20VC NEA's Scott Sandell on SPACS and Why Liquidity is One of the Challenges of our Time, Why We Are At An Inflection Point For Secondaries & Why There Is Nothing To Suggest The Boom Will Not Continue

Summary Notes


In this episode of "20 Minutes VC," host Harry Stebbings interviews Scott Sandell, the managing general partner at NEA, a venture firm with $23 billion under management. Scott shares insights from his extensive experience, having led investments in transformative tech companies like Salesforce and Workday. He discusses the evolution of venture capital, the impact of the internet on both healthcare and IT, and the challenges of differentiation in a saturated market. Sandell also reflects on the importance of trust and decision-making in venture partnerships and the changing dynamics of company building, emphasizing the need for ample capital in prolonged private market periods. He highlights the role of SPACs as a new liquidity avenue and touches on NEA's approach to investment decision-making and the significance of supporting entrepreneurs through both successes and failures.

Summary Notes

Introduction to the Podcast Episode

  • Harry Stebbings hosts the 20 Minutes VC podcast.
  • Scott Sandell, managing general partner at NEA, is the featured guest.
  • NEA is a leading venture firm with $23 billion under management.
  • Scott Sandell has led investments in transformative technology companies.
  • Acknowledgments to various individuals for their input on the episode.
  • Advertisements for Carter, Ramp, and Secureframe are included.

We are back. This is the 20 Minutes VC with me, Harry Stebings, and following our incredible episode with Spotify founder and CEO Daniel Eck on Monday, we returned to the wonderful world of venture with a legend of the industry.

The quote introduces the podcast episode and the guest, Scott Sandell, highlighting his status in the venture capital industry.

Scott Sandell's Career and Entry into Venture Capital

  • Scott Sandell joined NEA in 1996.
  • The venture capital industry was small, with few jobs and unplanned career paths.
  • Sandell's transition from Microsoft to NEA involved consulting work and introductions to NEA partners.
  • Peter Barris, former managing partner at NEA, played a role in Sandell's hiring.
  • Sandell's career in venture capital spans over 26 years.

Well, obviously, a lot of good luck along the way. But the story is, back in 1996, when I first had the chance to join NEA, people didn't think about joining a venture firm by design.

Scott Sandell discusses his fortunate entry into the venture capital industry at a time when careers in this field were not commonly planned.

Influence of Scott Sandell's Father

  • Scott Sandell's father was a high-ranking officer in the US Coast Guard.
  • His father's values of excellence and humility influenced Sandell.
  • The importance of being a devoted father and husband is emphasized.

You know, my father is definitely one of my heroes, probably my primary hero.

Scott Sandell reflects on his father's influence on his life and career, highlighting his father's commitment to excellence and family.

Changes in the Venture Capital Industry

  • The Internet is the most significant change in both venture capital and healthcare.
  • The venture capital industry has become more competitive and difficult to differentiate.
  • Young venture capitalists face challenges in standing out and adding value.

Well, I was thinking about that last night, Harry. I don't think it'll surprise you, but I really think the biggest change is the Internet.

Scott Sandell identifies the Internet as the most transformative change in the venture capital industry, affecting all aspects of business and investment.

Impact of Economic Cycles on Investing

  • Venture capital investments often align with economic cycles, including booms and busts.
  • The importance of capital conservation and planning for downturns is noted.
  • The ability to adjust business plans to use less capital during busts is crucial.

And so that's a little bit of a frightening thing. I think the practical reality is that the only way you can deal with that is to be very careful with capital and always have enough capital to last a while should there be some kind of a bust.

Scott Sandell discusses the challenges of investing amidst economic cycles and the strategies to mitigate risks associated with booms and busts.

Speculation on Future Capital Supply in Venture Capital

  • Interest rates and inflation may influence the capital supply in venture capital.
  • There is uncertainty about future macroeconomic events and their impact on the industry.
  • The necessity to be mindful of unpredictable events is emphasized.

We all wonder about that, right? We all wonder like, what are we missing? It's not obvious, right? But then Covid-19 wasn't so obvious either.

