20VC Kleiner Perkins' MZ Zaveri on Why Success In Venture Is About The 3 F's, How VCs Can Manage Deal Heat & Is There Too Much Venture Dollars At Seed

In a comprehensive discussion on "20 minutes VC," host Harry Stebbings interviews venture capitalist Mz Zaviri, a partner at Kleiner Perkins with a rich background including a stint at Tencent and co-founding a Y Combinator-backed startup. Mz shares insights on the venture capital industry, emphasizing the importance of proactive outbound efforts over passive inbound deal flows, even at a prestigious firm like Kleiner Perkins. He discusses the "three F's" of venture—finding, financing, and fixing—and the nuanced role of deal heat in evaluating opportunities. Mz critiques the hype around broad themes like AI, stressing the need for specific applications, and touches on the evolution of monetization models, including the rise of commerce within apps. He also shares his latest investment in Ujet, a cloud contact center software solution, chosen for its innovative, product-centric approach to customer support.

• MZ Zaviri is a partner at Kleiner Perkins, a prestigious venture fund.
• Kleiner Perkins has made investments in major companies like Google, Amazon, Twitter, Square, and Airbnb.
• MZ previously worked with Tencent in Palo Alto.
• At Tencent, MZ worked on investments in companies such as Verb, Tile, Satellogic, and Weebly.
• MZ co-founded Proxino, a Y Combinator-backed startup in the JavaScript error detection space.

"Now MZ is a partner at Kleiner Perkins, one of the world's most prestigious venture funds, with prior investments in the likes of Google, Amazon, Twitter, Square and Airbnb, just to name a few."

This quote introduces MZ Zaviri and the venture fund Kleiner Perkins, highlighting its prestigious status and notable investments.

• Harry Stebbings uses Zoom for calls and interviews, citing it as an enterprise experience for various online activities.
• Zoom recently partnered with Sequoia in a 100 million funding round, emphasizing its business importance.
• Viewdit, a video recording tool, is recommended for personalized communications and comes with tracking powered by the Vidyard platform.

"My response Zoom, the number one video and web conferencing service providing one consistent enterprise experience that allows you to an array of activities including online meetings, video, webinars, collaboration enabled conference rooms and business IM, just to name a few."

Harry Stebbings explains his preference for Zoom, emphasizing its versatility and enterprise-level consistency in providing various communication services.

• MZ has been in the Bay Area for about six years.
• He co-founded Proxino in the summer of 2011 after moving to the Bay Area.
• Proxino was aimed at helping developers debug and optimize JavaScript in production environments.
• After turbulent times with Proxino, MZ joined Tencent in Palo Alto.
• His venture capital journey began somewhat randomly after his startup experience.

"Moved here initially in summer of 2011 to start a company called Proxino with a former classmate of mine."

This quote highlights MZ Zaviri's entrepreneurial background, detailing his move to the Bay Area and the founding of his company, Proxino.

• Tencent is a large company with a Chinese user base and a global presence.
• MZ joined Tencent by coincidence, linking up with an executive there.
• At Tencent, MZ focused on outbound seed investing.
• He learned that venture capital works best with proactive outbound efforts rather than passive inbound ones.
• MZ did about 20 seed deals at Tencent.

"I fundamentally learned that outbound is the way venture works and inbound is rarely the way it should work."

MZ Zaviri discusses his key learning from Tencent, emphasizing the importance of proactive outbound investment efforts in venture capital.

• MZ maintains his belief in outbound investment strategies even at Kleiner Perkins.
• He believes in building early relationships with founders, given the abundance of companies and financing options.
• MZ suggests that capital is somewhat commoditized, and therefore, relationships with founders are crucial.

"Why should you be in this mental model of ambulance chasing? If you can build conviction earlier? Why not sort of preemptive financing?"

This quote reflects MZ Zaviri's investment philosophy, advocating for proactive relationship-building and early conviction in investment opportunities rather than reactive strategies.

