20VC Elad Gil on Becoming One of Silicon Valleys Top Angels, Why Most People Get Market Sizing Wrong & Should VC Services Always Be Bundled Together

In this episode of "20 minutes VC," host Harry Stebbings interviews Elad Gil, a prominent angel investor and founder of Color Genomics. Elad shares insights from his journey, starting with organic investment opportunities through friends seeking advice, to becoming a renowned investor in companies like Airbnb, Stripe, and Pinterest. He emphasizes the importance of being market-driven, highlighting that a great team in a bad market often results in the market prevailing. Elad discusses his hands-off investment approach, preferring to focus on a few key processes rather than overcomplicating with excessive structure. He also touches on the significance of investor engagement, suggesting regular updates and strategic use of investor expertise. Additionally, Elad reflects on the tech cycle's end, market sizing, and the evolving role of VC, suggesting a potential unbundling of capital, governance, and advice. Finally, he mentions his recent investment in Checker and the importance of recognizing market potential and product demand.

• Harry Stebbings introduces Elad Gil as the guest for the episode.
• Elad Gil is the founder of Color Genomics.
• He is a prominent angel investor with investments in Airbnb, Stripe, Square, and Pinterest.
• Elad has experience as VP of corporate strategy at Twitter and was involved in starting Google's mobile team.
• Acknowledgements are given to Josh at Gusto and Sarah Guo at Greylock for introducing Elad Gil.

"Now, for those that do not know Elad, he is the founder at color Genomics. Elad is also one of the most successful and prominent angel investors in the Valley, with a portfolio including the likes of Airbnb, Stripe, Square and Pinterest, just to name a few."

This quote introduces Elad Gil's background and his significant impact as an angel investor in Silicon Valley.

• Elad started angel investing organically through helping friends with their startups.
• His entry into investing was through friends who sought advice and subsequently invited him to invest.
• Word of mouth from being helpful to these companies led to more investment opportunities.

"And so as I was helping people with things like their fundraises, they just started asking me if I wanted to invest as part of it as things came together."

Elad Gil describes how his initial involvement with startups naturally progressed into opportunities for angel investing.

• Elad Gil does not have many formal processes for his angel investments.
• He focuses on a few lightweight key factors that truly matter.
• He compares this approach to running an engineering team where only a few critical processes are necessary.

"I've basically asked, what are the three or four lightweight things that really matter?"

This quote summarizes Elad Gil's minimalist approach to angel investing, emphasizing the importance of a few key considerations.

• Elad Gil is stage agnostic and looks for companies with tenfold potential in size, valuation, and impact.
• He invests in companies with a tremendous road ahead, regardless of their current stage.
• Elad's experience allows him to add value to companies at various stages, from startups to more established businesses.

"I guess I'll get involved with companies at almost any stage as long as I think that they still have ten x potential to increase in size and valuation and impact to the world."

Elad Gil explains his criteria for involvement in companies, emphasizing the potential for significant growth and impact.

• Elad is more market-driven than other angels who may focus primarily on the team.
• He believes that a great team in a bad market will struggle, as the market often prevails.
• His operating experience at Twitter and Google allows him to provide advice on various aspects of business growth and scaling.

"I think a great team in a terrible market, the market tends to win."

This quote highlights Elad Gil's perspective on the importance of market conditions in the success of a startup, even over the quality of the team.

• Elad assists startups in determining the right structure for growth and executive hiring.
• He advises on capital raises, governance, board structure, and secondary sales.
• Elad compares business to a chess game, which becomes more strategic as the company grows.

"So I think those are sort of the major components."

This quote encapsulates the key areas where Elad Gil contributes to startups, including team structure, capital and governance, and company strategy.

• The support Elad provides varies by company; some need more help than others.
• Founders often face unique challenges, but common struggles include making acquisitions and managing secondary sales.
• Elad remains engaged with some companies long-term, adapting his advice to their evolving needs.

"And then the set of issues that come up are often unique to the company."

Elad Gil acknowledges that while each startup has unique challenges, there are also common issues that many encounter as they grow and scale.

• VCs can be involved at different stages of a company's lifecycle, depending on the founders' needs and the existing team's competencies.
• Harry Stebbings discusses the importance of VCs being able to provide value by filling gaps, either temporarily or on an ongoing basis, through advice to functional leads or founders.

"So I do think some companies will use me throughout their lifecycle. Some will pull me in early and then not have me involved late, some will involve me late."

This quote explains that the involvement of VCs like Harry Stebbings can vary widely, with some companies utilizing his expertise across all stages, while others may only do so at specific points in their growth.