Scott Sandell expresses the uncertainty and unpredictability in the venture capital industry, acknowledging that unforeseen events can have significant effects.

Uncertainty in Predictions

  • There is no clear indication of imminent challenges in the market.
  • Concerns often revolve around unknown factors that could impact the future.

"I say nothing I can see would cause me to think that there's something around the corner. But I don't know what I worry about is what I don't know."

This quote expresses a sentiment of uncertainty, highlighting that while no immediate issues are visible, unforeseen factors are a source of concern. It underscores the difficulty in predicting market movements or challenges.

Innovation Economy and Private Equity Market

  • The world is rapidly digitizing, a trend accelerated by the COVID-19 pandemic.
  • Power is shifting from established players to new entrants in the market.
  • New technologies are enabling the creation of potentially iconic companies.

"And so if you think about it as the balance of power shifting from the incumbents to the upstarts, that's what I see happening every day in one new market after another, with one new technology after another."

The quote discusses the dynamic change in market leadership due to technological advancements, suggesting that newer companies are poised to become the major players of the future, much like how some of the current tech giants have risen to prominence.

Changed Dynamics of Company Building

  • The internet has fundamentally altered how companies grow.
  • Growth rates of software companies have increased significantly over the past three decades.
  • Open source technology and new business models are enabling faster and more efficient company development.

"And I think it's why we see companies growing so much faster than we ever did in history."

This quote reflects on the observation that companies, especially in the software industry, are growing at unprecedented rates due to changes in technology and business practices.

Capital Influx in the Industry

  • The increase in growth rates has attracted more capital to the industry.
  • Companies are staying private longer, requiring more capital to grow.
  • There is a balance to be maintained between too much and too little capital.

"I mean, companies are staying private for longer, even though it's cheaper to start a company, still takes a lot of capital to grow a company."

This quote points out that despite lower initial costs, the extended period before going public necessitates greater capital investment for company growth, affecting the dynamics of venture capital funding.

Secondary Markets and Early Stage Management

  • Secondary markets are becoming more important for liquidity.
  • Early-stage fund managers need to navigate these markets effectively.
  • The increase in secondary market activity is a response to longer private holding periods.

"Well, I do think that the secondary markets are really at an inflection point, and there's more and more capital flowing into the secondary markets."

The quote suggests that secondary markets are reaching a critical stage of development, becoming increasingly relevant for providing liquidity in the venture capital ecosystem.

Price Sensitivity and Investment Decisions

  • Distinguishing between high-priced deals worth pursuing and those that are not is challenging.
  • In a capital-rich environment, great deals often come at a premium.
  • Investors must consider future growth potential when evaluating high prices.

"But I think in an environment where there is this tremendous amount of capital and sources of capital at all stages of company formation today, you can assume that in almost all cases, great deals will be priced at what appears to be a premium at any given point in time."

This quote addresses the reality that in a competitive investment landscape, quality deals will generally command higher prices, and investors must assess whether the price is justified by the company's growth trajectory.

Strategy for Reserve Allocations

  • Early-stage investors should be cautious with reserve allocations at high prices.
  • It may be more strategic to diversify rather than concentrate capital in high-priced rounds.
  • The average holding price can significantly increase if reserves are allocated at inflated prices.

"You got to be really careful about taking the precious capital that you have and letting your average price get moved up substantially."

The quote advises early-stage investors to be mindful of how reserve allocations at high valuations can affect their overall investment strategy, emphasizing the importance of capital preservation and strategic allocation.

SPACs and Portfolio Companies

  • The rise of SPACs (Special Purpose Acquisition Companies) offers a new avenue for companies to go public.
  • Portfolio companies need guidance on whether to engage with SPACs as part of their exit strategy.

"We mentioned Spacs, though. So, Scott, while I have you, I do have to ask about this. The unprecedented rise, how do you feel about it?"

This quote introduces the topic of SPACs, signaling a discussion on the impact of their increasing popularity on portfolio companies and their exit strategies.

