20VC Lightspeed's Jeremy Liew on Why It Is More Important To Be Right Than Contrarian, The Most Common Mistakes Made By HyperGrowth Companies & 3 Characteristics That Make An Individual Incredible At Sourcing

In this episode of "20 Minutes VC," host Harry Stebbings interviews Jeremy Liu, a partner at Lightspeed Venture Partners, known for his early investment in Snapchat and his role in leading investments in companies like Stitch Fix and Affirm. They discuss Jeremy's journey into venture capital, the nuances of sourcing deals, and the importance of building relationships with founders before fundraising begins. Jeremy emphasizes the significance of focusing on one's strengths as a VC, the challenges of rapid fundraising cycles, and the critical nature of supporting existing portfolio companies. Additionally, they touch on the strategies for winning competitive deals and the potential pitfalls startups face when scaling, particularly in identifying saturation points in growth channels. The conversation also covers the value of domain expertise and the balance between providing guidance and allowing founders to lead their vision.

• Harry Stebbings expresses his enthusiasm for his job as a venture capitalist and podcast host.
• He feels privileged to interview and build relationships with influential people in the venture capital industry.
• Harry mentions his excitement about welcoming back Jeremy Liu, a partner at Lightspeed Venture Partners.

"I always feel incredibly lucky when I think of my job."

This quote encapsulates Harry's appreciation for his role, which enables him to interact with leading figures in the venture capital space.

• Jeremy Liu is known for being the first investor in Snapchat and has led investments in other successful companies.
• Prior to Lightspeed, Jeremy held positions at AOL, including SVP of Corporate Development and General Manager of Netscape.
• He has been featured on the Forbes Midas list multiple times, highlighting his success as an investor.

"Jeremy is a partner at Lightspeed, one of the leading firms of the last decade, with a portfolio including the likes of Snapchat, Mulesoft, Max Levchin's Affirm app Dynamics, and many more incredible companies."

This quote provides a brief overview of Jeremy's professional background and his association with notable investments and his role at Lightspeed.

• Harry introduces Brex, a corporate card for startups, emphasizing its ease of sign-up and high credit limits.
• Stripe is presented as a valuable resource for technology companies, offering guides and information on various business aspects.

"Brex founders Enrique and Pedro built a payments business in Brazil, but found themselves rejected for a corporate card when they were in Y Combinator."

This quote introduces the origin story of Brex, highlighting the founders' challenges and their motivation to create a solution for startups.

• Terminal is introduced as a solution for the challenge of hiring skilled engineers, providing comprehensive services for setting up remote engineering teams.
• Harry cites examples of companies like Eventbrite that have benefited from Terminal's services.

"Did you know that there are five job openings for every one developer in the United States? No wonder hiring great engineers is impossible."

This quote highlights the high demand for developers in the U.S. and the difficulty companies face in hiring them, setting the stage for the introduction of Terminal's services.

• Jeremy discusses his entry into venture capital in 2006, a time when there were fewer consumer-focused investors.
• His experience with Web 1.0 companies like Netscape and AOL provided a foundation for his venture career.

"I got into venture when it was a lot easier back in 2006."

This quote reflects on the state of the venture capital industry in 2006, suggesting it was less competitive to enter the field at that time.

• Jeremy explains that his approach to sourcing deals has evolved over his career, now relying heavily on established relationships and past investments.
• For new investors, Jeremy emphasizes the importance of meeting many companies to develop a sense for identifying the exceptional one in a thousand company.

"The job of venture is to spot that one in a thousand company. Not one in 100, not one in ten, but one in 1000."

This quote underscores the rarity of finding a truly exceptional investment opportunity and the scale of effort required to identify such companies.

• Jeremy advises new investors to take many meetings and build a broad understanding of what a successful company looks like.
• As investors gain experience and build a portfolio, they must become more selective due to time constraints.

"There is no substitute for just taking a lot of meetings and building a lot of companies."

This quote suggests that exposure to a large number of companies is essential for venture capitalists, especially early in their careers.

• Jeremy discusses developing mental filters to pre-screen opportunities, especially at later stages like Series A and Series B.
• He may ask for specific metrics or evidence of engagement, retention, or growth before taking a meeting.

"I will definitely be asking a lot more questions via email."

This quote indicates Jeremy's method of initial screening through email inquiries to ensure potential deals meet certain criteria before investing time in a meeting.

• Jeremy praises his partner Nicole Quinn's natural talent for sourcing deals and attributes her success to work ethic, likability, and connectivity.
• Nicole's active involvement in entrepreneurial ecosystems and her efforts to add value to them are highlighted as key factors in her effectiveness.

"Nicole Quinn has been amazing here at Lifebeat since she joined."

This quote praises Nicole Quinn's contributions to Lightspeed and her effective sourcing methods, which involve active community engagement and value addition.

