Benchmark Part I

In this episode, the hosts, Ben Gilbert and David Rosenthal, delve into the story of venture capital firm Benchmark and its unique approach to investments, contrasting it with the more traditional models of other top-tier firms. They discuss Benchmark's steadfast commitment to an equal partnership model, avoiding the typical hierarchical structures of venture capital, and how this philosophy has led to both challenges and remarkable successes, including iconic investments like eBay and Uber. The episode also touches on Benchmark's evolution, its experimentation with various strategies, and the eventual refocusing on its core principles. Moreover, they highlight the firm's ability to adapt to changing market dynamics and its influence on the broader venture capital landscape.

• Benchmark Capital was founded with a strong belief in equal partnership.
• The founding team consisted of individuals from diverse backgrounds.
• The firm set out to challenge the traditional venture capital model with a unique approach.

"The venture business is an intensely personal relationship business, and it's not an industry that scales well."

The quote emphasizes the personal nature of venture capital and suggests that success comes from close relationships and individual attention rather than scaling operations.

• Bob Kegel, Bruce Dunlevie, Andy Rachleff, and Kevin Harvey were the initial four co-founders.
• Val Vaden, the fifth co-founder, came from a buyout industry background.
• The team faced challenges in recruiting additional partners due to their unconventional approach.

"Bob, I'm honored, but I don't have the Microsoft money here. I'm a few years younger than you. I don't have the same kind of safety net."

Bruce Dunlevie expresses his concerns about the financial risks of joining a new venture firm without the financial security that other founders may have had.

• Benchmark Capital aimed to set a new standard in venture capital, reflected in their name and approach.
• They sought a premium carry of 30% in their first fund, which was controversial among LPs.
• Horsley Bridge was a significant LP that believed in Benchmark's vision and became a long-term partner.

"There is always room at the top."

This quote from Benchmark's fund one prospectus demonstrates the firm's confidence and ambition to be a top player in the venture capital industry.

• Val Vaden's investment style did not align well with Benchmark's early-stage focus, leading to his departure.
• The firm had a slow start with investments, and some high-profile deals were missed.
• Benchmark had to regain their confidence and aggressive approach to succeed.

"Val will be establishing a new fund to focus on technology special situations investing."

This statement indicates Benchmark's support for Val Vaden's departure to focus on investments that align with his expertise, showing the firm's commitment to its equal partnership ethos.

• David Beirne was recruited as the new fifth partner to bring his aggressive and competitive nature to the team.
• Beirne's background in executive recruiting was seen as a valuable addition to Benchmark's capabilities.
• The recruitment of Beirne was part of Benchmark's effort to regain momentum and assertiveness in the venture capital space.

"It's a lot of chutzpah to go and recruit someone away from the firm that has their name on it."

The decision to recruit David Beirne reflects Benchmark's boldness and willingness to make unconventional moves to strengthen their team.

• Ramsey Byrne was a nascent executive search firm with no prior high technology executive searches.
• They falsely advertised themselves as the leading firm in high technology.
• Dave Byrne began cold calling prospective tech clients in Silicon Valley from New York.

They start cold calling prospective clients in tech and in Silicon Valley from Westchester, New York, Dave starts cold calling them and saying, we're Ramsey Byrne, the leading executive search firm in high technology.

This quote illustrates the bold and somewhat deceptive marketing strategy employed by Ramsey Byrne to gain a foothold in the technology executive search market.

• Ramsey Byrne's claim of being a leading firm was initially unfounded.
• The firm's reputation grew after securing John Doran as a client.
• The practice of replacing CEOs with professional ones in VC-backed companies was common.
• Dave Byrne's success with Netscape and Excite solidified Ramsey Byrne's reputation.

It becomes a genuine self-fulfilling prophecy when in the, I think it's probably late eighty s, early ninety s. Dave gets his big break and he gets through to John Doran. John makes him his preferred executive recruiter for CEO searches for his portfolio companies.

The quote highlights how Dave Byrne's persistence led to a pivotal opportunity that transformed Ramsey Byrne's standing in the executive search industry, turning their initial claim into reality.

• Dave Byrne was convinced by Benchmark to leave his successful search firm.
• Benchmark needed a "shot in the arm," which Dave provided.
• Dave Byrne's first major VC deal was likely Webvan.

So Benchmark comes out, I think Bruce flies out to Westchester and convinces Dave to leave all this behind. He's making millions of dollars a year in cash running his search firm yeah.