• The concept of the three F's in venture capital involves Finding, Financing, and Fixing.
• Finding is about sourcing opportunities and is at the top of the funnel, encompassing the act of seeing a company to potentially invest in.
• Financing ensures that a company has the necessary resources to progress and grow.
• Fixing (or Building) pertains to the investor's role in supporting and aiding the growth and development of a company, particularly through introductions and adding value to revenue streams.

"The three f's in my mind are sort of finding, and that's sort of like the top of the funnel, right. It's like you have to see a company in order to invest in it. And I would say finding and picking are kind of like lumped together two very distinct, but still kind of get to just make that acronym sort of fit neatly."

This quote explains that the 'finding' aspect involves both discovering and evaluating potential investment opportunities, which are distinct but related steps in the investment process.

"You have to ensure that companies have enough gas in the tank to get where they need to get. And so it's in many ways, it's sort of a lily pad from one financing to the next."

The quote highlights the importance of adequate financing for startups to move from one stage to the next, likening it to hopping from one lily pad to another.

"There is sort of a notion of investors being able to help companies as they're growing and sort of help build with them."

This quote emphasizes the idea that investors are not just financial backers but also partners in the growth process, helping to 'fix' or 'build' the company.

• Follow-on funding is considered by many investors as one of the biggest value-adds they can provide to a startup.
• The ability to provide additional capital can give a company a competitive advantage, especially in crowded markets.
• Startups are characterized as growth machines that require fuel (capital) to maintain their high growth trajectory.

"The ability to sort of ensure that your companies can have enough gas in the tank to get to the finish line is crucial."

This quote underscores the critical role of follow-on funding in enabling companies to reach their long-term goals.

"If one can raise more than the others, you can suck the oxygen out of the room."

Here, the speaker suggests that a well-financed company can dominate the market and outpace competitors by securing more resources.

• The process involves a people-first approach, especially at the seed stage, focusing on the founders' backgrounds, abilities, and suitability for their ventures.
• Later-stage investments also consider traction but do not diminish the importance of the founders' capabilities.
• The management of the pipeline includes assessing the timing of investments and the ongoing adjustments based on the evolving landscape and internal factors.

"For me, it fundamentally boils down to the individual I'm meeting."

This quote stresses the importance of the founder's character and background in the decision-making process for investments.

"It's maybe I make a slight mistake here, but how can I find the right end goal there?"

The quote reflects the iterative and adaptive nature of managing the pipeline and making investment decisions.

• Timing is a critical factor in venture capital, sometimes more so than the selection of the company itself.
• Investment decisions are influenced by internal factors such as board commitments, number of financings, and the lifecycle stage of the fund.
• Founders who understand the importance of timing in the VC process can engage more effectively with investors.

"I find that the best founders actually are kind of aware of this notion of timing and how they approach you and your process."

This quote indicates that founders with an understanding of the VC landscape and timing can navigate the investment process more successfully.

• Both founders and investors have a role in understanding and communicating the intricacies of VC fund cycles and investment environments.
• Seed investors also have a responsibility to educate and guide founders through the financing process.
• Building a relationship between founders and investors often involves a courtship period where both parties get to know each other.

"I think it's a role that should be played in two parts. Right. I'd say it's the responsibilities on the founders and investors as well as sort of their seed investors."

This quote suggests that the responsibility of understanding VC knowledge bases is shared among founders, investors, and seed investors.

• The concept of deal heat pertains to the level of interest and competition around a potential investment opportunity.
• The speaker believes that deal heat is not a straightforward concept and can be complicated, implying that it has both positive and negative aspects.

"I don't think it's that clear cut and I'm not trying to kind of dodge the question, but I'd say it's complicated."

This quote reflects the nuanced view of deal heat, suggesting that it cannot be classified simply as good or bad.

• Market signals, such as momentum, can be a valuable proxy for identifying interesting ventures.
• Investors should use market signals as one of many inputs when making decisions.
• A viable investment should be grounded in truth or conviction, focusing on the team, momentum, the thesis, or the market.
• Concern arises when momentum exists solely for its own sake, often driven by egotistical reasons rather than fundamental value.

