20VC Why Spray & Pray Investing Is Wrong, Why DataInformed VC Beats Data Driven VC & What To Look For When Investing In A Marketplace with Josh Breinlinger, Managing Director @ Jackson Square Ventures

In this episode of "20 minutes VC," host Harry Stebbings interviews Josh Brinlinger, a managing director at Jackson Square Ventures and a seasoned expert in marketplaces, discussing his journey from a mechanical engineer to a venture capitalist and his role in companies like Odesk and Rev. Brinlinger shares insights on the importance of being data-informed rather than data-driven in VC decisions, the nuances of GMV in marketplaces, and the potential rise of master marketplaces in sectors like education and healthcare. He emphasizes the significance of post-match value in marketplaces, the strategies to solve the chicken and egg problem, and the pitfalls of focusing solely on deal activity as a VC success metric. Brinlinger also touches on the evolving nature of funding rounds and the importance of high conviction investments.

• Host Harry Stebbings expresses excitement for the episode with guest Josh Breinlinger.
• Josh Breinlinger is a managing director at Jackson Square Ventures.
• Breinlinger has invested in companies like Contently, OfferUp, and Rented.
• He is known for his expertise in marketplaces, especially regarding early-stage startup challenges like the chicken and egg problem.
• Breinlinger was part of the founding team at Odesk and has been involved with Rev and Adrol.
• Special thanks to Sarah Tavill at Greylock for introducing Josh to the show.
• Promotional mentions for Foundersuite and Greenhouse software.

You're listening to the 20 minutes VC with me, your host, Harry Stebbings, and you can find me on Snapchat at htebbings.

This quote is an introduction to the podcast, providing the host's name and social media handle.

• Josh started as a mechanical engineer in Boston, attending MIT.
• He comes from a family of engineers, with his father and brother also being MIT graduates.
• Josh worked on projects like fuel injectors and designing a fryer for Burger King.
• In 2004, he moved to San Francisco and joined the founding team of Odesk (now Upwork).
• At Odesk, he worked in various roles including sales, product, community operations, marketing, and business development.
• He enjoyed the startup and marketplace culture, focusing on balancing both sides of the market.
• In 2010, he moved on to early-stage companies, working with Adroll and co-founding Rev.
• He was recruited into Sigma partners by Greg Gretch, leading to his venture capital career.
• After joining Sigma, they spun out to form Jackson Square Ventures.

Sure. So I started my career actually as a mechanical engineer in Boston. I went to MIT and I was from a nerdy engineering family where my dad was an electrical engineer at MIT and my older brother was an MIT mechanical engineer.

This quote outlines Josh's educational background and family's engineering history.

• Josh Breinlinger discusses the difference between data-informed and data-driven venture capitalists.
• He cites a quote from Charlie Munger about the importance of thinking over calculating too much.
• Breinlinger believes that focusing solely on data can lead to ignoring common sense and market dynamics.
• He uses Meerkat as an example of a company that showed rapid usage growth but lacked sustainability.
• He emphasizes the importance of not being blinded by hype and considering if a startup's approach is scalable and competitive.
• While data is important, Breinlinger prioritizes the founding team and the potential of the service or product.
• He uses a mental test to assess whether a new startup could completely change consumer behavior.

One of the things Charlie says, which is fantastic, is he says people calculate too much and think too little. And I think that actually happens in venture capital.

This quote from Charlie Munger, referenced by Josh, highlights the tendency to over-rely on data without sufficient critical thinking in venture capital.

• Josh looks at a lot of data but prioritizes his love for the founding team.
• He contemplates whether a new startup's service can cause him to switch all of his behavior.
• He mentions a recent investment in a company called Scriptdash, a pharmacy offering same-day delivery.

No, obviously I look at a ton of data, but what I really look to first is, first of all, do I love the founding team? And obviously that's a must have.

This quote explains Josh's approach to company evaluation, emphasizing the importance of the founding team in his investment decisions.## Venture Capital Investment Criteria

• Josh Breinlinger emphasizes the importance of falling in love with the team and product/service before considering the data.
• The data should validate the initial belief in the product and service.
• If the data shows negative trends, it may indicate a misunderstanding of the product's appeal or market fit.

