Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 11, episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

David: And I’m David Rosenthal, and I'm an angel investor based in San Francisco.

Ben: And we are your hosts. The hardest thing to do in venture capital is create those massive outsized returns that only come from investing in one of the five or so truly important companies each decade. Then, once you've done that, the next hardest thing is to keep doing it with an entirely different generation of partners.

Today, we are going to talk about a firm who built one of the top franchises in venture capital, Benchmark, that has incredibly managed to do both.

Our Sequoia and Andreessen episode was about the empires that those firms chose to build, and this episode is about the empire they chose not to.

David: Or maybe. There was a flotation with an empire in there as we'll get into.

Ben: There was. Benchmark famously believes that venture capital doesn't scale. They have zigged when others have zagged. They have not grown their fund size. They haven't tried junior partners. They don't have a platform team. They are not multistage. I've heard they don't even have a CRM, and yet they are the big early backer of so many of the world's most important companies. There were early ecommerce companies in the '90s like eBay, eShop, 1-800-Flowers, semiconductor and networking companies like Synopsys and Juniper Networks, and of course, in the next generation, OpenTable, Zillow, Twitter, Instagram, Uber, WeWork, Snap, Riot Games, Asana, Discord, New Relic, and our friends of the show at Modern Treasury.

We are at the moment of the changing of the guard. Bill Gurley is not a general partner in the next Benchmark fund, and the majority of the current partners joined in the last five years. They clearly transition from the eBay generation to the Uber generation. The question is can they do it again? Will this third generation of Benchmark continue to set the benchmark for all-time greatest venture capital funds in history?

David: I like what you did there. That was good. Ben teed this up before we started recording. He's like, I really like my intro on this one. If you don't like it, stop me. But I like that. That was good. Well done.

Ben: Thank you. Listeners, we did a very different thing in preparing for this episode. We're trying to embrace raising the bar in different ways as the show grows.

For this episode, we talked to several current partners at the firm, several former partners, some of the original founders of the firm, portfolio CEOs, and even public company CEOs who used to be portfolio CEOs to get a whole bunch of different perspectives on Benchmark.

For our presenting sponsor for this episode, we have a company that we are very excited about. It's Fundrise. In our earlier episodes, they broke some news about a fascinating new product called the Fundrise Innovation Fund that enables their customers not only to invest in real estate but now also in late-stage growth tech companies that are still private.

This is an especially fun episode to have Fundrise Innovation Fund as our sponsor given that we are talking about the foundational building blocks of venture capital itself which Fundrise is disrupting as we speak. We're back here today with Ben Miller, CEO and co-founder of Fundrise.

Miller: What does it mean to be a late-stage company these days? Usually, a company has a valuation of more than $1 billion. That means basically that they could have gone public in the old days, but instead, they stayed private. They raise money from growth funds.

The year Amazon went public in 1997, they had 250 employees and they had $16 million in revenue the previous year. That sounds actually smaller than most late-stage companies these days.

There are 675 unicorns in the United States with more than $1 trillion of market cap that people, ordinary individuals, and 98% of the country can't invest in. But those companies are probably of higher quality and higher growth than most of the small-cap public companies, if not, maybe even a lot of large-cap companies.

The only way to get access is to pay 20% carried interest. Twenty percent of the upside to a venture fund has a toll and an access fee. It just doesn't make sense. That's because of this divide between public and private markets. This divide that was created 100 years ago no longer makes any sense. Our mission is to tear down the artificial divide. It gives retail investors access to these great companies, and it gives these great companies access to retail investors.

More than two-thirds of all "venture capital" is actually Series C. Later, those investors aren't doing the same type of value-add as early-stage investors. Early-stage investing is a totally different animal. There are tons of risks and tons of work, but by that time, a company is raising hundreds of millions of dollars. Those great companies should be accessing capital for retail investors too because it sets those companies up for successful public offerings and way more name brand recognition.

Fundamentally, how do most people invest? Passive Vanguard index funds. That's the kind of investor you want. If you actually think about it even more, who is your long-term investor? The venture fund is going to sell when you go public, so your actual long-term investor is this retail individual investor. You just cut out the middleman and you go directly to the right investor.

Ben: Our thanks to Fundrise, the largest private investment platform in the world for retail investors. If you want to join over 350,000 individuals investing with Fundrise, you can click the link in the show notes. If you're a founder and you want to get in touch about having the Innovation Fund to participate in your next funding round, email notvc@fundrise.com.

All right, listeners. As you know, after this episode, you should come join Slack to talk about it with the 13,000 other passionate, smart, and kind members of the Acquired community. We also have a merch store that we launched at acquired.fm/store. If you've already gotten your sweet, sweet gear, you should tweet it to us at @acquiredfm, and we will reshare some of our favorites. If you are dying for more Acquired, go check out the Acquired LP Show by searching for that in any podcast player.

David: I feel like every episode now, I'm constantly thinking, are there going to be any quotes from this episode that should make it into the merch store?

Ben: I know. On the Sequoia one, I was thinking about Doug talking about burning cigarettes in his arms and he wouldn't flinch.

David: Market size unconstrained and from Bezos.

Ben: Absolutely. All right, David, take us in. Listeners, please know that this show is not investment advice. David and I may hold investments in the companies discussed. This show is for informational and entertainment purposes only.

David: I'm so excited for this one. There's so much Silicon Valley history. I feel like we covered Sequoia, we covered Andreessen, and there's this missing gap between the two of them. This is Benchmark. We're going to talk about it today. I hope we can do it justice. I'm so pumped.

To understand Benchmark, we start in the 1990s in Silicon Valley, but I don't think you can actually start with Benchmark. You have to start with another firm. I'm sure you know what that firm is.

Ben: Are you going TVI? Are you going Merrill Pickard? Are you going somewhere completely different?

David: Somewhere completely different, but I bet you can guess it.

Ben: The 800-pound gorilla, Kleiner Perkins?

David: Indeed, and not just Kleiner Perkins, but specifically, John Doerr's Kleiner Perkins.

Ben: After a very successful generational transfer of their own from Kleiner and Perkins to John Doerr.

David: Here in the 1990s, John Doerr, we've talked about him this season on the Amazon episode. He was alone the 800-pound gorilla in the VC ecosystem in the early 1990s and specifically leading up to and during the Internet era. You think today of the top VCs and top VC firms. You think Sequoia, Benchmark, and Andreessen Founders Fund. He was all of that all in one. He was just absolutely at the top of his game.

He had joined Kleiner. He did not start his own firm. He started his career at Intel working for Andy Grove. From that, just like Don Valentine when he got into the business and in his very Don way said he had an advantage and he knew the future, John also knew the future. He saw the PC wave coming. He did Compaq. He did Intuit. He did Sun which wasn't the PC wave, but it was in that era. That of course led to Vinod Khosla then joining Kleiner and this dominant franchise.

Then, when the Internet started, man, he did Netscape. He did Amazon as we talked about. He did Google. If you were an ambitious, young venture capitalist in the 1990s in Silicon Valley—and that was a very big if—you could do very well as a venture capitalist in that era without being ambitious. But if you were ambitious, boy, you needed a good answer about how you were going to be John Doerr.

Ben: Yeah. To set a little context for how you could do well even if you weren't ambitious, there are 100 times as many venture capitalists now as there were then. Those businesses didn't have the economics either in terms of gross margin, addressable market size, or zero distribution costs. All the things that make big tech big tech now didn't exist then.

For a while, the capital base and the number of venture capitalists actually made sense with the much smaller technology ecosystem. There were always those few years of, basically, arbitrage where innovations happened that made these much more interesting investable categories, but there were still only a few venture capitalists looking around at each other like, oh my God.

David: And valuations were so low. It was crazy when John and Mike Moritz did Google at a $100 million valuation in the Series A. That was Earth-changing.

To understand John, we've painted the picture of how dominant he and Kleiner were. There were two very specific aspects to his and Kleiner's style. One was he was unquestionably the guy is a good way to put it. He was the CEO of the firm. He was the leader. He was also the best player on the field. It's like he was Michael Jordan, Phil Jackson, and the front office. He did everything.

That led to plenty of situations like we talked about on the amazon.com episode of he called Tom Alberg's wife, he aggressively came in to try to court and win the deal, and then he would try and pass off the board seat to a junior partner. Jeff, of course, didn't let that happen, but many entrepreneurs did.

The other very particular aspect to the Kleiner Perkins model at this time was they had adopted this idea of a modern keiretsu within a venture capital firm. This is funny to think back on now, but it made sense at the time. You have to put yourself in the context of the 1990s, a proto-Internet ecosystem really. These were the AOL days leading into the Netscape days. Biz dev deals and distribution were a lot more important and different than it is now. It wasn't like you could just have an idea for a company, spin something up on AWS, put it on the Internet, and get distribution for free on social. It didn't work that way. You needed deals in place.

Ben: Product-market fit was a lot less organic and quite frankly, a lot less real because you didn't get this immediate signal of users finding your product and paying for it in this high fidelity organic way. You had few products available to you and they were whatever products got done in these deals. True product-market fit ended up being an equal peer to your biz dev prowess, unlike today.

David: A core part of this currency model at Kleiner is some would argue that they would do more than help facilitate. They would force these partnerships and biz dev relationships upon their portfolio companies. When your portfolio companies include Netscape, Amazon, and Excite, these would be quite valuable deals both for Excite and the young startups.

Ben: Which, of course, sounds great. If you are funded by Kleiner, you're joining this cabal where Kleiner will pull some strings behind the scenes and orchestrate what deals make sense for them as a shareholder across all of these companies. Theoretically, everyone will benefit from it by being a part of the cabal.

David: Of course, KP was unquestioned the best venture firm at the time, but they weren't the only top-tier firm in the "bulge bracket" of proto VC firms at that point in time. There was, of course, Sequoia, and Don had done Cisco. They were about to do Yahoo!. It was up-and-coming, but they weren't yet the dominant Sequoia that we think of today.

Ben: It's amazing. They were almost a 20-year-old firm, but they weren't Sequoia as we know them.

David: There was Greylock based out of Boston. There was Venrock, of course, and IVP, one of the early institutional firms.

Ben: David, we have to quick history on Venrock because listeners are going to care about this. What is the rock in Venrock?

David: That would be Rockefeller.

Ben: Yes. It's a pretty loose connection at this point but was at one point the venture arm of one of the Rockefeller family offices spinning off to do a venture fund.

David: Indeed. There were all those folks. There were the summits and the TAs at the growth stage, and then there were a couple of other venture firms that you've probably never heard of. You probably never heard of them because they don't exist anymore. Among those were one called Technology Venture Investors or TVI.

Ben: Which had one very notable investment.

David: One very, very notable investment that we'll talk about in one sec. And another one, Merrill Pickard Andreesen & Eyre. The two of those firms just so happened to share the same office building on Sand Hill Road. They shared 2480 Sand Hill Road, part of the Quadrus Office Park Complex right there in Menlo Park.

There was a reason—or at least I'm assuming that there's a reason—why they were in this building. Because that office park was the original office of a little company called Forethought which we talked about many, many years ago on Acquired.

Ben: No. Really?

David: Yes.

Ben: Oh, I had no idea.

David: Forethought was the maker of a little Mac application that then became a Windows application called PowerPoint. Forethought, of course, got acquired by Microsoft and absorbed into the Office juggernaut. Their campus there in the Quadrus Office Complex became Microsoft's original Silicon Valley campus on Sand Hill Road renamed The Graphical Business Unit.

Now, why am I saying that it was appropriate that one of these venture firms were based there at this point in that building?

Ben: It's appropriate that TVI anyway is based there.

David: Yes. Who wouldn't want to be right in the thick of the Microsoft Silicon Valley business unit outpost? But TVI, Technology Venture Investors, had a unique honor. What made them single-handedly really part of that then top-tier venture capital firms is they were the only venture capital investor in Microsoft.

Ben: Yep, $1 million to own 5% of the company. I don't believe they raised another dollar until the IPO. Imagine owning 5% of Microsoft at IPO. I don't know how long they held, or I imagine there was a pretty rapid distribution to limited partners there, but that is a rare honor.

David: Really nothing else mattered at that point. You could hang up your shoes after that one and declare victory, which is some foreshadowing because that is exactly what would happen.

These two firms shared this office building there at 2480 Sand Hill. Merrill Pickard had done pretty well for itself as well. They've done PalmPilot. Remember PalmPilot?

Ben: Yeah.

David: One of the few successful companies out of the pen computing era. They've done a bunch of semiconductor companies. They did Rambus. That was a big winner for them.

TVI made all this money on Microsoft. Merrill Pickard had done really well.

Ben: And TVI was Dave Marquardt who made that investment in Microsoft and was the leader of TVI.

David: Yes, but not one of the founders, I don't think. I think he was part of the second generation. But there starts to be a whole bunch of conversations within these two firms about, hey, what does the structure look like going forward? The firms are getting a little longer in the tooth. These older GPs maybe aren't working as hard anymore. They've made their money. We've got some junior investors here that are out doing all the deals. Maybe we need to rethink some of the ownership structures of these firms.

It's worth a quick digression here about how does a venture firm actually work economically? Even today, I think most people and a lot of entrepreneurs don't really know this. There are multiple parts to the economics of a venture firm. You think about a fund and the carry within a fund. It's pretty straightforward which partner gets what percentage of the carry, but there's also the management company.

Ben: Yes. Typically, the way that this works is the founding partners of a firm own the management company. That management company is an LLC that has basically an employment relationship with all of the founders, and then it is the umbrella parent over each of the funds.

Each fund has its own carry that gets cut up in different ways among all the different partners for that particular fund, but over the umbrella of the whole thing is a management company, which you would think of typically an LLC, but you can think about it like Kleiner Perkins Incorporated.

Of course, that's the governance of do we raise more funds and how big are those funds, but there’s also economics. There’s the economics on a fund by fund level, which is how is the carry from this fund getting distributed on a percentage basis across everyone with carry?

David: Yep. The performance gains from the fund.

Ben: Yes. But then, of course, there are fees. The fees flow into the management company. It's a fee paid to the manager for managing the LP's money. The owners of the management company decide how those fees get paid out and if they give this as the salary, the fixed part of compensation in venture capital.

David: Now, here's the important factor. The split of the carry in any individual fund—while it tends to reflect ownership and the management company—are two wholly different entities.

What you often had and what you had with these old firms back at this point in time was the management companies were owned and controlled by the people who founded the firm and nobody else. You might let some of your junior partners in for pieces of the carry and future funds, but you wouldn't let them into the management company. That meant they had no governance, they had no control, they had no right over anything, and they didn't have a contractual right to any of the fees. They were just employees. They were at large whatever the managers of the management company decided that they should get in terms of salary and allocations in carry.

Ben: Typically, these would be high numbers. Ideally, as a venture capitalist, you're getting paid more on the carry than the fees a lot more. It has always been a well-compensated profession, so it's not like the owners of the management company were back there saying, we're not going to pay any cash out. No, they would pay a high salary, but then they would get to keep everything remaining in the management company at the end of the year and sweep it into their own bank accounts.

David: There's this amazing New York Times article from 1995. Why The New York Times was covering the politics of Silicon Valley venture firms, I don't really know.

Ben: This article is deep and full-on Real Housewives.

David: In this article, The New York Times quotes an anonymous source. "If Merrill Pickard had divided the rewards more equitably, they wouldn't have split up."

Then, there's another quote in the article from one Robert Kagle, partner at Technology Venture Investors as we're talking about. "Today, the power is much more distributed," says the young Robert Kagle. "Nobody can claim that they are making all the money for the firm."

The resentment is in the air among the younger partners of venerated Silicon Valley venture firms at this time.

Ben: When they say today it is much more split up, you can imagine Bob Kagle is saying this a little wistfully. I envision a future where this is the case, but it seems like at TVI and Merrill Pickard, this wasn't the case at the moment.

David: Well now, who is this Bob Kagle character? His story is actually pretty unbelievable and explains why he might harbor some resentment for this privilege that you might say of the older generation. He grew up in Flint, Michigan.

Ben: Yes, listeners, that Flint, Michigan.

David: His mother was a single mom. His whole family worked on the production lines for General Motors, the year of falling on hard times. It was rough. You think about Flint, Michigan. Even today, that is a hardscrabble background.

Bob was a great student in high school, but there was not a lot of opportunity there. In fact, the only opportunity he had to go to college—of which he was the first member of his family to go to college—was to go to an institution called General Motors University.

Ben: It's fascinating that this existed.

David: Which was a training school for members of General Motors' employees and families. The idea was it was a quasi-vocational school to get them ready to work in the industry.

I believe he works in the company for a little while, and then he ends up getting a chance to go to the prestigious Stanford Business School. While he's at GSB, he gets a chance to meet and intersect with someone a few years his senior who had graduated a few years before, Dave Marquardt, who he had talked about earlier from TVI. This is right as the Microsoft deal was going down.

Ben: Quite fortuitous.

David: After GSB, Bob goes into consulting at Boston Consulting Group, and then Dave invites him to come back and join TVI. He does really well there. He does Synopsys, the big EDA company—it's still around today—Avant, Viasoft, and a bunch of other companies that do well and the firm makes good money on.

After 10 years, he's like, all right, I've done well here. I've risen up from nothing, but you guys are still holding on to the keys to the firm and all the economics.

Speaking about Bob and their impression of him at the time, he had an almost religious fervor that anything other than an equal partnership was just morally wrong for a venture capital firm. I totally understand where he's coming from here.

Ben: I don't think Bob had any idea of the incredible amount of knock-on effects that would come from that absolute steadfastness of an equal partnership. We're going to spend the next however many hours of the story really diving into what are all the trickle-out effects and different emotional states that that puts a person in at various points in a company's lifetime.

David: This is the beginning. We didn't talk to Bob, but I don't think he first saw just how powerful this was going to be. I think it was motivated, first and foremost, especially given his background by a sense of fairness, morally what is the right thing to do, and fair and proper rewards for proper work.

Then, almost certainly, economics was a core motivation here too. He was like, hey, related to fairness, I'm doing the work. You guys are making the money. You're taking my money here.

Ben: For sure. We did unearth something that I've always been a little bit curious about because people always say Benchmark is an equal partnership. It both means that each of the partners in a given fund has equal carry but also, all of the current GPs own the management company without paying for it. The management company is always just given to whoever the equal current GPs are.

David: If we do a deep dive on it someday, I would be very curious to know how the Kleiner management company transitioned from Kleiner Perkins Caufield & Byers to John Doerr, but it's not common that it is just given.

Here's Bob. This is the [...] we're in. Bob, in particular, is quoted in The New York Times talking about this. He feels more strongly than anybody about this idea of an equal partnership going forward.

