20VC Why VCs Have Forgotten Their Job To Invest In Entrepreneurs not Technologists, How To Know When Growth Creates Value and When It Destroys It & How To Bootstrap Learning Most People Acquire Over Decades with 8VC Founding Partner, Drew Oetting

Summary Notes


In this episode of 20 minutes VC, host Harry Stebbings interviews Drew Oting, founding partner at Eight VC, discussing the venture capital landscape and Oting's journey into VC. Oting shares his insights on the shift towards operational depth in VC, the importance of being company-friendly over founder-friendly, and the challenges of managing internal VC fund dynamics. He emphasizes the need for funds to adapt to longer exit cycles and the pitfalls of prioritizing growth over sustainable unit economics. Oting also critiques the venture industry's focus on technology over entrepreneurship and the importance of proprietary deal flow. The conversation touches on the advice for young professionals seeking an accelerated career path, understanding personal motivations, and the need for focus. Oting expresses concerns about the disconnect between elites and average Americans and the lack of data-driven media coverage on critical issues.

Summary Notes

Introduction to 20VC and Guest Drew Oetting

  • Harry Stebbings hosts the 20 minutes VC podcast.
  • Drew Oetting, founding partner at eight VC, is the guest.
  • Eight VC is a new entrant in Silicon Valley with significant funding.
  • Drew Oetting has a background with Joe Lonsdale and Bill Gates investment.
  • Andy Rankin acknowledged for his role in facilitating the episode.
  • First Republic Bank and Segment are mentioned as resources for startups.

"Alright, we are back with the 20 minutes VC with me, Harry Stebings, and it'd be fantastic to hear your thoughts and question suggestions for future guests, and you can do that on Snapchat at htebbings with two B's."

This quote introduces Harry Stebbings, the host of the podcast, and invites audience interaction through Snapchat.

"But to our guest today, and I'm very excited to welcome Drew Oting, founding partner at eight VC, one of Silicon Valley's youngest and most exciting new entrants to the VC market."

Harry Stebbings introduces Drew Oetting, highlighting his role at eight VC and its status in the VC market.

"I'd also want to say a huge thank you to a very under the radar player in the market, Andy Rankin."

Harry thanks Andy Rankin for his behind-the-scenes contribution to the podcast.

Drew Oetting's Background and Entry into VC

  • Drew Oetting shares his early life and interests in Iowa.
  • He attended Claremont McKenna College, influenced by notable alumni and his interest in golf.
  • Drew's experiences range from private equity in Mongolia to the Bill and Melinda Gates Foundation.
  • His introduction to VC was through Joe Lonsdale, leading to his role as chief of staff and eventually co-founding eight VC.

"So I'll give you a little bit of my life story which dovetails into that."

Drew Oetting begins to share his personal journey to provide context for his current role in venture capital.

"I became obsessed with the idea of both being entrepreneurial in the way that investing works and also in doing private investing where I sort of felt I could have the most advantage."

Drew explains his passion for entrepreneurial and private investing, hinting at his future in VC.

"And in 2015, we started eight VC. So I've been doing it really ever since, just through fortunate introduction."

Drew marks the beginning of eight VC and acknowledges the role of fortunate introductions in his career.

The Shifting Nature of Venture Capital

  • Drew Oetting discusses the similarities between venture capital and private equity.
  • He predicts changes in the perception and practices of VC, including founder friendliness.
  • The discussion touches on the operational depth of VC versus the financial orientation of private equity.

"Yeah, I think it's interesting that venture capital is so distinct at least culturally and in the media from private equity, because fundamentally they are very similar and really they're identical businesses done at different scale and at different times in a company's lifecycle."

Drew Oetting points out the fundamental similarities between VC and private equity, challenging the common perception of their differences.

"But I do think that the way that we think of venture capital today will shift."

Drew anticipates a shift in the understanding and approach to venture capital in the future.

Founder Friendly vs. Company Friendly

  • Drew Oetting addresses the balance between being founder friendly and company friendly.
  • He emphasizes the legal responsibility of investors to prioritize the company's interests.
  • The discussion acknowledges the evolution of the relationship between founders and investors as a company grows.

"As an investor, you are legally, if you're on a board, you are legally responsible for being company friendly. You are violating your obligations if you are founder friendly or if you are investor friendly, you're supposed to be company friendly to all stakeholders."

Drew clarifies the legal responsibilities of investors, highlighting the importance of being company friendly.