• Venture Capitalists (VCs) often need to differentiate between good and great opportunities within the sourced funnel.
• Good from bad is relatively easier to discern, but distinguishing good from great requires experience and intuition.
• The ability to identify a one in a thousand company versus a one in a hundred company is crucial.
• Success in venture capital often improves with experience, as VCs learn to recognize exceptional companies.

"Good from great is tricky because it does require the ability to distinguish between a one in 100 company and a one in 1000 company."

This quote emphasizes the challenge VCs face in identifying truly exceptional investment opportunities among many good ones. The discernment between good and great companies is nuanced and requires deep industry knowledge and experience.

• VCs often evaluate risks to determine which are acceptable when investing in companies.
• The decision to invest may depend on the perceived potential of the founder or the company itself.
• Some investors prioritize extraordinary founders, believing they can pivot to great opportunities, while others focus on the market potential, which cannot be changed.
• The alignment between an investor’s risk tolerance and a company's profile is key to a successful investment.

"There will be some investors who will lean into that and say, you know what, I think that over time, a quality founder will find a great opportunity."

This quote illustrates the perspective that a high-quality founder is a key factor in a startup's potential success, even if the current company is not yet exciting. Investors with this belief are willing to take on the risk associated with the founder's potential to pivot and find success.

• VCs should be cautious not to impose their ideas on startups in an attempt to transform a good company into a great one.
• Entrepreneurs have a deeper understanding of their business than investors, who have broader but shallower engagement due to their diverse portfolio.
• VCs can help entrepreneurs avoid mistakes but should not attempt to create upside volatility.
• The challenge lies in respecting the entrepreneur's autonomy and avoiding overstepping as an investor or board member.

"Folks who believe that they can take a good company and make it great by sheer value of being an investor, I think in general, maybe being a little bit too optimistic."

This quote points out the potential overconfidence of investors who think they can significantly improve a company just by their involvement. It suggests that while investors can provide valuable guidance, the execution and deep knowledge required to make a company great lie with the entrepreneurs.

• When VCs spot potential issues, the approach to communicating concerns depends on the severity of the risk and the relationship with the entrepreneur.
• Minor issues may not require intervention, while more serious risks necessitate immediate action.
• The mode of communication (board meeting, one-on-one, etc.) should be tailored to the entrepreneur's receptiveness to feedback.
• Influencing the direction of a company should be approached with caution, as entrepreneurs are often better positioned to understand their business's needs.

"It really depends on the entrepreneur. And I want to draw that distinction, which is like averting danger."

This quote underscores the importance of context and the entrepreneur's personality in deciding how and when to communicate potential issues. It differentiates between averting immediate danger and suggesting new directions, emphasizing the need for a nuanced approach to guidance.

• Startups often fail to recognize when their growth channels are nearing saturation, which is a common mistake during scaling, especially for consumer-focused companies.
• Growth typically follows an S curve, and identifying when the curve is plateauing is crucial to avoid over-investment in a channel with limited potential.

"Specifically around starting to scale? I think perhaps the most common mistake that people can make is not recognizing when the channel on which they're scaling is going to start to reach saturation."

This quote highlights a frequent oversight by startups in the scaling phase, where they do not anticipate the limits of their growth channels. Recognizing the saturation point is critical to adapt strategies and sustain growth.

• Identifying when a marketing channel has reached saturation is crucial to avoid overinvestment.
• Overinvesting in a saturated channel can lead to poor economic outcomes for a company.
• It's important to distinguish whether a channel has truly topped out or if it can still yield growth.

"And if you overinvest in a channel where you're actually seeing a top out, then you can get a little bit upside down on the economics."

This quote emphasizes the risk of investing too much into a channel that no longer provides significant growth, which can harm a company's financial health.

• Established channels like Facebook, Instagram, and Google are benchmarks for product-market fit.
• These channels can guide pricing, value proposition, and scale businesses.
• When these channels reach their limits, companies must look for new opportunities.
• Word of mouth and genuine virality are powerful as they grow with the user base without saturation.
• Some products may benefit from broader-based campaigns and less targeted acquisition channels.
• Decisions on customer acquisition strategies should be tailored to the company and opportunity at hand.

"And then there are certain products that also lend themselves to less targeted customer acquisition channels. And those can be things like outdoor and television and radio."

This quote discusses alternatives to digital marketing channels that may be effective for certain products, suggesting a strategic approach to customer acquisition based on the product's nature and market presence.

• Winning competitive deals is one of the hardest tasks in venture capital.
• Success in winning deals often depends on the individual VC's unique strengths and background.
• Domain expertise and a strong track record can be significant differentiators for VCs.
• Building on previous connections and leveraging unique perspectives can provide competitive advantages.
• VCs must recognize their strengths and focus on them, as there are no rewards for being a secondary choice.

"It doesn't matter that you identified, this was a great opportunity if you didn't get to invest in it."

This quote highlights the importance of not just recognizing a good investment opportunity but also securing the deal to benefit from it.

