AboutWriting

Notes on Benchmark Capital

Framer's Component Picker

Some of its most successful rivals say Benchmark is the firm they admire— and fear—the most:

“They benefit from being extremely focused” - Jim Goetz, Sequoia

Roelof Botha, who leads Sequoia’s domestic operations, said Benchmark’s structure gives the partners “incredible clarity” to spot lucrative technologies.


People

Active

  • Sarah: Sarah Tavel (GP)
  • Eric: Eric Vishria (GP)
  • Peter: Peter Fenton (GP)
  • Chetan: Chetan Puttagunta (GP)

Inactive

  • Andy: Andy Rachleff (GP)
  • Matt: Matt Cohler (GP)
  • Bill: Bill Gurley (GP)
  • Mitch: Mitch Lasky (GP)

Why Benchmark Is Special

1. Young Generation

Benchmark’s goal is to avoid the generational struggles that have hobbled other Valley firms:

Young people end up the hustlers and the old people sit in place. That’s the biggest secret of Benchmark. When our founders were at the peak of their powers, they handed us the keys. - Bill Gurley

2. Focused Stage, Thesis

Mitch:

My partner Bill Gurley has said that in venture it’s not enough to be “consensus correct” — that’s essentially an index fund and won’t outperform the baseline market — you have to be non-consensus correct. If you really want to create “alpha” as a venture investor, you have to be willing to entertain a bit of crazy.

The “crazy good” ideas usually come down to three important factors.

  1. Is there an untapped market or unmet need that the idea connects with in an organic way, and can you show evidence of momentum?
  2. Is the idea suitable to sustain a business? Venture capitalists invest in companies, not products or feature improvements. Companies have to be able to make money, and great companies have to be able to make lots of money, ideally with defensible moats, economies of scale, and network effects.
  3. Can the founders organize a team to execute the idea in a really great product or service? Ideas are worthless without proper execution.

Bill:

I think all VCs work hard to create a narrative for founders/entrepreneurs that is beneficial to that VC's position on the field.

We invest as an alternative to seed (or pre-seed or pre-pre-seed :)) all the time. Love getting in on the ground floor. And we have confidence in our views on categories and GTM approaches, so unafraid to start that early.

Eric:

For Benchmark specifically we often write the very first check to a company - no seed, no pre-seed, no dollars prior, and those types of investments are among our most successful invesments. NewRelic, Nextdoor, Elastic, Discord, Docker, Confluent and Cerebras are some examples where we were the very first investor with many others examples in the earlier stages of development. To be clear, we didn’t lead seed rounds in any of those, they were straight A rounds - lead investor, priced round, board seat… So the takeaway is early stage != seed or pre-seed.

A couple other parts of the question are interesting. Why do “VCs talk” at all? Biggest reason is they are marketing to the next entrepreneurs. Why do they “talk about making early stage investments”? A VC’s job is to find, win the right to invest in, and support great companies. A typical VC will see easily 100 new pitches a year and invest in 1 or 2 (I personally see ~200 a year). Seeing pitches early is often an advantage to “finding” and “winning the right to invest in” parts of the job. So, talking about early stage is all about being able to see companies as early as possible in order to develop the option to invest in the case that it is the 1% that the VC falls in love with.

Peter:

I don't invest in trends. I know it sounds a bit too-cool-for-school but what I've found is that you get far more insight from purpose than from trends. So, for example, in the case of Docker I invested in Dotcloud (which became Docker), in the purpose of this radical, intense leader, Solomon, who wanted to give the world's programmers superpowers, tools of mass innovation. In the case of Yelp, it was Jeremy's purpose to allow for the truth of great (and bad) local businesses to be visible to all. Or when I met Jack in 2007, he had this unstoppable purpose for Twitter to “bring you closer”. Sometimes that purpose is just this raw force, an energy, like it was in the case of Shay at Elastic in 2012. When I feel like the trend, the space, the concepts vs the tactile reality of a purpose forms the narrative of the investment I lose all interest.