As you can imagine these discussions within TVI, they were not able to get to a resolution, shall we say, within the firm. Everybody's made a lot of money, especially the senior guys. They decide to—and this is the term they use—"declare victory" and say, you know what, we won.

They did Microsoft. They won. What more did they need to prove?

Ben: What a spin. Hey, the firm's blowing up, the people we've trained don't really believe the economics are fair, they don't think there's a way to fix it within the current culture, and therefore, we're declaring victory and calling it a day.

David: That's the end of TVI. They manage out the current funds and everybody remains on their board seats. It doesn't just disappear. This is a thing with venture capital firms. There's a long tail because all of these existing firms and board seats existed. Everybody's got to manage them out.

Ben: I think Microsoft had gone public. At least they were able to distribute that at this point.

David: Yes, of course.

Ben: It's worth noting that Dave does (after TVI) go on to found August Capital.

David: Yes. Bob and future Benchmark aren't the only ones that come out of this, also August Capital also in 2480 Sand Hill Road. It's in one building.

Man, it's so funny. Even in the '90s, we joke about the original Silicon Valley history that there were 10 people and everybody knew each other. This is all going down in one office building.

Ben: Yeah. For how concentrated tech was, venture was much more concentrated.

Before we actually get into the formation of Benchmark here, it is worth lingering on Dave, TVI, and the Microsoft investment for one more moment. When I was looking up what the terms of the deal were for the Microsoft investment, there were some interesting colors shared by Dave about his style of investing. You can see that the seeds of Benchmark really were present in TVI's demeanor toward what they believed about venture investing.

Here's an excerpt from Dave Marquardt. "The venture business is an intensely personal relationship business, and it's not an industry that scales well." He says he would never consider adding a value-added service. "Companies should do that themselves. Bill Gates wouldn't let me bring in outside PR people and marketing talent. That's what founders do. My view is that the CEO ultimately is responsible and accountable for everything. They are the ones who make the decisions. The VCs are there to support and be steady."

David: Oh, I love that. I love that you found that.

Ben: That could have been a Benchmark Partners quote, but it was Dave Marquardt when he was at TVI.

David: Totally. You could copy-paste those exact words. Back to Bob here, I think he really would have preferred to keep going at TVI and convert it to an equal partnership. This is what he was agitating for, but obviously, that wasn't going to happen, so he's got to go figure out something else.

Ben: Yup. He believed so deeply in his soul that it is worth not continuing at this firm in order to realize this dream.

David: So what does he do? We're now in probably early 1994-ish. He calls up his good buddy, Bruce Dunlevie. He trots up the stairwell—maybe takes the back stairs—to go see his buddy, Bruce, up at Merrill Pickard.

Bruce had gone to GSB a few years after Bob. When Bob was at BCG after GSB, Bruce interned for them. Bruce comes from quite a different background than Bob, shall we say. Bruce grew up in Texas and was a high school football quarterback in Texas which is a big deal. He goes to Rice University where he's very erudite. He studies English literature.

I don't know any other young VCs who studied European literature in college and somehow managed to weasel their way into the industry.

Ben: I don't know how you did it, David.

David: I don't know how I did it either. Definitely would not work today.

Ben: You were destined to become a podcaster.

David: Yeah, right. It all works out in the end. Bruce had gone on to work in the PC industry, then importantly, at Goldman Sachs, and joined Merrill Pickard. In his venture career, he was the one who did PalmPilot. He was on the rise. He was one of the Young Turks within Merrill Pickard, but remember, he's a few years younger than Bob.

Bob goes up to see him. He's like, hey, TVI is breaking up. I really believe in this equal partnership thing. The Internet I think is coming like Netscape. You know what's happening here. We're positioned to do this.

Ben: This is early '94. This is the same time Bezos is driving across the country and starting Amazon.

David: What do you think about busting loose out of this place, and you and I start a firm together? Bruce is like, well, 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 safety net.

It doesn't happen at that point in time. A few months go by, and Merrill Pickard starts to have internal discussions about what their next fund is going to look like.

Ben: The bug of equal partnership seems to have made its way around the building a little bit and infected the waters of discussion elsewhere.

David: It's like a virus that's infecting a very specific building in Silicon Valley. Bruce and his fellow young partner at Merrill Pickard, Andy Rachleff, are like, hey, guys, there's this equal economics idea. What do you think? It turns out that that conversation, I think, probably goes about the same as it went at TVI.

Ben: They probably got little pats on the head. By the way, can we just recognize that Bruce was Bob's intern? Think about the incredible vote of confidence and how counter to human nature it is for Bob to approach Bruce and say, would you like to be my equal partner? It's kind of a flaw. We remember people the way they were when we met them, so as they grow, we tend to underestimate them. It shows an incredible amount of maturity and it really illustrates this obsessive sense of fairness that Bob had that the very first person he asked used to be a subordinate of his. He asked, will you be my equal?

David: Totally. It reflects two things certainly in Bob and in all the early folks at Benchmark and Benchmark as a firm. This religious devotion to equality and fairness also reflects just an absurd amount of self-confidence. Bob's like, hey, you and me, let's together go take on this whole industry, just the two of us. You need both to go do something crazy.

Bruce is a little bit more the voice of reason here. He and Andy within Merrill Pickard have had these conversations. He's amenable to the idea of leaving and starting a new firm, but he's like, Bob, just the two of us. For what we do, we're not going to have enough capacity to be able to create an actual portfolio that makes sense if it's just the two of us doing deals. We need to have some more investment capacity here.

Ben: We need enough diversification. They were thinking about round sizes at the time. They might invest $1 million or $2 million, but they're just not going to have enough companies in the portfolio with them doing venture the way that they believe they need to do venture—8–10 board seats a person, no investments without board seats, and that sort of thing.

David: The TVI style.

Ben: If they're on 16–20 boards and that's all the company's in a portfolio, that's not enough,

David: Right. There's also a credibility aspect to talking to LPs about this too. They're going to start poking holes right away.

Bruce says, all right, I'm down, but we got to recruit some more partners here. They start going around the Valley and they go outside of the office building trying to recruit folks. Maybe they thought of the religious meme of equal partnership and fairness and there's a new generation dawning in Silicon Valley. Maybe being within 2480 Sand Hill, they thought it was more pervasive than it was because the pretty universal reception they get around the valley as they approach other young GPs is, you guys are freaking nuts.

Ben: Right. We're in an amazing club here. Don't screw up a good thing that you got going. Didn't they try to recruit a well-known GP from Greylock who was like, no, I’m at Greylock. What do you think?

David: Right. The smart thing to do was not to go do something crazy. It was to do the John Doerr path. If people and young folks had ambition, it was like, hey, I'll put my time in. Look at John, it worked for him. He was still quite young at this point in time and he had the keys to Kleiner Perkins. There was no real reason to believe for a lot of these folks that they had to go leave their firms and do it on their own.

We got a chance to talk to Bruce and we asked him about this time, this interregnum period. We're like, how are you feeling during this time? Were you a true believer? Did you think it was all going to work out?

Ben: He's like, no, I started thinking maybe we were a little nuts too.

David: Yes. But he made a good point, which is that their back was against the wall. They burned the boats. They were gone. At this point in time, they had no other option. They had to go make this work, or they were out of the industry.

Ben: This is like Michael Ovitz when his application for credit to start CAA had been discovered by the upper-level management of his old firm. He was out. He was done. There was no way to go back and undo it, so you had to build the business.

David: Yes, there is no other path forward. They need some more folks. There's an obvious recruit to bring in to join them who also is in the same position and of course, who they do bring in which is Bruce's partner, Andy, from Merrill Pickard. He's in the same building, so it's easy to get him.

Ben: So now you got three.

David: You got three pretty good folks. I believe it was Bruce who says, hey, look, we're having a tough time convincing other venture guys and other GPs to come join us, but we might actually want to look somewhere else. It might actually be a good thing for us if we bring in some entrepreneurial DNA into the firm. We've got all these problems with the way traditional venture works and all these other folks out there are reluctant to join us. Maybe it'd be good for us to actually bring in some different perspectives.

He says, I think I know just the guy, a former entrepreneur who I worked with and sat on his board. We actually went to Rice together, Kevin Harvey.

Kevin after Rice had started two companies, the first one Apple had acquired, and then the second company, Approached Software, Bruce had invested at Merrill Pickard. He was on the board. They just sold it to Lotus and had a decent outcome. Bruce thought, hey, Kevin might make a pretty good VC.

They approached him and he's like, great, this sounds way easier than starting another company. There you go. You've got Bob, Bruce, Andy, and Kevin, the four well-known founders of Benchmark. But four wasn't actually the number they were going for. They thought they needed at least five people to have a viable firm.

They go and actually recruit a fifth founding member, the fifth co-founder of Benchmark, a guy named Val Vaden. Val had also gone to GSB and worked in a venture, but he had moved on from two early-stage ventures. He was doing software company buyouts. I'm thinking of Thoma Bravo and Vista, the precursor to that at a much smaller scale.

They bring Val on as the fifth partner. Here we are now at the end of 1994. We got the five members of the band: the drummer, the guitarist, the bassist, the lead singer, and the rhythm guitarist. Bob, Bruce, Andy, Kevin, and Val put together a prospectus to go out and raise their first fund.

The first thing they need to put on the prospectus is a name. It's quite an audacious name that they come up with, of course, Benchmark Capital.

Ben: Yeah. They went all in on signaling something to the market. I think what you're about to get into is how they signaled that in the form of the economics that they were asking for, but they certainly signaled it in the name. It was, you haven't heard of us, but we're already important.

David: Yes. Our aspiration is to set a new benchmark for performance in this industry and how venture capital is done. This is featured prominently supposedly in the Benchmark fund one prospectus. It says, "There is always room at the top."

Then, what you're talking about, Ben, typical economic terms of venture funds especially in those days was a standard management fee and carry management fee of 2% and standard carry performance element of the fund of 20% of the net profits of the fund.

Ben: For those who don't know, just a quick crash course, 2% is an annual fee, so if you raise a $100 million fund, that's $2 million every year that goes to the management company. That gets used to pay the budget, salaries, and all that sort of thing. Then, if not just 20% of all the profits, it's typically 20% of the profits after 1X. You give everybody the money back, $100 million goes back to the LPs, and then you get 20% participation and all of the profits after that.

David: Yup. That's standard in the industry. I think at this point, some firms, or maybe just Kleiner, had charged more than 20% carry. I believe Kleiner did at this point because they were such a marquee and they were so proven. If you wanted to invest with Kleiner, you had to pay a premium to get it.

Ben: Yeah. They felt they had pricing power.

David: Benchmark comes out. The new Benchmark Capital swing in right out of the gate with 30% premium carry. We're going to price and position this like the premium product that it is, which of course from one perspective and the perspective of several prominent LPs is quite laughable. There's nothing here.

Ben: And LPs at the time are looking at this, like, hey, we think that fees in this industry are going down, not up. A good allegory is actually the thing that Andy Rachleff went on to do after Benchmark, which was to found Wealthfront. He's like, oh, investment management fees are way too high. These strategies are only available to a small group of people. What if we democratize it and we bring down not a 1% management fee for private asset management but a 0.25% or whatever well thrown is?

It's amazing that when he was going out to raise for Benchmark, he was saying 20% profit? We'll take 30% of the profits.

David: As you can imagine, one reaction that this does not engender from the LP community is indifference. This was a brilliant strategy. Some LPs absolutely love this. Very notably and famously, Horsley Bridge, the big investment advisor, makes a huge bet on this motley crew of Benchmark Capital founders in fund one.

Ben: I think they've been in every single fund ever that Benchmark has raised and were in before any other institutions.

David: Yes. I think they are still one of the very largest Benchmark LPs to this day. They're a big investor in that fund one, which ends up being an $85 million fund, which fast forward a little bit becomes one of, if not the best-performing venture fund in history returning billions of dollars still LPs.

Ben: I think it's the best cash-on-cash of a large venture fund in history.

David: Still to this day, I think.

Ben: There have been some small funds, Lowercase Fund One, Chris Sacca's fund, but nothing of this size of $85 million which with inflation today is probably $150 million or $160 million. But with venture inflation of how much these funds have grown, think about it like the way you would think about how newsworthy a $500 million fund is in today's environment.

David: Yeah, this is probably the equivalent of a $300 million, $400 million, or $500 million fund.

Ben: It is the best returning fund of that caliber of venture fund in history.

David: Horsley and a bunch of other LPs love it. Some LPs absolutely hate what is happening here. They hate it in every dimension.

Ben: In fact, they tried to go viral with their hate.

David: Yes. They hate a few things. Obviously, they hate the premium carry for the reason of what you said, Ben. They're like, there's more capital coming into the space. It's getting more competitive. We want fees to go down, not up.

You got to remember. We've painted the picture a little bit here, but this was a different world in venture where you could do pretty well by being pretty lazy. In the LP world, it was even more extreme. There was nowhere near the same level of competition for institutional dollars going into private partnership alternative asset funds.

If you were one of the larger university endowments, you had it pretty easy, but your team was pretty small, so you felt like you had privileged access to this small set of money managers. Now, you've got people coming in within these established firms and relationships who you like. You feel like you can deploy capital with them and get great returns either year after year or decade after decade. Those firms are blowing up, there are new firms entering the industry that you have to evaluate, and these new firms want premium carry. They're pissed.

Ben: It's hard to underwrite because any LP that you talk to will tell you that it's not just the track records that we're looking at, it's not just the meetings we're having, and it's not just the relationship we have with these individuals. It's our belief that those individuals will create magic together.

Will they be the Chicago Bulls or will they be the LeBron Miami Heat? You don't know that they're going to have the trust, process, and demeanor. The number one fear is everything looks great on paper, so we wrote a big check, but it turns out these guys can't work with each other. When you have a new firm with a new brand and a new set of people, that's the key risk.

David: Hey, the Heat brought home a championship. I think actually, the analogy holds here of a fund might bring home a championship, but if you're a large endowment, you don't care about one fund.

Ben: Right. You want to back in during the franchise.

David: You want 10 funds. Stanford—

Ben: Your esteemed alma mater.

David: The alma mater of almost all of these folks who are starting Benchmark get so angry that not only did they not invest in the fund. They start organizing against this young Benchmark Capital. They call up all of their peers and the other university endowments across the country.

Ben: Including ones who have already committed.

David: Including ones who have already committed to the fund and say, we don't think this is a good idea. We want you out. Literally, Stanford blackballs Benchmark. Totally insane.

Now, it's easy for us to pick on them now because famously, they have a complete 100% turnover in the management team of the Stanford endowment a decade-plus later.

Ben: They end up being a large Benchmark LP.

David: They do end up coming back to Benchmark and the new team. Very happily for Stanford, my alma mater gets into Benchmark for the first time and atones for that sin.

But man, this was a rocky birth of Benchmark fund one, shall we say? These guys were going way against the grain. Actually, this is a funny story. Bob probably would have had the religious fervor about the equal partnership anyway, but right around this time is when Jim Collins' first big book, Built to Last, comes out.

Bob reads it, loves it, and as he's thinking about what's going on at TVI, what he wants for his future fund, and what Benchmark would become to be, it totally aligns with Jim's principles in the book. They actually hand a copy of the book to every LP as they're pitching them going around for fund one, which is really funny because I think they did believe in the values espouse they're in. But it's also brilliant marketing if LPs care about backing firms and funds that are going to have multiple funds and last for decades. You're literally handing them a best-seller called Built to Last.

Ben: And the number one risk with you is that you're new and unproven. It all aligns so well. They do actually slightly oversubscribe it. I think they had $87 million commitments and they cut someone back, so they're off to the races. It's $85 million. It's these five partners and they start investing.

David: They overcome the blackballing of Stanford, LP, and VC establishment. They just survived coming through the fire here. What happens next is interesting. It's towards the end of the second half of 1995. They've raised the fund and they've just been through this journey. Frankly, there's kind of a letdown. Maybe that's too strong, but a few things happen here. They didn't expect that this was going to instantly be an obvious success right out of the gate. It wasn't all 100% sunshine and roses within Benchmark itself as a partnership either.

Ben: Right It's not just that, hey, we're starting to make some investments but nothing's really popping in this '95–'96 era. To your point, it was we're not gelling as a team the way that I was hoping we were, and it's not all of us. It's one of us.

David: Yeah. There were deals to be done during '95 and '96 that would have put the firm on a very different trajectory during those early years. Those were the years when Amazon as we talked about got done. That was the time when Yahoo! got done. Would Benchmark have beaten John Doerr to do Amazon? Probably not, or maybe, but they weren't even really in the picture.

Certainly for Yahoo!, Mike Moritz is great. He's wonderful, but a big part of what started to make Mike Moritz Mike Moritz was Yahoo!. He wasn't Mike Moritz before he did Yahoo! Benchmark wasn't in the picture then, so there were some notable missuses during those years.

Then, Val came from this very different perspective. He was coming from the proto software buyout industry, and Benchmark was all about doing formation stage investments in technology and Internet companies. There just wasn't a fit in investment styles.

Ben: I think that is probably the right thing to chalk it up to. David and I stumbled upon this and we were like, Val Vaden. How have we never heard this guy's name? I remember thinking, wait, there was a fifth founder of Benchmark?

They had people coming from a venture capital background, they had someone coming from an operational background, and they would have someone who we haven't talked about yet coming from an executive recruiting background who would be a slam dunk fit, but this person coming from more of a buyout background turned out not to have the same fit with the rest of the firm.

David: At the end of 1996, Val ends up leaving the firm, the equal partnership, which certainly was I'm sure not what any of them planned or were hoping for. They've invested about $16 million in companies by the end of '96 which is a fine deployment but maybe a little slow.

They're having a partnership transition. The firm is not winning. I'm sure it must not have felt great. I've been there. I've had friends who've been there. It can get depressing. If you're a new firm and you don't come out the gate strong, you end up fading away a lot of folks.

Ben: Right. Lots of fund ones don't raise fund twos and certainly don't raise fun threes because then you have fund one's performance to look back on that should have been popping already.

David: I imagine there's a lot of concern at this point in time. Maybe some of the swashbuckling myths of the founding has maybe been replaced by a little bit of depression.

Ben: They had to call all the LPs and tell them, hey, we came to you talking this big talk and one of us is out. I will say after talking to a lot of different people around the firm, the number one characteristic that just kept coming up over and over and over again is they do what they say they're going to do. They carry themselves with incredible decorum. They have tremendous discretion when speaking publicly. This just comes through anytime you hear any of them talk.

From what we can tell, there was a very generous separation with Val from the firm, so much so that when you go to the Wayback Machine, it's just an incredible resource that exists.

David: You found some great stuff. You were tweeting the last couple of weeks screenshots from old Benchmark websites. They're amazing.