• Entrepreneurs are likely to choose VCs based on their outstanding abilities, not their lack of weaknesses.
• VCs should focus on their strengths, which can be domain expertise, network building, or the ability to attract attention and resources.
• Knowing one's unique capabilities and leveraging them is crucial in the competitive landscape of venture capital.

"Entrepreneurs who choose to work with you will choose to work with you because you're the best at something, not because you're not terrible at something else."

This quote advises focusing on one's strengths to stand out to entrepreneurs, as excellence in a particular area is more valuable than being average in many.

• Round compression is a reality in venture capital, especially for well-known companies.
• VCs benefit from experience and domain expertise to make quick, informed decisions.
• Focusing on critical factors rather than an exhaustive checklist can streamline the investment process.
• Building relationships with entrepreneurs before financing rounds is advantageous.

"And so I think there is a large part of the prospecting that we all do as venture capitalists, is ideally getting to meet people well ahead of the financing process."

This quote stresses the importance of early relationship-building with entrepreneurs to facilitate decision-making when round compression occurs.

• Entrepreneurs are advised against continuous fundraising due to its exhaustive nature.
• Building a relationship with potential board members over time is crucial, as they will have a long-term impact on the company.
• It's important to distinguish between efficient fundraising and the necessity of ongoing relationship-building with future investors.

"But if you're going to consider adding someone to your board, that person is going to be on your board for years."

This quote underscores the significance of carefully selecting board members, as these relationships will have long-lasting effects on the company's governance.

• The significance of meetings not strictly for fundraising but to understand the perspectives and potential assistance of individuals.
• Assessing the follow-through of potential investors can aid in decision-making during actual financing rounds.

value in taking meetings, not necessarily for the purpose of fundraising, but just to see what people are like, what their perspectives are, how they can help or not help, and then actually watching to see if they in fact follow through and do help well ahead of a financing process because it'll help you narrow down the set of people that you would genuinely consider taking capital from when that financing actually occurs.

This quote highlights the strategic approach to meetings outside of fundraising efforts to evaluate potential investors' true value and reliability.

• Internal meetings, such as partner meetings and discussions about prospective investments, occupy significant parts of VCs' schedules.
• Subsector group meetings are held to discuss early-stage companies and market trends.

Typically for us, we would have a partner meeting where we're meeting companies that are pitching to the whole partnership on Mondays, and then we would discuss those. And that typically takes up our mornings. On Mondays and on the afternoons we split into smaller subsector groups where we talk about companies and trends and themes that we're seeing that are a little bit earlier in the process.

The quote outlines the typical structure of a VC’s Monday, dedicated to internal meetings and strategic discussions.

• VCs prioritize existing portfolio work, such as board meetings and calls with CEOs, over meeting new companies.
• The average number of meetings and calls a VC attends per week can vary based on their portfolio size and other commitments.

So I have a decent sized portfolio now because I've been in the business for a little while. And so on average I have two board meetings per week and then seven other calls or meetings with portfolio company CEOs for a week.

This quote gives insight into the weekly commitments a VC has with their existing portfolio, emphasizing the importance of supporting current investments.

• The frequency of pitch meetings varies among VCs, influenced by their availability and portfolio obligations.
• Pitches are typically spread throughout the week to accommodate entrepreneurs' schedules.

So I would see maybe five to ten pitches per week, whereas my partners are probably more in the range of ten to 15 per week.

This quote provides an estimate of how many pitch meetings a VC might attend weekly, highlighting the balance between portfolio management and exploring new opportunities.

• Networking involves building relationships with entrepreneurs outside of active financing rounds.
• Time spent on networking varies, with more availability leading to more networking meetings.

A networking meeting is a meeting with an entrepreneur that isn't necessarily in a financing process, but you think you might want to invest in them in the future, and so you're building that relationship ahead of time.

The quote distinguishes networking meetings from pitch meetings, emphasizing the proactive approach to forming potential investment relationships.

• Favorite activities include working with current portfolio companies.
• Least favorite activities involve managing a high volume of emails and maintaining prompt response times.

My favorite activities are spending time with my current portfolio in board meetings and helping them in other calls and so forth.

This quote reveals the VC's preference for engaging with existing portfolio companies, reflecting the rewarding aspect of supporting successful ventures.

• The decision to invest is influenced by the strength of the relationship with the entrepreneur and belief in the business opportunity.
• Factors such as team experience and unique insights into market opportunities are critical in the decision-making process.

They had come up with this really, I think, counterintuitive insight, and they had the team that we knew and believed in and that had the right experience.

The quote explains the rationale behind a recent investment decision, highlighting the importance of the entrepreneur's vision and the team's capabilities.

• Expressions of gratitude for the opportunity to share insights and learn from the conversation.
• Recognition of the support and guidance provided by the guest to the host.

Thank you so much for having me. It was super fun.

This quote conveys the guest's appreciation for being part of the podcast and the enjoyment derived from the discussion.