Another way to look at this is that I've found the best entrepreneurs have discovered preconditions that enable their purpose, that make it possible today versus in 10 years. To increase the odds of finding the extraordinary, it helps to have a point of view about the most dynamic preconditions. As my partner Matt Cohler says, “to see the present most clearly”. Obviously mobile ubiquity is the major precondition today, with the additional attributes of GPS, high quality cameras, and ever improving networks. I don't think we've even started to realize the potential of this enhanced mobile ubiquity. Another precondition is social behavioral norms, our readiness to share, to engage expands in what feels like a geometric way when the conditions are right. An “all cloud” world is another precondition — it forces every layer of the technology stack to be reconsidered and in many cases reinvented for the cloud. Mass compute and mass storage is a precondition for machine learning at scale.

I wish it were easy to articulate, but it isn’t because in some ways venture capital is all about finding the exceptions - there are no set of rules you can consistently apply.

The great market, great team stuff is obvious and uninteresting but there may be some nuances to those points that are valuable to think about.

On the market - I find myself getting most excited when the founders articulate a point of view on the market or problem that I haven’t heard or read before, and forces me to challenge my own assumptions. For example, 4.5 years ago, when I first met Jay Krepsand Neha Narkhede, co-founders of Confluent, they explained why Kafka wasn’t just a pipeline for data ingest, but actually the beginnings of a much larger, up-until-then-unarticulated idea - a real-time analog to the data warehouse. They made me change my world view. It was like they told me a secret that very few people knew, but in time would become common knowledge. Thinking about it now, every single company I’ve invested in has a similar story.

Also on the market - a lesson I learned the hard way is it is much easier if there is something massively changing in the world that creates a tailwind for the startup (or the category). For example, Instagram took advantage of phones with cameras everywhere, and a couple years later, Snapchat took advantage of phones with cameras AND LTE everywhere. I don’t believe the timing of those successes is coincidental. That doesn’t mean a particular startup doesn’t have to beat the other companies in the category, but it does often mean the category will yield a big winner.

On the team - I like teams that have been thinking about the very problem they are going after for a really really long time. There are lots of blog posts articulating this in various ways - Chris Dixon’s idea maze concept or the notion of founder-market fit come to mind.

In enterprise some old-school VCs often invest in incredible technology founding teams with the intention of hiring a go-to-market oriented CEO in a couple years. Personally I much prefer founding teams with CEOs who have a deep understanding of the problem/technology/product AND great go-to-market instincts and strong desire to learn and develop those instincts. They are rare, but having all that in one head pays dividends for years and years.

There are lots of other things that matter too - moats and network effects, personal chemistry with the founders, my personal interest and knowledge of the space…

3. Staying Small

Gurley: My belief is that starting with 2008 — I mean, what happened in 1999 and 2001 starts to play a role — but it was really 2008 where all the LPs kind of woke up and said, “You know, enough is enough.” For firms that invest in Series A and B, it’s become, I think, hard, and I think it’s become harder to raise funds in that sector. For various reasons, the seed stage — just because more wealth has been created in the past three or four years, so there is ample cash there. And then, for reasons that are still quite curious to me, the late-stage market has just been full of money … [but] we’ve got a small set of LPs that we’ve been with forever, and it’s not a process, really.

Cohler: And we have a very focused strategy. We don’t have a seed fund, we don’t have a growth fund, we don’t have international funds, we don’t have sector funds. We have one early-stage, company-building Internet investing fund, and that makes sense.

Gurley: We got distracted from our focus in early 2000, and it took away from what we loved to do. So our resolve is partially a function of the fact that we lived through that, so we think long and hard before we do something that would expand the scope of what we’re doing, just mainly because it distracts you.


Lessions

On looking for in an entrepreneur

Peter:

I asked this question to Paul Graham, who runs Y Combinator, and was struck by the resonance of his answer with mine. The first quality in any entrepreneur, which is visible in the first 90 seconds, is authenticity. You need to have a solid foundation and confidence in what you are doing. Majority of entrepreneurs we meet are unfortunately promotional.  It’s a gut feel and I felt it, for example, with Travis at Uber or Evan at Snapchat. These are great examples. If you met Evan, at age 21, the intensity of his belief in what he was building was captivating. Secondly, I think the trait that great entrepreneurs have is fearlessness or fearsomeness. There needs to be something crazy in terms of recklessness, intensity and irreverence. Paul describes it as fearsomeness because he says that he needs to feel nervous about this person. A lot of great founders are dropouts. They don’t necessarily want to get grades in a system, which they didn’t create. Getting good grades in a system that you didn’t create can become more embarrassing because your subject is somebody else’s domain.