"I have to fall in love with the team first, then with the product and the service, and then the data has to back it up."

This quote highlights the sequential approach to venture capital investment where personal conviction in the team and product precedes data validation.

• Josh criticizes the overemphasis on deal activity as a measure of VC success.
• He points out that most important VC data is private, making public data like investment activity an unreliable success metric.
• Josh advocates for a high conviction, concentrated investment strategy to beat the market.

"There's a lot of data out there about the venture capital world... But the hard thing to understand about the venture world is most of the important data is private and confidential and opaque."

This quote underscores the difficulty in assessing VC success due to the lack of transparency in critical data.

• Josh Breinlinger expresses concern that reported venture capital activity can be misleading.
• Simple metrics like the number of investments do not provide insights into the quality or terms of the deals.
• He mentions the practice of including small investments in high-profile companies as a way to inflate a VC firm's perceived success.

"I could write a 25K check in a late stage of Uber and put it on my portfolio page. So, yeah, it just doesn't mean much."

This quote illustrates how minor investments can be misrepresented to enhance a VC firm's portfolio without reflecting true investment success or influence.

• Josh advocates for a strategy of making fewer, more concentrated investments with high conviction.
• He draws a parallel between this approach in venture capital and successful money managers in the public markets who focus on concentrated portfolios.

"In venture capital, I believe the best way to get returns is to have very high conviction investments, very concentrated investments, and I think that's the way to beat the market and stand out."

This quote emphasizes Josh's belief that a focused investment strategy leads to superior returns in venture capital.

• Josh discusses the desired ownership percentage in companies that his firm invests in.
• He explains that his firm's smaller fund size allows for a comfortable ownership range of 15% to 20%.
• The typical investment size and valuation at which his firm leads rounds are also mentioned.

"We want as much as we can get, but the average tends to be 15 to 20."

This quote reflects the ownership goals of Josh's VC firm and how they align with the fund's size and investment approach.

• Josh predicts a shift in marketplaces towards offering access to top-tier professionals and experts, which he terms "master marketplaces."
• He contrasts this with the previous generation of marketplaces that focused on more commoditized services.
• Josh doubts that one company can effectively operate both commodity-level and master-level marketplaces due to different workflows.

"I think the previous generation of marketplaces, there's a lot of commodity. There will still continue to be that. But I think there's the separation happening now."

This quote indicates a market trend where there is a growing distinction between standard and premium offerings in online marketplaces.

• Josh explains that the workflow for engaging with top-tier professionals is different from that of commodity services.
• He describes how masters are recruited or leveraged in these marketplaces, focusing on efficient use of their time and skills.

"The workflow in a master marketplace might be completely different. It might be masters sign up very, very easily, but their time is leveraged very well."

The quote highlights the unique operational dynamics of master marketplaces, which are designed to attract and utilize the expertise of top professionals efficiently.

• Josh discusses the Total Addressable Market (TAM) for master marketplaces, suggesting it varies by industry.
• He believes that industries with a wide quality spectrum among professionals have the potential for successful master marketplaces.
• Josh is uncertain about the size of the TAM for these marketplaces but highlights several industries where they could thrive.

"The tam is really just going to depend on the industry."

This quote suggests that the potential for master marketplaces is industry-specific and dependent on the quality differential in professional services within those sectors.## Market Approach: Bottoms Up vs. Top Down

• Josh Breinlinger expresses a preference for a bottoms-up approach to market analysis.
• Recognizes the importance of large markets, using the pharmacy industry as an example.
• Suggests that in sufficiently large markets, the distinction between bottoms-up and top-down approaches becomes less relevant.

"Yeah, I guess I'm more bottoms up. But there's so many markets that we look, we like really big markets. Think of script ash. The pharmacy industry in the US is 412,000,000,000, I believe. So whether you do it top down or bottoms up, it's big enough, it just doesn't matter."

The quote explains that for extremely large markets, such as the pharmacy industry, the size itself makes the approach to market analysis less critical, as the potential is evident from either perspective.

