20VC Most Downloaded Episode of 2019 with Bill Gurley, General Partner @ Benchmark Capital



In the most downloaded episode of 2019 on "20 Minutes VC," host Harry Stebbings celebrates having venture capital titan Bill Gurley of Benchmark on the show, a dream guest since the podcast's inception. Gurley, renowned for his investment acumen and roles in companies like Uber, Twitter, and Amazon, shares his journey from Wall Street to becoming a general partner at one of the most successful funds. He discusses the role of luck in venture capital, the importance of embracing market size expansion potential over fixed TAM analyses, and the significance of maintaining a strong reputation by supporting both successful and struggling portfolio companies. Gurley also emphasizes the necessity of passion for venture capitalism, the challenges posed by abundant capital in the market, and the equal partnership model at Benchmark that fosters generational talent and enduring success.

Summary Notes

Celebrating the Most Downloaded Episode

  • Harry Stebbings expresses excitement about the most downloaded episode of the year featuring Bill Gurley.
  • Bill Gurley is recognized as one of the leading figures in venture capital.
  • Gurley's portfolio includes companies like Uber, Twitter, Dropbox, WeWork, Snapchat, Stitch Fix, eBay, and more.
  • Prior to joining Benchmark, Gurley worked with Hummer Winblad Venture Partners and as a top-ranked research analyst on Wall Street.

"Our most downloaded episode of the year is with Bill Gurley, general partner at Benchmark, one of the most successful funds of the last decade, with a portfolio including the likes of Uber, Twitter, Dropbox, Weworks, Snapchat, Stitch Fix, eBay and many more incredible companies."

The quote highlights the success of Bill Gurley and the recognition of his episode as the most downloaded, indicating the high interest in his insights within the venture capital community.

Introduction to Carter and Pendo

  • Carter simplifies equity management for startups and investors, offering cap table tracking and valuations.
  • Pendo provides a benchmarking microsite for software products to compare against peers.

"Go to carter.com 20vc to get 10% off and with more than 800,000 employees and shareholders, using Carter to manage hundreds of billions of dollars in equity."

This quote emphasizes the value proposition of Carter in managing significant amounts of equity for a large number of users, suggesting its importance in the startup ecosystem.

Room's Soundproof Phone Booths

  • Room offers mobile, soundproof phone booths for businesses to create quiet spaces in open offices.
  • Room's product is environmentally friendly and is used by major companies like Nike, Google, NASA, and Salesforce.

"Room helps businesses build a better workplace with their mobile, soundproof phone booths helping you tune out the noise of the open office."

The quote explains the utility of Room's product in improving workplace environments, particularly in open office settings where noise can be an issue.

Bill Gurley's Venture into Venture Capital

  • Bill Gurley's journey into venture capital was influenced by luck and random opportunities.
  • Gurley's sister's involvement with Compaq introduced him to the concept of stock options and company growth.
  • After hitting a dead end in venture capital, Gurley became a sell-side analyst, which led to a network-building opportunity.
  • Frank Quattrone offered Gurley a position that would introduce him to venture capitalists, eventually leading to a VC offer.
  • Gurley joined Benchmark after a stint at Hummer Winblad Venture Partners.

"And that's how I ended up here."

The quote succinctly captures the culmination of Gurley's journey into becoming a general partner at Benchmark, highlighting the serendipitous nature of his career path.

Impact of Boom and Bust Cycles on Investing Mentality

  • Bill Gurley has studied the history of financial markets and is aware of the cyclical nature of boom and bust.
  • Silicon Valley has a tendency to forget risk quickly, leading to increased risk-taking over time.
  • Gurley observes that risk aversion returns abruptly when markets bust.
  • Venture capital is inherently cyclical due to the structure of venture funds and the dynamics of capital flow.
  • Gurley believes that avoiding cyclicality in venture capital is challenging, if not impossible.

"So as markets start to boom, the amount of capital that comes into the category is immense. But when the market breaks, the capital doesn't have a mechanism to go away quickly because it's already been committed to these ten year windows."

The quote explains the structural reasons behind the cyclical nature of venture capital, where capital inflows during booms are not easily reversible during busts due to long-term commitments, affecting how venture capitalists approach investing.