The third trait is a mindset that I look for in an entrepreneur — a learn-it-all, and not a know-it-all, approach. I think it is a remarkable trait that is common between the very best people, be it Mark Zuckerberg or Jack Dorsey or Evan Spiegel. They are effective critical thinkers; they are constantly asking questions and listening to those. That drives their long-term success. As a potential investor, I find them interrogating me as much as I am interrogating them. Without being offensive, they will ask me questions like ‘What is it about our business that you like?’ or ‘Tell me why you think that is interesting?’ Beyond this, there comes a personality trait. I have been doing this job for 19 years and I ask this basic question ‘Would I want to work for that person?’ A lot of what we are doing is recruiting. There are a lot of people who tick the first two boxes of authenticity and fearsomeness, but for the lack of choice of words, I would say I find them unappealing to work with. We were lucky to spend time with Jeff Bezos, who is a big investor in our fund. As part of that, we get a dinner with him every year. Of course, there is a survivor bias, but these dimensions are crystal clear in great entrepreneurs like him.

VC Lessions

Eric:

The advice I heard most often was be patient, don’t rush to make an investment, take time to get calibrated before making an investment…

My partner Matt Cohler had different advice. His was - the business is cyclical. Certain sectors will have a series of massive successes and then lay dormant for many years. Be aware of the cycle and the sector, and then trust your instincts. It’s good advice.

Peter:

Doing this job for almost 20 years now has taught me far more about people than about business. So let me first answer what I've learned about business, and in this case I mean the business of investing in startups. I started out as someone who had all the conceptual overhead needed to sound intelligent in our world, Porter's 5 Forces, the Innovators Dillema, and Crossing the Chasm. I would, in my former firm's parlance, develop a “prepared mind” in a sector so I could see where the logical opportunities should exist. I became an expert on Storage, on Application Software, on SupplyChain. All of that, I came to realize, was useless without the alchemy of an entrepreneur who was playing around with explosive market forces. Yes we can look, and it helps to look with a lens, but the best ideas and companies aren't filling logical white spaces. They are touching nuclear reactor of some force that will yield, and yield quickly, to an entrepreneurial leader.

I also came to realize that at the beginning, no analysis can capture “what can go right” without sounding like you are clinically insane. Having seen the Series A pitch for Facebook, Uber, Snap, Twitter, VMware...$1B in revenue for any of those companies would have been nearly impossible to imagine. Yet in each of those cases, I vividly remember the meetings, the day, the setting...and this feeling that an exceptional entrepreneur had touched on something nobody else had understood at their level of depth and insight. Each in its own way felt limitless. I'll never forget meeting Evan Spiegel in 2012 at Sightglass in SF and leaving thinking, I know with all of my being that this person, this product, will give humanity back the playful joy of self expression, which had been stolen away by then current social networks. Sometimes it's obvious.

Some other off the top of my head business lessons.

  • I'd be a fraction of myself without my partners
  • Venture is a shoe-leather business, you can only be great if you are out looking engaging and hustling
  • Never turn down a company on valuation. It's a mental trap, and allows for weak thinking
  • Board's are responsible to ensure the integrity of the Strategy, Stucture, and Staff. If the strategy is clear, the structure of the org should be aligned to that strategy, and the staff should be aligned to that org model
  • Entrepreneurial culture and professional culture will be in constant tension and conflict, and the art of the CEO is to balance both, and most CEOs don't
  • Always, always pull the future forward on the organization you want
  • The only time to lose fierce optimism is when you're out of money, in all other scenarios greatness is on the horizon

What I've learned about people....the biggest lesson is that, simply put, the magic of human connection is the reason to do this job forever. The joy of being a partner, in the fullest sense, to a leader on the heroic journey of a startup inspires everything I want to contribute to this world. In terms of specifics, I've learned that the one variable that defines a great relationship above all else is trust. I believe that comes from clarity of purpose, and shared-purpose. If there's a “hidden agenda” it's immediately obiovous to the subconscious mind, and it destroys trust. In a high trust relationship, I've found CEOs adapt and evolve at a higher positive rate. If there is one distinguishing trait in the best people I work with, they are learn-it-alls not know-it-alls. Another specific, I've also learned, as Peter Drucker said, where there are great peaks there are great valleys, and our job as a partner is to amplify the strengths and to recruit complements for the valleys. A final big lesson for me has been that motivation isn't a fixed constant. Everyone will go though periods, which can last for months at a time, when they have lost faith or confidence in the potential of the business, and in those situations it's essential as a partner to be a foundation of support and belief. It never ceases to amaze me how motivation can and almost always does return in full.