This quote emphasizes the significant career shift Dave Byrne made from running a profitable search firm to entering the uncertain world of venture capital with Benchmark.

• Webvan was an ambitious e-commerce bet for Benchmark.
• The investment in Webvan reflected the firm's willingness to take risks.
• Webvan's initial focus on groceries with plans to expand mirrored Amazon's strategy.
• Despite Webvan's ultimate failure, the investment was considered a strong, calculated risk.

This is the exact kind of swagger bet with the right aligned asymmetric upside and downside that if you want to be taking the right kind of risk to establish yourself as one of the premier early stage venture capital firms, you should be doing.

The quote captures the strategic mindset behind Benchmark's investment in Webvan, recognizing the potential for high reward despite the inherent risks.

• eBay's growth was initially organic and driven by user fees.
• Benchmark's investment in eBay was pivotal, with the firm playing a significant role in recruiting Meg Whitman as CEO.
• The investment in eBay was highly successful, with Benchmark's stake appreciating significantly post-IPO.

That's what, like, Lyft is today. They go from, let's assume it was 10% that they each got. Maybe there's a little dilution in there, but let's keep it easy. Three and a half million to $800 million in public stock within two, three years.

This quote illustrates the extraordinary return on investment Benchmark realized from its stake in eBay, comparing it to the valuation of modern tech companies.

• Benchmark's equal partnership model fostered a culture of trust and cooperation.
• The firm's success influenced entrepreneurs to adopt similar cooperative models in their companies.
• Benchmark's approach to venture capital was unique and non-consensus.

It's way harder to cooperate your way to success. There are other ways to do this. Obviously, there are other models of very successful venture firms.

This quote from Rich Barton highlights the distinctive culture at Benchmark, where cooperation and teamwork are key to achieving success, setting it apart from other venture firms.

• Companies like Goldman Sachs, General Motors, and General Electric expressed interest in forming joint ventures with Benchmark.
• These companies sought Benchmark's expertise in creating online ventures, such as thegoldmansax.com.
• The idea was to leverage Benchmark's startup knowledge to modernize traditional companies.

"You become Goldman Sachs. It's more like, help us create thegoldmansax.com."

The quote highlights the type of assistance companies sought from Benchmark, which was to help establish their online presence, not to transform into a venture capital firm like Benchmark.

• Benchmark considered raising more money due to the perceived small size of their $85 million fund.
• There was internal debate among the five partners about whether to scale up by hiring associates and junior partners.
• Some partners believed that scaling up would help perpetuate the firm's success and aid other entrepreneurs.

"There's an opportunity to raise a lot more money. Should we do that? 85 million was kind of a small fund."

This quote reflects the internal discussion about whether Benchmark should increase their fund size to have a greater impact and potentially generate higher returns.

• In 2002, Benchmark's website featured a page called "Our Corporate Network".
• The network consisted of key industry executives from various companies who facilitated growth for Benchmark's portfolio companies.
• Companies in the network ranged from tech giants like Intel to financial firms like Charles Schwab.

"The Benchmark corporate network is made up of key industry executives who accelerate the growth of our portfolio companies by facilitating strategic partnerships."

The quote explains the purpose of Benchmark's corporate network and how it was designed to support the growth of their investments through strategic partnerships and advice.

• Benchmark faced the choice of maintaining their existing successful model or adapting to new trends like dot-com ventures.
• Other firms like Andreessen Horowitz and Sequoia successfully pursued different strategies like international expansion and larger funds.
• Benchmark experimented with various approaches, including corporate partnerships and international expansion.

"But benchmark didn't do any of that. They stuck to their guns. They knew what made them special and they chose to ignore all the temptation."

Despite the quote's assertion, Benchmark did in fact try various strategies before ultimately reverting to their core principles.

• Benchmark sought to recruit new partners who were already successful venture capitalists.
• They looked for candidates who had enough experience to be proven but were not at the end of their careers.
• The ideal candidate would be competitive, a great team player, and fit within Benchmark's equal partnership model.

"You need someone who's probably like 30 and the best 30-year-old venture investor."

This quote outlines the specific criteria Benchmark used to identify potential new partners who could contribute to the firm's long-term success.

• Bill Gurley joined Benchmark and became known for his analytical approach to investing, particularly in marketplaces.
• Gurley's understanding of financial dynamics and network effects helped shape Benchmark's investment strategy.
• Despite not having early mega-hits like eBay, Gurley's investments in companies like Uber later became transformative for Benchmark.