Importance of Staying Invested Through Market Cycles

  • The majority of returns in venture capital often come at the end of investment cycles.
  • Pulling back due to market concerns can lead to missing out on significant gains.
  • Venture firms that retreated in the late '90s missed out on substantial returns from the following years.
  • A strategy to protect against downside is to fully capture the upside, despite it sounding risky.

"The vast majority of the average returns over a multidecade window are right at the end of the cycle."

This quote emphasizes the importance of remaining invested through the entire market cycle to realize the majority of returns.

"The best way to protect it against the downside is to enjoy every last bit of the upside."

This quote suggests that to mitigate losses, one should stay invested to benefit from the full potential of the market's growth.

Impact of Market Crashes on Fundraising

  • Market crashes lead to increased risk aversion among principals in venture firms.
  • High burn rates in companies could pose significant risks if capital becomes scarce.
  • The current levels of capital commitment to asset classes are unprecedented.

"Everybody gets hyper conservative at the same time."

Bill Gurley indicates that during market downturns, there's a collective shift towards conservatism in investment behavior.

"The burn rates now are probably two or magnitude higher than they were in the 99, 2000 time frame for some of these companies."

This quote highlights the increased financial risk companies face today due to higher operational expenses without corresponding revenue.

Price Sensitivity in Venture Capital

  • Venture capital involves asymmetric risk and reward, influencing investment decisions.
  • Missing out on a successful investment can be more costly than investing in a failure.
  • Price sensitivity may be less critical for early-stage investments with high potential.

"If I invest in a company that doesn't work, I lose one times my money."

Bill Gurley explains the asymmetric nature of venture investing, where the cost of a failed investment is limited to the initial investment.

"If I decide not to invest in Google, that error in decision making cost you 10,000 x or whatever, 1000 x, whatever the number was."

This quote illustrates the opportunity cost of passing up a successful investment, which can far outweigh the cost of a failed one.

Market Sizing and Opportunity Assessment

  • Overemphasis on Total Addressable Market (TAM) analysis can be misleading.
  • Disruptive technologies can expand markets beyond initial estimates.
  • Investors should consider the potential for a company to redefine its market.

"People get into more trouble by over focusing on TAM analysis, especially in these super early stage companies."

Bill Gurley discusses the pitfalls of placing too much emphasis on traditional market size analysis for early-stage ventures.

"What could possibly be true that would know those types of Tam analysis to be wrong?"

This quote suggests that investors should challenge traditional market size estimates by considering how a company could disrupt and expand its market.

The Signaling Effect of Venture Firms

  • The reputation of a venture firm can create a "brand halo" that benefits portfolio companies.
  • Benchmark's practice of taking board seats is seen as a commitment to fiduciary duty, positively influencing subsequent fundraising.
  • The signaling power of a venture firm may vary depending on market conditions.

"The companies we invest in definitely benefit from a brand halo."

Bill Gurley acknowledges that Benchmark's brand reputation aids its portfolio companies in fundraising and market positioning.

"We take the responsibility of being a principled owner and being a contributor on the board very seriously."

This quote underlines Benchmark's commitment to active board participation and its positive impact on the perception of investors.

Evolution as a Board Member

  • Board members should be well-prepared and knowledgeable about the companies they serve.
  • Over time, board members learn to contribute more effectively by speaking less and focusing on relevance.
  • Self-reflection on contributions during board meetings can lead to more efficient and targeted input.

"I'm the best board member in Silicon Valley... I'm more prepared than anyone else at the table."

This anecdote from Pierre Le Mon showcases the importance of preparation and knowledge in being an effective board member.

"Does this need to be discussed right now? Is there a benefit of this being discussed with the other board members right now?"

Bill Gurley shares his method for evaluating the necessity and timing of his contributions during board meetings.

Advice for New Board Members

  • New board members should avoid dominating discussions and understand their areas of expertise.
  • It's important to contribute meaningfully when relevant and defer to others when appropriate.

"Know your circle of competence."

Bill Gurley advises new board members to be aware of their strengths and when it is most beneficial for them to contribute to discussions.