"So if you're not founder friendly at the beginning in the Seed series, a series b stage, then you're not really being company friendly, because most"

Drew argues that in the early stages of a company, being founder friendly is effectively the same as being company friendly due to the founders' integral role.## Evolution of Investor-Focused Approach

  • The venture capital landscape is shifting towards a more company-friendly perspective.
  • Investors are beginning to prioritize the interests of all shareholders, not just founders.
  • High-profile cases like Benchmark and Uber illustrate the changing dynamics between investors and companies.
  • Venture capitalists are advised to be transparent with entrepreneurs about the evolving nature of their relationships.

"I think what you're going to see is investors become more company friendly. And what that manifests itself in is looking at all shareholders, not just the founders."

This quote highlights the trend towards a more inclusive approach to investment, where the needs of all shareholders are considered, moving away from a solely founder-centric model.

Venture Capital Fund Structures and Exit Cycles

  • Private equity typically holds investments for four to seven years, while venture capital holds for seven to twelve years.
  • Current fund structures are barely accommodating the extended exit cycles of successful private companies.
  • Venture funds are usually ten-year funds with potential extensions, which may not suffice for the most successful companies.
  • Success in venture capital is often evident within the normal fund cycle, reducing concerns about longer waits for liquidity events.

"Most funds are sort of ten year funds with one to four year discretionary extension periods, and I think that's probably just enough."

The quote explains the typical duration of venture capital funds and suggests that while the structure is just adequate for current needs, it may not be ideal for all scenarios, especially with companies that delay their liquidity events.

Internal Mistakes in Venture Funds

  • Venture funds often fail to optimize their internal management and talent development.
  • Many funds do not properly nurture or retain the smart, young talent within their ranks.
  • Internal competition within funds is counterproductive in an already competitive market.
  • Practices like deal-by-deal carry and credit for sourcing deals can harm internal collaboration.
  • ABC, as an example, has eliminated such practices to foster a more collaborative environment.

"So the two big areas that I see are, first, I don't think that they do a great job of developing talent or even valuing talently appropriately."

This quote identifies a critical flaw in venture funds' internal operations, emphasizing the lack of focus on talent development and retention.

Proprietary Deal Flow in Venture Capital

  • There is a belief in the value of proprietary deal flow, especially at the early stages of investment.
  • Companies and investors alike are concerned with who holds primary equity.
  • While later-stage opportunities are more visible, early-stage deals can remain hidden from the public eye.
  • Proprietary deal flow is still considered possible and valuable at the seed, Series A, and sometimes Series B stages.

"So I very strongly believe in proprietary deal flow at the earlier stages of the stack."

The quote reaffirms the speaker's conviction that proprietary deal flow is significant and achievable, particularly in the early stages of venture investing.

Challenges for Young Investors

  • Young investors face the challenge of identifying unknowns and learning efficiently.
  • Venture mechanics are learnable, but interpersonal experience takes time to develop.
  • Humility is essential for young managing partners to learn and grow.
  • Being young in the industry can lead to more learning opportunities due to perceived non-threatening status.

"I think the biggest challenge ultimately, is trying to identify all the things you don't know and learning, it's how to learn efficiently."

This quote captures the essence of the challenges faced by young investors, emphasizing the importance of recognizing knowledge gaps and learning from experience.## Learning Human Interaction and Decision-Making in Business

  • Understanding human behavior, interactions, and board dynamics is challenging without direct experience.
  • Learning from others' experiences is crucial when direct observation isn't possible.
  • Decision-making involves knowing when to incentivize (carrot) versus when to apply pressure (stick).

"The biggest challenge I've had is just how do you learn these things about the way people act, that people interact, the way that boards interact, the right time to use a carrot, the right time to use a stick."

The quote emphasizes the difficulty of grasping the nuances of human behavior and decision-making within a business context without firsthand observation, highlighting the importance of learning from others.

Career Advice for Young People

  • Understanding personal motivation is key, even if it may not be socially acceptable to admit certain motivators, such as money.
  • Career shouldn't be used as therapy; personal issues should be addressed privately.
  • Focus is crucial in the early stages of a career, as young people have the advantage of time.
  • Focusing on one thing can yield exponential returns, and even if it doesn't work out, the fallback isn't severe.
  • Cultural pressure often pushes for maintaining optionality, but deep focus can be more beneficial.

"Know fundamentally what motivates you... Don't use your career as a method of therapy... focus... Time is the one thing you have an advantage over everyone else... if it doesn't work out, you're still in a pretty good place for sure."

This quote outlines the advice for young individuals seeking an accelerated career path: understand your motivations, don't mix career with personal therapy, and focus intensely on one area, leveraging the advantage of time.

Venture Capital's Role and Focus

  • Venture capital is about supporting entrepreneurs and new business ideas, not just technology.
  • Ideas often involve technology, but the core purpose is to back new businesses.
  • Investors sometimes focus too much on technology rather than on how it enables a compelling business.
  • Businesses are valued based on growth potential, profitability, and the defensibility and recurrence of revenue.
  • Technology should be viewed as a lever or tool for creating a strong business, not as an end in itself.

