20VC Lessons From 2x $Bn Exits in Trulia and lastminute.com, 3 Leading Indicators That Suggest Potential Marketplace Success & Why We Are Going To See A Fundamental Change To The World of VC with Pete Flint, Managing Partner @ NFX

In this episode of the 20 minutes VC, host Harry Stebbings interviews Pete Flint, the managing partner at NFX, a Silicon Valley venture fund with a recent $150 million fund. Flint, a seasoned entrepreneur, co-founded Trulia and was part of the founding team at Lastminute.com, both of which saw successful exits. He discusses the critical mass theory of startups, the importance of timing, and the role of network effects in building defensible businesses. Flint also touches on the challenges of transitioning from an operator to an investor and the future of venture capital. The conversation highlights Flint's insights on capital efficiency, the significance of culture in startups, and the balance between intuitive and analytical decision-making.

• Harry Stebbings hosts the 20 minutes VC podcast.
• Harry encourages listeners to participate via Instagram.
• Listeners can suggest future guests and submit questions for a chance to be mentioned in future episodes.

"This is the 20 minutes VC with me, Harry Stebbings. I would love to see you on Instagram at H Stepbings 96, where you can submit future guests for the show and submit questions with the chance to be named in a future episode."

The quote highlights the interactive nature of the podcast and the host's invitation for listener engagement through social media.

• Pete Flint is a successful British technology expert and managing partner at NFX.
• NFX is a Silicon Valley-based venture capital firm with a new $150 million fund.
• Flint has a history of entrepreneurship, including founding Trulia and being part of Lastminute.com's early team.

"So I'm very thrilled and proud to welcome Pete Flint, managing partner at NFX, one of Sil Valley's newest and most exciting funds, with the recent announcement of their new $150,000,000 fund late last year."

The quote introduces Pete Flint and his venture capital firm, emphasizing the significance of their new fund and Flint's successful background in technology and entrepreneurship.

• Pete Flint joined the startup scene in London in the late 1990s.
• He was part of the early team at Lastminute.com, which was later acquired for over a billion dollars.
• Flint attended Stanford Business School as his route to Silicon Valley.
• He co-founded Trulia, which went public and merged with Zillow in a $3.5 billion transaction.
• After a period of angel investing and board positions, Flint co-founded NFX, focusing on network effect companies.

"So I got involved in Internet startups back in the mid, late ninety s... And then after that I went to the Mecca, which is Silicon Valley... And then after a year there, I sort of dreamed up this idea for Trulia... And then after that, I really took a little bit of time off... And I teamed up with James Career and Gigi Levi Weiss to launch NFX."

The quote summarizes Pete Flint's career trajectory from his early involvement in startups to his success with Trulia and his eventual co-founding of NFX.

• Flint reflects on the successes and failures at Lastminute.com.
• Building a strong brand and a Silicon Valley culture in London were significant achievements.
• The lack of focus compared to competitors like Booking.com was a critical misstep.

"Building a really incredible brand... And they built an incredible kind of Silicon Valley culture in the heart of London... But it's really when you take a look at Booking.com. Their focus was just undeniable and incredible, which enabled them to build."

The quote outlines the strengths and weaknesses of Lastminute.com, highlighting the importance of brand and culture, as well as the necessity of focus in business strategy.

• Flint has experienced market crashes with Lastminute.com and Trulia.
• Market corrections can be opportune times to build valuable businesses.
• Flint's investing is influenced by capital efficiency, opportunistic fundraising, and the importance of company culture during tough times.

"The biggest and most valuable businesses are those that built precisely the point when there's market corrections... Again, that contrarian mindset when others are not investing, perhaps that is the time to invest."

The quote emphasizes the potential for growth during market downturns and the contrarian approach to investing during such times.