Time Allocation Across the Portfolio

  • Venture capitalists face a conundrum when allocating time to companies in their portfolio.
  • There's a temptation to focus on winners due to the higher returns they offer.
  • Struggling companies can be mentally taxing, especially during difficult times like layoffs.
  • However, a venture capitalist's reputation is built over the long term and can be significantly affected by how they support companies that don't succeed.
  • Founders often ask for references from CEOs of ventures that didn't work out, indicating the importance of maintaining a good reputation even in failure.

"There are companies in any venture portfolio that are going to be delivering 100x more return than another one that you might be working on."

This quote highlights the disparity in potential returns between successful and less successful companies within a venture capitalist's portfolio, which influences time allocation decisions.

"Your reputation is going to be a part of what allows you to win or not win investment opportunities in the future."

Bill Gurley emphasizes that a venture capitalist's reputation, shaped by their conduct across all investments, influences future investment opportunities.

Investment Decision Making at Benchmark

  • Benchmark's investment decision-making process is collaborative and not heavily reliant on detailed analytics due to the early-stage nature of investments.
  • The process often hinges on the perceived competence of the founder.
  • Benchmark's unique structure with equal economics among partners fosters a sense of importance for each member's voice.
  • The partnership dynamic allows for recognition of each other's biases and helps in making balanced decisions.
  • Annie Duke's book "Thinking in Bets" is referenced to illustrate the benefit of understanding each other's weaknesses within a partnership.

"80% of the weight might just be a group decision about the competency or capability of the founder."

Bill Gurley describes how the founder's competence is a significant factor in Benchmark's investment decisions, often more so than detailed financial analysis.

"If a majority of the partnership wants to move forward, we move forward."

This quote explains the democratic nature of Benchmark's decision-making process, where a majority vote can drive an investment decision.

Partner Selection at Benchmark

  • Selecting the right partners is crucial for the long-term success of a venture capital firm.
  • Criteria for selecting partners at Benchmark include youth, curiosity, business judgment, an investor mindset, and a passion for being a venture capitalist.
  • The changing landscape of interest in venture capital as a career choice is acknowledged.
  • The importance of enjoying the sales aspect of venture capital is highlighted.

"I'd rather be known for being a good partner picker than investment picker."

This quote underscores the importance of choosing the right partners for the firm's longevity and success, as opposed to just focusing on individual investment decisions.

"You need to be passionate about being a venture capitalist."

Bill Gurley stresses that passion for the venture capital industry is a vital trait for potential partners at Benchmark.

Abundance of Capital and Strategic Challenges

  • The current abundance of capital in the market presents strategic challenges that are unprecedented in the history of business.
  • Negative interest rates in some countries lead to difficulties in applying traditional financial models like the Discounted Cash Flow (DCF) model.
  • Venture capitalists must navigate these peculiar conditions when making investment decisions.

"There's just so much peculiarity that's happening right now because of these massive amounts of capital."

Bill Gurley expresses his concern about the unusual market conditions created by an abundance of capital and their implications for venture capital strategy.

30-Year Transformational Shift in Technology

  • There's a debate on whether the integration of technology into all parts of the economy represents a 30-year transformational shift.
  • Some believe that this shift could make the tech sector immune to macroeconomic cycles.
  • However, Bill Gurley is skeptical and believes that no sector is completely invulnerable to macroeconomic influences.

"There's no way it's unavoidable."

Bill Gurley expresses skepticism regarding the idea that the technology sector could be immune to macroeconomic cycles, suggesting that all sectors are likely to be affected at some point.

Venture Capitalist Messaging

  • Venture capitalists often convey optimistic messages to potential founders they have not yet met.
  • Positive messaging is seen as more appealing than highlighting potential downturns.
  • Venture capitalists maintain their operating principles despite market cycles.

"Anytime a venture capitalist opens their mouth, they're probably sending a message to the founder they haven't met yet."

This quote emphasizes the strategic communication of venture capitalists, aiming to attract founders by projecting confidence and optimism in the technology sector.

"I've got no incentive to change my operating principles or the way I go about doing the job just because I think one day the cycle might end."

