20VC The 4 Key Skills All VCs Need To Be Successful, How To Build, Maintain and Scale Your Network in VC and What is The Process Through Which VCs Build Conviction in Opportunities with Max Motschwiller, General Partner @ Meritech Capital

In this episode of the 20 minutes VC, host Harry Stebbings interviews Max Motschwiller, a partner at Meritech Capital, discussing the intricacies and strategies of growth-stage investing. Max shares his journey from Summit Partners to Kleiner Perkins, emphasizing the blend of analytical rigor and intellectual thought that shapes successful venture investing. He highlights the importance of early conviction in both picking and winning investment opportunities, and the leverage gained from helping portfolio companies with executive recruitment and customer acquisition. The conversation also touches on the competitive landscape of growth equity, with Max explaining Meritech's approach to fund size and collaboration with other firms. They delve into the challenges and opportunities in consumer investing, with Max noting a decrease in high-quality consumer startups, possibly due to platform maturity and distribution control by tech giants. The dialogue concludes with Max's recent investment in Amplitude, driven by the conviction that data-driven product development is essential in today's market.

• Harry Stebbings hosts the 20 Minute VC podcast and promotes interaction on Instagram.
• The episode features Max Motschwiller, a partner at Meritech Capital.
• Meritech Capital is highlighted for its successful IPOs and notable portfolio companies.
• Max's background includes tenure at Kleiner Perkins and Summit Partners.
• The podcast also mentions sponsors Terminal, Hi5, and FreshBooks, which offer services for remote team building, conferencing, and accounting respectively.

"We are back for another week on the 20 minutes VC with me, Harry Stebings, and if you haven't already, then you can see all things behind the scenes and ask questions ahead of time for future guests on Instagram at hstebbings 90 96."

This quote introduces the podcast and the host, Harry Stebbings, and invites listeners to engage with the podcast via Instagram.

"I'm thrilled to welcome Max Motschwiller, partner at Meritech Capital, one of the West coast leading growth investment firms with over 150,000,000,000 in ipos and a portfolio that include the likes of Facebook, Salesforce, Snap Box, Mulesoft and Cloudera, just to name a few."

Harry Stebbings introduces Max Motschwiller, highlighting his role at Meritech Capital and the firm's successful track record.

• Max Motschwiller joined venture capital through Summit Partners after the 2008 financial crisis.
• He worked at Kleiner Perkins before joining Meritech Capital.
• Max's venture capital career began by applying to firms where he could have an impact and avoid returning home after the collapse of Lehman Brothers.

"And the only person who gave me a job out of undergrad in 2008 was a firm called Summit Partners. And I am so forever grateful."

Max Motschwiller explains how he started his career in venture capital at Summit Partners, expressing gratitude for the opportunity.

• Summit Partners taught Max the "science of investing," focusing on analytics and the importance of price and numbers.
• Kleiner Perkins offered lessons in the "art of investing," emphasizing intellectual consideration over purely numerical analysis.
• Max values the combination of both analytical and intellectual approaches in venture capital.

"So at summit you really learned the science of investing. And then I'd contrast that with Kleiner. Felt like you were learning the art of investing."

Max Motschwiller contrasts his experiences at Summit Partners and Kleiner Perkins, highlighting the different investment philosophies at each firm.

• Meritech Capital combines the analytical and intellectual approaches to investing.
• The firm adapts its strategy depending on the company and sector, blending art and science as needed.

"We, of course, view the world as we're looking at both. And so I'd say it's a combination of the two of those things."

Max Motschwiller describes Meritech Capital's investment approach as a hybrid of the analytical and intellectual styles he learned from Summit Partners and Kleiner Perkins.

• The debate on career VCs versus operators in venture capital is discussed.
• Max believes that both career VCs and operators can be successful investors, and biases from past experiences influence decision-making.
• The stage of investment may affect whether operating experience or a career VC background is more advantageous.

"I think that there are awesome investors who have, of course, operating experience, and it's certainly been proven that there are great investors who don't have operating experience."

Max Motschwiller weighs in on the debate, acknowledging that successful investors can come from both operational and non-operational backgrounds.

• Operating experience can provide valuable insights but may also lead to overestimating the difficulty of problems based on personal challenges.
• A lack of operating experience can sometimes be beneficial, as it may lead to taking risks that an operator might avoid due to perceived difficulties.

"The flip side to that is you might understand that there's a problem that's so hard to solve. It was so hard for you to solve that then you don't believe that this entrepreneur will solve it."

Max Motschwiller discusses how personal operating experience can influence an investor's perception of an entrepreneur's ability to solve problems.## Challenges of Managing Large Organizations

• Max Motschwiller feels disadvantaged when dealing with challenges related to managing large organizations due to lack of personal experience.
• There is a difficulty in understanding the psychology of managing large organizations without firsthand experience.
• Max envies the ability to have multiple life experiences to draw from, especially in managing large teams.

"And so fully understanding the psychology of managing a really large organization when you've never done it is something that I certainly try to pick up secondhand."