Being VC is harder than before

Peter:

On a relative basis, the venture capitalist business today is harder than what it was, earlier in my career. It is a business that is defined by shoe-leather, hustle, energy and intensity. It is one of those few careers where the older you get; your probability of success goes down. So, after two decades in the venture capital business, you are less likely to find the next Google or Facebook. There are number of possible reasons for that. Success, in a venture business, can imprison you in your current board commitments. Second, success can lead you to believe wrongly that you have some special divine gifts of being able to make the companies you invest in successful. The reality is that you play a small part. Third, as you are successful, you have an image that great entrepreneurs will come and find you, which is just not the case; you need to go find them. That energy and motivation to be outbound is something that success can work against because your calendar is filled with people who want to meet you rather than people you should be trying to find. Success creates diversions and distractions that take you off the core discipline. Business, in itself, is an activity contest. It is about the number of hours you invest along with intensity and hustle that you put into it. The minute you back off, you degrade quickly. If you are not passionate about your job, you won’t sustain in this career.

On Capital itself can be a prime differentiator

Sarah:

I often think about Stitch Fix. Stitch Fix raised $42 million [in venture funding] over its life before the IPO, and it’s now a multi-billion dollar company. There are many ways to build companies. Uber obviously has created tremendous equity value by raising a tremendous amount of capital. There’s a lot of strength and value to having a lot of capital, but as you know, there’s a lot of damage that having a lot of capital can do to a company. It can diffuse focus, it can cover up things that aren’t working inside it, and it can stop the leadership from understanding the mechanics of its own business. Raising a ton of capital is a double-edged sword, and by no means is it the only way to build an enduring company.

The short-term effect is that there’s an arms race in some sectors where companies are raising more and more capital, and therefore, burning more and more capital. You see companies being able to kick the can around a little bit longer in terms of thinking about going public or getting acquired. You also see companies becoming a lot bigger in the private markets before they end up going public.

The long-term question — which we don’t yet have an answer to — is how effectively that capital is going to be put to work.

Operators-turned VCs and investor-only VCs

Eric:

This is all sweeping generalization so YMMV but IMO the career investors are better investors. They just are. They’ve been practicing the game longer, they have more mental models, bigger networks of the right type… Also they naturally focus on the big, strategic issues, which are most trajectory changing for the company because they’ve been working at the board level their whole careers

The operators-turned investors are often more empathetic to founders and CEOs and able to offer more feedback/advice/thinking on day-to-day operational issues.

For example in my 15 years operating, I saw somewhere between 2 and 5 businesses up close and personal. A career VC over the same period would see 30+, not at the same level of depth, but at the board level. That’s a lot more reps, mental models, financing decisions...

Frankly, both are valuable and most partnerships these days have both. Some entrepreneurs I meet are religious about wanting an operator turned VC. That doesn’t make sense to me. We’re all individuals with strengths and weaknesses. Focus on the specific partner and firm, do lots of references, and make a specific not general decision.

Sarah:

As a VC, you are often thinking big picture. You’re thinking about a market opportunity, how the product fits within that opportunity, how the founders fit with the product, and so on. But when you’re on the inside, you have to focus more microscopically. Even something as basic as, what is the core metric we should be focused on as a company?

I remember in the early days of Pinterest, we were focused on the number of follows, the number of likes, the time spent on site, the daily active users — you know, all these different metrics. It took us quite some time before we realized that ultimately the thing we had to focus on in order to figure out what to build and how to organize the company was around weekly active pinners.

As a VC, you can take that process for granted and not see all the strategic thinking that goes behind figuring out what the company should focus on. From the outside, you see the manifestation of all the small decisions that happen without realizing all the work that goes on behind it.

Do you think your operating experience has made you a better investor?

Sarah:

Without a question. One, you have an immediate level of empathy for the founders because it’s so freaking hard. Two, I’m much more interested than I used to be in the thought process that got to the metric they’re focused on today because that reflects how they’re running their company.