• Transaction size and frequency are highlighted as critical dimensions for evaluating marketplaces.
• Josh points out that not all marketplaces should follow the Uber model, which is characterized by high frequency.
• He contrasts high-frequency, low-transaction-size marketplaces like Uber with low-frequency, high-transaction-size marketplaces like those for real estate.
• Cites the "uber for locksmiths" as a poor marketplace model due to low frequency and moderate transaction size.

"Uber has a special characteristic which is incredibly high frequency. If I'm going on business travel, I might use Uber eight times in a single day. And then at the other end of the spectrum, you have super low frequency and very high transaction size, which might be things like real estate."

This quote emphasizes the uniqueness of Uber's marketplace model due to its high frequency of transactions and explains how different marketplaces operate depending on the transaction size and frequency.

• Josh discusses the horizontal marketplace approach as an alternative to high-frequency vertical marketplaces.
• OfferUp and Thumbtack are cited as examples of successful horizontal marketplaces.
• The horizontal approach aggregates low-frequency transactions across various categories to increase overall frequency.

"Offerup has done that in peer to peer commerce, Thumbtack has done that in local services. And the horizontal approach is much better in those cases."

The quote illustrates how horizontal marketplaces can achieve high frequency by spanning across multiple categories, thus providing a broader range of transactions.

• Josh challenges the notion that all GMV is equal, emphasizing the importance of repeat transactions and network effects.
• He argues for the importance of marketplaces adding value post-match to avoid disintermediation.
• Josh highlights the need for marketplaces to continually provide value to both buyers and sellers.

"Somebody comes in, spends $10 100 times with 100 different providers. That is much more valuable because you've got so much more data and network effects and connections happening within your network, as opposed to just more of a single transaction."

This quote explains that GMV generated from repeat transactions is more valuable than GMV from one-off transactions due to the resulting data and network effects.

• Josh suggests that the best way to prevent disintermediation is to add ongoing value to both sides of the marketplace.
• He stresses the importance of both buyers and sellers preferring to work within the marketplace rather than one side forcing the other.

"The best way is to just keep adding value after the match. Consumers have a somewhat rational behavior of if they feel they're paying fees that exceed the value they're getting, they're going to try to disintermediate."

The quote addresses the concept that to prevent users from bypassing the marketplace after an initial match, the platform must continue to offer value that justifies its fees.

• Josh discusses the concept of share of wallet and its significance in achieving marketplace lock-in.
• He emphasizes the need for a marketplace to offer superior services to capture users' attention and spending fully.

"If somebody's using Craigslist to hire, and they're using indeed to hire, and they're using your other marketplace to hire freelancers as well, you don't really have that great lock in yet."

This quote highlights the challenge of securing a dominant share of wallet when users have multiple marketplace options for the same service.

• Discusses the challenge Uber faces with driver loyalty due to the ease of switching between Uber and Lyft.
• Points out the importance of achieving lock-in for marketplace defensibility.

"Every car has two stickers on it, one Uber and one Lyft. And so it's really hard to get that complete lock in."

The quote illustrates the difficulty of achieving exclusive loyalty from participants in a marketplace when competitors offer similar opportunities, as seen in the example of ride-sharing drivers.

• Josh expresses his pet peeve regarding the naming of funding rounds, suggesting that the names are becoming increasingly meaningless.
• He criticizes the trend of companies presenting themselves as earlier-stage than they are through creative naming of funding rounds.

"Nowadays you might have a friends and family round and then a pre seed round and a seed and a seed extension and a postseed, and then maybe you have a series A and people get caught up in this and I don't think it makes any sense because the names don't mean anything."

The quote reveals Josh's frustration with the inflation of funding round names, which he believes do not accurately reflect the company's stage or the significance of the investment.## Valuations in Series A Funding

• Series A funding can range from a 5 million to 100 million valuation.
• The term "Series A" does not indicate a specific valuation.

"Because a series A could be anything from a 5 million valuation to 100 million valuation. So the name doesn't mean anything."

This quote emphasizes the variability in valuation that can occur during Series A funding rounds, suggesting that the label "Series A" does not provide a clear indication of a company's worth.

• Bridge rounds are often seen as a negative sign, potentially indicating a lack of product-market fit.
• Josh Breinlinger argues that bridge rounds can be part of successful company histories.
• Bridge rounds are not always indicative of failure; they may be strategic decisions during temporary setbacks.