Liquidity Challenges and SPACs

  • Scott Sandell discusses liquidity as a significant challenge in the current times.
  • SPACs (Special Purpose Acquisition Companies) are highlighted as a new form of liquidity and a source of risk capital.
  • SPAC investors are described as more risk-tolerant than traditional IPO investors.
  • Scott expresses enthusiasm for new paths to liquidity for private companies.

"As I mentioned, a minute ago, Harry, that I think one of the big challenges of our time is liquidity. And so SPACs are obviously a new form of liquidity for private companies, and frankly, what appears to me to be a new source of risk capital."

This quote emphasizes the importance of liquidity for private companies and introduces SPACs as a novel solution to this challenge.

NEA's Capital Concentration

  • NEA has increased both its assets under management (AUM) and team size over the past decade.
  • A study by NEA looked at growth investments and conviction investments, revealing that their best companies raised $32 billion, with NEA contributing $3 billion.
  • The companies in the study averaged a 36% annual return, suggesting NEA could have invested more capital.

"This particular collection of companies has raised $32 billion in total, and we've only been responsible for 3 billion of it... have generated a return of 36% on average every year."

Scott Sandell reflects on the significant capital raised by NEA's top companies and the high average annual return, indicating a potential missed opportunity for greater investment.

Fund Size and Optimization

  • NEA considers raising larger and different kinds of funds to meet capital needs.
  • NEA's growth in fund size has been steady, with the latest fund being $3.6 billion, up from $2.3 billion in 2000.
  • Scott suggests that having more capital in NEA's own hands could better serve their companies and limited partners.

"We just look back and we think we've left a lot of money on the table, and we can serve our companies and our limited partners better if we have more of that capital in our own hands."

Scott Sandell expresses the potential benefits of managing more capital internally to maximize returns and better serve stakeholders.

Preserving Decision-Making Quality

  • NEA's partnership has grown by 50% over 25 years, with the belief that the best decisions are made in small groups.
  • The firm uses a process decision method where all general partners vote on the process, but a smaller team makes the actual investment decisions.
  • NEA aims to keep decision-making groups small for efficiency and quality.

"The best decisions are made in relatively small groups... the average process decision would empower five or six of them to make a decision."

Scott Sandell explains NEA's approach to preserving the quality of decision-making as the firm and partnership grow.

Process Decisions

  • A process decision empowers a small group to manage the entire decision-making process and report back to the larger group.
  • NEA has two weekly slots for company presentations and decision-making.
  • The same group is kept for follow-on decisions for accountability.

"A process decision empowers usually five, six, seven people to literally run the whole process and make the final decision and report back to the rest of the group whatever they decided."

This quote details the structure of NEA's process decisions, emphasizing the empowerment of a select group to make and be accountable for investment decisions.

Investing Guidelines

  • NEA operates on guidelines rather than strict rules, acknowledging the need for flexibility and judgment in decision-making.
  • Scott emphasizes the importance of intuition and art alongside science in investing.

"We have a lot of guidelines. Or said differently, almost any rule that we could write down probably deserves to be broken under the right circumstances."

Scott Sandell highlights the flexible approach NEA takes towards investing, where guidelines are preferred over rigid rules to allow for nuanced decision-making.

Trust Within Partnerships

  • Hiring for cultural fit is critical at NEA, with a focus on aligning behavior with the firm's values and culture.
  • Trust is a fundamental aspect of NEA's partnership, enabling efficient decision-making and execution.

"The only reason NEA could have scaled to the size it is, is because of the trust that we have in the partnership, which enables us to meet for 3 hours a week, make all the decisions necessary, and then have the confidence that they would be executed."

Scott Sandell discusses the pivotal role of trust in NEA's ability to scale and operate effectively as a partnership.

Role of Managing General Partner (GP)

  • The managing GP is seen as 'first among equals,' with a non-hierarchical approach to leadership.
  • Scott encourages leadership development and provides opportunities for others to exhibit leadership.
  • Balancing leadership duties with investing and board responsibilities is a key aspect of the managing GP's role.

"I challenge everybody to be a leader and give them the space and the opportunity to exhibit leadership and develop their own leadership abilities."

Scott Sandell describes the managing GP's role as facilitating leadership among partners and maintaining a light touch to attract self-motivated individuals.