Ben: It's been so fun. Val is still on the website in January 1997, so there are five general partners. It says, "Complementing Benchmark's early stage focus, Val E. Vaden, concentrates on technology special situations."

When you click on his bio, he's there. He's got a picture. It says, "Val will be establishing a new fund to focus on technology special situations investing. The new fund's focus builds on Val's experience investing in technology companies undergoing significant transitions which can benefit from the capital and investing skills of a venture capitalist. These include fallen angel public companies, companies contemplating major acquisitions or divestiture programs, corporate spinouts, management buyouts, and in rare instances, turnarounds and financial restructurings."

They're basically saying, yup, we're going to keep using our brand to help you raise this thing you're good at.

David: Which becomes Vector Capital, [...], and then he's part of a few other venture firms over the years. Anyway, all this to say heading into 1997 was dark. If you were handicapping the future, if Vegas were betting on the odds of the young Benchmark Capital heading into 1997, the line would be long on outside success here.

Ben: Certainly nobody would think that this current fund that they are investing out of in this current basket of companies inclusive of the ones they would do over the next 12 months would be a 92X in just a few years.

David: On the fund. 1997, the annus mirabilis for Benchmark.

Ben: Can you explain that for those of us who didn't study literature?

David: I thought that was a prerequisite for getting into this industry.

Ben: Sorry, I did computer programming. I don't know if that's relevant.

David: It's Latin for miracle year, I think. Literally, it is a year of miracles, but they put themselves in a position to win. We're going to talk about this more in a minute, but a key element to Benchmark and to them getting it off the ground was both doing something different but also having the swagger to them. Obviously, they had the swag. I think they might have lost it in those early years.

I don't know how intentional this was. I'm imagining it was pretty intentional that the four of them remaining gut checked and say, okay, where are we headed here? How do we get the swagger back? How do we get back to winning? How do we get back to being aggressive?

They go out and decide they need to replace Val. The best way to do it is to bring in a new fifth partner. They go recruit the most aggressive, most hyper-competitive, and most swaggerful person that they know.

Ben: The tallest.

David: We're not yet talking about Bill Gurley. Although that will be a story coming up very, very soon here. They recruit the number one executive recruiter in all of Silicon Valley and technology, David Beirne from Ramsey/Beirne Associates.

Ben: That's a lot of hutzpah to go and recruit someone away from the firm that has their name on it.

David: Yes. And to go recruit somebody whose job it is to recruit. You can say many, many things about Dave, but you could never say that he doesn't have swagger and that he's not a hustler. Kind of like Bob, Dave also grew up pretty hardscrabble. His family was also a General Motors family. He grows up pretty working class, I believe, in New York. He ends up getting into the recruiting business and essentially, by pure force of nature and force of will, just wills his way to the top. It's like a Jerry Maguire type of story.

He ends up starting his recruiting firm Ramsay/Beirne. They're based in Westchester County, New York. They're not working in technology at the start. 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 Ramsay/Beirne, the leading executive search firm in high technology. They haven't done a single retained executive search in high technology when he starts doing this.

Ben: But they're not claiming anything literal or specific. Leading? Sure. It's like how the new iPhone has a 2X better camera, but they don't tell you any units or what vector that is better on.

David: Yeah, 2X better than what? But they're leading. It becomes a self-fulfilling prophecy when in the late '80s, early '90s, Dave gets his big break and he gets through to John Doerr. John makes him his preferred executive recruiter for CEO searches for his portfolio companies. Remember, back in those days, that's part of the standard VC playbook. You come in, you back the company, and you start a search for a professional CEO.

Ben: Yeah. Congratulations on finding product-market fit. Surely you don't know how to do the job after this.

David: We spent a lot of time talking about that in part one of our Andreessen Horowitz episode involving none other than Benchmark Capital. David ends up doing the CEO searches for Netscape. He brings in Jim Barksdale which, of course, is a Kleiner company and a John Doerr company. He does the same for Excite. He's working all over the valley.

It becomes a genuine self-fulfilling prophecy. He becomes the number one retained executive search CEO in Silicon Valley from his outpost in Westchester County, New York.

Ben: He projects an aura of success and eventually, it becomes success.

David: 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.

Ben: Yeah, none of this speculative startup equity. He's literally getting paid.

David: Yes. The Benchmark partners convinced him to come out, try his hand at being an actual VC, and to join Benchmark. I'm sure they're thinking and this is what plays out. They need a shot in the arm here for this firm. Boy, is Dave that. I couldn't 100% prove this, but I believe Dave's first deal is Webvan.

Ben: Oh, is it?

David: I don't know if he did others before. But if Webvan wasn't his first, it was certainly among the first right after he arrived. I'm just going to open up eBoys here.

Ben: For those who don't know, who have not heard of the book eBoys, it is the authorized history of Benchmark up until 2000, where the author actually sat with the partners for the better part of two years, fully sanctioned, to observe conversations in partner meetings.

When it comes out, it's not the book that they thought it was. It is a little bit more gossipy and interpersonal, and definitely characterizes each person to be a little bit more tropey than they would be in real life. It is both looked on as a lot of the facts are right, but also, there's a lot of drama.

David: It's a period piece. We're going to talk more about eBoys in a second here, but I'm just reading here from page 30. “David Beirne arrived at Benchmark with ambitions to contribute to the partnership fast in any way he could. He had some ideas for new businesses for which he hoped he could find entrepreneurs.

One of the concepts that kept nagging him was an ecommerce business that he called my store, which would sell online everything for everyday needs, start with groceries and move toward an online Walmart.” We've got some less family friendly language here, but I'm quoting from the book, so fast forward if you have little ones listening.

"Well, shit," Bruce Dunlevie said when Dave told him his idea as the two sat in Dunlevie's office. "Have I got the plan for you?" Dunlevie reached into a stack of papers and pulled out a business plan called Oasis. He tossed it to Beirne, explaining that he and the other partners lacked the balls to do it. Would Beirne be willing to be the guy?

Oasis, of course, is Webvan, which I remember Webvan is a creator, a cautionary tale of what could go wrong in the dot-com excesses. But going back, doing the research here, and looking at it, this was actually a great bet to make.

Ben: Oh, this is exactly the type of bet you should be making in venture capital.

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

Ben: All right, so what was Webvan?

David: What was the company or what was the deal?

Ben: What was the company and why was it so swagger-filled to do it?

David: Have we talked about Webvan on every season episode so far in season 11, I think?

Ben: That might be true.

David: Yeah, I feel like everybody knows.

Ben: The theme of season 11 is Webvan.

David: There we go.

Ben: That's so true. We probably hit it on Walmart and Amazon.

David: Of course, as we've talked about, it was Louis Borders, the founder of Borders Books, which had then gotten absorbed by Kmart and then spun out. He had left his part to all that. He felt like Borders didn't realize his vision. He wanted another big swing bite at the apple.

He knew Kmart, Walmart. He wanted to build Amazon, what Amazon is today. He wanted to build amazon.com. The modern amazon.com, he was just a couple of decades too early. That's all what Webvan was. It was anything you wanted, starting with groceries, that was their wedge, but it was anything you wanted from the web on a van delivered to your doorstep.

Ben: Importantly, now, Webvan did have this last mile component as the initial founding wedge. Whereas Amazon, they're like, yeah, we'll get to do it. It might take two weeks. Of course, then they get to Prime, they get to Prime now, now they're trying to do one-day Prime, and all sorts of things can happen the same day if you're spoiled like me and live in Seattle. Webvan had that from the start, and it was equally ambitious.

Louis Borders did want to do food and everything. It was The Everything Store at the edge, close to your house whenever you wanted it. It was so ambitious that even the Benchmark partners, after they invested, kept trying to talk him into, could we just do food? Do we have to compete with everything Amazon is doing right away?

David: The Benchmark partnership as a whole, but I think especially the original four Benchmark partners were the ones really pushing David to push Louis. Hey, can we just do food? Can we scale down? David totally falls in love with Louis. This is what he's there to do from his perspective.

Ben: It didn't feel like this was the sell to Dave. Hey, leave your lucrative successful executive search firm, because if you come here, you can make big bets. I think that was the thing that was always on his mind. If there's a bet that everyone else at the firm is too scared to make, maybe I'll make it.

David: Yup, he was that guy, which Benchmark totally needed. They needed to re-inject that DNA into the firm. And this deal is a great deal to make as I alluded to, so here's how the deal goes down.

Ben: This is great because this is not how people remember it. Everyone goes, Webvan, ball of flames, terrible venture investment, lits more money on fire than I can ever remember, emblematic of dot-com insanity and incorrectness. Everybody lost their mind. This is (a) a great risk adjusted bet to make by Benchmark, but (b) not actually that big of a smoking crater relative to today.

David: It's a $7 million round. Benchmark splits the deal with Mike Moritz at Sequoia. Sequoia does $3.5 million, Benchmark does $3.5 million, Moritz and Beirne joined the board. I think they each get 10% of the company. And then Webvan does do a late-stage one or two, I can't remember if it was one or two, at least one "later stage" but mezzanine rounds from completely other investors.

Sequoia and Benchmark don't put more money into the company before they go public, and then Webvan goes public. During the Go-go eras, it traded up to an $8 billion market cap. At the high point for this Webvan bet that Benchmark and Sequoia each put $3.5 million into...

Ben: That's what Lyft is like today.

David: 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. $3.5 million to $800 million in public stock within 2–3 years. So fantastic.

I don't think they got liquid on a lot of it. I think they were so locked up before the dot-com crash happened and occurred. Whether they got any money out or not—I don't know—what a great bet to make. I stand up and applaud for Webvan.

Ben: The thing that I really want to underscore here is for the asset class of actual venture capital, early-stage, high risk, high return stuff, you want to back someone who's got a missionary-focused dream like Louis Borders, who was ready for his next act and he wanted it to be really, really big. It was probably the right bet, maybe at the wrong time. It's probably a decade, maybe two decades early, but the vision was right.

You're betting on someone that has to be bigger than their previous wins, so they have an incentive to make it really, really big. As a venture investor, you want to be buying all that risk. You don't really want to be making these risk-mitigated bets. No. That is why you have a portfolio of 30 companies. Go get all the risk you can.

David: Especially for $3.5 million, that's less than 5% of the fund. For sure, of course. Do that all day long. That starts to bring some swagger back to Benchmark, and then you alluded to eBoys. It takes a couple of years for the eBoys to get written and come out, but what a ballsy move. These guys are like, yeah, let's bring in an established author.

Randall Stross had written (at that point) Steve Jobs and the Next Big Thing about NeXT. The tagline on the book, which I think was part of—the actual book ended up being different than I think what everybody thought—the first inside account of venture capitalists at work. The Benchmark guys, they got nothing to lose again at this point, so, why not? Let's be the first inside account of venture capitalists at work.

Randall gets access to everything. He sits in partner meetings. He's the author in residence. He's there 2480 Sand Hill. He's in the portfolio companies.

Ben: I think he even visited the Webvan facility.

David: Yup, which was off limits to all press, all outsiders.

Ben: It's super private. Yup. Even at their launch, they didn't let any press inside to see it because they were afraid of giving up trade secrets.

David: He embeds with eBay. It was crazy to do this. At the beginning of eBoys, Randall writes in the introduction here, "There was no precedent within the venture business for providing an outsider such access. I suspect that the Benchmark partners thought that something ballsy like this, which was sure to make the greybeards of the guild squirm, must, ipso facto, be a good thing," which is funny. Of course, it's more complicated than that. I think it's emblematic that they got the swagger back. They're like, you know what, you got to play like there's nothing to lose here.

That leads us to the big one, the one that actually changes everything certainly then and still right up among their best venture investments of all time.

Ben: This one required all the pieces of the puzzle. It required the executive recruiter. It required the knowledge of the consumer, which at the time, consumer investing was not a thing that overlapped with technology. It was not a thing that if you were betting on technology companies, you're usually investing in semiconductors, you're investing in networking equipment, you're investing in enterprise software.

You needed this marriage of, we need to find a killer executive for a consumer company that's building a consumer brand that has unbelievably disruptive, brand new cutting edge, always falling over technology.

David: It required a focus on and core belief in the future of the Internet, and it required teamwork of all partnerships working together. June of 1997—actually, well before June—Pierre Omidyar, who we talked about on the amazon.com episode, had been working a few years prior, had a little pen computing company called Ink. They were a pen computing company. Bruce Dunlevie from Merrill, Pickard, Anderson, & Eyre was an investor in the company.

Ink had an interesting journey. Pretty much the whole pen computing space accepts arguably PalmPilot didn't really pan out. This is like the gold corporation of which Jared Kaplan wrote the great book startup about. Ink certainly fell into that category, but the VCs and the management team refused to give up on the company. They pivot into very, very early ecommerce software enablement, enterprise software for early ecommerce.

The company ends up getting sold to Microsoft in a good outcome. Everybody's happy. They all went through the trenches together. Pierre had been working there as an engineer during at the time. He has fond memories. He got to know Bruce through that. Do you know where Pierre goes after Ink right before he starts AuctionWeb?

Ben: I do not.

David: I thought for sure you would know this. He goes to the epicenter of pretty much all innovation that has ever come out of Silicon Valley, General Magic.

Ben: Oh, that's right. I remember. Yes. I watched the documentary a few years ago.

David: We should do an episode on General Magic and maybe find some of the original people. That'd be fun. We should do that at the Computer History Museum in Silicon Valley. That would be super awesome.

Ben: I assume they have the device there.

David: They invented the concept of the cloud. They invented the concept of mobile.

Ben: In retrospect, it actually makes sense that Pierre would go to General Magic, given his background in pen computing.

David: Totally, it all makes sense. While he's working at General Magic, famously, in his free time, Pierre starts tinkering around on the early internet and starts a collection of internet services that he calls eBay for electronic Bay Area, although there would be lots of retrospective justifications of that name.

Ben: And there was a lot of crap on this website. It's like a courier font website that has like a bunch of stuff on it all under this umbrella of eBay, but it's just like a bunch of different content and some programmatic stuff. To your point, there was one link.

David: One of the five or so main things you could do on the site was do this thing called AuctionWeb, which—surprise, surprise—became the thing that became eBay. We're telling all this history because it's awesome to tell eBay history, especially having done Amazon earlier this season. But painting the picture here of like, Pierre is this engineer, this is a side project. It's really unclear what's going on here.

Ben: That's right. He was full-time. He was still a full-time employee at General Magic when creating eBay.

David: He's been at companies. But on the engineering side, he's not like what any VC at the time would consider a CEO material, as stupid as that was. But it's very different from Jeff Bezos coming from D.E. Shaw with a full-fledged business plan, building everything out, and then John Doerr from Kleiner Perkins cold calling. That's not what happened at eBay by any stretch of the imagination, but what does happen is it starts working.

At first, Pierre's just hosted these auctions for free. There's no business model. He gets so much traffic that his server costs go through the roof. He reluctantly had in hand shamefully asked his users to pay a small listing fee just to keep the lights on. Famously, the way he does it is they send checks to his apartment. He gets deluged with checks. He can't open the mail fast enough.

Ben: This is product/market fit.

David: That, our friends, is product/market fit. He brings on Jeff Skoll, who has a newly minted MBA from Stanford Business School, to come in and be the "business guy," meaning, literally open the checks and cash them.

Ben: It is funny that if Pierre hadn't needed to pay for the server costs, there's a really good chance this could have gone the way of the Linux Foundation or Craigslist. I know Craigslist is a real business now, but they could have been Wikipedia. It could have been this unbelievable resource for humanity that generated no profit. But instead, they became the “it” company for a generation. Think about the way we think about [...] today. In the early 2000s and late 90s, that's how people thought about eBay.

David: Totally. We chronicled something similar to this on the amazon.com episode. But for our purposes here, again, painting the picture, this deal had some hair on it.

Pierre, after he brings on Jeff, he's like, actually, okay, I'm open to building this as a business. Obviously, we've got good revenue. We have cash flow. I don't need the money, but having experience from Ink and then also from General Magic, he knows that VCs and the professional board can really help the company.

He remembers Bruce from the Ink days. But he and Jeff, they go around Sand Hill, they pitch this to everybody, and just about everybody else, actually, literally, everybody else turns them down.

Benchmark, though, is interested. Bruce is interested and he's like, you know, as you were saying, Ben, my partner Bob is actually really interested in consumer stuff, consumer marketing, and consumer technology. You should be my partner, Bob. Bring Bob in, then he brings David in, and David's like, I can bring in the management team. I can find the right person for this. Kevin and Andy love it.

It's really the whole team working together. They give Pierre and Jeff a term sheet to invest $6.7 million total in the company in a Series A financing at a $20 million pre-money valuation. Pierre and Jeff have one other term sheet, a competing term sheet, shall we say, but the terms of the offer are a little different. The other term sheet is from Knight Ridder, the large newspaper conglomerate.

Ben: It was basically an acquisition, right?

David: It was an acquisition at which Jeff Skoll had worked very briefly after graduating from Stanford GSB for a few months before Pierre recruited him to come help open the mail at eBay.

Ben: Which makes sense. This is a classified thing on the Internet, we do the classified things for newspapers. We can do this too.

David: How the world would have been different if one of the nation's leading newspaper companies had acquired the leading online classified business.

Ben: An interesting thing to know is, at this point, eBay is growing 10% a month, so check, fast growth company. It's profitable. All of these checks that are getting mailed in, it is generating cash and growing, so why would you get acquired? Why would you not keep running this thing?

David: Well, it was actually a pretty compelling offer. The reason you would get acquired is they offer Pierre and Jeff $50 million.

Ben: And that's the thing you would think about taking.

David: That is the thing you would think about taking, especially at this moment in time. That's a lot of money. "Exits" didn't often happen for that size, let alone exits of like a two person company that was barely a company. There's some debate about what happens here.

Ben: And there's debate among people who were there. This is a truly unknown truth, but we will give you everything we know.

David: It's like the AWS episode and multiple origins of AWS. There is a version of the story where none of the money that Benchmark invested in eBay was actually used by the company. That actually is probably true. They probably didn't actually burn any of the money because they were profitable. They were always profitable. They were never not profitable.

Ben: I think of the portion of the $6.7 million Benchmark investment that went to the company's balance sheet, I don't think any of it ever left the balance sheet.

David: I think that is correct. Perhaps not all of the $6.7 million went to the company's balance sheet. What we do know is that Benchmark got 20% or more of the equity in eBay for their equity investment in eBay.

Ben: What was reported was that they own 22.1% at IPO.

David: It was also reported by The Washington Post after the IPO of eBay that Benchmark had also structured equity backed loans to Pierre and Jeff in the amount of $750,000 each as a way to prevent them, essentially, give them an incentive not to take the acquisition offer from Knight Ridder, because they're sitting there. They're like, oh, my God, this is life-changing money.