It’s important to remember that no company that goes through hyper-growth is always up and to the right. There are always these moments where you’re asking, “Are we going to lose this?”

I remember by the end of my time at the Pinterest, I joked that I felt like one of these veterans that you see in World War II movies. They would be sitting there, smoking their cigarettes when a little bomb goes off. All the new recruits run for their guns or jump for cover, while the veterans are still smoking their cigarettes. By the end of your experience at a high-growth company, you’re the veteran smoking the cigarette. And that’s who you want on your board. You don’t want the person who is going to be jumping for their gun or running for cover when there’s a little bump in the road because there will always be bumps. You want the person who isn’t frazzled by it and is always focused on the long-term. You can get that from 20 years of being a venture investor or from a few years of being an operator.

Enterprise vs. Consumer

Peter:

I think, to be a great investor, you need to do both. I might be alone in thinking so, because my partners would say it is better to focus and specialise. I believe we can benefit from cross-pollination in all aspects of our lives. You can help your enterprise company learn from the growth dynamics in consumer and apply incrementalism to problems, rather than having a wide-eyed approach towards growth. You can be more appealing as an investor, if you have a broader array of experience and sectors to draw from. You need to understand what is going on, and that is what I aspire to do.

Consumer businesses are little less mechanical and have a more nuanced approach in both product design and its development. This is why Twitter is very different from Airbnb. E-commerce turns out to be more mechanical. A lot of it depends on the CEO’s ability to understand the sensibilities of what consumers want; this will have a huge impact on the underlying success of the product. Contrastingly, it is more determined in the enterprise business. You know companies need a certain X, Y and Z; so, you build that. You have more control because you know you are building something that people are going to pay for. Most stress in a start-up comes from lack of control. Enterprise businesses have more control. What they don’t have is the amplitude of success that consumer companies have had. If you take the last decade or two, all $300 billion market cap companies are consumer enterprises. We have a $50 billion market cap company in Salesforce, which has been a great success in the enterprise space in the last 20 years. But that’s one. There are a handful of companies in $10-15 billion market cap; Workday is about 20 billion. Then, you have some $1-3 billion companies. Typically, in an enterprise business, if you are successful you are likely to be a $1-3 billion company but if the consumer business is successful, you can go on to scale to around $100-300 billion.

My strong conviction is that in the next three years, we will see a number of really big breakout IPOs in the open source space. Benchmark’s first investment in open source was Red Hat in the late 1990s; and now, it is a $14 billion market cap company. We made a dozen investments including MySQL, JBoss and SpringSource. While all of them were successful, the only breakout was Red Hat. We started investing in open source because earlier, for every dollar we invested in the enterprise business, about 70 cents was going towards selling the product. Companies like Facebook, Twitter or Google spend zero dollars on convincing customers to use their product. Even Uber spends zero dollars on that kind of marketing. So, the insight was that because of the internet, you can get rid of the whole distribution chain between the author of the product and the user. What open source effectively allowed for is a new production model software, but importantly, it brought about a new distribution model where you can go straight to the source either through GitHub, or to an open source provider. By dislocating and eliminating the middleman, we can create more quality and transparency. So now, instead of spending 70 cents on distribution, you can spend that on engineering. And once you have underlying consumption of the open source product, you can build extensions to the core business model. These could be selling advanced features in the packaging business model , something which Red Hat and Hortonworks has done. We have about six possible investments coming up in the breakout category and those include Docker, Elasticsearch, Confluent and CockroachDB. By 2020, we will hopefully have three to five large open source companies.

Distribution Strategy

Liquidity Quality by Bill Gurley

Strong liquidity quality — word of mouth growth from passionate users who consistently came back to the product fed a flywheel that "simultaneously better served the individual desires of the customer and also contributed to higher inventory turns, fewer write-downs, higher capital efficiency and higher ROIC.

I've come up with this phrase I use internally that I made up — so I one day, I'll have to write a definition of it — called Liquidity Quality. And I tell entrepreneurs, I care way more about Liquidity Quality than I do how broad you are. We can use venture dollars and growth playbooks to go broad if the fire's burning bright. So how do you get this liquidity quality high? Jeremy (Stoppelman from Yelp) doing things that don't scale at those nightclubs in San Francisco, and people being super passionate in their reviews, frequency being high, the quality of the experience, even though is in a very small area? And so I very frequently run into entrepreneurs who think they need to expand to 10 cities really quickly to raise their A or B or whatever. And I'm like, no. If you have like incredible unit economics and growth metrics in a single city, where it's obvious that your playbook is working and things are spinning and things are getting better, you basically have network effects. That's way more interesting.