"If you believe in some quasi efficiencies in the marketplace, then you can't ignore that as a signal."

This quote emphasizes the importance of considering market signals as part of the decision-making process, recognizing that they can indicate efficiencies and opportunities in the marketplace.

"The worry is if something has just momentum for the sake of having momentum, and at that point, it's just sort of folks trying to cram dollars into something because of an egotistical reason."

This quote highlights the risk of investments driven by momentum without underlying value, suggesting that such situations are often fueled by ego rather than sound investment rationale.

• The seed ecosystem has changed, with fewer "party rounds" and more concentrated positions by institutional investors.
• Institutional seed investors typically aim for a 7-15% stake, necessitating a concentrated position in the financing.
• There's a trend away from rounds with many investors and towards more selective investor participation.
• Founders occasionally prefer to distribute equity across numerous investors if they are confident in their execution plan.

"I think there's a large number of... institutional seed investors, and they're sort of positioned to want to take anywhere from like, I don't know, seven to 15%."

This quote describes the current landscape of seed investing, where institutional investors seek significant stakes in startups, leading to a shift away from rounds with many small investors.

"I'm seeing less of it. But every so often a financing comes into play where the founder is like, I just need the money and I know what I'm doing."

This quote acknowledges the ongoing occurrence of widely distributed financing rounds, though they have become less common, and suggests that such rounds happen when founders have a clear vision and need for capital.

• Deal heat can sometimes be a "false positive," not necessarily indicating a good investment.
• Investors should understand the reasons behind a deal's momentum, differentiating between genuine potential and overhyped interest.
• Deal heat can be traced back to a few individuals with strong networks, which may not reflect the company's actual value.
• More seed funds and lower costs to start a company have increased the noise in the market, requiring discernment from investors.

"You have to understand why right. I kind of talked about why is there sort of interest."

This quote suggests that understanding the reasons behind deal heat is crucial, implying that not all interest is based on a company's merits.

"I think as you go downstream, there's more sort of dollars of cost to get a company started or less. And so obviously there will be a little more noise you have to sift through."

The quote reflects the increased difficulty in identifying valuable investments due to a higher volume of startups and lower barriers to entry, which results in more "noise" in the market.

• The heat in certain sectors can be justified by actual potential, while in others, it may be unjustified and driven by hype.
• Machine intelligence and AI-first companies may experience over-momentum without a clear application or market fit.
• Talent alone does not guarantee success; market and product fit are equally important.
• Diversified investment exposure is crucial to avoid overinvestment in a single sector or theme.

"I would actually say, I would probably counter with saying that I think sort of this broader notion of machine intelligence just for the sake of machine intelligence or AI first companies is a misnomer a little bit."

This quote expresses skepticism towards the hype around AI and machine intelligence without practical applications, suggesting that the excitement may be overblown.

"So in many ways you want to find, and from a category standpoint, some of the best companies possible in that category or that theme, and then find the next one."

This quote emphasizes the importance of diversification in investment strategy, focusing on identifying the best companies within a category before moving on to new opportunities.

• Thematic investing focuses on specific sectors or themes, which can be broad and encompass sub-themes.
• Investors must ensure the theme is broad enough to allow for diversified investments within it.
• Sub-themes can include areas such as autonomous driving, smarter applications, or augmented reality for consumers.

"Well, I'd say themes have sub themes. So if you are sort of a, hey, we're frontier tech investors, or we invest in machine intelligence, that's very broad at that point."

This quote discusses the breadth of thematic investing, highlighting that even within a single theme, there can be a range of sub-themes that allow for diversified investments.

• Market themes are often confused with business models.
• SaaS (Software as a Service) is a broad market theme that is more akin to a business model.
• It is challenging to categorize SaaS as a specific theme or category due to its vastness.

"So I know you've had Jason Lemkin on your show and you're close to him, but that's a very big market and theme. In fact, that's probably more of like a business model and it's really hard to call it a theme or category."