Ben: Right. It's effectively a secondary. It's structured as this equity-backed loan. But basically, you can take away if this Washington Post article is true, a total of $1.5 million was paid to Pierre and Jeff to say, hey, make yourselves comfortable, this is a secondary effect. I have also heard from a podcast where another Benchmark partner at the time said that three of the six were used as a secondary, 50% of the investment round. Of course, we have also heard that there was no secondary and that doesn't exist at all.

I think there was at least something. There's enough smoke here around the equity-backed loans that was reported not only by the Washington Post, but then was an SEC filings that, in addition to the equity investment that Benchmark made, there was also some equity-backed loans to give them the ability to whatever they made on the appreciation of the shares that they got as a part of the direct investment, they also had a nice, nice, nice return from the founders deciding to take some money off the table.

David: All of this is highly untraditional, highly non-consensus. They're the only term sheet. They're willing to probably do at least some of this, what would come to be known as a secondary transaction, that then later everybody would wake up and realize, like, oh, this is a great use case for this.

Allow the entrepreneurs to take some money off the table so they don't sell the company for $50 million. Instead, let everybody make $50 billion, but nobody else is willing to do it at this time. They were the only VC term sheet and the only ones willing to structure a deal like this.

Ben: I also love how everyone was making hay during the Clubhouse deal that this was some kind of new phenomenon. Like, oh, my gosh, $10 million to the company's balance sheet and $2 million to the Clubhouse founders when it's only a few months old? What is Andreessen Horowitz thinking? This is crazy town. The Benchmark-eBay deal, that may have been 50% of the round or at least 25%.

David: The deal gets done in the summer of 1997. You don't have to wait long for the fruits of that deal to ripen.

Ben: Unbelievable.

David: In September 1998, just a little over a year later, by which point in time the company with Benchmark and David Beirne highly involved, has recruited Meg Whitman, the superstar Meg Whitman from Hasbro and previously of Disney strat planning fame.

Ben: That's right. She was part of the strap planning group.

David: Yup. I think previous to that, Bain—I believe it was Bain, one of the big three consulting firms—came in, took over as CEO, and lead this business. God, does Wall Street love this story. At the IPO in September 1998, Benchmark's stake of the $6.7 million they invested was worth $400 million.

Fortunately for them, though, they're still locked up for another six months. They can't distribute. By the time the lockup expires the next spring in 1999, that stake is worth over $4 billion on an $85 million fund.

Ben: A $6.7 million investment turned into $4 billion.

David: In a little over 18 months, less than two years. The IRR on that is unreal.

Ben: This alone 47X's their fund.

David: Yes. Now, if something did or didn't happen with a secondary and these loans, and if those were incremental to the actual equity investment, which we don't know for sure if they were or weren't, but if they were, if what is recorded in the Washington Post in that old article which is linked to in our sources is true, that's another $1 billion kicker on top of the $4 billion.

Ben: Which is an additional 12X on a fund that would have already, whatever, 47X'd.

David: Unreal. Whether you're talking about $4 billion, $5 billion, whatever, and Benchmark distributes that. They locked that in. That is real returns to the funds limited partners, to the GPs.

Ben: We do know for sure that they distributed $4 billion.

David: Yes.

Ben: I just want to pause real quick and say fund one did go through the dot-com run up and burst. In 2000, after that, a lot of the investments—actually not eBay—looked much worse very quickly. eBay had obviously a drop, but not like a drop to zero or anything, so depending on when they got out of certain things. At the point that eBoys was published, the mark on this fund was 92X. But even if it went down, we know it was at least a 50X, because we know for a fact that $4 billion was actually distributed to LPs.

David: Now remember back to the premium carry. Oh, boy, 30%.

Ben: Remember how I was painstakingly explaining that the first 1X goes back to the LPs. Then only after that do GPs participate. That's a rounding error at this point. Even if they didn't give the first 1X back, if you 50X a fund...

David: Even by the most conservative analysis—assuming no secondary kicker, everything, just what we pretty sure actually know—that's $1.5 billion of carry dollars to be distributed amongst the equal partnership after the eBay investment. They had slices of carry. I'm sure, Val retains some carry after he left. Famously, I think Bob pushed for this. They gave pieces of carry to their assistants. You hear the stories about Benchmark assistants becoming multimillionaires. That was it.

Ben: This is how.

David: This was how. I think before the IPO, but after eBay is clearly working and Meg Whitman is there, Benchmark had been doing for a while and would really embrace bringing in entrepreneurs and residents in doing the EIR strategy of company formation, bring somebody who wants to start a company in, house them at the firm, help them get started, bring the whole partnership together to help them, and incubate the company. They did this with an EIR named Danny Shader.

Danny comes up with the idea for a company he calls accept.com. He notices eBay is becoming so big. It's now this viable platform on its own, but actually doing payments for auctions that are completed is pretty hard. He says, I think there's actually an opportunity to build a separate independent company to do payments on the Internet, and specifically to start with accepting payments for sellers on eBay.

Benchmark partnership gets super excited about this. They bring in eBay, they bring in Meg. Meg is talking about like, we like this, we need this, maybe eBay will invest in the deal itself, too. They put the deal together. They fund the company Benchmark does.

The IPO roadshow starts, Meg gets distracted, eBay ends up not investing. After the IPO is done, eBay gets cold feet. They don't do the deal. They're thinking about, oh, should we build this ourselves? Should we look at other acquiring companies? PayPal doesn't exist at this point.

Ben: Right. Why are we partnering at all? Shouldn't we own just 100% of this thing if we're bringing all the customers to it?

David: This company is stillborn at this point in time. What are they going to do? The whole business plan was payments on eBay Auctions listings, you think this would be a zero. They call up Amazon.

We talked about this on the amazon.com episode. Fortuitously for them and for Benchmark, Amazon was starting to think about competing directly with eBay and launching Amazon Auctions. They swoop in and they buy accept.com for $175 million of Amazon stock. Benchmark gets some Amazon stock.

Ben: And would become close with Jeff Bezos. There was all that long standing relationship between Jeff and Benchmark.

David: eBay then, they do buy another company, but one that does not have good technology. It doesn't work out. That's what leaves the window open for PayPal a couple of years later. There were so many points in time where the window should have closed for PayPal to be started. There's no reason that that company should have been successful or existed yet.

Ben: But unforced errors just kept happening in front of them, and they just kept having that open window.

David: It's so fun. It's such a fun sidebar. Fun to tell it now from the eBay and Benchmark side of things as we told it from the Amazon side a little bit ago.

Ben: Why is it that in less than two years, Benchmark's stake grew 100,000%? Why did eBay appreciate so quickly? To put a finer point on that, they invested at a $20 million pre-money valuation. By the next spring, the company was worth $21 billion.

David: I think there are a few things. The simple answer to that question is, the world and the financial markets woke up to the power of the Internet, and what heretofore was a secret hiding in plain sight right in front of everybody's faces that like, hey, the Internet is this incredible enabling technology, and you can build real businesses that make real money on the Internet, was not something that most people believed until then.

Now, other people in Silicon Valley did, of course, believe that, Kleiner Perkins being chief among them. But there was another non-consensus from a Silicon Valley perspective aspect to the eBay deal that Benchmark was willing to see and exploit that nobody else did, which was that the external facing aspects of this company did not look anything like the kind of companies that Silicon Valley backed. But if you just looked at the numbers, it was working.

This was already working. The outward factors made it look like there was a ton of risk investing in this business, but it was already de-risked. It was already working.

Ben: From the outside, it looked like this UI sucks, no one will ever use this, and also, it's not a real business of people selling Beanie Babies. They were getting laughed at, so a super non-consensus from that perspective. Sidebar, the first business enterprise that I ever did in my entire life was selling Beanie Babies on eBay.

David: No way. You were a merchant.

Ben: Yeah, totally. I sold three Beanie Babies, two of them for $100 each, and one of them, a Jerry Garcia bear for $350. It's weird that I remember all this.

David: Oh, I remember that Jerry Garcia bear. That was the real hot commodity, right?

Ben: Yup. It's interesting. To answer the question of the growth, there was intrinsic value growth, certainly, of this company growing 10% per month. It had some fits and starts. There were times where it was growing even faster than that.

And then there were times where it wasn't growing at all, because the servers were down and they had to work directly with, I don't know if it was DAC or Sun but someone to come help us fix whatever we're breaking on your hardware by scaling so fast and using this for purposes that you never intended it to be used for because this was pre-good web servers existing.

Also, the multiple growth was just nuts. People were willing to project way farther in the future, because they thought, okay, retail is a big market. If the Internet's actually a thing and people are willing to transact on the Internet, then, my God, this business is going to enable online peer-to-peer commerce with no holding of inventory. This is an asset, light, high growth, pure technology business in a gigantic consumer market. Let's go. Of course, bubbles happen.

David: Of course, that would never happen again.

Ben: No, of course not. It's funny. I looked up eBay's market cap today. If you look at eBay's market cap when they went public, it was a couple of billion dollars, then of course, ran up real fast as we talked about to $25 billion, stayed there through the dot-com crash.

The bottom of the trough, I think, was something around $7 billion, and then it would have another run-up in 2004 up to $77 billion. But after going up and down, buying PayPal, and divesting PayPal, after all this, do you know where it is today, David?

David: I believe it's about $25 billion, right?

Ben: $23 billion right about the market cap. However many years later this is, 22 years later, right around the market cap where Benchmark got liquid.

David: Wow. That's so crazy.

Ben: Isn't that wild?

David: And right about 1/50 of Amazon's market cap?

Ben: Something like that. It's still astonishing to me that in the long run, Amazon ended up beating eBay. It makes sense. It's that Bezos quote about, in the long run, there is zero misalignment between customer experience and shareholder value. Customers get a much better experience from Amazon holding inventory and Amazon doing all this really hard, low margin, thread-the-needle stuff in order to create this great user experience, but that stuff compounds.

David: That is the perfect transition to come back. I want to talk about the Benchmark architecture itself and analyze why the equal partnership, the teamwork, and everything worked here. But first, speaking of Jeff Bezos of Amazon, I think we should talk about our next sponsor of this episode, the one and only pilot.com.

Ben: Yes.

David: Pilot is one of our longtime, very, very favorite companies in the Acquired family. They set up and operate your entire financial stack as a startup and growing company, including your finance, your counting, your tax, even higher level CFO services like investor reporting. They can't yet be a software version of a Meg Whitman in a box for you, but they're working on it. They will get there someday. AI, you can do amazing things.

Even without yet getting to Meg Wittman, all of this stuff that otherwise you would be hiring either an old school accounting firm to do or spending half a million dollars a year bringing in a full-fledged CFO, VP of finance, finance team to manage for you...

Ben: Recruiting Dave Beirne to then further recruit you as CFO.

David: Yes, indeed. Much better to replace all of this with an outsourced service and software. The Jeff Bezos mega theme that we talked about all the time that we dove deep in the last episode on AWS of focus on what makes your beer tastes better, do not build your own infrastructure if it is undifferentiated to what goes into making your actual product, your beer tastes better.

Finance and accounting for 99% of startups and growing companies out there is that you should not spend your limited cash resources, but more importantly, your limited time resources as a founder during this. How many founders do we know who in the past would like to get smart at using QuickBooks?

Ben: Never the right use of time.

David: Not the right use of time. Do not do that. Go to pilot.com. Use them. For the vast, vast, vast majority of companies, this is way, way, way better. They take all that headache off of your plate. They provide you with a team of experts who this is all they do all day.

They also, and this is what makes Pilot itself such an awesome technology startup backed by Sequoia, Index, Jeff Bezos himself, finance these days for most companies, runs on technology. It runs on fintech. It runs on Stripe, it runs on Modern Treasury, it runs on Brex, it runs on Gusto, Shopify, Square, you name it. Your traditional accounting firms are not staffed by a bunch of engineers that are going to build integrations directly with that software.

Ben: No, and there's going to be 10 more of those. Pilot is going to be the people that build the integrations as those things become things that your company uses.

David: Totally. Stripe itself is an investor in the company. There's no way that either doing this yourself and integrating those APIs is worth it or that an old school accounting firm is going to do this.

Do yourself a favor, go to pilot.com/acquired. Make your life easier. Eliminate all the pain of finance, tax prep, accounting, from your company for good. Thanks to our friends and Pilot co-founders—Waseem, Jessica, and Jeff—all Acquired listeners. If you use that link, pilot.com/acquired, you will get 20% off your first six months of service. Pilot, you guys are the best.

Ben: Thanks, Pilot.

David: All right, we've told now the story of Benchmark fund one from pre-founding up through fund one, raising it, the marketing, the founding religious fervor around equal partnership, the rocky start, and then the hiring of David Beirne, the getting the swagger back. It all is working.

Maybe before we continue on the rest of the very much more to come of Benchmark history, I think we should take a step back and talk about, okay, this equal partnership thing itself that they marketed so much around the beginning of the firm that really was the founding ethos, how did this actually play out in practice?

Part of it, obviously, was economics. Part of it was what they thought was right. Part of it was LP marketing. Part of it was counter positioning against John Doerr, obviously, for sure.

Ben: How do we be different? Do something that they will never ever do, which would have been giving up an enormous amount of their personal economics.

David: Right. John wasn't going to make the other partners at Kleiner Perkins equal partners to him. It was not going to happen. And there are downstream impacts of that to portfolio companies, to winning deals, but also to then working with portfolio companies. John and Kleiner almost lost the Amazon deal when he tried to hand off the board seat.

Not only did that not happen at Benchmark because there were no junior partners to hand the board seat off to, in the case of eBay, it was the opposite of that. Like, hey, we'll all come help you. We're going to bring the whole talents of the whole firm and all of our varied skill sets to help you.

There's the other counter positioning aspect versus John and Kleiner of, there's no keiretsu here. There's no being forced to work with other companies. There's no, you are a part of a larger whole. You're not a cog in the machine.

This is a boutique by design. This cannot get bigger than what it is. Everyone is special. Everyone gets attention. Every partner within the firm has full context on who you are and what you're doing.

Ben: Designed not to scale.

David: Yes.

Ben: Now let's talk about some of the second order benefits or effects. Everything is about trade offs. It's the benefit that comes with the problem. It creates a culture of unbelievable trust. I think this was some of the surprise upside of the model.

When nobody has any incentive to claim credit for anything because everyone already has the best job at the best firm, then it forces even the most competitive people of which they all were unbelievably competitive people to have a sense of teamwork, that just wouldn't have happened otherwise.

As we know, from Buffett and everyone else who has said it over the years, incentives drive behavior. If you truly create the incentive for this group of people to be this team-oriented, then all you're left with is this culture of teamwork and this culture of trust, where you're all in bed with each other. You have signed up to be, for better or for worse, a part of this person's success or failure.

David: Let's unpack those incentives, because I think there are several layers to this. There's the obvious economic incentive. David Beirne made as much money on eBay as Bob Kagle made on eBay, as Bruce Dunlevie, as Kevin Harvey, as Andy Rachleff, made on eBay. They all made the same. If one of them could help give a boost that would add an incremental couple of billion to that market cap, it was well worth it to all of them.

That's the most baseline obvious one, but I actually think that's the less salient one on a day-to-day basis. Having lived myself as part of firms, we all have too, obviously, the money is the scoreboard. Your job is to provide outsized returns for your limited partners and it matters to you. But on a day-to-day basis, that is not part of your mind every day.

What is much more salient to most people who are working as investors within a venture capital firm, is the impact of what they are doing on their own career trajectories. In any other structure, that is either the foremost thing on your mind or the foremost thing at the back of your mind. You may profess otherwise, but it is there. It is there every day in what you're doing.

Just one small example that the older generation and some of the current generation Benchmark partners like to talk about. The older folks are thinking back to their previous firms. Say a senior partner has a portfolio company that they're on the board of, that they're responsible for that investment, and there's an executive hire that would really help. You know a candidate who could be the perfect candidate for that firm.

Is it in your best interest to send that candidate to that firm or to wait until one of your portfolio companies has a spot open for that candidate? There's economics. But even more than that, making that senior partner’s track record better not only does you no good, it does you net negative good because it widens the gap between them and you.

Ben: Once you introduce a secondary incentive, which you have when there is anything junior-senior, and the incentive is to become senior, then there's a misalignment. Whether someone chooses to act on that, they're not good for not doing it. They're not evil for doing it. It's just worth acknowledging that a new incentive exists, so it will change the behavior.

This isn't to say, every fund should all be equal. The only way this works is if everyone truly brings the same amount of value to the partnership. Because otherwise, over time, you will have a situation where even if you're equal economically, you become unequal in everybody realizing, hey, that person is not bringing it the way that we're bringing it. That creates just as big of a problem.

David: You've brought up the absolute crux of this. We've now read, watched, and listened to probably just about, I won't say 100%, but probably 95% of all the content out there about Benchmark. I don't think this is talked about anywhere else. I think this is hopefully the biggest piece of context we can bring to the understanding of Benchmark and venture capital in our industry with this episode.

There is a very obvious question when you look at Benchmark, you look at their success, and you look at their success over generations, which is, if this obviously works so well, why doesn't everybody do it? Why doesn't it work everywhere else?

The Benchmark firm model is very, very much in the minority. There may not even really be any other firms that are structured the same way as them. I think what you just brought up to me is the crux of the answer. There are two ways that this partnership model in the Benchmark style can play out, depending on the personalities involved.

For most groups of people, I think it actually trends towards mediocrity. This was some of the criticism of LPs and some of the other GPs in the early days thinking they were crazy. They called it a communist capital. This looks like communism. If everybody's responsible, nobody's responsible. You trend towards the squishy middle. I think for a lot of groups of people, that's what the natural outcome of this would be.

Ben: Not to mention, you have people that are over compensated and some that are under compensated if you're not all bringing the same amount of value. The incentive there has messed up, too, because I think this is a different way of saying the same thing you already said. But if you're the person that brings the most value, but you're not being compensated for it, then...

David: Why are you giving 80% of your economics to these other deadbeats?

Ben: You start showing up in a mediocre way.

David: Yup, you're going to leave. For this model to work, you need every active general partner, every owner of the firm, everybody who is in that equal slot, to be bringing it at an equal level, both in terms of effort and in terms of output, to bring it to an equal level and to literally the utmost of their capabilities.

I think it does trend towards equilibrium and equal level of effort and bringing it that everybody brings, but you need a cultural norm of, we're all bringing it 100% every day. That's, I think, a big part about what the initial swagger that Benchmark had. Then that reset afterwards, I think, really set that as the tone. That's what I think makes it very hard for other groups to replicate.

Ben: Yeah, and I also think that's why they have to retire once they aged too far out of their 40s, because it is an implicit thing among the group of, you got to be bringing it all day, every day. At some point, if you want to notch down to 90%, it's time for you to not be a GP in the fund.