Downturn

Gurley: Anyone that studies finance for like a year should walk away with the attitude: micro, maybe; macro, no chance. It’s just so complex, there are so many variables.

Fenton: I think we are in a time when investors, marginal investors, are obsessed with growth, and obsessed with growth without a high degree of concern for operating income. In times like that, what invariably happens is [that] companies forget the income component of their P&L and they build a set of practices that are just not durable, because they burn through so much capital.

Lasky: And then those pigeons always come home to roost. The cyclicality of the public markets is such that earnings will become important.

Fenton: That we have this debate around bubble/non-bubble completely misses the point. The advice we try and give to the entrepreneurs is to visualize a world in which the capital goes away. And if they can visualize that world and still be okay, then proceed apace. It’s when you start to become dependent on that in macro conditions that become variable that you get caught.

Bill and I were practicing in the business in 2000 and saw these geniuses that became idiots, because all the assumptions changed in a brief period of time, when they lost the otherwise great opportunity in front of them. So that particular problem is pervasive, particularly in late-stage private companies where — if you just did an X-ray on the late-stage private world — my guess is the majority of those companies do not have durable expense rates.

Well, they will be woken up, eventually.


Side Notes

Benchmark wasn’t always true to its credo. During the dot-com bubble, it made a bid to go global, opening offices in London and Tel Aviv. Though the results were solid, the firm dynamics grew increasingly strained. Gurley missed out on Skype by trying to hand the investment off to his European partners, and the different offices struggled not to step on each other's toes. By 2007 they began to scrap the experiment, spinning out the firm's European and Israeli units. “We weren’t doing it for a little more money, we were doing it because we thought the brand had an international appeal,” says Fenton. “But if you have a small equal partnership, you can’t have a leadership figure. And to run an international partnership, you need a CEO.”

Being small can have its downsides: Some major tech companies have slipped through Benchmark’s grasp. The biggest misses include Google, which Benchmark had a chance to pursue but didn’t, and Airbnb, on which Benchmark initially got a bad read, Cohler says. Other recent misses include Houzz, the online home decorating phenom, and Slack, the hot enterprise messaging startup, which the partners tested but never met.

Stitch Fix

Stitch Fix’s founder and chief executive, Katrina Lake, credited Benchmark’s Mr. Gurley with helping her at critical junctures. Early on in the online clothing service’s business, Mr. Gurley encouraged her to hire a financial chief when she didn’t think she needed one, and helped recruit the company’s top lawyer.

Ms. Lake said. He pushed back against a lower-priced product, worried it would undercut the brand, she said. Ms. Lake showed Mr. Gurley data that the cheaper product expanded the company’s potential customer base.

“Every now and then I can’t change his mind but he’s going to get on board with what the company is doing,” she said.

Uber

When Uber was hit with a wave of scandals, Benchmark led an investor group to demand Mr. Kalanick step down. Other investors and Mr. Kalanick accused the firm of fighting dirty. A few months later, Benchmark sold $900 million of Uber shares to SoftBank, and it still owns an over $7 billion stake.

Mr. Gurley said in November the firm “suffered certainly some brand hits” from the high-profile Uber fight.

Nextdoor

Gurley also helped remove founder and Chief Executive Nirav Tolia of neighborhood social-networking company Nextdoor Inc., according to people familiar with the matter. Two of the people said the board didn’t feel Mr. Tolia could maximize the value of the company. Mr. Tolia, who will remain chairman, didn’t respond to a request for comment.

Snap

Snap co-founder and Chief Executive Evan Spiegel also stood in the way of Benchmark realizing gains, delaying the Snapchat maker’s IPO indefinitely. The venture-capital firm in 2016 helped design a special incentive package that would give him $625 million of stock if he took Snap public. Another Snap investor said he wasn’t happy when he learned about the package. He felt the company should go public when the time was right.

Snap’s shares have fallen 30% since the offering. Benchmark had sold almost half its stake as of February, according to a public filing, realizing nearly $1 billion in gains.


Sources