"The partners here, we've invested in four unicorn companies and three of them equal logic, docusign and responsus. They all had bridge rounds. Some even had down rounds in their history."

Josh Breinlinger reflects on his experience at Jackson Square Ventures, noting that successful unicorn companies he has been involved with have gone through bridge rounds, suggesting that these rounds can be part of a normal growth trajectory for successful startups.

• Docusign faced a significant challenge when regulations caused a 25% revenue loss overnight.
• Jackson Square Ventures led a bridge round for Docusign based on conviction in the team and business thesis.
• The bridge round was a temporary measure that allowed Docusign to recover and eventually succeed.

"Docusign was fascinating story because we had led around and then shortly after that, some regulations changed and basically they lost 25% of their revenue overnight."

The quote recounts a critical moment in Docusign's history where a sudden regulatory change impacted the company's revenue, leading to the necessity of a bridge round which Jackson Square Ventures led due to their belief in the company's potential.

• A quick fire round involves short statements followed by immediate thoughts within 60 seconds.

"No, I do agree with that on the bridge around thesis, but I do want to dive into a quick fire round now. So I say a short statement and then you give me your immediate thoughts in 60 seconds."

Harry Stebbings introduces the quick fire round segment, where he will provide short statements and Josh Breinlinger will respond with his immediate thoughts in a concise manner.

• Josh Breinlinger's favorite author is David McAuliffe.
• McAuliffe's book on the Wright brothers is highlighted for its portrayal of passionate and innovative entrepreneurs.

"So well, I'll give you, my favorite author is David McAuliffe, and he writes a lot of history books. And one of the ones I read recently was the Wright brothers."

Josh Breinlinger shares his admiration for author David McAuliffe and specifically mentions "The Wright Brothers" as a recent read that he found particularly inspiring due to the story of innovation and entrepreneurship.

• The strongest form of defensibility in marketplaces involves many-to-many connections with high-frequency transactions.

"So lots of many to many connections where lots of buyers connecting with lots of different suppliers in basically in high frequency transactions."

Josh Breinlinger describes the importance of having numerous connections between buyers and suppliers engaging in frequent transactions as a key to creating a defensible position in marketplace businesses.

• Various tactics exist to solve the marketplace chicken and egg problem.
• Using aggregators of demand or supply can solve one side of the marketplace.
• B2B sales tactics can be applied to consumer marketplaces.

"Yeah, there's a lot of different tactics. I wrote a blog post called Liquidity hacking that anybody can Google and you'll find there's a bunch of different things."

Josh Breinlinger suggests that there are multiple strategies to overcome the initial hurdles of building a marketplace, referring to his blog post "Liquidity Hacking" as a resource with detailed tactics.

• A trend of B2B sales within consumer marketplaces is emerging.
• This approach involves selling to businesses that then distribute to consumers.

"It's this cool trend of, I think of it's b to b sales in a consumer marketplace."

Josh Breinlinger discusses a trend where businesses are targeted as initial customers in consumer marketplaces, leveraging B2B sales techniques to ultimately reach consumers.

• Bill Gurley's blog is highly recommended for insights into marketplaces.

"Certainly. Bill Gurley's blog is phenomenal."

Josh Breinlinger recommends Bill Gurley's blog as an excellent source of information and insights for those interested in learning more about marketplaces.

• Scriptash is a recent investment that met all of Josh Breinlinger's metrics.
• The investment was influenced by personal experience and high customer satisfaction.

"And the one I can talk about is scriptash. And we've talked about it a little bit already, but it hit all my metrics."

Josh Breinlinger shares details about his recent investment in Scriptash, highlighting that the company met his investment criteria and he had a positive personal experience with the service.

• Foundersuite and Greenhouse are promoted for their services in raising capital and hiring, respectively.
• Special promo codes are offered to listeners for discounts on these services.

"Foundersuite makes software for raising capital... Greenhouse software designs tools that helps companies hire great people."

Harry Stebbings endorses Foundersuite for capital raising and Greenhouse for hiring, mentioning the success of these platforms and offering promotional discounts to the podcast's listeners.