This quote highlights Max's acknowledgement of the gap in his experience when it comes to the psychological aspects of managing large organizations, which he attempts to understand indirectly.

• Max outlines the simple formula of a VC's role: sourcing, picking, winning, and helping companies.
• Early in one's career, the ability to win deals matters less, and associates are often valued for their sourcing ability.
• Picking the right companies is emphasized as the most crucial skill for a VC, leading to success and forgiveness in other areas.

"The reality is, I think the most important skill, and it probably sounds obvious for a venture capitalist, is picking right, like picking solves."

Max stresses that the ability to pick the right companies is fundamental for a venture capitalist, as it is the hardest skill to develop and the key to success.

• In growth investing, all companies at the decision stage are high quality, and picking involves making decisions around price.
• The skill in growth investing is knowing when to stretch and pay a higher price for investment in a company.
• Understanding underlying societal shifts and trends can justify paying a premium for a company that aligns with those changes.

"And so making an investment in one of these really high quality companies often the brilliance of a growth investor is knowing where to really stretch and pay up on price."

Max explains that the art of growth investing lies in discerning when to invest more heavily in a company based on its potential, despite the high price.

• Building conviction is a process that is strengthened by early engagement and monitoring of a company's execution.
• Seeing a company execute on its plans from an earlier stage allows for better assessment of its potential for success.
• The ability to execute on plans is a high indicator of future returns and successful businesses.

"The highest correlation to a business that will be a great return and will continue to execute is one that is out executing in the current state."

Max highlights that a company's current performance in executing its plans is a strong predictor of future success, which is a key factor in building conviction for investment.

• Being intentional about networking and prioritizing certain relationships is crucial.
• Starting with a broad network and then narrowing down to develop deeper connections with key individuals is advised.
• Having a "best friends" list of people who will have you top of mind for opportunities is important for career advancement.

"But then where I think people get tripped up is they don't farm the bottom of the network and make sure that they develop what we call internally as best friends."

Max discusses the importance of not only expanding one's network but also cultivating deeper relationships with a select few individuals who can provide significant opportunities and support.

• The approach to networking and deal sourcing can be highly individual and should be reassessed regularly.
• For those new to the industry, talking to as many companies as possible can help develop a filter for recognizing great companies.
• The decision between meeting many founders for benchmarking or being selective and deliberate is a personal choice that impacts how time is spent.

"And so when I first started in the industry at summit, I had very little background and very little data on being able to pattern match what made a great company."

Max reflects on his own experience starting out in venture capital, where he was advised to engage with numerous companies to build his pattern-matching skills and decision-making filter.## Investment Strategy Evolution

• Harry Stebbings has shifted from high volume to a focused approach, selecting one company per month to potentially invest in.
• He aims for twelve investment opportunities a year, expecting to be interested in half.
• The goal is to develop early conviction and convert one or two of those six companies into investments for Meritech.

"I've moved from super high volume to very, very focused, such that I am at a cadence now where every single month I pick a single company that is my priority, one company per month."

This quote explains Harry Stebbings' evolved investment strategy, which is more focused and allows for deeper evaluation of potential investments.

• Max Motschwiller acknowledges the challenge of competing for deals as a young partner.
• He emphasizes the importance of early conviction in winning deals.
• Entrepreneurs prefer investors who believe in their vision and have conviction, which can be a competitive advantage for younger partners.

"Entrepreneurs want people who believe in their vision and have conviction around the same belief that they have."

Max Motschwiller highlights the importance of sharing an entrepreneur's vision and belief to win investment opportunities, especially for a less experienced partner.

• Max Motschwiller identifies two main areas where he can add value post-investment: finding great people and customers.
• He focuses on quality over quantity in both areas, aiming for tangible ROI.

"So the two highest points of leverage that I find my entrepreneurs really love are one, finding them great people... And then the second area is customers."

Max Motschwiller outlines the key ways he adds value to his investments after the deal, focusing on strategic hires and customer acquisition.

• As a later-stage firm, Meritech reserves fewer dollars for follow-on investing.
• The company takes cues from entrepreneurs on whether to increase or decrease their stake in subsequent rounds.
• The preference of entrepreneurs in follow-on rounds is to have an outside lead to ensure fair pricing.

"So as a later stage firm, we reserve fewer dollars for follow on investing... And so a lot of it for us is taking our cues from the entrepreneur."

Max Motschwiller explains Meritech's approach to follow-on funding and how they rely on entrepreneurs' guidance for their investment decisions.

• Meritech competes by keeping their fund size relatively small, allowing for collaborative rounds with other investors.
• The firm differentiates between late-stage and pre-IPO investments, with larger players focusing more on pre-IPO.
• Meritech aims to be in a preferred position for investment opportunities by maintaining a smaller fund size.

"And the way in which we've been conscious of making sure that we still have a great spot in this ecosystem is one we've kept our fund size relatively small."

Max Motschwiller discusses the strategic decision to keep Meritech's fund size small to remain competitive and collaborative in a market with large players.

• Meritech is raising their 6th fund, targeting 25 portfolio companies.
• They reserve 20% to 25% of the fund for follow-on investments, which is less than typical early-stage firms due to fewer subsequent rounds needed.