• Startup timing is crucial for founders and investors to understand the innovation cycle.
• It's important to recognize whether a startup is too early or too late in the market lifecycle.
• The "critical mass theory of startups" is a framework used to identify the tipping point of market transformation.
• Three key factors influence this change: enabling technology, economic impetus, and cultural acceptance.
• Examples of enabling technology include self-driving cars and computer vision.
• Economic changes can turn unprofitable businesses into profitable ones, as seen with Uber and Lyft.
• Cultural acceptance is critical as startups can become cultural phenomena, like Instagram, Snapchat, and YouTube.

"So I guess when I think about startup timing, it really comes down to founders and investors understanding the innovation cycle, whether you're too early or too late, and kind of how your position in the lifestyle stage of the company, in the market impacts the strategy."

This quote explains the importance of understanding the innovation cycle and its impact on startup strategy. It highlights the relevance of timing in the lifecycle of a company and the market.

• Market timing risk is a challenge in assessing when technologies like AR/VR, drones, self-driving cars, and blockchain will be ripe for investment.
• It's not just about being earlier or later than competitors; it's about achieving the necessary scale at the critical mass point.
• Blockchain is a prime example of a technology that has been around for a while but only recently reached a tipping point due to economic and cultural factors.
• As an investor, one must consider the ability to fund a company until it reaches the necessary scale for transformational change.

"Yeah, I think it's super interesting. I think what's really important is it's not about whether you're earlier or later than your competitors on an absolute basis. It's really about who can achieve the necessary scale to be a breakout leader."

This quote emphasizes the significance of achieving scale rather than just being first to market. It suggests that the right timing for investment is when a company is positioned to become a leader at the point of critical mass.

• Investing in startups with market timing risk requires a willingness to support the company for a longer period.
• Founders and operators anticipate the long journey of ups and downs in startup growth.
• Having a large seed fund with the capacity for follow-on funding is beneficial for supporting startups through challenges.
• Investment ratios are considered, with a benchmark of roughly $1 initial capital to $2 follow-on capital being the plan.

"Yes, for sure. I think we, as founders and operators ourselves, we kind of anticipate that these things are going to take a long, long time."

This quote acknowledges the long-term commitment required in startup investing, especially when absorbing market timing risk. It reflects an understanding of the entrepreneurial journey's inherent challenges.

• Network effect businesses improve as more users join, which should be reflected in increasing retention rates by cohorts.
• Defensibility is critical and can be influenced by market fragmentation.
• The ability to create and extract economic value is essential for the viability of network effect businesses.
• Growth rates and market opportunities are key metrics for assessing potential at the seed stage, along with the team's capabilities.

"There are a few things. So one is just that the definition of a network effect business is one that for every additional user, the product experience gets better for every existing user."

This quote defines network effect businesses and highlights the importance of user growth improving the overall product experience. It underscores the need for increasing user retention as an indicator of potential success.

• Startups should focus on value creation as the guiding principle.
• Not all Gross Merchandise Volume (GMV) is equal; growth rates and sources are crucial.
• At the seed stage, the focus is on the team and the market opportunity rather than extensive metrics.

"Well, I think it's fundamentally about value creation. When you think about startups, that has to be the guiding light for the entrepreneur and the founder."

This quote stresses that value creation is the primary objective for startups, guiding entrepreneurs and founders in their decision-making process.

• The lack of a clear, free, and open distribution channel in 2018 poses a challenge for startups.
• Historically, startup waves have been driven by such distribution channels, including the Internet, web browsers, and social media platforms.
• Defensibility and the cost of customer acquisition are concerns for scaling network effect businesses in the current landscape.

"It's a really interesting point. I think at this time in 2018, it's just like there's not a sort of obvious free and open distribution channel that is driving a whole bunch of startup innovation."

This quote addresses the difficulty of finding a free and open distribution channel for startups in 2018, which is a departure from previous trends where such channels were integral to startup growth.

• Network effects are less capital intensive, requiring fewer marketing dollars or salespeople.
• Businesses built on core distribution platforms like Facebook and Google face more challenges today.
• Network effect businesses have historically been capital efficient, with eBay as a classic example.
• The application of network effects extends beyond consumer marketplaces to industries like synthetic biology and blockchain.
• Capital efficiency and focus can be leveraged across various industries through network effects.

