In this episode of "20 Minutes VC," host Harry Stebbings interviews Jeff Bussgang, General Partner at Flybridge Capital, a seasoned entrepreneur turned VC and a senior lecturer at Harvard Business School. Bussgang shares his journey from a computer science undergrad with entrepreneurial roots to becoming a VC, emphasizing the importance of adopting a realistic approach to unit economics and growth. He discusses the venture capital industry's focus on money-in, money-out metrics and the challenges of maintaining culture and values amidst hypergrowth. Bussgang also highlights the significance of transparent risk communication and mitigation strategies in pitches. Additionally, he touches on the implications of signaling risk for VCs making seed investments and the value of picks-and-shovels investments, citing Sentenai, a machine learning data engineering startup, as his latest public investment.
"Joining me in the hot seat, we have Jeff Bussgang, general partner at Flybridge Capital."
This quote introduces Jeff Bussgang as the guest, highlighting his roles and achievements, setting the stage for the conversation about his career and insights into venture capital.
"The trajectory for me was first I was a computer science undergrad and son of an entrepreneur... I bumped into a bunch of VCs while I was at HBS... It was sort of a circuitous route through the path of entrepreneurship."
Jeff Bussgang narrates his journey from a computer science student and management consultant to becoming a VC, emphasizing the influence of his education and entrepreneurial background.
"One of the most important ones was that all the systems that you design when you're a certain size are completely wrong six months or twelve months later."
Jeff reflects on the necessity of dynamic systems in a hypergrowth environment, implying that successful management requires flexibility and the ability to evolve.
"I never believe there's one path to the final journey... I do advise a lot of my students and young folks who are aspiring to get into VC that if you can, I think it is advantageous to get some operating experience."
Jeff challenges the idea of a single path to success in VC, advocating for diversity in experience while acknowledging the benefits of operational exposure.
"It really settles in on values and culture... if you have a consistent set of values and culture and hopefully a consistent mission and a consistent purpose that you're trying to achieve with your startup."
This quote underscores the significance of a strong, value-driven culture as an anchor for companies experiencing rapid growth and change.
"If you can maintain that focus, then all the other pieces are more disposable. And that's really the key, is not to dispose of the culture and the focus and the strategy and the mission."
This quote emphasizes the importance of maintaining the core elements of a startup (culture, focus, strategy, mission) while being flexible with less critical aspects (organizational and communication structures).
"It's really just about the return that you generate. It's money in, money out."
This quote simplifies the concept of venture returns to the basic principle of the amount invested versus the amount returned, highlighting the primary concern for LPs.
"So the metrics that LPs use to measure our performance are typically two. One is multiple on multiple cash on, cash return... And the second is a factor of time, which is the IRR..."
This quote outlines the two key metrics for assessing venture fund performance, emphasizing the importance of the amount returned relative to the amount invested and the time value of money.
"The premium becomes more attractive if a venture fund can return 15 20% year over year."
The quote highlights the attractiveness of venture funds in a low-interest-rate environment where traditional investments yield low returns, making the higher risk of venture funds worthwhile.
"Venture capitalists can dole out the money and mitigate the risk over time."
This quote explains the strategy of distributing investments over time to reduce risk, which is a shift from larger, upfront investments to smaller, staged ones based on company performance and information.
"I am pleased when founders are realistic... But you also have to focus on real results and building a real business and creating real value."
The quote reflects the speaker's approval of founders who maintain a balance between optimism and practicality, ensuring they are building a sustainable business while pursuing ambitious goals.
"And in our industry, typically, the pendulum does not swing too far in the realism category."
This quote emphasizes that the venture capital industry usually leans more towards enthusiasm and high expectations than towards a realistic assessment of businesses.
"It typically does swing too far into irrational exuberance, to quote Alan Greenspan, and founders getting very markets getting frothy, and founders and vcs feeding that froth."
The quote references Alan Greenspan's term "irrational exuberance" to describe the overly optimistic and sometimes unrealistic expectations in the market that can lead to inflated valuations.
"I can't think of a single one where we're not being aggressive enough and not thinking enough about growth balanced with profitability."
