses his appreciation for the venture capital model and his belief in its effectiveness.

"You're not going to affect the industry by doing something new and disruptive. You're just going to add to it."

This quote implies that while new approaches to venture capital are welcome, they are unlikely to completely overhaul the existing system but rather contribute additional options to it.

Lessons from WeWork

  • Headline valuations can be misleading and should be approached with caution.
  • The importance of big markets and the potential they hold.
  • The necessity of maintaining board oversight to prevent missteps.

"Be careful of headline valations."

The speaker warns against being overly influenced by high valuations that may not accurately reflect a company's true value.

"Board oversight remains critical."

This quote underscores the importance of effective governance in preventing and addressing issues within companies, as demonstrated by the WeWork situation.

Learning from Success and Failure

  • People tend to analyze failures more than successes.
  • The venture capital industry often focuses on missed opportunities outside of their portfolio.
  • Learning from peers and experienced individuals can be more valuable than focusing solely on successes or failures.

"I think humans tend to overanalyze failure more than success."

The speaker is suggesting that people often spend more time contemplating their failures rather than learning from their successes.

"I learned most by talking to people and sitting around the table of people who've been smarter than me."

This quote reflects the speaker's belief that engaging with knowledgeable and experienced individuals is the most effective way to learn and grow.

Investing Lessons Over Time

  • Being more optimistic and risk-seeking in deal evaluation is a lesson some wish they had embraced earlier.
  • The significance of investing with the right people, as the quality of co-investors can greatly impact a company's trajectory.

"I would urge myself to be more optimistic, more kind of risk seeking as we evaluate each and every deal."

The speaker reflects on the importance of a positive, risk-tolerant approach to evaluating potential investments.

"Who you invest with actually really matters."

This quote emphasizes the critical role that co-investors play in the success of investments, highlighting the need for careful selection of investment partners.

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