"Network effects sort of, by definition, are less capital efficient, require less marketing dollars or less salespeople."

This quote emphasizes the inherent capital efficiency of network effect businesses, which grow through user interactions rather than heavy marketing and sales efforts.

"Ebay. Back 20 years ago, I think you mentioned Peter Fenton. I think eBay said they didn't even spend the initial investment from benchmark."

The quote illustrates the exceptional capital efficiency of eBay, a network effect business that didn't fully utilize its initial venture funding due to rapid organic growth.

"We're thinking about applying network effects to a whole range of different industries, from synthetic biology to blockchain to traditional industries that are being transformed."

This quote highlights the broad applicability of network effects beyond traditional consumer marketplaces, suggesting their potential to revolutionize various sectors.

• A culture of frugality in network effect businesses is about leveraging points in the business, not just cutting costs.
• Frugality involves strategic investments in areas like product development and user acquisition.
• The right time to scale rapidly is when product-market fit is evident, and market conditions allow for aggressive expansion.
• Transparent competition necessitates swift action to capture market share when the opportunity arises.

"Frugality is not about being cheap. It's really looking for the points of leveraging the business."

The quote clarifies that frugality is about smart investments that create leverage and competitive advantage, rather than simply minimizing expenses.

"When you start to kind of see that spark, when you start to see that product market fit, then it's essential to scale extremely rapidly."

This quote indicates that once a company finds product-market fit, it must quickly scale to capitalize on the opportunity and outpace competitors.

• Every business has an invisible asymptote, a growth inhibitor that must be anticipated and overcome.
• Founder-driven businesses are particularly adept at transforming to break through these growth ceilings.
• Companies like Netflix demonstrate the ability to evolve through multiple business models, such as DVD rental, streaming, and original content production.

"Every business has an invisible asymptote, basically the inhibitor of growth that you have to foresee to prevent that being a ceiling on your growth."

This quote introduces the concept of an invisible asymptote, which represents unseen limits to a company's growth that must be identified and addressed.

"A company like Netflix is able to do these three different businesses during its lifetime and build an enormous company."

The quote uses Netflix as an example of a company that has successfully navigated and transcended multiple growth inhibitors by transforming its business model.

• Founder CEOs often face challenges due to inexperience in their role.
• Authentic leadership and organizational empowerment are crucial for recovery and success.
• Sharing KPIs and enabling rapid decision-making can help foster a more resilient organization.
• Peer support and founder-to-founder interactions can provide valuable insights and help check ego.

"Overconfidence is an incredibly dangerous experience."

This quote warns against the pitfalls of overconfidence in leadership, suggesting the need for humility and self-awareness.

"We created this organizational framework to think about how do we enable rapid decision making and empowerment at scale."

The quote describes the shift towards a more decentralized and empowered organizational structure, which was pivotal in overcoming failure and fostering a strong company culture.

• Founders benefit from frank, peer-to-peer discussions to navigate challenges and remain grounded.
• Regular meetings with fellow founders can provide support and shared learning opportunities.
• There is no specific framework for an ego check, but open dialogue and peer interaction are key.

"I spend a lot of time having founder to founder interactions and kind of talking through this in sort of closed circles."

This quote emphasizes the importance of founder support networks for personal growth and overcoming the isolation that can come with leadership.

• Decision making involves balancing intuition with analytical thinking.
• Leaders face difficult decisions, such as mergers or strategic pivots, requiring both emotional and rational evaluation.
• The merger between Trulia and Zillow exemplifies a challenging decision that involved both heart and head considerations.

"The bigger decisions in life and business come from just this understanding of how you're thinking and how you evaluate decisions both intuitively and then analytically."

The quote addresses the complex nature of decision-making and the importance of integrating both emotional and rational perspectives to make well-rounded choices.

