Hi and welcome to iinovate, a new podcast on entrepreneurship and innovation with Julio Vasconcellos and myself, Matt Wyndowe.
In this, our first episode, we are fortunate to interview a famous venture capitalist, Andy Rachleff. Andy is the co-founder of the renowned B.C. firm, Benchmark Capital, which has backed such huge successes as Palm, 1-800-FLOWERS, JambaJuice, AOL, and of course, EBay. As this is our first episode, we are really excited to get any feedback that you might have, so please let us know what you like, what you don’t like, be that about the format, the questions that were asked or just suggestions that you have for next time.
Check us out at www.iinovatecast.com; enjoy the show, and thanks very much for listening.
Julio: Andy, thanks for coming to the Podcast. V.C.’s look at thousands of business plans a year and take hundreds of meetings and end up only investing in a handful of companies. How do you evaluate a business plan and decide whether or not to invest?
Andy: Well first of all, I think that it is an overstatement to say that we look at thousands of business plans a year. Often you’ll hear venture capitalists talk about how many business plans come in. It is an irrelevant statistic. None of the high quality firms ever quote that, because we never meet with companies that aren’t referred or where we don’t know the entrepreneurs. So that eliminates a huge number of business plans right off the bat. That’s a lesson to the entrepreneur, don’t send in a business plan unreferred. I am always amazed how many entrepreneurs do that. The first thing that happens when we get one of those e-mails, delete. So it’s a complete waste of time to send in your business plan.
Julio: What is the criteria you’re looking for?
Andy: Well, I think different venture capitalists have different ways of articulating the issues but they’re typically the same four issues. We all have different ways of stating it but they’re the same four. We typically want a visionary founder, that’s a hackneyed term, but vision is really a unique characteristic. A large potential market: we want it to be potential not actual, because if the market is already large, you’re a late entrant and that’s not a very attractive way to do it. We want a fundamental advantage, typically that’s technology, but an example of a non-technology fundamental advantage would be a network effect, which is all the rage of late; and lastly, modest capital requirements. If you can get all four, it’s a pretty good opportunity and it’s seldom that we find all four. Not all 12 that we fund each year necessarily have all four.
Julio: Pretty frequent debate that we often hear of venture capitalists having is around the entrepreneur or the team and the market, and I think there is a saying that goes back and forth about, “Would you rather invest in an A-team with a B-market or a B-team with an A-market?” And if faced with that choice, how would you think about that?
Andy: The answer is yes. It’s hard to divorce the two. In the end I’m a big believer that the ultimate determinant of outcome, the single greatest determinant of outcome, is ultimate size of market addressed. If your company ultimately addresses a small market, no matter how good the people are, you’re not going to succeed, you’re not going to build a large business. And if your people are not all that great but the market you address grows into becoming very large then you’re going to be very successful. If you’re able to find great management addressing a great market, then something really special happens. Typically if you look at the really successful companies, the business plan on which they succeed is 90-180 degrees different from the business plan they set out to pursue.
Julio: In addition to vision, what else are you looking for in an entrepreneur and how do you try to observe those kinds of characteristics that you think make a founder, a visionary leader, and someone that can grow the company to where you want it to be before you exit?
Andy: Believe it or not, vision is everything. I’m a big believer in Pareto. I think there is 80/20 in everything in this world, and if you think about a startup, there is usually one thing that they can do, that if they do it well, they can succeed to the point that they can screw up everything else if they do that one thing well. Well the same is true about personal characteristics; if an entrepreneur has vision; he or she is going to lead you to a compelling market. As I said before, if you hit a chronic compelling market, you’re going to succeed no matter how poor your execution. So I don’t worry about many of the other issues. I certainly don’t care about execution in the founder. Many people ask us about management skills. The value that we can bring to the party is helping attract and recruit the people who can bring those skills. You can always hire execution, you can never hire vision. That’s a lesson we’ve learned over and over and over again.
Julio: Today we hear a lot about social networking, tagging, search; there is money going into all these trends. What are you looking to invest in today? What’s Andy’s top three list of trends and companies that you think are really hot?
Andy: That question was asked of me many times over the 20-some odd years that I was investing, and the answer that I always gave disappointed people was, “I don’t know” and “I don’t want to know.” Some reporter would say, “Well, what do you mean by that?” And I’d say, “Well if you think about it, our greatest success comes from companies that address new markets. Your greatest successes are from the companies that grow to be large and independent companies.” Your greatest chance to back a company to become large and independent, is if it creates it and then holds onto a significant share and tends to better than someone coming from behind. Well, by definition, if someone is going to create a new market, we have no idea what it is before we invest. That’s true in early stage investors. So if you go to any of the great early stage firms and ask “What are you investing in?” they’ll tell you what they invested in, but not what they’re looking to invest in because they have no idea. There are some general ideas at a very high level, but in terms of the actual business, they have no idea. If I were a late stage investor, I could tell you what I’m investing in because I look to see what’s hot and then I try to pick the best of the companies in that particular space.
Matt: Andy, we’re talking a lot about what venture capitalists are looking for in entrepreneurs. If you were in the entrepreneur’s shoes, what kind of characteristics would you be looking for in a venture capital firm?
Andy: Judgment and leadership. That’s what we talk about when we think about the partners that we bring into our firm. Those are the two most important characteristics. And a lot of being a venture capitalist is pattern matching. You want someone who has been through a lot of success, because you learn a lot more from success than you learn from failure. Who would you rather hire? Someone who’s been successful so you can learn from what they did to succeed or someone who’s failed three times so they know what not to do?