Especially after talking with folks who are and have been partners, I think a lot of this is implicit. I don't think this is codified and rules anywhere. I don't think a lot of it is explicitly set in conversation because they have an awareness of how unbelievably delicate the trust is and how you need to create an unbelievable support system for your partners to be able to succeed. You have to be super supportive of them to make the riskiest possible decision because that is the business that we're in.

You have to find the outliers. You have to go find these weird marginal edge cases. If somebody feels like they don't have the trust, support, and safety in their partner group, they're not going to do that. A lot of conversations, well, I think it's very like a familial group. There's lore about these 10-hour Monday meetings, where it's meandering, it's jovial, and it's friendly. I think the hard conversations have to be just so delicately handled in order to maintain this very delicate state.

David: It's constantly bounced on a knifepoint, I think. Here's what's even harder about maintaining that knifepoint equilibrium, the nature of our business, and particularly the nature of early stage. Even the very best investors and the most engaged, the people who are bringing it on the effort, and who have produced and are likely to produce extraordinary outcomes going forward, all hit dry spots.

I was just recently, the other week, listening to Roelof from Sequoia. He did a great interview on Tim Ferriss' show. An awesome conversation. It's freaking Roelof. He's running Sequoia now. He took over for Leone. And one of his very first investments was YouTube. Right out the gate, he's crushing it, but then he hit a dry spell. It was really hard on him. It was hard on the partnership, and he talks about it.

Now imagine you're within the Benchmark partnership, and one of the partners or multiple to partners, hit one of these dry spells. How do you disambiguate as a member of that group? Do I think that my partner or this person can pull themselves out? Can we as a partnership together pull them out of this dry spell? Will they get back to performing at the top of their game or not?

Ben: You have to keep their head game strong. You can't add to the pile of reasons to have self-doubt.

David: I think this is the trade-off of implicitly architecting a firm like Benchmark the way that they have if you're going to maintain world-class performance.

Ben: It will not scale, but you do get this next level of trust that you can't get any other way, which should lead to outcomes. Actually, this is a good time. I was debating if I was going to actually mention this on the episode or not, but I want to.

In preparing for this, I was talking with Rich Barton. Rich famously started Expedia by spitting that out of Microsoft, and then started Zillow, where Benchmark was an investor. Rich, for a long time, was a venture partner with Benchmark.

I think it was only when he jumped back in the seat as CEO of Zillow that he stopped being an active venture partner there. His point to me was, 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.

David: We've told several of them on this podcast.

Ben: Yeah, but this cooperating your way to success is the Benchmark's secret sauce. Because of that and because the relationship with a Benchmark board member who is almost like a co-founder, and the entrepreneur is so tight, and the communication is so frequent—we talked to founders who said, I'd speak to my board member every week and we talked to other people who said, we're texting or calling every single day—this is really a tight knit relationship in how they think about the board role.

Rich's point was, this culture of cooperation and trust ends up being a model for entrepreneurs to bring into their company. It's amazing having that kind of example to follow. I don't think he meant that it was super direct or overt, but I think he meant that you naturally end up learning from that, following it, and implementing it in your company.

David: Yes, this absolutely spills over into the portfolio company relationship, both between the lead, the board member within Benchmark. But even more so, and I think this is one of the things that makes Benchmark very different from other firms, the whole firm of Benchmark, the whole partnership, the firm is the partnership. There is no difference between the firm and the partnership, there's nothing else. That relationship with the entrepreneur in the portfolio company.

Ben: If I'm a founder and I am choosing a board member, it's crazy how most people don't think about this because you're mostly trying to figure out, can I get a deal done, can I get a deal done in good terms, that sort of thing. But really, what you want is a board member who feels psychological safety in their partnership to do the things that they think are right without conflicting incentives. It is crazy how rare that is for someone to actually have that psychological safety.

David: Bringing it back for a minute to the psychological makeup of the individual partners within the partnership and why it's so critical and delicate, a big theme of this first part of the Benchmark story we just told was having to have the swagger. If you don't have the swagger, if you don't have the, one of the folks we talked to called it swashbucklingness, if you don't have that, the magic disappears.

For anybody who's played sports, the minute you start thinking when you're out there on the field, it's game over. You're not going to win, you're not going to perform. You got to be out there feeling yourself believing I'm going to hit that shot. I'm going to make that play. Give me the ball, I want the ball, we're going to win. If you don't have that mindset, you're going to crumble. That's why I think these things are so intricately tied together in a partnership structure like this.

Ben: Now that we laid the groundwork of how delicate it is, how essential it is, and how at the core of Benchmark's every fiber of their being is, let's talk about the first time that they recruited someone new into the partnership. That's got to be pretty hard to be the first person coming in to be the next generation of the firm.

David: After the big success, because David Beirne was this, but it was part of almost a reset. They hadn't had that success yet. We're now post-eBay, late 98, early 99, the IPO has happened, distributions are being planned underway. You've got a pretty interesting set of circumstances here. The model worked.

Ben: You had the highest performing venture fund of all time in terms of returns to LPs of a meaningful size fund.

David: Yes. It worked bigger and better and faster despite the false start than I think any of them really imagined. You also have this element that we just talked about of like, you got to all be all in for this to continue to work, but everybody just made hundreds of millions of dollars. What now?

Ben: Why are we raising from LPs again? Why aren't we just turning this into a family office?

David: Of all the times to declare victory, they could actually declare victory now.

Ben: Why are any of us going to work anymore at all, even if it's to invest our own capital?

David: Even though I think they all do recommitment—eBoys talk about this a little bit—it's hard to know what the actual psychology was of any of the folks at the time. But as painted in eBoys and as born out in practice, they all do recommit. Nobody raises their hand and says, you know what, I can't go 100% anymore, I'm going to do other things. They do later, but they don't now.

Even despite all that, the game just got way harder for them because they went from the people painting the targets on the back of John Doerr and other people to now, they're the ones with the targets on their backs. That's the lesser problem. The bigger problem is the target of people who want to work with them.

They're now overwhelmed with opportunity. The easy opportunities are the deals, the investments, the entrepreneurs, the new companies. Even as the tech bubble starts to burst, Benchmark is now one of the top tier firms. They get all the calls. They get to see whatever they want to see, basically.

Ben: There are a bunch of things we didn't even talk about, like all the Fortune 500s that are calling them to say, start a joint venture with me to create a dot-com. You don't even have to put any money in, but help me recruit the management team and understand how to do a startup.

David: This is the big problem.

Ben: Nordstrom and Toys R Us.

David: This is the bigger problem—the distractions. Literally, Goldman Sachs calls them up and is like, we want a Benchmark-Goldman Sachs joint venture.

Ben: And not like you become Goldman Sachs. It's more like help us create the goldmansachs.com.

David: You could imagine, that could lead to all sorts of things. The car companies called them up. GM (General Motors), the original, the DNA of two of the partners. They want to do the same thing. General Electric wants to do this. There is so much, and then we're going to talk about LPs, international, and all of that in a minute here.

Ben: There's an opportunity to raise a lot more money. Should we do that? Maybe $5 million was a small fund.

David: For the five partners, there's a lot of debate about what to do now. It's not clear what to do. They don't have to do anything, as we talked about, but they're all committed they want to do something. Some of them say, hey, are we actually cutting off our nose to spite our face by not hiring associates and junior partners here and scaling up, scaling our capacity? We started as associates. We learned the trade, and look at us now. Why can't we do the same for other people?

Some of them say, we should be doing all of these JVs. We should be moving towards a more next iteration modern version of this Kleiner keiretsu concept. If we have a relationship with Goldman Sachs, if we have a relationship with General Motors, if we have a relationship with Toys R Us and Nordstrom, isn't that helpful to all of our other entrepreneurs?

Ben: Oh, they started something. If you look at their website from 2002, God, I'm so glad the Wayback Machine exists, they have a page called Our Corporate Network. They've got like 30 different companies on there that the text says, the Benchmark corporate network is made up of key industry executives who accelerate the growth of our portfolio companies by facilitating strategic partnerships sitting on boards and offering advice where appropriate.

Companies active in the Benchmark corporate network include, and it's of course, tech companies—TSMC, Toshiba, Intel. But it's also companies that are bridging the old world and the new. You've got Charles Schwab and E-Trade. Of course, there are companies that were never in their portfolio, but are other big successful tech companies like Cisco.

David: You got some partners saying we should do that, and then you've got other partners saying, guys, don't mess with success. The model ain't broken, don't fix it. We should stay focused and stay doing the exact same thing.

Ben: Could you paint a picture either way? There's definitely a picture to be painted of the eBay thing really worked out. This set of principles we had was a really good way to get started, but the world's going to change and it's going to pass us by, so we need to adapt. If the new wave is the dot-comification of America's greatest companies, we’re in an amazing place to either seize that or let it pass us by and let it slip through our fingers.

There was a very compelling argument to be like, let's be the future. If you look at Andreessen Horowitz, what they decided with Web3, they made that choice. Let's, at the risk of destroying everything, bet on this brand new big wave that we think could be the thing.

David: Sequoia too. Sequoia expanded internationally. Sequoia added a growth fund. Sequoia raised bigger funds. There are very clear examples of success in pursuing any of these paths.

Ben: Listener, where you might expect us to go here is, 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. But despite what they are today, that is not at all what happened.

They tried everything. They threw the kitchen sink at corporate partnerships. They expand to multiple continents at the same time. They were like, oh, let's raise a billion dollar fund. They tried it all.

David: Two thoughts. One, the one thing that they didn't do, the one thing they stayed true on, was they didn't bring on junior partners.

Ben: That's a hard decision to undo once you do that. You can undo all this other stuff.

David: Hard, but you can, and they did it. The other thing I was going to say on that, the other firms we talked about that were successful with different strategies, were architected in a way that they could pursue those strategies. Sequoia was a CEO firm, Don Valentine was the CEO, and then Mike Moritz was CEO, and Leone was COO, Roelof is the CEO now.

Ben: There was someone who could make a call.

David: Yes, there was someone who could make a call who could say, I'm taking time—as Doug talked about on our episode with him—Mike and I are taking time. We are going to travel to China, and we're going to go find the right partners for us in China. You all here are going to keep doing what you do here making investments in Menlo Park.

Ben: Tending to the chickens.

David: What a great episode that was. That was so fun. Andreessen, they are an organization. They have hundreds of people. All the things that they're pursuing, the corporate partnerships, the Web3, and all that, there are hundreds of people working there in all different roles and levels. That's not Benchmark.

The one thing, though, as you teed it up here that they all, pretty much right away, are in agreement after eBay is, let's bring in a sixth partner, a new, equal general partner. Let's continue the model. Maybe we'll pursue some of these other things, too. But under minimum, it's time to bring in a new general partner.

They've done this before, of course, with David Beirne, but it was different. Now, it's Benchmark. Back then it was Benchmark Capital. I haven't heard of you guys. Now it's Benchmark.

Ben: Honestly, listeners, I'll put the link in the show notes. If you go to the 97 website and the 2002 website, it is comical to see the word Benchmark in this. They're selling so hard. They don't sell at all now, at least in a public facing way. It's almost like someone made a cartoon about Benchmark when you go looking at this.

David: You tweeted about this that they had directions from the airport.

Ben: There's a literal map from both San Jose and San Francisco. It's like, here's San Francisco, here's San Jose, here's Stanford, and here's Benchmark. That's amazing.

David: Now, when you're bringing in a partner with the Benchmark equal partnership model, there's no try before you buy. You can't bring them in as a junior partner, see what happens, and be like, oh, you'll get a sliver of economics in this fund, we'll see if the partnership gels, we'll see if you perform here. No, you can't do that. You got to go all in from the beginning.

When you accept that that's the set of constraints you operate in, there's actually a very narrow path that it makes sense and a very narrow pool to fish in for future Benchmark partners, which is if you want to be reasonably confident that somebody's going to be a good venture capitalist, you probably want to find people who are already good venture capitalists.

Ben: Yes, that's a great point. You could develop the talent internally.

David: But you can't at Benchmark.

Ben: It's like, we can develop it internally, but the way we're set up prohibits that, so we must look elsewhere. What should we do? We should look for someone who has been in the industry long enough that they've burned through all the capital being a bad VC, because there are a lot of tropes about it takes seven years or it takes $50 million to make a VC, which I think are all quite reasonable, because your first several investments, it's like you're getting the crap out.

David: You may hit some winners, but it's probably going to be luck, not skill.

Ben: Exactly, and you don't really have the right networks yet. You haven't sat on boards with other VCs, even seen how people and other firms operate. There are just lots of reasons why it takes a lot of money and a lot of time to form you into a great venture investor.

But you don't want someone who has been doing it so long such that they're already the most senior person at their firm or their toward the end of their career. If you're going to recruit them in and make them equal partners, you want to have 20 years of running room left in that person's career. That scopes you in super narrowly to, you need someone who's probably 30 and the best 30-year-old venture investor.

David: Yes, currently on the field. Back to the original founding impetus of Benchmark, somebody who's operating within a firm context where they are not an equal partner with full economics and it's going to be very attractive for them to transition to a place where they are.

Ben: On a personality trait characteristic, just to keep narrowing further and further, they need to be fiercely competitive, but also under the right set of conditions, an unbelievable teammate.

David: Yes.

Ben: The box gets small.

David: It gets very small. At this moment in time, late 90, early 99, there is one very obvious, very large person who fits in that very small box.

Ben: You need him to be over 6'5'' and a white man. They all did fit that characteristic early on, but fortunately more diverse now.

David: Which is funny now. Peter is the only white man left as he's fond of pointing out, which is great. That is progress. Bill Gurley, of course, we're talking about.

Ben: Yes. He sees above the crowd.

David: I can't imagine that anybody listening now, 2–3 hours into this podcast that's still listening, does not already know about Gurley. His history is basically perfect for this. He's also from Texas, he's from Houston. His dad worked for NASA, I think.

He goes to Florida. He plays basketball. He started his career as an engineer at Compaq (a John Doerr company). He goes to Wall Street, he starts reading Above the Crowd. There's a great interview he did years ago with Kara Swisher. I think this was where he tells the story.

When he started Above the Crowd, he went to a tech conference that Stewart Alsop was putting on. They were selling this new device, PalmPilots, at the tech conference. It's a new next wave of technology. Obviously, Bruce was on the board, even, he wasn't focused on that at the time.

These PalmPilots at the conference had the contact information for all the attendees of the conference, including Bill Gates, Steve Jobs, and these people. Bill bought the PalmPilot and then just started spamming everybody with their fax numbers with his Above the Crowd post.

Ben: I do know, Michael Mauboussin shared the story with us that the way that Bill originally started Above the Crowd was there was someone else who sent out a fax that was a weekly equities analyst, effectively, like blog posts, like newsletter. They would send it out by fax at a certain time. When that person retired, Bill started Above the Crowd to start sending the faxes at the same time and fill the slot that this other person had, which was of course, genius.

David: And then he added to the contact list from the PalmPilot with fax numbers. It's so genius.

Ben: Did you know, David, he eventually also started writing for Fortune.

David: Oh, yeah. I'd forgotten about that.

Ben: He had a regular column in Fortune. He would always leave at the bottom. If you have feedback, email I think it's like atc@benchmark.com. I think it was the Above the Crowd.

David: That's awesome. He's a good growth hacker. He's underrated on that.

Ben: Very good at distribution.

David: Very good at distribution.

Ben: And it turns out, venture capital investing.

David: We'll get into that. We tell the story elsewhere. He'd been on Wall Street. He then worked for Frank Quattrone in Silicon Valley. He did the Amazon IPO with Frank.

Frank promised to get him into venture if he came out. He did. Bill joins Hummer Winblad. He spends about 18 months there as a venture capitalist, but he's a well-known commodity.

Ben: One of the rare female-led venture firms.

David: That's right, especially at that era. They're very, very, very few. Bill's just good. What can we say about Bill that hasn't been said? One of my favorite things when we were talking to folks is so perfect. Bill has a Calvinist work ethic. It's absolutely true having worked with him on some stuff.

Ben: I actually pulled all my quotes from research from things people said about partners into one place. I definitely have this one. “Having someone like Bill Gurley on your board is really like bringing in a new co-founder. He is always working on behalf of your company intellectually and executionally.”

David: It sounds like the Bill I know. He is funny. All of this is chronicled in eBoys, the whole recruitment process, all the internal discussions about Bill. Of course, it's eBoys, so you got to take it with a grain of salt. It's dramatized. What's interesting, when I read it, there's this discussion about Bill that just screamed off the page to me, where the existing partners are concerned about whether Bill's too intellectual.

Ben: And too analytical. He'll overthink the decisions.

David: There's this quote in there from one of the partners saying, I don't think it's attributed to whom, "We all know that this is more a balls than brains business." When I read that, I just wanted to yell at the book I was like, this is a balls and brains business. Nobody personifies that more than Bill. I can't believe how wrong this is. God, this is so eBoys.

Talking to a bunch of folks and thinking about this, I actually see what they're getting at. At that era and all of what had gone into making Benchmark, Benchmark at that point in time, it was more balls than brains business, because you had to be willing to take risks that others weren't willing to take. They were certainly open to doing that. With the exception of eBay, with the exception of the one that was the one.

You were backing companies at that era that hadn't put the products in the market. You had to raise venture capital for most companies to get the infrastructure to build the product. There was no AWS yet. You had to make those people bets. At the stage the Benchmark was investing, you weren't investing on product traction.

Ben: Which is really interesting, because Benchmark mostly markets themselves at this point as a Series A firm. That is not how they marketed themselves then. They said, we do seed and startup investments, seed being pre-business plan and startup being post-business plan.

David: Right, but not customer traction.

Ben: Exactly. What I was really trying to figure out, how did they shift from seed to Series A, and why? I think there are shades of gray. I think what they actually did was they shifted to Series A for consumer, and they're still willing to do seeds in B2B.

In fact, there's a great Gurley quote where he says, "Backing a repeat entrepreneur in the enterprise sector is near risk-free." I think basically what happened is, as more and more consumer startups started happening in the early- and mid-2000s, you basically had angel investors that were starting to come in and fill the randomness risk, the pre-launch, no traction, who knows.

David: The product building risk.

Ben: Right, because consumers were so hit-striven that Benchmark basically said, okay, we'll let you guys take that risk. We'll invest at the point of traction or the point of product/market fit. Because these consumer products are such frequent crap shoots that we don't want to be playing in that seed stuff anymore for consumers.

David: I have so much to say here. One of the most obvious things to me here that's so funny is eBay is like the exception that proves the rule, but is the rule. eBay had traction when they invested. That's what made it non-consensus. But actually, that was the smart thing to do because it had traction. That's where they made the lion's share of their returns.