"Yeah, so to answer the question very directly, we're in the process of raising our 6th fund. It'll be about 600 million. And our view is to have roughly 25 portfolio companies in that fund."

Max Motschwiller provides specifics on Meritech's portfolio construction and reserve allocation strategies for their upcoming fund.

• Max Motschwiller feels it is a challenging time to invest in consumer companies compared to previous years.
• He notes a decrease in high quality and high upside consumer investment opportunities.

"I think that relative to other time periods... this feels like a harder time to be investing in consumer in that there are fewer high quality and super high upside opportunities in consumer."

Max Motschwiller compares the current investment climate for consumer companies to previous years and finds it less favorable, with fewer standout opportunities.## Consumer Opportunities and Platform Shifts

• The quantity of high-quality consumer opportunities has decreased compared to a few years ago.
• The decrease is attributed to the maturity of mobile platforms and the saturation of ideas.
• There's anticipation for the next big platform to emerge.

2012. And so it feels as though there has been just a gap in the amount of exciting consumer opportunities. Not to say there aren't and there won't be, but I just think if you just look at it holistically, the overall quantity of high quality upside opportunities is lower than it was a couple of years ago and naturally makes sense as people have spoken about this platform shift and waiting for the next big platform and mobile has just gotten a little bit more mature and picked over from an idea standpoint.

This quote explains the current state of consumer opportunities in the market, highlighting a decline due to the maturity of the mobile platform and the need for a new platform to drive innovation.

• Free and open distribution is hindered by the dominance of large platforms.
• Viral products can still achieve significant distribution.
• Startups are dependent on major platforms for growth and face competition from them.

Is it that idea standpoint or is it as kind of Peter Fenton said on the show, it's this lack of free and open distribution in many cases, often with kind of distribution channels being massively inflated customer acquisition cost wise, meaning startups can't distribute freely and openly as they would have done before.

The speaker is questioning whether the challenges in the startup space are due to a lack of innovative ideas or the difficulties in distribution caused by the dominance of large platforms and high customer acquisition costs.

It's a yes and a no. Taking the no first, I actually think if you have the right viral product, there are so many avenues for really, really powerful distribution.

Max Motschwiller acknowledges that despite the control of distribution by large platforms, the right product can still achieve viral growth.

The yes part of there is this lack of open distribution is that there are these core platforms that feel to have a monopoly on distribution, right?

Max Motschwiller confirms the issue of limited open distribution, citing the monopolistic control of major platforms over distribution channels.

• Max Motschwiller recommends "Homo Deus" by Yuval Harari for its impactful content.
• Reflecting on the past, exploring creative ideas with a friend led to valuable insights for Max's investment decisions.
• The best board member Max has worked with is his partner Rob Ward, who excels at distilling information to its core.

I'm sure you've read some of Yuval Harari stuff, but I thought his second book, homo Deus, was amazingly impactful.

Max Motschwiller recommends "Homo Deus" as a significant and impactful read.

It allowed me to explore creatively a lot of different ideas, and none of the ideas came to manifested itself in starting something that was successful.

Max Motschwiller discusses how creative exploration with a friend helped develop a foundation for his successful investments later on.

What makes Rob so good is his ability to distill lots of information down to one key point.

Max Motschwiller praises his partner Rob Ward for his exceptional skill in identifying and focusing on the most critical aspects of information.

• Consumer businesses are primarily concerned with growth and engagement.
• A sustainable business model, often reflected in the average revenue per user (ARPU), is also critical.

Oh, wow. It's a broad question, but the reality is people in consumer if you oversimplify, care about two things, right? They care about growth and they care about engagement.

Max Motschwiller summarizes the two main concerns in consumer businesses: growth and engagement.

• The abundance of capital in the system can lead to a lack of discipline and focus in startups.
• Capital should be used as a forcing function for discipline.

There's capital gluttony. When there's too much capital, it can lead to deprioritization and defocus, because you think you have so much time and you'll end up wasting a lot of capital and not focusing in at times where the business needs to be really focused.

Max Motschwiller expresses concern about the excess of capital in the venture capital ecosystem, which can cause startups to lose focus and discipline.

• Amplitude, a product analytics company, was chosen for investment because of the importance of data-driven decisions in business.
• The investment is based on the belief that product development teams need data-driven tools to succeed in a data-centric business environment.

We are in a data driven world, and if you're not making data driven decisions on really every dimension of your business, that someone is going to do better than you are.

Max Motschwiller explains the rationale behind investing in Amplitude, emphasizing the necessity of data-driven decision-making in all business aspects.

• Appreciation is expressed for the support and introductions provided by Rob Ward and Alex Curland.
• The value of the podcast as an asset to the ecosystem is acknowledged.

Max has been so kind and supportive to me. And again, I want to say a huge thank you to both Rob Ward and Alex Curland for making the intro to Max today, without which this fantastic episode would not have been possible.

Harry Stebbings thanks Max Motschwiller for his support and Rob Ward and Alex Curland for facilitating the introduction that made the episode possible.