• Elad Gil questions the commonly claimed value addition by VCs, such as making introductions and providing advice, and whether VCs consistently deliver on these promises.

"How do you perceive understand the very common vc value add that they continuously suggest of introductions and advice? What do you make of that? And do you think it's fundamentally stuck to by vcs?"

Elad Gil is skeptical about the practicality and consistency of the value addition that VCs claim to provide, specifically in terms of introductions and advice.

• Three types of VCs are identified: negatively impactful, neutral (simply capital providers), and very helpful.
• Helpful VCs contribute to strategy, hiring, and special deals, but entrepreneurs must synthesize advice and decide their own direction.

"There's people who are negatively impactful... There are people who are neutral... And then there are people who are very helpful."

This quote categorizes VCs based on their impact on companies, ranging from detrimental to neutral to highly beneficial.

• Entrepreneurs should actively engage their investors to get the most out of their abilities and contacts.
• Sending monthly updates, setting up a shadow board, and reaching out for specific advice are strategies for leveraging the investor base.

"I think you should be sending out monthly updates to your broader investor base... Number two, I know some companies that almost set up like a shadow board... Number three, I do think that there's two ways to reach out to investors ongoing."

This quote provides practical advice for entrepreneurs on how to keep investors engaged and how to make effective use of their expertise and networks.

• Moving from CEO to Chairman can provide insights into market trends and expand networks for partnerships.
• Angel investing as a hobby can offer valuable information on hiring, salaries, and capital markets, but it is time-consuming and not recommended for everyone.

"I think that it's been very helpful... it sort of creates an expanded network that you can tap into... The flip of it is it does take up a lot of time."

This quote reflects on the benefits and drawbacks of balancing angel investing with running a company, highlighting the importance of time management and selective engagement.

• The best companies may seem overvalued at the time of investment but undervalued in hindsight.
• Price sensitivity becomes more significant at later stages of investing, especially when valuations reach the billion-dollar mark.

"I guess ultimately there's three answers to that... the best companies always look expensive at the time and cheap in hindsight."

This quote discusses the investor's perspective on valuing companies, emphasizing that standout companies often appear overpriced early on but prove their worth over time.

• There is a suggestion of an impending end to the current tech cycle, with investors seeking new areas for growth and innovation.

"We're entering a period where everyone is looking for the next truly deep vein to explore."

Although not fully elaborated in the provided transcript, this quote hints at a shift in the tech industry, where investors are on the lookout for the next significant opportunity as the current cycle potentially winds down.

• The end of a tech cycle is marked by investors and entrepreneurs seeking new areas to replicate past successes.
• There is often a scattergun approach to investing in a wide variety of different areas.
• Examples include the late '90s when investors moved from successful internet companies to other sectors like energy and nanotechnology without a clear "why now" rationale.
• The characteristics of software investments, such as high margins and scalability, are sometimes overlooked in the rush to find the 'next big thing'.
• The current cycle's end is seeing similar diversification, which may lead to disappointment due to the different market characteristics.

"And at the end of that cycle, in 2001, 2002, investors and entrepreneurs really started trying a variety of other things that there was no clear why now statement around, but that they sort of invented reasons why this would be the next big market."

This quote highlights the tendency for investors and entrepreneurs to pivot to new sectors without a solid rationale following the end of a successful tech cycle.

• Concerns arise when investors fund non-tech businesses that have a tech interface, like a website, but lack the scalability and margins of traditional tech businesses.
• Awareness of different margin structures and inventory risks is crucial for investors in these businesses.
• Investors may get burned by applying software business models to non-software areas without considering the differences in margins and physical goods handling.

"It depends on how aware they are of what they're doing. So if people understand that that's what they're doing and they're going into something that fundamentally has a different margin structure, that has an inventory risk...then that's great."

This quote underscores the importance of investor awareness regarding the fundamental differences between tech and non-tech businesses when making investment decisions.

• Pattern recognition can be both beneficial and dangerous in investment decision-making.
• Recognizing patterns related to product demand and growth is valuable.
• However, focusing on unimportant patterns like team composition can be misleading.
• Important patterns to recognize include product-market fit, market size, growth velocity, and defensibility (moat).

"I think it depends on what the pattern is that you're looking for...if the pattern is these people are growing 30% month over month...That's an amazing pattern."

This quote emphasizes the value of recognizing patterns that indicate strong product demand and company growth, as opposed to less relevant patterns.