Matt: Actually, you’ve got a great quote in Eboys. In the book you say, “The amazing thing about being a venture capitalist is that everyone forgets the losers, they always remember the winners.” Is that still true today?
Andy: Absolutely. The funny thing about the venture business is it’s not a batting average business. It doesn’t matter how many losers you have; all that matters is how big your winners are. And if you’re going to succeed, you have to be willing to take risks.
Matt: Swing for the fences.
Andy: You have to swing for the fences, which means that you’re going to strike out a lot, but it doesn’t matter. Unfortunately, I can’t think of another business where batting average isn’t important.
Matt: When you reflect back on your investments, can you think of any big strikeouts that you’ve made?
Andy: I can think of a number. The big lesson was the market didn’t happen. Many of those investments I would have pursued again given the information that we had at the time. I’ll give you an example of a company that I wasn’t on the board of but my firm invested in and is associated with as a huge loser, Webvan. Great example of premature scaling; a company spending before they knew whether or not the dogs would eat the dog food. People think, “God you must have been idiots to invest in that thing.” Well, we put up $3.5 million in the first round, and after the company had raised over $250 million, we still owned 11% of the company. On a risk and reward basis, was that a good bet? I would say yes. Now had they perfected the model before they expanded, it might have been a different story. But, if we had that opportunity to pursue all over again, I’d do that again.
Matt: Andy, a lot of people are probably going to be listening to this podcast, and think a venture capitalist is a glamorous, exciting job, but I’m sure it’s not always like that. What are some of the worst things of being a venture capitalist?
Andy: The absolute worst is firing a CEO or moving a founder out, asking a founder to step aside for a new leader.
Matt: How does that conversation go?
Andy: It depends. Sometimes the founder realizes that they’re not up to the task and it’s not what they enjoy doing. You know, we all are best at that which we most enjoy. There are a number of founders out there that are working on execution challenges that don’t interest them intellectually. There is no passion in it, but they feel like they need to do it because there is an ego gratification in being CEO. Often they’ll be very disappointed when the message is delivered, and later happy. Now, there’s a normal curve, so there are some founders that are screaming mad and will never recover, there are some that can’t wait for it to happen, and the vast majority are somewhere in between.
Matt: If someone is dead-set on becoming a venture capitalist, at one point in their career, what are the different paths that you might think of and recommend them to pursue to become a successful venture capitalist?
Andy: The classic path is to have an engineering degree undergrad and work for a couple of years developing real products, then perhaps go to business school and get into product marketing. Because if you think about it, a product marketer is tasked with developing markets for new products and evaluating new markets for new products, which is probably the most analogous thing to what we do. So that’s why John Doerr, the world’s greatest venture capitalist, has that background and that’s why it’s become the most sought-after background in our industry. Now that being said, there are outliers. There are many people with backgrounds that are different than that that have succeeded. Mine is very different. I studied finance and computer science undergrad but I never practiced my computer skills, so I came in, technically as my wife calls it, as a ‘financial weenie.’ There are many people who believe you can’t have a taste or judgment for products if you don’t have product experience. Mike Moritz from Sequoia Capital was a journalist before he got into the business. A wide variety of backgrounds can work. If you look at my partners, we all come from very different backgrounds; we have a very common view about the business, but we all have very different experiences and we think that makes for a better group dynamic.
Julio: You’ve met a lot of visionaries during your career…
Andy: And so-called ones, including venture capitalists! If ever you hear a venture capitalist say they’re a visionary, they’re completely full of it because none of what we do is visionary. What we’re trying to do is listen to the real visionaries tell us what’s going to happen. If ever a venture capitalist invests in their own idea, you can be assured that it is nine months late. Because if we’ve thought about it, surely someone who’s in that field who has an authentic view of what’s going on figured it out well before we did. So we are by no means visionary, we are very opportunistic. It’s perhaps one of the most opportunistic businesses you’ll ever come across.
Matt: I find I’m an aspiring entrepreneur. What are maybe three skills that you think one should seek to master, or seek to at least develop excellence towards that goal?
Andy: Well I don’t believe that entrepreneurs are created, I think they are born. Executives are created. A big point that I make in the classes that I teach is that we’re not here to teach you to be an entrepreneur, we’re here to teach you to work in an entrepreneurial company; the subtle but very, very important difference. Either you’re an entrepreneur or you’re not. That’s for you to determine. I can tell you about the skills to be a successful entrepreneurial executive. I think leadership is a very important one, again judgment, exceptionally important, and an appreciation for the importance of product market fit.
Matt: So it’s almost like the founder, the critical thing is for him to be a visionary, and then the…
Andy: Now if he’s a visionary and a leader, then you’ve died and gone to heaven. And if you think about it, some of the absolute most successful companies in this world have the visionary founder as the CEO. That’s the best, you know, Bill Gates, Larry Ellison, I’m not sure if Scott McNeely is the visionary of that business, but having the founder as CEO is a great benefit because you want your CEO to be the visionary.
Julio: One other thing we’re trying to do – I mentioned to you, that we’re interviewing Mark Leslie this afternoon, and we’d like to give you an opportunity to ask Mark Leslie a question. So if you had one question that you could ask Mark Leslie on behalf of our listeners, what would that question be?
Andy: Where can a venture capitalist add value?
Julio: Andy thanks so much for speaking with us today, we really enjoyed the time.