Jeff Bussgang indicates that in his experience, there is a consistent effort to balance growth with profitability, suggesting that neither aspect is being neglected in the companies he is involved with.
"We're all focused on equity value creation, both the entrepreneur and the VC."
This quote underlines the shared goal of entrepreneurs and VCs, which is to increase the value of the company's equity, suggesting that both parties have a vested interest in the success of the business.
"So I disagree with that VC."
Jeff Bussgang explicitly disagrees with the unnamed VC's strategy, setting the stage for an alternative approach to building a company's value.
"There are times when you want to drive adoption first, monetization later, and delay the focus on unit economics."
The quote suggests that there are strategic periods during a company's growth when focusing on adoption can be more beneficial than immediate profitability, with monetization and unit economics becoming a focus later on.
"A difficult bridge to cross. And we've had some companies that have struggled to cross that bridge."
Jeff Bussgang acknowledges the difficulty companies face when trying to convert free users to paying customers, indicating it's a common challenge.
"If you lower the bar on the free product, then sometimes you lose conversion rates and suddenly you have a lot of attrition and your adoption strategy goes away."
This quote highlights the delicate balance companies must strike when adjusting the features of their free products to encourage users to upgrade to paid versions without losing the user base.
"I think the most compelling pitches are when the founder articulates more risks than I can think of and then lays out really thoughtful risk mitigation plans."
Jeff Bussgang emphasizes that acknowledging and addressing potential risks upfront makes a startup pitch more compelling to investors.
"It's a common feature of the best pitches and the most confident founders."
The quote suggests that transparency about risks is a hallmark of the most successful pitches and is associated with founders who exude a certain level of confidence.
"y to be vulnerable and an ability to admit mistakes that comes through very strongly with the best pitches."
This quote emphasizes the value that investors place on founders who can openly acknowledge their vulnerabilities and mistakes, indicating a level of honesty and self-awareness that is appealing to venture capitalists.
"I think one of the best pitches I've seen was Mike Baker from Datazoo... Mike had a vision for how the future would unfold... and that vision... has exactly played out."
This quote highlights the importance of having a clear and compelling vision for the future, as well as the ability to effectively communicate that vision to investors, as demonstrated by Mike Baker's successful pitch.
"You're at an early stage in the investment process. It is worth your time, because if they can be a champion for you and get you credibility with the partner, it's worth it."
Jeff Bussgang indicates that engaging with non-key decision-makers can be beneficial as they have the potential to advocate for the founder within the firm, thus advancing the investment process.
"Your favorite book and why Viktor Frankl Man's search for meaning my dad survived the Holocaust in pre war poland as a refugee and soldier in the war."
The quote reveals the personal significance of the book to Jeff Bussgang and underscores the impact of Viktor Frankl's work on his worldview.
"Size of fund, size of typical investment profile of the investments made, and do reference checking with ceos and entrepreneurs that have worked with that fund before to get their likes and dislikes."
This quote outlines the key areas of research a founder should conduct before meeting with a VC fund to better understand the fund's preferences and track record.
"No, they can't."
Jeff Bussgang succinctly asserts that it is not possible for large VCs to avoid signaling risk when making seed investments.
"Vcs are big data decision makers. Think about us as pattern recognizers and machine learning, deep learning algorithms that feed on data."
The quote draws a parallel between VC decision-making and machine learning, emphasizing the data-driven nature of investment choices.
"A lot of transparency with respect to the key issues and a lot of transparency with respect to the timing, and a lot of transparency with respect to how high a priority this is."
The quote stresses the importance of being open about the investment process and where a particular opportunity stands in terms of priority for the VC.
"The Economist is a must read for me. And then Mattermark is the other must read."
Jeff Bussgang shares his preferred sources of information, which include a publication covering global affairs and a company specializing in startup data.
"The most recent public investment was Sentine... I thought that the technical founder was incredibly compelling and had a great vision for how the world was going to play out in the machine learning world."
This quote explains Jeff Bussgang's rationale behind investing in Sentine, highlighting the founder's vision and the startup's role in the burgeoning field of machine learning.