Bill joins from Hummer Winblad. Do you know what Bill's first deal at Benchmark was?

Ben: No, I don't.

David: It got some real fun Silicon Valley history trivia here.

Ben: OpenTable?

David: Nope, Epinions. Do you know who the CEO of Epinions was at the time?

Ben: No.

David: Naval.

Ben: Really?

David: Naval Ravikant. Yup, that was his debut in Silicon Valley. That did not end well for Naval.

Ben: He did Venture Hacks after that.

David: And then he went to do Venture Hacks. He ended up leaving the company and was replaced as CEO. I think that was probably a big part of why he went and did Venture Hacks. It was anti-VC in Silicon Valley. That led to AngelList. Now, how funny, how full circle it all comes. Bill also talks a lot about this on that Kara Swisher episode. It's so good.

Bill joins. We got to tell this too from eBoys. There's this really funny vignette. The partnership can't get comfortable. The one thing they're having trouble with with Bill is, is he going to overthink things? Is he too analytical? Is he too intellectual? Does he have enough balls?

Kevin Harvey invites him on a hunting trip. He has hunting property. On the hunting trip, Bill apparently greatly impresses Kevin by jumping over a cliff to go chase down either a deer or a boar that they're hunting and go like...

Ben: In the rain?

David: Yeah. And Kevin's like, woah, I wouldn't do that. Okay, this guy's got balls. I'm not worried about that anymore. Oh, so funny. It's just everything, so eBoys.

Two things to talk about here. We got to talk about the Imperial era, but first, let's flash forward a little bit. I want to talk about Bill and his investing and how it ends up transforming the firm over time. He's a great investor in enterprise and consumer, but he becomes known for marketplaces.

He's very analytical. He does well. He does some of these early marketplaces. He does OpenTable, he does Zillow, he does Grubhub. He does what becomes oDesk, DogVacay that merges with Rover, et cetera.

Ben: HackerOne.

David: Yup. The earlier era than that, Grubhub, OpenTable era, and all. Those were great wins. Bill worked tirelessly, I think, to help make those companies' successes. They weren't eBay-sized wins. They were far from eBay-sized wins.

Ben: Benchmark did not have an eBay-sized win until Bill's big marketplace.

David: Exactly, but I think it's very retrospectively, and there's so much randomness tied into all this. I do think that inside of the Series A style investing, Bill and Benchmark in the next generation, recognize that shift of like, oh, there's a mispricing here. Benchmark used to invest in seed and formation stage taking the product risk.

You can now invest at the Series A, post product risk where there's data. You can see if something's working or not. You can make crazy seeming bets like Uber at a $60 million valuation that are actually deeply in the money. You cannot lose money. That was the era when Benchmark really shined.

Ben: That's the thing that bill really brought from being an analyst and from writing regularly. We've referenced probably 10 times on the show, A Rake Too Far, Bill's post where he compares all the different take rates and what goes into a take rate. There's so much tying that into moats and pricing power. He just understands all this stuff at such a deep level.

I think we shouldn't disparage the other founding partners. It just wasn't their skill set. It wasn't their strength. They didn't look at financial statements and develop emotions around what this business was good at, bad at, and what the future could look like. They sat in a room with entrepreneurs and thought, does this guy have it? I think it's a very different skill set.

David: Very, very different skill set. To bring it back now to this moment in time when they're bringing Bill on and also facing all of these other decisions and opportunities, now that Benchmark is Benchmark, it's interesting that that decision, the bringing Bill on, the evolving the partnership, that was the right decision. All the rest of it was the wrong decision, so let's get into that.

Ben: To dive in on your right decision, I just want to add a little more color. The series A was the place to run to for that period of time because of the mispricing you identified. If they had said, we want to stay a gut-based business and we want to stay out of the formation stage investing. The rise of seed firms, accelerators, and angel funds, meant that that got so competitive so fast that they probably would have needed to go multistage and raise huge funds in order to compete rather than being lost in the baselines and lowercase.

David: There's just no way. Let's take Y Combinator, which is the big institutionalized winner out of all that. Benchmark couldn't have built Y Combinator. They weren't architectured to build Y Combinator.

Now the interesting thing is there is this interregnum period. It wasn't until after AWS that all this became possible, which wasn't until the mid 2000s. From when Bill joins and all these decisions around the table in 1999–2000, you've got another 5–6 years before the world shifts.

Ben: Okay, what are all the other decisions they made?

David: Like we said, the only thing they don't do is bring in junior partners, but they do everything else. They raised a billion dollar fourth fund. Before that, the first fund was 85. I think the second, I want to say, was 150. And the third, I think, was 175. I think those were the core funds, and then there were parallel entrepreneurs' funds on top of those. You top it up a little bit to allow individuals and entrepreneurs to invest as well. That was the scale that they were investing at.

They raised a billion dollars for the fourth Menlo Park-based, Sand Hill-based fund. They expand internationally, first to Europe, and then to Israel. Bruce essentially moves to London. He's commuting back and forth, but spending a lot of time in London for the first year setting all that up.

Ben: Which again, for all these things, the thesis makes sense. They looked and thought, eBay, that could have been started anywhere. There's no reason that needed to be here in the Bay Area. It actually, at the beginning, at least, didn't require that many employees. It was matching people who are shipping stuff all around the world. We've got a brand and we have a unique ability to raise capital from LPs, we should be leveraging that for the next eBay that starts anywhere.

David: Yup. They recruit seven partners, new partners to come in and run the international funds. The separate Europe fund and a separate Israel fund both structured the same way but separate partnerships.

Ben: The interesting thing is that it wasn't like, now we're all equal partners in one big pool. It was, you guys are a fund, you have your own equal partnership, and we will come to an economic agreement where you get to rent the brand from us.

David: But the reality was, especially in those early days, there was a lot of work involved from Benchmark. It was Benchmark LPs that we’re investing in. It was the Benchmark brand. Then they had to go recruit the partners, put everything together, and then instill the Benchmark way in them or tried to.

Ben: Deal with answering the question, how do you guys handle it when there's XYZ in the partnership? There's suddenly real administration in the group that's allergic to administration.

David: We didn't mention this earlier, but there's one last tidbit I wanted to say. The upside benefit of the trade-off of running a partnership like Benchmark, you get to spend all your time on the field when you're a small equal partnership. You're not spending your time managing the firm, worrying about managing the firm, worrying about where your career is going, or worrying about this, that, or the other thing. Literally, 90%–95% of your time is spent playing the game on the field, which is making investment decisions, helping portfolio companies. There's nothing else.

Ben: Right. Imagine, David, you and I spend all of our Acquired time on research, recording, final tweaks on the edit, and then, how do we want to message the release of an episode? Imagine if I had a recurring meeting for three hours on your calendar on Monday mornings about how should we hire the next 15 hosts to come up with and acquire all the listeners for all the new shows we're going to make, you are the exact wrong person to do that job, and that is the allegory.

David: That is a big reason why Acquired is what it is today. We talked about that years ago. Should we have more shows?

Ben: Should this be a company? And we were both like, absolutely not.

David: No, that's not what we want to do. It's very similar here. But Benchmark, to take the personal analogy, they wanted to run Acquired, but they instead decided to go build the New York Times.

Ben: But you can't go halfway. That's the thing. You need to go all the way if you're going to cross that chasm.

David: Pretty quickly, the cracks start showing in this model. Here's what they do. They raise the billion dollar US fund, they raise a $750 million Europe fund, they raise a $220 million Israel fund. The Europe fund, they ended up cutting back to $500 million after the bubble burst, because they're like, we just can't invest $750 million. We can't deploy at all.

Even still, you're now talking about a firm that the previous fund structure was on the order of $200 million, mostly in Silicon Valley but all in the US, to now on the order of $2 billion around the world. It's a big task that they bite off. The cracks start showing almost immediately. The three examples, all of which are sins of omission, which are the biggest sins in venture capital.

None of the sins of commission of deals you do are what's really going to hurt you. It's what you don't. The first, and this happens shortly after Bill joins, but as all of this architecture, all of this infrastructure is starting to get spun up, that's when Google shows up.

Ben: Does Google pitch Benchmark?

David: It's unclear to me exactly what happened. Bill talks about it a lot. I think this is one of his few biggest regrets. He said that publicly. He had just joined the firm and Google appeared. Some subset of the Benchmark partnership, including Bill, heard about them, met with them, and had an opportunity to pursue.

Bill always frames it as, they failed to pursue Google. Not that they passed or that there's a pull part, but they didn't pursue it with the typical Benchmark and Bill hyper competitiveness drive to win that we all know. They declined to pursue.

Would they have beaten John Doerr for Google? Maybe, maybe not. Debatable. Would they have beaten Mike Moritz for Google? Again, maybe, maybe not. Mike had done Yahoo at that point. Maybe slightly more believable that they could beat Sequoia at that point in time. But could they have beaten one of those two firms to get one of the two primary VC slots in Google? Almost assuredly.

At this point, this was where they had just done eBay. They were at the height of their powers. They were an internet firm. Google was the next internet company. They had a relationship with Bezos, even though Kleiner had a tighter relationship. But remember, Bezos was a very influential and large seed investor in Google. Gosh, that's a big mess.

Ben: Yeah. Okay, Google is a miss.

David: Google is a miss. Okay, that's one. Next, a much smaller miss, but still a big miss for a different reason. They've got this Europe fund now. What happens with a really promising European company that has aspirations to be a Silicon Valley company and go global? Does the Europe fund do it? Do the core Benchmark Menlo Park partners do it?

Ben: Wait, can I guess where this is going?

David: Yeah.

Ben: Skype.

David: Skype. That emerges a couple of years after all this gets set up.

Ben: Out of Tallinn, Estonia.

David: Out of Estonia, and Bill talks about this, too. He met Skype. Skype is right up his alley, right up Benchmark's alley, and eBay ends up buying Skype. But should Bill do it? Should Benchmark Menlo Park do it? Should Benchmark Europe do it? Are they trying to hand it off in the process? They lose the deal, so that's another miss.

The third miss that is not directly related to international expansion, but I think is more symptomatic, perhaps, of taking your eye off the ball. But a Google-sized miss is that they missed Facebook. We know Sequoia is out for Facebook, because of Sean Parker, the pajama pitch, all that bad blood. Sequoia can't do Facebook. Who else could do it?

Ben: Kleiner was still Kleiner at that point, right? The tumult hadn't started there.

David: Totally. Accel ends up doing it. Accel is a great firm. Jim Breyer does not take anything away from them, but absolutely Benchmark should have been and was in the conversation.

Ben: This is 2004–2005.

David: Yup, for the Series A, for the $100 million valuation of Facebook, very similar to that Google round. What happened? Specifically, what happened was Benchmark had invested in Friendster, and was conflicted out. Now you could argue that was an unavoidable mistake, but boy, does that hurt.

Supposedly, I think it was Bob Kagle, who was on the board of Friendster. At that point, there had been some CEO turnover at Friendster. Jonathan Abrams, who then started Nuzzle and Founders Den. He was the original founder of Friendster. I'd forgotten that.

Ben: Oh, my gosh, with the original Acquired meet-up at Founders Den.

David: Indeed, and now runs 8-Bit Capital. They had brought in Tim Koogel as CEO of Friendster at that point. Tim had been CEO of Yahoo. Tim blocks Benchmark from pursuing Facebook.

Ben: Oh, is that really what it was? Did they know about Facebook? They never got to look at it because of Friendster?

David: That's the story. Supposedly, Mark Zuckerberg loves Bob, loves the Benchmark team. Who knows? My point is, if you want to be a generational-defining venture firm, by definition, you have to invest in the generational-defining companies. They did that with eBay.

The international expansion happened. For a whole variety of conflicts and reasons, no Google, no Skype. Skype is not generational-defining, but they should have been there to do it. No Facebook.

Ben: Bummer.

David: I think you can probably trace most, if not all of that back to probably making the wrong architecture decisions.

Ben: This is 2001–2010, actually not a great decade for Benchmark. They had some good investments. They had OpenTable.

David: Well, not 2010. I would say until 2006–2007.

Ben: Okay, fair. But if we look at the biggest wins out of that period, it's probably OpenTable, Zillow.

David: Grubhub.

Ben: Instagram wouldn't have been yet. That's probably those three that we just mentioned.

David: Yup. Finally, after all this, and I don't know if this was before or after Accel doing Facebook, but right around the same time, legend has it that one of the Menlo Park Monday partners meetings, I think it was Kevin Harvey who finally just said what probably everybody was thinking at that point in time of, guys, why are we doing this?

Ben: We don't need to be wandering in the woods.

David: Can we go back to focusing on what we all actually want to do here, which is invest in California with the right size funds, do early stage, focus only on the game on the field, and not do all this? Supposedly, one by one, everybody's like, yeah, actually, that sounds a lot better.

Ben: This is after that article came out in Bloomberg that I think is pretty illustrative of the time. It was in 2000. The title is, Still The Benchmark To Bet On? It's funny because in 2000, this is still very early in their wandering in the woods years of everything you're talking about right now, but it raises a lot of the right concerns.

David: Yup. There's a great quote in there that I'm sure everybody involved regrets. I think it was Mark Kvamme from Sequoia about, does Benchmark have the technical prowess to relate to the next generation of founders?

Ben: That was a good dig. Like, hey, they're not technical, and how are you supposed to work with technical founders?

David: It was a good dig.

Ben: The other screw up that they had is they really started changing strategy on their core stuff, too. They did a late-stage mezzanine investment in 1-800-Flowers that was not a good investment right before their IPO. Why are they deploying capital into that?

David: They had a billion dollar fund, they had put that money to work to get on to the next one. Again, the Benchmark roller coaster continues. It was up, it was down, it was up, but now it's down again.

Ben: And this kind of thing is why you need to treat the partnership with such delicacy. This is where the relationship stuff really matters, where you need to have built that foundation of safety and trust so that you can call each other on. Hey, we got to massively unwind a huge thing that we did here as a partnership, and not take it personally, and know that that person is thinking with all of our best interests in mind, and not thinking less of me as a human because of it.

David: Totally. That happens. That 2004–2005 era, post Facebook, they do that. They spin-off Europe, they spin-off Israel.

Ben: Becomes Balderton, and then Michael Eisenberg goes and starts Aleph in Israel, both of which have become great funds.

David: Yup. We didn't talk to either of those teams, but I would imagine they exist. They're great firms now, because Benchmark helps set them up. It's not like this was not any value created for the world. It just came with some real trade-offs.

Around this time, the first actual wave of retirement, of stepping back of some of the original partners, happens.

Ben: And this is the test, right? Are they actually going to take no further economics?

David: Are they going to live up to the founding principles? They were on the other side of that table at this point 10 years ago. They've now been wildly successful. They've had ups and downs at Benchmark. It's time to refocus the firm. What are they going to do?

They do it. They actually do it. They resist the temptation. David Beirne and Andy Rachleff, and they had brought on another GP during that period, Alex Balkanski, in the 2005–2006 fund. They raised then. They all step back. They don't take tail economics, meaning they're out of the management company. No longer formal decision-making power in the firm, the current ownership structure, the management company transfers to the current GPs, and they don't take carry in the new fund. They keep working, keep carrying the boards that they're on from the old funds.

Ben: And their LPs, their big LPs.

David: And their big LPs, yes, in the future funds going forward with their own personal money. But they actually make a clean break. They do the transition that they had asked for so many years ago.

Ben: What's the GP group look like at this point?

David: At this point, heading into fund six or in the mid 2000s, the lineup is Bruce, Bob, Kevin, and Bill. We're down to four—three of the original founders plus Bill. Still a very good lineup, but you probably need some more firepower to really pursue what you want to do here.

Ben: Like what you were mentioning in the 1996 recruitment, where they went and got Dave Beirne. The spree of recruiting that they go on here to inject a little giddy-up back into Benchmark. They go and get hitter, after hitter, after hitter. It is the most impressive lineup of venture capitalists to all suddenly join the same firm. This retrospectively feels like the heat, but none of these people were these people yet.

David: No. Peter Fenton is the first of these new blood to come on board. He has a quote at TechCrunch Disrupt 2020 many, many years later talking about this. He's asked about Bill and his time in this period of Benchmark.

He says, "Bill, like me, isn't a founder of Benchmark. But in a sense, we have acted as though we were founders of Benchmark." This is a refounding of the firm with the blessing and not direction of what to do but the prescription from the original founding group to go forth, do your thing, and figure out what's going to work now.

Ben: Yup. In many ways, it's just back to basics.

David: It's back to basics, but it's back to basics in a way that makes sense for the moment. What did they do? Peter Fenton is the first person to come on board.

Ben: And Peter joins from Accel?

David: And Peter joins from Accel, which had just done Facebook. Peter wasn't directly involved in the Facebook investment but was part of that relationship with [...].

The other thing about Peter that we heard from folks talking to you was, at that time, the existing group of GPs at Benchmark and in particular, Bill, they found that as they were going and meeting companies, everything that they would get interested in as they're going around the valley, they'd show up and Peter had already been there. They saw him coming out the door. He was one step ahead of them in all of these companies.

Peter has an interesting background. His dad is Noel Fenton who was an entrepreneur and then founded Trinity Ventures, the venture capital firm Trinity.

Ben: Oh, I didn't realize that.

David: Yeah. Peter grew up in the business.

Ben: First, his dad hated VCs, and then he became a VC.

David: Yes, who just found Trinity.

Ben: Which is a common path. I think it's like, I want to do things differently.

David: Totally, but he fits the bill. Just like Bill when Bill joined, he was early 30s. He had an established track record. He was young, he was hungry, he was up and coming. He was a baby GP in Accel, but he was not a full GP.

Ben: Is that a formal title?

David: Yeah, baby GP. That's the formal title. Here's what I would love. If Acquired can have some influence on our industry—this is what I love—I want transparent titling on LinkedIn or whatever. Just be clear about what you are.

Ben: So does every founder.

David: Exactly. Like, I'm a baby GP. I'm an old, crusty senior GP. I've hung around too long.

Ben: I have a lot of economics, but I'm not currently doing deals.

David: Exactly. Peter is a baby GP. He's had a bunch of early wins at Accel, and he's clearly out there hustling. He's clearly smart. They make the pitch to him to join in. On the one hand, it's an intelligence test, like it was an intelligence test for Bill to join. On the other hand, there are some questions about Benchmark right now.

Ben: Yup. Oh, it's the first generational transfer. It's like, oh, this is a firm that had one big win and some other wins in that fund. Look, if you 90X a fund or whatever and only 40X of it comes from one company, clearly you had multiple winners. But one fund that was really great, and it's been a tough several years. A bunch of those people from the big successful fund are stepping away. Bill Gurley hasn't become Bill Gurley yet. What am I joining and how certain is it?