"Venture capital fundamentally is about supporting entrepreneurs... It's to support new businesses... I invest in companies that leverage the technology that's available today to complete a business solution and solve a problem."

The quote clarifies that venture capital's primary purpose is to support entrepreneurs and the implementation of their business ideas, which often, but not exclusively, involve technology.

Misunderstanding Growth and Value in Business

  • There is confusion about when growth adds value to a business and when it can be destructive.
  • Growth is valuable when it leads to increased profitability through operating leverage.
  • Focusing solely on top-line growth without considering unit economics can be misleading.
  • Businesses should aim to establish a cost-efficient operational base that supports sustainable revenue growth.
  • Ignoring unit economics can lead to a misunderstanding of a business's true profitability.

"There is a massive misunderstanding over when growth creates value and when it destroys value... Growth creates value when there's an argument or there is evidence of operating leverage... what you want to see is that businesses lose money for a finite period of time as they set up an operational platform... the home base costs don't grow."

This quote discusses the common misconception in the startup world where growth is pursued at the expense of profitability, emphasizing the importance of understanding unit economics and operating leverage for sustainable business growth.## Understanding Unit Economics

  • A firm grasp of unit economics is essential for business viability.
  • Understanding the cost of delivering one product or service is critical.
  • It is important to know the costs of manufacturing and the expenses for selling or marketing a product or service.
  • Companies, especially outside major tech hubs, must focus on unit economics due to fundraising challenges.
  • Unit economics is increasingly becoming a concern for new and existing companies.

"How much does it cost me to run the home base that manufactures those products or services, and then how much do I need to spend to sell or market those products and services."

This quote emphasizes the importance of understanding the full cost structure of producing and selling a product or service, which is a crucial aspect of unit economics.

Venture Capital Insights

  • The value of an idea is less significant than the people behind it.
  • The success of a venture often hinges on the integrity and capability of the founders.

"The idea means nothing. The people mean everything."

This quote highlights the perspective that in venture capital, the team behind an idea is more important than the idea itself.

Artificial Intelligence Misconceptions

  • There is a distinction between generalized AI and functional AI.
  • Generalized AI is a broader concept with philosophical implications.
  • Functional AI requires complex and structured enterprise data to be valuable.
  • The business world needs to focus on data infrastructure for AI to be effective.

"In order for functional AI to exist in applications, especially in the business world, we need there to be data in software systems, which means we need enterprise software with highly complex and vertically focused data structures before AI can have very much value."

This quote explains that for AI to be useful in business applications, there must be a solid foundation of data within enterprise software systems.

  • Drew Oetting recommends two influential books: "Barbarians at the Gate" and "Fooled by Randomness."
  • "Barbarians at the Gate" introduced Oetting to investing.
  • "Fooled by Randomness" taught him about the asymmetry in the world.

"Two books. One is barbarians at the gate. That's the book that introduced me to investing. The second is fooled by randomness, which was the first book that taught me to think about the asymmetry that exists in the world."

This quote shares personal book recommendations that have shaped Oetting's perspectives on investing and understanding the world.

Media and Social Understanding

  • There is a disconnect between the elites and average Americans.
  • The media's reliance on anecdotal reporting is concerning.
  • Real issues like income inequality and systemic racism are not adequately addressed.
  • The political right and left are criticized for not being attached to reality.

"I'm most scared right now of a complete lack of understanding between the elites in the United States and the average everyday American."

This quote expresses concern about the disconnect between different social groups in the United States and the implications for societal cohesion.

Investment Philosophy

  • Integrity and honesty of founders are paramount.
  • The potential market size is a crucial consideration for investments.
  • The ability of a business to iterate and adapt is a positive indicator.
  • Recent investment decisions are based on consistent criteria.

"One, I believed in the integrity and honesty of the founders. That's the requisite number one. Number two, I believed that the market was incredibly compelling and large enough to support a business that could do hundreds and hundreds of million dollars of revenue over a short scale."

This quote outlines the primary factors that guide Oetting's investment decisions, emphasizing the importance of founder integrity and market potential.

Acknowledgements and Further Engagement

  • Harry Stebbings expresses gratitude to Drew Oetting for his contributions.
  • Listeners are encouraged to follow behind-the-scenes content and engage with the podcast.
  • The podcast promotes First Republic Bank and Segment as valuable resources for startups.

"Harry, thank you so much. I really appreciate it."

This quote is an expression of gratitude from Oetting for the opportunity to participate in the podcast, reflecting the mutual appreciation between the host and guest.

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