Board Membership Style

  • Scott acknowledges the courage required to be an entrepreneur and aims to support that in his role on boards.
  • He emphasizes the importance of understanding and supporting the entrepreneur's perspective.

"I think the thing that's been most profoundly obvious to me is what a courageous act it is to be an entrepreneur. And so I try to support that, and I try to walk in the shoes of the entrepreneur before I utter something to"

This quote reflects Scott Sandell's approach to board membership, focusing on empathy and support for the entrepreneur's journey.

Venture Capital Insights

  • Scott Sandell shares his approach to board meetings, focusing on how companies respond to missed milestones and new opportunities rather than being judgmental about the missed targets.
  • He emphasizes the importance of adapting to new circumstances as business plans are outdated once execution begins.

"I always try to look at each situation fresh as it is on the day, which is to say, recognize that every business plan is dead the minute you start executing on it, and then you're facing new circumstances."

The quote highlights the dynamic nature of business and the need for flexibility and fresh perspectives in board meetings and venture capital.

Advice for New Board Members

  • Scott Sandell advises new board members to learn from more experienced board members from other firms.
  • He suggests that new board members should listen more and talk less to gain insights from others.

"I'd try to get somebody to lead the series B, who I thought was going to be a more experienced, great board member, and then I'd learn from them."

The quote suggests the value of mentorship and learning from seasoned professionals in venture capital.

Building Trust Between Board Members and Founders

  • Trust is built naturally, according to Scott Sandell, and it is crucial not to be overly critical of entrepreneurs during tough times.
  • Kindness in difficult times is appreciated and helps in building sincere trust.

"I think that just happens naturally, but I think it is especially helpful never step on somebody when they're down."

This quote emphasizes the importance of support and empathy in the relationship between board members and founders.

Challenges of Building Trust Remotely

  • Scott Sandell acknowledges the challenges in building trust due to compressed timelines and lack of in-person interactions caused by COVID-19.
  • However, he is surprised by how effective remote tools like Zoom have been for maintaining relationships and conducting business.

"It is obviously tougher, Harry. There's no doubt about that."

The quote acknowledges the difficulties faced in remote interactions but also the unexpected effectiveness of digital communication platforms.

Scott Sandell's Favorite Book

  • "The Old Man and the Sea" by Ernest Hemingway is Scott Sandell's favorite book due to Hemingway's economical use of words and the themes of daring greatly and perseverance.

"It's all about daring greatly and perseverance of the old man in the."

This quote reflects the appreciation for the novel's themes that resonate with the challenges and efforts in venture capital.

Beliefs in Venture Investing

  • Scott Sandell believes in the potential for companies to be enormously large and impactful, which requires a belief in their potential from the outset.
  • Patience is key as great outcomes take time to materialize.

"I just believe that we have the opportunity to invest in companies that can be enormously large and impactful and ultimately valuable."

The quote encapsulates the optimism and long-term vision required in venture investing.

Personal Motto

  • Teddy Roosevelt's quote about the man in the arena is Scott Sandell's guiding principle, emphasizing effort, perseverance, and daring greatly.

"It's not the critic who counts, not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena."

The quote serves as a motivational reminder of the importance of being actively engaged and resilient in one's endeavors.

Reflections on Career in Venture Capital

  • Looking back, Scott Sandell wishes he knew he would be successful but appreciates that he enjoyed the journey without worrying too much.

"It would have been nice to know that I was going to be successful."

The quote conveys the inherent uncertainty in a career in venture capital and the value of enjoying the process.

Pride in Career Achievements

  • Scott Sandell is most proud of living up to his own values and having few regrets throughout his career.

"I'm most proud of not having a lot of regrets and living to my own values."

This quote highlights the personal fulfillment that comes from integrity and staying true to one's principles.

Recent Investment

  • NEA's recent investment in Loanpal, a company that finances solar loans for homeowners, was driven by confidence in the leadership team despite market uncertainties.

"It was really a bet on the team and they've done spectacularly well."

The quote emphasizes the importance of team quality in investment decisions, especially during volatile market conditions.

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