David: Those are the questions on the Benchmark side. There's a massive question for Peter on the Accel side. Let's take off the table whether Accel made a counter offer for him to be a grown up GP or not. Whether they did or didn't is irrelevant. He had GP economics, even if they were baby GP economics in the Facebook fund. He's walking away from that to join Benchmark.

Ben: Wow. Yeah, that's not an intelligence test. That's an emotional decision.

David: That's a gut check. Do I really, really believe in this refounding of Benchmark, this refocusing on this model? Do I think it can work? Do I think Bill and I and other people we recruit can bet on the future here, and it'll be worth me walking away from Facebook fund economics? So he does.

Ben: He takes it.

David: He takes it. I think he's probably pretty glad he did. It becomes a great decision for everybody involved. In short order, Peter goes on to do Twitter, Dockers, Zuora, Hortonworks, New Relic, Elastic. He brings Bret Taylor of Google Maps and then Facebook fame into Benchmark as an EIR. They do Quip together.

Ben: And Peter Fenton had been an investor in FriendFeed when Bret Taylor started that before Bret sold that to Facebook.

David: You're right. That is how he made the journey from Google and Google Maps to Facebook.

Ben: Unbelievably, Bret has gone on with the Quip acquisition by Salesforce to become the president, co-CEO of Salesforce with Marc Benioff, and also is the chairman of the board at Twitter who is the central spokesperson for this ongoing lawsuit with Elon Musk. The Bret Taylor universe is unbelievable.

David: The Bret Taylor cinematic universe.

Ben: Yes.

David: I love that. I don't know which Avenger he is, but he's one of them.

Ben: Yes. Okay, Peter is new partner number one coming in in the next slot after Bill. Who's next?

David: Next is Mitch Lasky. Mitch I think is really super under the radar and kind of unsung part of what comes to be the Fab Four era, and they truly are. The analogy is the Beatles here. Mitch had been founder and CEO. He has been a games industry guy. He worked in the games industry his whole life and then founded and was CEO.

Ben: He started game studio?

David: Of an early mobile games company called JAMDAT that bill had led the Series C and was on Mitch's board. The super random about Mitch, he was later in his career. He had been a founder. He didn't like VCs either. Why would he do this? Why would they recruit him? JAMDAT had gone public and then had gotten acquired by EA in short order during this period where Benchmark didn't have a lot of wins.

Ben: It's the plight of all good games companies. He'd get acquired by EA eventually.

David: Indeed. Ah, Tripp. What a great episode we did with Tripp back in the day. Mitch had actually pervaded over one of the bright spots for Benchmark during that era. Mitch, criminally—so few people aren't familiar with him—just went on Patrick show on Invest Like the Best.

Ben: Great episode.

David: You got to go listen to it. If you want to understand Mitch and why he's so special, go listen to that episode. Games investing, but also just broadly why you would want him in your partnership. I got to work with Mitch on the board of a company called PlayFab that was started by James Gwertzman who's now Andreessen Horowitz's gaming GP. It all comes full circle.

Ben: Small world.

David: But he joins next. Mitch would have some incredible wins in these coming funds, not just in gaming. Gaming, he would do thatgamecompany, which is under the radar, but it's doing incredibly, incredibly well.

Ben: It's literally called thatgamecompany. David's not forgetting a word here.

David: That is the name of the company and several other gaming investments, but also Snap, Discord, big, big, big time wins. Mitch joins next, and then the final member of the Fab Four gets rounded out. They recruit from Facebook, and this is still when Facebook is a private company, leaving Facebook as a private company, having been employee number five at Facebook, and before that, employee number I think less than five at LinkedIn, Matt Cohler.

Ben: Matt Cohler is the single best person at understanding consumer social products, maybe all consumer products, and maybe all consumer psychology in the entire world.

David: He's super smart, I understood, but he was there. Talking about knowing the future, Don Valentine knew the future because he had been in National Semiconductor, worked with the Traitorous Eight, and all that. He knew what was going to happen.

Matt had been at LinkedIn and then he'd been at Facebook. He knew the future and just had this fundamental unfair advantage over everybody at that point in time. He also got all of these new folks. Bill got what AWS meant for the industry, Series A investing, the difference between formation stage, seed investing, and investing in data and traction.

Ben: Matt is the person who we have referred to on previous episodes when Kevin Systrom was negotiating to sell to Facebook. Due to the court documents, there was a conversation leaked about Kevin strategizing over Aim with a very strategic adviser about how to position the sale to Facebook. Of course, who would know Mark Zuckerberg's psychology and what Facebook would and wouldn't do better than employee number five at Facebook. Matt Cohler, of course, is that confidant.

David: He also has one of my very favorite lines that I, before doing this episode, had assumed was a truism of venture all along. I now realize what's a specific moment in time truism that something had changed, which he says, "Our job as venture capitalists is not to see the future, but to see the present very clearly." That, all of a sudden, became true at that moment in time, thanks to AWS, thanks to the Facebook platform.

Where you could now do these Series As, these still early stage "investments," where there was no product risk, there was no adoption risk, there was no market risk. You were still looking at early data, but you could look at Instagram, you could look at an Uber, you could look at a Snap. You could look at the data and you can say, my God, this is working.

Ben: Yes. It is awesome watching 10- and 15-year-old videos of Matt on stage at conferences, talking and just basically being 10 years older than everyone else. He has a quote. I think he's onstage at TechCrunch Disrupt with maybe Mike Arrington in 2011-ish.

He's like, "I don't think anybody understands mobile advertising. This is going to be so huge. This is much more like TV advertising. Everyone thinks it’s going to be less valuable. I think they're all wrong."

The primary thing you have to understand is this is basically a TV where we can take over the whole screen. It's enriched with all this other data and all this other location. People misunderstand the potential of mobile advertising.

Of course, mobile advertising would go on to become an enormous market. He was very right about that. I've never met Matt, but in the countless hours of him speaking at various things that I watch, he just has the demeanor of a beetle.

David: I think they all were at this point in time in this era, they genuinely were. Fund six is the transition here.

Ben: Wait, Matt didn't have a background in venture. Do you know if he was a big angel investor?

David: I don't think so. I believe he had always wanted to get into venture. Mitch didn't have a background in venture either. Both of them actually were. We talked about the Benchmark spec for hiring a GP. The best way to be reasonably confident in someone's ability to be a good venture capitalist is someone who's already been a good venture capitalist. They were making more riskier bets on both Mitch And Matt, both of which paid off hugely for the partnership.

The other thing that Matt identified long before much of the rest of the investing world and world at large, was the dynamics behind Uber. Even though Bill ended up doing the investment, but they worked as a partnership to source and we'll talk about it.

Matt had this saying back then that was partly formed by his experience with Uber I think, that, “The smartphone is going to become your remote control for the real world.” That was an outlandish thing to say in 2010–2011, but my God, was he right.

Ben: Yup. Okay, you have the slate now. You have the Fab Four. You have Bill Gurley, you have Peter Fenton, you have Mitch Lasky, and you have Matt Cohler. Of course, I think Bruce Dunlevie is still an active partner at this point, too.

David: I think Bruce and Bob are still active, at least in fund six. Maybe a little bit into fund seven, but fund six is the transition. Fund six is great. I believe it'll probably end up being 5X-plus, 5X–10X fund. Instagram's in that fund. That's like Matt's third or fourth investment, which is my God. They return the fund on the investment but with the sale to Facebook.

Ben: Because it's sold 12 months after they did the Series A. Imagine doing a series A investment. I don't remember the valuation of Instagram Series A.

David: Call it $50 million, maybe less.

Ben: Right. To 20X in a year, it's crazy.

David: It's very hard to turn that down.

Ben: It's also funny that Sequoia claims Instagram was one of their investments where it sold 48 hours after they invested.

David: Yeah, they were an investor for two days. Hey, branding. Success in venture capital leads to success and venture capital. Bill told me that once. Instagram's in that fund, Asana, which was actually Matt's first investment, which was former folks from Facebook. That took a long time, but they end up getting public on that. New Relic, Hortonworks, a bunch of Peter Fenton IPOs, are in that fund.

Ben: New Relic which was incubated in their office.

David: Yup, because Peter had invested in Lew Cirne's previous company when he was at Accel. To Bill's point about repeat entrepreneurs and enterprise are as close to a sure thing as you can get. By the end of fund six, it's clear. There's something special going on here, and then that leads into fund seven, which I think was...

Ben: 2011, and they raised $550 million for Benchmark fund seven.

David: And it's the four of them.

Ben: Benchmark fund seven is about as close as you can get to speed running in venture capital. This is a group that had perfectly gelled from fund six. The world was their oyster. They raised the perfect size fund with the perfect GPs who have expertise in all the things that were going to flourish in the next decade, and they could look and they could just execute.

You could argue fund one was like this. Certainly from a returns perspective, fund one was actually better than fund seven, but they had to wander in the woods to find their way. This was just like a perfectly set table.

David: Yes, 100% on all that, and two things I would add. One, I think they knew a secret that very few other people in the industry knew, which was this Series A is in a favorably mispriced asset.

Ben: Right, which it's not now. When someone thinks that could be the next Facebook, that's why Clubhouse gets done at 100 million immediately, and then shortly thereafter, billion.

David: Most Series As are not done post product/market fit anymore. Now, seed and A and B are often pre-product/market fit.

Ben: When there's a thing that is the next big consumer social app and it's showing signs of that, everyone knows exactly what to look for and prices that appropriately.

David: Yes, but that had not happened yet by any stretch. That's one thing I'd add. Two, they had the swagger. They knew they had a secret. They knew they had the right team. They knew they had gelled as a team. And they were willing to just go run, not overthink things, and play the game on the field.

Ben: It was a perfect balance of gut and intellectualism.

David: This fund is ridiculous. Uber, Snap, Discord, thatgamingcompany, Stitch Fix, Duo Security...

Ben: Docker.

David: Elastic, Nextdoor, and WeWork.

Ben: WeWork, at the time that they got liquid, I do think it was a very, very, very profitable investment for them.

David: Yup. They got money out of that in the SoftBank shenanigans. A quote that we had from talking to folks part of the firm and other entrepreneurs is that it was "swashbuckling insanity" but in a good way in every dimension.

Ben: Wait, is Riot Games in fund seven? That must be fund six.

David: I think Riot might have been fund six, but that was another great Mitch investment. Benchmark fund one was one of, if not the best fund of its size and scale ever. Benchmark fund seven is one of the best, if not the best fund of its size and scale ever.

Ben: According to a 2018 Wall Street Journal article, they reported that before fees, the 2011 fund was sitting on a 25X on that $550 million that is a venture fund, a full sized venture capital fund that 25X'd. Of course, it may be lower than that now, but I think it's still north of 20, depending on when they got liquid on what, because this is something we'll talk about in the playbook. Benchmark knows how and when to sell in addition to how to identify these phenomenal companies.

I think the Benchmark philosophy is that they don't want to hamstring the next generation with any of their decisions. It's funny. All I have is these gut feelings from talking to people. But I think the way Benchmark works is when they handed over the next generation, first of all, they don't do it all at once.

They do it in this blended way, so they can carry a lot of the institutional memory with them, but it's, you guys do what's right for you, here's what worked for us. By the way, what worked for us probably will work for you, but you need to make that decision on your own. Again, I don't think it's said. I think these things are kind of unsaid.

David: Yup.

Ben: Listeners, the Fab Four era just to put a fine point on this, you had by this point, the very best marketplace investor in history in Bill Gurley. You had Matt Cohler who literally helped create the DNA of the modern social media company as an early Facebook employee. He's investing in consumer social. Again, these are too narrow of swim lanes. They're doing other stuff. You had one of the best games investors to ever live investing in games with Mitch Lasky. And these are super clear swim lanes.

It was the best decade of all time to be investing in the categories of marketplaces, consumer social, and games with mobile having an undercurrent of all of it. On top of all of this, you have Peter Fenton as a utility player, a total shark across all categories from doing the Twitter investment to New Relic.

David: Especially open-source software, enterprise, and bottoms-up adoption, he did great there. But they all blend in too, like Mitch did Snap The point is it doesn't matter. It was a refounding of the firm back to those original principles of it genuinely was, they were functioning as a team. Matt found Uber, but Bill was the right board member. We'll talk more about Uber in a minute here.

Ben: Yeah, let's do that. I think, so far, this has been the Benchmark glory fest. I think the takeaway is overwhelmingly positive here, but let's continue to paint some of the trade-offs and some of their tougher moments.

David: Two things just to put the cherry on top of the fund seven fab for glory fest. In March of 2015, which really was the apex, I think, of this era, ironically, after Eric joined, so there were five at this point, but Eric had just joined, Eric Vishria, who we'll talk about in a sec, but Forbes comes out with this article. Man, I remember this article. It will always be seared in my memory working in the industry.

It was post-GSB back in Madrona at this point in time. This article comes out in Forbes called The Benchmark Way. "Five partners," because it was five at this point, Eric had joined, "who make other VC firms look outgunned and overstaffed." It was just this chronicling of the Fab Four era and all these companies we've talked about. Everything they touched turned to gold.

We listed all those companies that all other firms would kill to have one or maybe if they were in their wildest dreams to have those portfolio companies in their funds. They had like 12.

Ben: And they own like 20% of each of them. It's not like they're cutting little checks here and there. On average, each partner takes one board seat per year. When they take a board seat, they invest at the Series A, and they own 15 to 20-plus percent.

David: In those days, I think it was 20+, 20–25.

Ben: Yeah, pretty wild.

David: All right, should we talk about Uber?

Ben: Yes.

David: That was a journey, and ends up being the bulk of the returns in fund seven, even amongst all those great companies.

Ben: In 2018, when that Wall Street Journal piece came out, their holding in Uber was worth $8 billion. That alone would have 16X the fund.

David: I think at that moment, they sold some to SoftBank in a transaction at that point in time.

Ben: That's their thing. They've gotten liquid on a lot of things along the way. In February 2018, Benchmark sold almost half of its stake in Snap and realized a billion dollars in gains. I don't remember the time frame exactly, but Benchmark sold $900 million worth of Uber shares to SoftBank and at that point still owned $7 billion as of 2018.

David: And to rewind the Snap for a minute, Benchmark I think was instrumental in encouraging pushing Snap to go public as soon as they did. Remember we did that whole episode way back in the early days of like, holy crap, Snap is going public after four years of existence. That's crazy. There was a whole structure, it's all in the SEC filings. It got to be massive, like a $600+ million bonus for a successful completion of an IPO. They're very good at this.

Ben: Even knowing when to sell things, WeWork. They sold a lot of WeWork shares to SoftBank. I think it's actually still part of some ongoing litigation where SoftBank didn't want to complete that transaction.

As an aside, actually on WeWork I was watching a video with Peter Fenton and he said, "We were involved with WeWork. That guy was as pathological as you could possibly imagine and then go further. The stories would blow your mind." I almost feel like we're just not going to get into WeWork on this episode. We did that whole thing with Dan Primack.

David: Yeah, no. That's not the point of this episode. You can hear about that elsewhere. We should definitely, though, talk about Uber.

Ben: Yup. All right, Uber. Famously, Gurley had been studying the space, and had been dealing at Taxi Magic.

David: Taxi Magic. We talked about it all on our Uber episode. He had literally been searching for this company. He tried to get Taxi Magic to become Uber. It didn't happen. There's so much great history. Go listen to that.

Ben: The original Uber pitch is actually Garrett Camp coming in and pitching the limo thing. Travis isn't CEO yet. Finally, Travis gets in the seat. There's some product/market fit. It seems to be happening. Benchmark invests, Gurley joins the board. 2011 I think that happened.

David: 2011. A $10 or $11 million Series A at a $60 million post money valuation.

Ben: And one of the first investments out of fund seven.

David: Yup. There are such great fund stories of that era that I think is just fun to think back on like a happier time in Silicon Valley and show the swashbuckling insanity of Benchmark at the moment. They knew they wanted to do the deal. Before the final partner meeting, Travis was pitching at Sequoia right before. Uber was active in San Francisco, but wasn't active on the peninsula down on Sand Hill.

He had taken an Uber down from San Francisco to all the firms on Sand Hill Road and told the Uber like, hey, just wait for me, nobody else is going to call you here. The Benchmark guys knew what was going on. While Travis is inside at Sequoia just up the street, they call the Uber away, so then Travis has to run.

He literally runs down Sand Hill, which if you've been there, it's like a quasi highway. There's multi lane. Anyway, after they do the deal, they send him a pair of Nikes as a joke. Anyway, fun stuff. Then right after that, Travis goes on to JCal's show on TWIST, one of the best TWIST episodes ever, episode 180, and talks about the deal.

Ben: Is that where he talks about the Michael Ovitz episode, too?

David: He talks about Ovitz. I'm just watching and I was like, man, God, Travis was sharp.

Ben: Was, is. He's just behind the scenes now.

David: I mean, great upside, great downside, but mam, he was good. Uber was good. Those days were something special. Anyway, Jason asks Travis at that moment. The deal had just gotten done. Jason had been an angel investor, of course.

Ben: Jason, an angel investor in Uber?

David: Oh, was he the third or the fourth angel investor in Uber? We'll have to ask him about it. JCal, we love you. Jason asks Travis on this episode, why did you go with Benchmark, why did you go with Bill? And Travis just doesn't blink. He's like, they're the best.

I went with them because they're the best. I didn't want to work with anybody else. I knew it was Bill, I knew it was Benchmark. They are the right partners. They are the best, period.

Ben: That is what two other portfolio CEOs said and the exact same way that I had talked to privately to prepare for this show. I shouldn't share who they are, but they're like, oh, because they're the best.

David: There was no other need for explanation.

Ben: Yeah. I actually got lots of other explanations. They're this unbelievable partner, they actually can help you recruit executives. Three people told me they feel like a co-founder.

David: We can get into all that in analysis. I'm so nostalgic and wistful now. Do you remember those days? 2010-2015? For a whole industry, it was just a different time. It's so much happier.

Ben: Feels like it, right? I'm trying to figure out, was tech intrinsically better than or did we just not think about the downside?

David: We just didn't know. I don't think anything was actually different. It was still early.

Ben: And frankly, there weren't enough hooks in most products yet to make you hopelessly addicted. The sophistication of applying all the behavioral psychology and the machine learning that applies a lot of the models to just the ruthless execution of capitalism. I don’t think we realized it yet and it was just much more nascent.

David: Of which Uber, a prime example. You all know what happens. It’s interesting. What’s the right way for us to talk about this?

Ben: There's a thing that we should definitely talk about on the Benchmark episode which is Benchmark with their board seat on Uber ends up suing the founder along with a group of other people. Give me 60 seconds on how we got to that point.