Bill Gurley explains his commitment to his investment strategies regardless of potential market fluctuations, indicating a long-term approach to venture capital.

Quick Fire Round: Favorite Book

  • Bill Gurley's favorite book is "Complexity" by Mitchell Waldrop.
  • The book discusses complexity theory and the Santa Fe Institute.
  • It profoundly impacted Gurley's perspective on systems, economies, and investments.

"It's called Complexity by Mitchell Waldrop, and it's about the rise of the Santa Fe Institute, which I've very recently joined the board of."

Bill Gurley shares his admiration for a book that has significantly influenced his understanding of complex systems, which is directly relevant to his work in venture capital.

Career Motivation

  • Bill Gurley's motivation stems from helping founders realize their dreams.
  • He values the process of envisioning and supporting the creation of future successes.
  • The affection for the art of venture capital would persist regardless of compensation structures.

"I have a profound affection for the art of helping founders realize their dream."

This quote captures Bill Gurley's passion for venture capital as a means to assist founders in achieving their vision, highlighting the fulfillment he derives from his work.

Lessons Learned in Venture Capital

  • Bill Gurley reflects on a missed investment opportunity with Larry Page and Sergey Brin (Google's founders).
  • He would advise his younger self to take more risks regarding valuation during investment decisions.

"I had a meeting, or my firm benchmark had a meeting with Larry and Sergey where they said, will you invest at 100 pre? And we should have said, yes."

Bill Gurley expresses a lesson learned about the importance of recognizing exceptional opportunities, even if they seem costly at the time.

Valuation and Investment Regrets

  • Benchmark Capital debates the potential upside of investments when valuations stretch.
  • The firm's biggest regrets are often related to missed opportunities due to price sensitivity.
  • They focus more on missed big winners than on bad investments due to the asymmetry of outcomes.

"A lot of our biggest regrets are when we got too worried about price."

The quote reflects on the tendency to overly focus on valuation, which has led to missed opportunities that could have significantly impacted the fund's success.

Benchmark's Equal Partnership Model

  • Benchmark Capital follows an equal partnership structure, which facilitates generational change.
  • The firm operates in an artisan way, with partners conducting due diligence without large support teams.
  • Bill Gurley takes pride in the enduring model and the team-oriented culture at Benchmark.

"The founding partners put together this crazy idea of this equal partnership."

Bill Gurley explains the unique and successful partnership structure at Benchmark, which fosters a strong sense of unity and shared purpose among partners.

Recent Investment: Good Eggs

  • Benchmark Capital invested in Good Eggs, an online company with compelling leadership and a direct-to-consumer approach.
  • The investment was driven by the CEO's fit for the role and the company's optimal supply chain for direct-to-consumer retail.
  • Bill Gurley acknowledges the early stage of the investment and the associated risks.

"We put some money in a company called good eggs."

Bill Gurley describes the rationale behind a recent investment, highlighting the importance of leadership and strategic supply chain management in their decision-making process.

Show Acknowledgements and Promotions

  • Harry Stebbings thanks Bill Gurley for his participation in the show.
  • Harry promotes Bill Gurley's Twitter and his own Instagram for further engagement.
  • Harry endorses Carter and Pendo for their services in equity management and product benchmarking.
  • Harry also mentions Room, a company providing mobile, soundproof phone booths for office spaces.

"I want to say huge thank you to Bill for giving up his time."

Harry Stebbings expresses gratitude to Bill Gurley for joining the podcast, emphasizing the value of his insights to the audience.

"Carter simplifies how startups and investors manage equity, track cap tables and get valuations."

Harry Stebbings provides a recommendation for Carter's services, which are beneficial for startups and investors in managing equity and valuations.

"The team over at Pendo, the product cloud company, just launched a free product performance benchmarks microsite."

Harry Stebbings introduces Pendo's new service, which allows companies to compare their products with competitors, providing a valuable resource for founders.

"Room helps businesses build a better workplace with their mobile, soundproof phone booths."

Harry Stebbings endorses Room for offering practical solutions to common workplace issues, highlighting the convenience and utility of their product for businesses.

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