"Backing a repeat entrepreneur in the enterprise sector is near risk-free."

The quote from Bill Gurley emphasizes his belief in the lower risk associated with investing in experienced entrepreneurs within the enterprise sector, reflecting his investment philosophy.

• Benchmark decided to refocus on their core strengths, spinning off their international funds and resizing their main fund.
• The firm returned to its roots, concentrating on early-stage investments in Silicon Valley with a smaller, more agile fund.
• This refocusing allowed Benchmark to re-establish itself as a leading venture firm.

"Why are we doing this? Can we go back to focusing on what we all actually want to do here?"

This quote captures the moment when Benchmark partners decided to abandon their expansion efforts and return to their original successful model.

• Benchmark's structure as an equal partnership is a foundational aspect of its identity and success.
• The equal partnership model ensures that all partners have equal economic interest, which fosters collaboration and avoids internal competition.
• This model contrasts with other venture capital firms where senior partners may have a larger share of the economics, potentially leading to power struggles and misaligned incentives.

"Benchmark is structured to provide a high level of service with maximum investment flexibility. Our capitalization of $20 million per partner allows for an average of six board seats and ensures the right level of partner attention and support regardless of investment size."

The quote emphasizes Benchmark's commitment to providing attentive and flexible support to its portfolio companies by limiting the number of board seats per partner, ensuring that each company receives the necessary focus and resources.

• Benchmark's investment strategy is not thesis-driven but rather founder-focused, with a willingness to make contrarian bets on consumer companies.
• The firm has historically made significant consumer investments that were initially seen as non-consensus, such as eBay, Uber, and Snap.
• Benchmark's current partnership composition suggests a potential shift towards more enterprise and B2B investments, with consumer investing being a question mark for the future.

"Many venture firms recently raised mega funds capitalized at more than $40 million per partner. This can lead to an overextension and a lack of accessibility and responsiveness to portfolio companies."

This quote reflects Benchmark's critique of larger venture funds and their potential negative impact on the level of service provided to portfolio companies, highlighting Benchmark's contrasting approach of staying lean and accessible.

• Benchmark has cultivated a mystique and strong brand in the venture capital industry, leading to their investments being highly sought after by entrepreneurs.
• The firm's branding is so strong that their capital is often perceived as more valuable than that of other venture capital firms, even when offered at a lower valuation.
• Benchmark's brand and reputation provide a significant advantage in deal sourcing and attracting top-tier entrepreneurs.

"Benchmark doesn't have a platform team, and, like, oh, we haven't even talked about that yet. And on top of that, they sued Travis. Remember that?"

The quote references Benchmark's lean operational model, which lacks a platform team, and the controversial decision to sue Uber's founder, Travis Kalanick. This action could have impacted their reputation, yet Benchmark maintained its strong position in the industry.

• Benchmark partners are characterized as learning machines, constantly seeking to understand and adapt to new market conditions and opportunities.
• The firm's culture of learning is exemplified by their famous Monday night dinners, where they invite industry leaders, including those from companies they missed investing in, to learn from their insights.

"Benchmark with their board seat on Uber, ends up suing the founder along with a group of other people."

This quote highlights a significant and contentious moment in Benchmark's history, where they took legal action against a founder from one of their most successful investments, showing their willingness to make tough decisions in the face of controversy.

• Benchmark's operational simplicity allows partners to dedicate their time fully to their portfolio companies and sourcing new investments without the distractions of managing a large firm or multiple funds.
• The firm's commitment to remaining focused on early-stage investing without a growth fund or other investment vehicles is a strategic choice that differentiates them from competitors.

"Benchmark goes through with this. They know that they have existential risk to their reputation based on suing one of the most iconic, successful founders of all time."

The quote underscores the calculated risk Benchmark took in suing Travis Kalanick, which could have had significant implications for their reputation and future deal flow, yet they proceeded with the belief that it was the correct course of action.

• The future direction of Benchmark's consumer investing strategy remains an open question, with the current partnership having a strong enterprise focus.
• The firm's next partner addition and investment choices will likely provide insight into whether Benchmark will continue to be a leader in consumer investing or pivot more towards enterprise investments.

"Is benchmarks money worth twice as much as a competing term sheet? That might be ridiculous. Is there a 20% premium? Definitely."

This quote discusses the perceived premium value of Benchmark's investment, reflecting the firm's strong brand and the additional benefits that come with having Benchmark as an investor, such as a higher likelihood of securing a subsequent funding round.