• Founders often struggle to balance their emotional and analytical perspectives when making decisions.
• Emotional understanding is crucial for founders, as it can influence decisions just as much as analytical thinking.
• Startups typically rely on analytical execution, but recognizing one's emotional state is also important.
• It's a challenge to align one's feelings (heart) with one's rational thoughts (head) in the startup environment.

"And over time, my kind of heart caught up with my head. And I think this is one of the hardest thing for founders to really think about. How do you feel about something and how do you think about something?"

This quote emphasizes the difficulty founders face in reconciling their emotional responses with their analytical thinking, highlighting the importance of both in decision-making.

• Investors are often caught between their enthusiasm for an entrepreneur and recognizing flaws in the business model or investment opportunity.
• At early stages of a startup, passion can be more important than analytical assessments.
• The passion of the investor and the entrepreneurs can be a critical factor in foreseeing success.
• Trusting one's intuition and following one's heart is advised, especially given the long and difficult journey of startups.

"At the margin, it does come down to the heart."

Pete Flint suggests that when making investment decisions, especially in the early stages of a company, the emotional connection and passion can be more decisive than purely analytical considerations.

• Pete Flint views the IPO of Trulia in 2012 as a career highlight.
• The achievement was significant due to the challenges faced by the real estate industry at the time.
• Overcoming adversity and leading a team to take a company public was an incredible experience for him.

"The IPO at Trulia 2012. Just a few years earlier, we were kind of like an online real estate company in 2008, and it was just terrible industry to be in."

This quote reflects on the pride and significance of Trulia's IPO for Pete Flint, especially considering the tough economic climate for real estate in 2008.

• Investors often overemphasize market size over other factors like product and team.
• The true measure of a business opportunity is the size of the problem it addresses, not just the market size.
• Interesting businesses often create their own markets rather than entering existing ones.

"It's really not about the size of the market, it's about the size of the problem and what is the available market for that?"

Pete Flint challenges the common investor focus on market size, advocating instead for a focus on the significance of the problem being solved and the potential to create new markets.

• Transitioning from deep involvement in one company to a broader focus on multiple companies is challenging.
• It requires a significant shift in thinking and approach, often described as changing "muscle memory."
• The adjustment to this new role can be exhausting but ultimately rewarding.

"It's been that kind of change in what I call muscle memory, really, the change from being kind of deep and into one company versus being horizontal in a whole bunch of different companies."

Pete Flint discusses the personal challenge he faced when moving from an operational role in a single company to an investor role with a portfolio of companies.

• The venture capital fundraising process is seen as outdated and inefficient.
• There is an anticipation of a transformation in Silicon Valley, similar to changes seen on Wall Street.
• Technology and platform businesses are expected to revolutionize the venture capital process.

"The venture capital process and fundraising process itself is incredibly antiquated."

Pete Flint criticizes the current state of venture capital processes in Silicon Valley, implying the need for modernization through technology.

• Data availability and the need for scale are changing the venture capital landscape.
• Capital is considered a commodity, and venture capitalists are seeking ways to differentiate and add value.
• Building platforms to support entrepreneurs and leveraging network effects are becoming increasingly important.

"Part of that's data, part of that services, and I think part of that is inherently network effects."

Pete Flint highlights the role of data, services, and network effects in the evolving venture capital industry, suggesting these are key areas for venture capitalists to add value.

• Personal success is often shared with close family members.
• Pete Flint's brother's success in the tech industry is a source of pride and inspiration.

"Oh, well, today I was just texting my brother, and so that's the first person."

This quote shows the personal connection Pete Flint has with his brother's success and how it resonates with him on a familial level.

• NFX recently invested in Ribbon, a company aiming to transform the real estate transaction process.
• Ribbon focuses on simplifying and securing the home buying process through a cash transaction platform.
• The investment reflects NFX's interest in companies that innovate within traditional industries.

"Ribbon is a company that set out to transform the real estate transaction."

Pete Flint explains NFX's investment decision in Ribbon, emphasizing the company's mission to innovate in the real estate transaction space.