• Both top-down and bottom-up approaches are necessary to estimate market size.
• Investors often miscalculate market size, underestimating for successful ventures and overestimating for non-transformative ones.
• Differentiation and market sizing are difficult to separate.
• A practical approach is investing based on personal use cases and clear product needs.

"I think ultimately you have to do a bit of both. But honestly, I think people tend to mislead themselves around market size."

This quote reflects the speaker's view that a combination of top-down and bottom-up approaches is needed for accurate market sizing, while also acknowledging the common pitfalls in estimating market potential.

• Market creation is not about inventing new behaviors but capturing existing ones in new ways or mediums.
• The most compelling products often revamp existing interactions rather than creating entirely new behaviors.
• Companies that succeed tend to recast something that already exists rather than invent something new.

"I don't know if I would agree that Snapchat is market creation...the most compelling things are capturing behavior that already exists and then revamping it in a new way or capturing it in a new medium."

This quote challenges the idea of Snapchat being a market creator and suggests that the most successful products and companies often innovate by repurposing existing behaviors.

• Investment interest in startups can vary greatly, with phases of high competition and periods of disinterest.
• It's difficult to predict which companies that are competitive early on will become the most successful.
• Investment interest can fluctuate, with companies sometimes struggling to raise funds in one round but attracting significant interest in subsequent rounds.

"And so you really see these odd cycles of people being interested, losing interest and being interested, et cetera."

This quote highlights the unpredictable nature of investor interest in startups, which can shift dramatically over time.

• Elad Gil provided advice to Airbnb founders during their Series A and subsequently invested alongside major firms and notable individual investors.
• The seed round of Airbnb was not initially competitive, but interest spiked when Sequoia Capital decided to invest.

"I was providing some help and advice to the founders around their series A, and so I ended up investing in the series A alongside Greylock and Sequoia."

Elad Gil describes his involvement in Airbnb's Series A funding, indicating the importance of advisory roles in securing investment opportunities.

• Investor branding is important for differentiation and recognition.
• Strong online presence through blogging or social media can provide access to investments and attract entrepreneurs.

"I think they're definitely important because ultimately that's how people differentiate."

The quote emphasizes the value of investor branding in the venture capital landscape, as it helps investors stand out and gain access to deals.

• Elad Gil enjoys a wide range of books, making it difficult to choose a favorite.
• He mentions "The Wind-Up Bird Chronicle" by Murakami as one of his favorites.

"I really like the wind up Bird Chronicle by Murakami."

The quote shares a personal preference, providing insight into Elad Gil's interests outside of venture capital.

• Address tasks immediately to avoid a backlog.
• Aim for inbox zero to reduce time spent on repeated email considerations.
• Allocate large chunks of time for concentrated effort and learn to say no to low-value opportunities.

"You really need to figure out how to break out large chunks of time."

This quote underscores the importance of time management and the ability to focus on tasks without distraction.

• Elad Gil has not considered venture capital as a full-time role due to his focus on operating roles.
• He feels fortunate to have experienced both starting and scaling companies, as well as investing.

"So busy just operating that, honestly, I haven't given that very much thought."

Elad Gil expresses his current focus on operational roles over considering a full-time position in venture capital.

• Venture capital traditionally bundles capital, governance, and advice, but these skills may not always coexist in one individual.
• There is a possibility of decoupling these elements in the future, as some funds are experimenting with different models.

"Should those three items always remain bundled, or are there smart ways to decouple them in the future?"

The quote reflects on the traditional structure of venture capital and the potential for innovation within the industry.

• Missing out on investing in successful startups like Lyft is a regret for Elad Gil.
• Not having the opportunity to meet or invest in certain companies can be more disappointing than passing on an investment.

"In some sense, it's even sadder to never even had the opportunity."

Elad Gil discusses the feeling of missing out on investment opportunities, highlighting the nature of venture capital.

• Elad Gil's recent investments have been either very early-stage or later-stage, with not much in between.
• His last public investment was in Checker's Series B, driven by his belief in the company's growth potential.

"I think that's an example of one where on an ongoing basis I'm just such a strong believer in terms of how much more growth they have ahead of them."

This quote explains the rationale behind Elad Gil's continued investment in Checker, demonstrating his strategy of backing companies with strong growth prospects.

• Thanks are given to individuals who facilitated the podcast episode.
• Listeners are encouraged to engage with the host on social media and to check out Elad Gil's blog.

"And again, a big hand to Sarah Guo at Greylock and to Josh Reeves at gusto for the intro today, without which this episode would not have been possible."

The quote acknowledges the contributions of others in making the podcast episode happen, underlining the collaborative nature of the industry.