The quote explains that SaaS, while often referred to as a market theme, is extensive and more accurately described as a business model rather than a specific theme or category.

• The seed market has seen significant growth in the number of seed funds.
• There is an abundance of alternative forms of capital in the market compared to earlier years.
• Differentiation and focus are crucial for new funds starting in the current market climate.
• The speaker does not overly concern themselves with the excess of capital but focuses on winning in the market.

"Comparing that to now, would you say there is a mass excess of capital in today's seed market with, I think it's 335 seed funds today as opposed to the 30 or so that were around in 2000 and 910?"

The quote raises the topic of the increased number of seed funds in the market today, suggesting a significant influx of capital compared to the past.

• Common industry advice can sometimes be misleading or overly simplistic.
• Companies and individuals evolve, making it unwise to write them off based on initial impressions.
• The speaker emphasizes the importance of recognizing the potential for change and growth in ventures.

"I'd say like, huge market. And then the other pet peeve is this is a feature or something like that, right? It's like companies evolve and change."

This quote criticizes the tendency in the industry to oversimplify advice, such as claiming a venture is just a feature, without acknowledging the potential for evolution and change in companies.

• The speaker does not commit to a single favorite book.
• They express enjoyment of the fantasy genre, specifically mentioning Neil Gaiman's "Neverwhere."
• Preferences in reading material are described as evolving.

"I would say it's sort of a list that's constantly evolving. But I will say I started watching american gods, like, watched the first episode. So while american gods isn't my favorite book, I've read it. I'd say I like never wear by Neil Gaiman quite a bit."

The speaker indicates that they do not have a static favorite book but enjoys fantasy literature, with a particular liking for Neil Gaiman's work.

• Tencent's diverse monetization models, including microtransactions, have influenced the speaker's perspective.
• The integration of commerce within apps, like news reading apps in China, is a trend the speaker believes will spread to the West.
• The speaker finds the evolution of commerce as a monetization model to be an interesting development.

"50% of its revenue comes through microtransactions. And you're seeing. So for instance, there's news reading apps there like Tatiao, which integrate sort of commerce like functionality in the news app, and you can actually conduct commerce there natively."

This quote highlights Tencent's revenue strategy, focusing on microtransactions, and points to the incorporation of commerce into traditionally non-commerce apps as an emerging trend.

• The speaker values relationships and believes there is something to learn from everyone.
• They do not use a specific strategy for managing contacts but are passionate about their work and the connections they make.

"I'd say, like, at the risk of sounding cliche, I'd say I live and breathe what I do on a day to day basis. And so I really just value the relationships I'm making or will make."

The quote reflects the speaker's approach to networking, emphasizing the importance of valuing relationships and learning from others without relying on a structured management strategy.

• The speaker regularly follows "Strictly VC" and enjoys "20 minutes VC."
• They also mention Fred Wilson's blog as a resource they appreciate.

"Strictly VC on a daily active basis. Obviously a big fan of 20 minutes VC."

This quote identifies the speaker's preferred sources for industry insights and information, highlighting "Strictly VC" and "20 minutes VC" as daily reads.

• The speaker's most recent investment was in Ujet, a cloud call contact center software solution.
• They were impressed by the founder CEO's product-centric approach and focus on customer support from a consumer's perspective.

"Ujet, they're a cloud call contact center software solution. [...] we loved how the founder CEO is taking a product centric approach to customer support, really trying to re architect his products from a consumer's mindset and their experience."

The quote explains the rationale behind the speaker's recent investment in Ujet, emphasizing the company's innovative approach to product development and customer support.

• Harry Stebbings recommends Zoom for its simplicity and scalability in providing enterprise video and web conferencing services.
• Viewdit is suggested as a free video recording tool that allows for personalized video communications and tracking.

"My response Zoom, the number one video and web conferencing service providing one consistent enterprise experience [...] Viewdit is a free video recording tool that makes it easy for organizations to embrace the power of video for personalized communications."

These quotes provide recommendations for tools that facilitate online meetings and personalized video communications, highlighting the ease of use and benefits for businesses.