Uber had a lot of bad stuff that all happened seemingly all at once like #DeleteUber, but how did we end up with a situation where shareholders were all looking at each other going, we need to replace the CEO. Otherwise, the company will destroy all the value it's created.

David: I think there are multiple threads to explore here. One, all the reasons we're wistful for or I'm wistful for 2011–2012 when things were just simpler and happier. Uber was at the forefront of all this stuff that made now a less wistful time, everything you said. Some of those were the company's fault, some of those were Travis' fault, and some worked. You look back at #DeleteUber. That was just an absurd situation. Uber was trying to do the right thing.

Ben: Yes. But that was an example of a company where you know how luck is about maximizing the opportunity for good fortune to happen to you. This was the opposite. They had built up so much ill will that a pure misunderstanding about the way that they were trying to help launched a gigantic social media campaign where people assumed they were acting with malice.

David: Yep. Then, you have the Susan Fowler stuff.

Ben: In which case, many people at Uber were acting with malice.

David: Yes, no doubt about that. There was the attitude that was needed. You couldn't have built Uber without the, hey, the existing laws and regulations are stupid. They don't serve consumers and we need to fight them.

The company and Travis never changed that stance. Whereas public opinion started on their side, as things just escalated, moved first slowly and then quickly over to the other side. I don't think the company and Travis moved along with them. That's a tough position for the board. I think that's another thread.

Then, the last thread—and I think this is obviously the Uber situation and the WeWork situation too to a certain extent—is obviously, the Uber situation is the end of the Fab Four era. There's [...] Gurley stays for a while.

We'll get into all that, but that's the end of The Beatles. Just like the Beatles had a 10-year run, the Fab Four had a 10-year run. It stopped being fun. I think part of that, I suspect, was the pressure. You get to a certain point with Uber.

We started out with Benchmark and Bill, and Travis and the company are besties. Lock arms for life. You listen to that [...] right after the Series A. You listen to all the interviews with Bill that Travis is the best, most shining example of representing an entrepreneur I've ever worked with, all this stuff. Then, it doesn't go right from that to suing the company. There are a few years in the middle where Bill starts sounding the alarm in Silicon Valley about all sorts of things. He's not talking about Uber, but clearly, he's talking about Uber.

Ben: And not naming Uber but saying things like, hey, maybe valuations are out of control. Hey, maybe it's not in the founder or any of the company's best interests to be raising this much money at these valuations.

David: Or if you are going to, be in the private markets where there's so much opacity for everybody involved. It was unprecedented. Uber hit with an $80 billion valuation on the private markets.

Ben: Or maybe $80 billion was the number that it was anticipated to go public.

David: Could be. I know it was at least a $60 billion valuation. Whatever it was, that had never happened in history before. Never by an order of magnitude had that happened, and all of a sudden, the rules of the game have changed and things are very different in the amount of pressure on the company, on Benchmark, on the board, and on the LPs of Benchmark—a point that I hadn't thought about until I started thinking about in this research. Say you're an LP in Benchmark.

Ben: Some university endowment.

David: You work at that pool of capital. That is an LP in Benchmark fund seven. Uber is not getting marked-to-market, but you are getting your quarterly marks from Benchmark fund seven based on the valuations that Uber has achieved.

Ben: Which has comp tied to it.

David: Which has your personal comp as an employee of the organization, as an LP, and for the future planning of the disbursements from the delegate. It reaches a point where the amount of capital involved is so meaningful here to so many players all up the stack.

Ben: Thousands and thousands of people in addition to all the employees, all the customers, and the drivers on the platform. You actually have these thousands, if not tens of thousands, of people impacted.

David: By these paper valuations at Uber. The amount of pressure just land this plane, so to speak, or reaches just crazy heights. Is this anybody's fault? Who do you blame? I don't know. But I think this happened.

Ben: Yeah. Then, it was like, okay, we need to get public. We need to get public in a way where people don't fear that the company is going to fall apart. We need to stay on the same order of magnitude of the current valuation so that the world doesn't fall apart for us and all the other investors, all the LPs, and all of the investors in this thing so far. If you have a disagreement about that, there is a greater good than any single relationship you have with a founder.

David: At a certain point, the level of scale that you're impacting here becomes way more than just you and your board member or with Silicon Valley. Even going back to the Bubble, we were talking about Webin. Webin gets liquid, goes public, and trades on the public markets for up to $8 billion. Crazy, right? Here, we're talking about $80 billion, an order of magnitude more on the private markets.

Ben: Benchmark goes through with this. They know that they have an existential risk to their reputation based on suing one of the most iconic, successful founders of all time who many other founders want to be like and many other founders don't want to be like. There are a lot of people who deliberately do not want to be Travis.

David: This is a Rubicon crossing move.

Ben: Right. It's interesting. In some ways, there are actually two ways where I don't think it's that big of a deal. Let's start with the one that's more arguable.

Getting sued by someone that you've signed a very heavy contract with. People talk about it like, wow, no one will ever do business with them again.

That is a thing that's unique to startups and venture capital. There are lots of other agreements and lots of people who do business together where if you start doing ill will by the other party, there are lawsuits. I don't know why everyone made it out to be this big deal because Silicon Valley runs on trust, love, sunshines. If you raise a big debt pool and then you don't use the debt pool for the intended purpose, the LPs and the debt pool will sue you for that.

David: You don't have to look very far. Look at venture capital's cousin, private equity. Nobody would bat an eye here.

Ben: Not that I would ever want to be in that situation and not that I would ever take any of the first 10 steps that get you to that situation, but it always struck me as people are getting really holier than thou around this Rubicon of a lawsuit.

Then, there's the second thing of, okay, did it actually impact them as much as people projected that it could? Was this really an existential risk? I think the answer is no.

David: I think the pretty clear answer is no at this point.

Ben: It's definitely a tool that gets trotted out. If you already have all these other things stacked against you, Benchmark doesn't have a platform team.

David: We haven't even talked about that yet.

Ben: And on top of that, they sued Travis. It's the cheapest shot you can take, but it's a shot you can take and you can bet that people take that shot when they're competing for a deal that's a really important one.

David: I think pretty unambiguously at this point, both in my opinion and just looking at what's happened in the intervening five years since then, the answer to does this meaningfully negatively impact Benchmark is directly, no.

Ben: And probably hasn't, but there's some question around is there some pajama pitch moment where they're not getting to see something because of this move? It's probably not this move. I don't think it's happened yet, but startups take a long time to mature and we don't know what they didn't get to see and why, so who knows?

David: Yeah. Directly, the answer in my mind is clear-cut no. Indirectly, yeah, very little doubt in my mind that this precipitates the end of the Fab Four era.

Ben: That's probably the biggest value destruction.

David: This is the Yoko Ono moment.

Ben: It causes people to retire earlier than they otherwise would have.

David: I don't mean to blame Yoko, but whatever your pet theory is for why The Beatles broke up, this is the end of the era.

Ben: Dude, I watched the documentary. It's because Paul is full of himself. That's the reason.

David: Amazing. I haven't watched it yet. I got to go. We've been doing too much research.

Ben: It's so good.

David: All that comes to end in 2017 and into 2018. In 2018, they do fund nine. Matt and Mitch step back at that point, Bill sticks around for one more fund cycle, and then, of course, probably everybody knows at this point.

Certainly, if you're still listening at this point, Bill has stepped back now at this point and Peter is the only current active GP from the Fab Four era.

What's Benchmark today? To start the answer to that question, we got to go back to 2014 when they brought on another non-spec GP.

Ben: An operator, a CEO.

David: We are, of course, talking about the one and only Eric Vishria.

Ben: Who you introduced me to in 2013 or 2014 when he was visiting Seattle. We all hung together.

David: That's right. What was that great bar we went to?

Ben: I don't remember. Somewhere in Pioneer Square in Seattle in Delicatus.

At the time, I was freaking out. I was like, oh my God, this was the guy with Ben Horowitz who did Loudcloud. I had just read The Hard Thing About Hard Things, and I was like, oh my God. It is incredible, the fact that he worked with Ben.

David: And Mark. He was VP of Marketing.

Ben: On Loudcloud and Opsware and then ended up at Benchmark and not Andreessen Horowitz.

David: He joins. Eric, for anybody who knows him, is an understated guy.

Ben: But total class act. Fits the Benchmark, is understated, and is classy. He'd always go above and beyond, be incredibly responsive, and be courteous. That's despite being—I'm going to say this in the most kind way possible—a killer. He has all those characteristics too. He's so sharp and so kind.

David: Yes. All of the above. Quietly, in the midst of all this, of the transition through the setback half of the Fab Four era and now into the new era, Eric's just killed it. There's no other way to put it.

His first deal was confluent, Series A, $7 million at 24-post companies trading at a $7.6 billion market cap today. Then, he did Amplitude, Benchling, and Cerberus, one of our pet favorite semiconductor companies out there now.

Ben: Yeah, he fit right in. You've got Eric.

David: Now, in 2017, really in the midst of all the Uber stuff going down, Benchmark brings on another general partner. In some ways actually, the very perfect Venn diagram hybrid spec if there ever were a spec for a Benchmark, general partner, and in other ways, the most different general partner that they've ever had at Benchmark. They bring on Sarah Tavel.

Ben: A good friend of the show.

David: The first woman investor and ipso facto GP.

Ben: At Benchmark ever. She worked at Greylock before. She scouted the Pinterest investment and then famously went and worked at Pinterest and helped scale the company.

David: That was when she was at Bessemer.

Ben: You're right. Bessemer to Pinterest to Greylock.

David: Sarah in so many ways, literally, if you were to ask Dalí to paint a picture of a Benchmark GP, it would come out looking exactly like Sarah because she started her career in venture as a junior analyst at Bessemer at which she sourced Pinterest, which was a very non-consensus deal at the time.

She then goes and joins Pinterest as a very early employee and spends years there helping scale Pinterest and working with Ben, the CEO, in building that company. Then, she goes to Greylock and joins Greylock as a baby GP.

I didn't make that up. We heard that in the research, not about Sarah but about Peter. Literally, I can't imagine a more qualified partner to join Benchmark.

Ben: In some ways, she's the Bill protégé that takes his place afterward. She does a lot of consumers. She does marketplace investing. She's very analytical. She's a big framework thinker. She writes a lot. No one's a clone of each other, but you can see where Sarah's swim lanes emerged from when they were thinking, who do we need someone like?

David: Here's the other interesting thing about Sarah and why I think she's a great fit to everything we've talked about at Benchmark here. Yes, you're totally right. She fits that swim lane, but do you know what her first investment was at Benchmark?

Ben: I do not.

David: The very first investment that she made after she moved over from Greylock and joined Benchmark was Chainalysis which does not fit any of those categories and was a very, very non-consensus deal to do in the middle of ICO crypto winter in 2017, early 2018. She did, I believe, a Series A. Benchmark, I believe, has a meaningful part of that company, which is currently valued at $8.6 billion.

Ben: That's the most risk-adjusted way to do crypto by the Enterprise Security Analysis Tool.

David: But I think it's so funny. She fits Benchmark and that investment of knowing a secret that other people aren't willing to recognize, making a correct non-consensus bet.

Ben: You keep saying correct and non-consensus. It's funny. All of the Benchmark partners, or at least some Benchmark partners from every generation, reference Howard Marks' axiom very often.

This is awesome because we just had Howard and Andrew on the show. But Andy Rachleff and Bill Gurley say it all the time. Of course, in order to make money in investing, you have to be both non-consensus and right.

I have heard another addendum to this from a Benchmark partner that I thought was pretty interesting.

David: Do tell.

Ben: You want that to be true when you make the investment, but you don't want to be very non-consensus for long. You want to be non-consensus and right. You just don't want anybody to see it until you make that bet. But you don't want to make that bet and then be sitting there for five years still non-consensus.

David: Knowing the personalities involved, I can tell you exactly who said that, but we will protect their identity to protect the guilty here.

Ben: But it is a great point. It is the point that I wanted to make in regard to eBay. That is the takeaway of, you seem a whack job buying the company that facilitates selling Beanie Babies which seems a nonmarket to within a year having—whatever it was—100,000% growth or something like that on that investment.

David: That was 2017. You got Eric joining in 2014, you got Sarah joining in 2017, and then the next year, 2018, surprise, surprise another spec hire who joins Benchmark as the next GP. Of course, we're talking about Chetan Puttagunta.

Ben: He is a spec hire. While he's been very successful and blah, blah, blah, we can say that one of his greatest successes is joining us for the only episode that we've ever done not about anything related to Acquired, tech, or business where we analyze the last Star Wars movie together.

David: You two liked it, and I was like, what? We can't get into a holy war here because we're treading enough controversial territory here. We don't need to go into Star Wars.

Ben: But that's on the LP Show from four years ago or something. Chetan is a total spec hire for Benchmark. He was 30-ish. He came from NEA. He had already done Elastic, MuleSoft, and MongoDB and knocked it out of the park on all three investments. One got acquired by Salesforce and the other two went public.

The exact thing that we were describing of being in venture for 7-ish years and then having 20 amazing years ahead of you, Chetan is exactly that. Now, you've got two great enterprise investors with Eric and Chetan there.

David: Not to mention it's not like Peter has left yet. You still have Peter Fenton there.

Ben: Yup. That brings us to the most recent person to join as a general partner at Benchmark, Miles Grimshaw, which was last year, David?

David: Yeah. Maybe a little over a year ago, but not long ago. Miles, of course, was the [...] Thrive Capital involved in helping build that firm as a baby GP, all these baby GPs into incredible success there but now part of Benchmark.

Ben: What companies was he involved with there?

David: Airtable where he met Peter and Benchling where he and Eric overlapped on the board. I think Miles was very, very early to Benchling. Definitely before Benchmark and Eric.

Ben: If you want to be a GP at Benchmark, just be on boards with them. That seems to be the takeaway.

David: But even better, join boards before they join,

Ben: And then have those companies be incredibly breakout successful companies. I think that's the answer.

David: That's the playbook.

Ben: That's the lineup right now. You got the elder statesmen with Peter Fenton. You have Eric Vishria, Sarah Tavel, Chetan Puttagunta, and Miles Grimshaw. That is the current Benchmark partnership.

David: Which is funny. That's five. In no way do I mean this to take away from Peter, but he's the last of the Fab Four.

Ben: Save this for analysis. I have a lot of thoughts on this.

David: Okay. We got to talk about NZS first.

Ben: Yes, we'd love to talk about our friends at NZS Capital. For those of you who have listened to our last few episodes, you know that we reached out to Brinton, Brad, Joe, and Jon at NZS Capital to propose the idea of doing a paid sponsorship. They jumped on it and told us, hey, we've got a caveat for you. You can't really do your normal thing and sing the praises of the product. That's not what we want you to do with this.

David: Although I would say if you're talking about Fab Four, [...]. I'm just saying.

Ben: We just want feedback. We know smart people listen to Acquired. We want people to read one of our white papers, think about it, and help us refine the thesis. But first, of course, what is NZS Capital, David?

David: For those few of you now who don't know, they're a long-only global public equity fund that manages money for institutional and accredited investors. They have over $1 billion in capital under management. The team worked together for many years in another much larger firm before starting NZS in 2019.

These guys, if you've listened to any of the episodes we've done with them in the past and the segments of the past couple of episodes on semiconductors, are just among our very, very favorite thinkers on Acquired. They're deep with the Santa Fe Institute folks who also Bill is involved with and Michael Moritz. There's so much connective tissue in all of this and complexity theory. We just love these guys.

Ben: Today, we want to talk about their white paper, Redefining Margin of Safety. Many of you know the margin of safety Benjamin Graham concept. Buffett and Munger, of course, popularized it.

Similar to complexity and to NZS's core thesis, margin of safety is the logical conclusion of what to focus on if you admit that you just cannot predict the future with any precise accuracy.

Ben Graham would, of course, have the very simple version of this, which is if there's a high valuation relative to fundamentals, you have a low margin of safety. If you have a low valuation relative to fundamentals, then there's a high margin of safety, which means if you make the investment, then you should feel like you have a lot of margin of safety with the price being low.

David: Good, old uncle Ben Graham back in the day would probably define margin of safety on evaluation of if you are paying more than half of the cash on hand of the company, you probably don't have a high margin of safety.

NZS, of course, has evolved this thing. They've taken this concept which is a very important one for investing, evolved it, and said look, obviously, valuation alone is no longer sufficient for defining margin of safety and related to their thinking about complexity in this idea that we don't know the future anymore. If you don't know the future, what do you do?

They define margin of safety as management and the company's ability to adapt, what is their adaptability within the company. If you believe that the pace of change is fast and getting faster every single day, then the most important competitive advantage you can have as a company—any company, not even just a technology company these days—is the ability to adapt to that change.

Ben: Yup. Of course, you have to take into account the caliber of the management team generally, but you also have to take into account the rate of change of the particular business that that management team is in.

If you look at Zynga, for example, everything was changing so fast around them and the business was such a high-growth business that even if you could have bought Zynga at a cheap price relative to fundamentals, there's still a lot of risk in the business just because of how fast everything is moving around that you don't have a lot of margin of safety similar to the way that if you are driving at 400 miles per hour. Even if you feel like you're a pretty good distance from the car in front of you, you don't have a lot of time to react even if you're the best driver in the world if there's some extenuating circumstance that happens.

This comes back to an old axiom that we love that NZS writes about a lot, which is that the duration of growth ends up being more important than just the growth rate over a short period of time. All of us who obsess over compounding and understand its power definitely can appreciate that, although it's counterintuitive.

This is a really great white paper to read. If you find it fascinating, you can read the whole thing by clicking the link in the show notes. It is totally worth reading in full.

We say that just because we are fans of their ideas. We are not clients of NZS. But as I mentioned, they really do want feedback. Of course, you can read the white paper and then send them an email. I think their emails are on the front of the white paper, but even better, we did a Zoom call with them a few weeks ago and we're going to do another one because it was really great to get so many of you together to discuss these topics with the authors themselves.

Click the link in the show notes. We're going to be doing this in early October to talk about all of these ideas together. There'll be a link there to add that to your calendar. We'd love to see you there. Thank you to NZS.

David: Thank you, guys.

Ben: Okay, David, analysis of Benchmark Capital. This is a hell of an undertaking. Is it Benchmark Capital or is it Benchmark? I know they used to say Benchmark Capital

David: The entity itself is Benchmark Capital.

Ben: At least their goofy website.

David: Oh, we didn't tell the story of the website. We got to do it here.

Ben: Let's do it.

David: As Ben has been talking about in the episode to do the Wayback Machine, they used to have a truly goofy website.

Ben: Yeah. But I actually think I know something that you don't.

David: Okay. Go for it.

Ben: All right, website. Many people know that Benchmark has a website that is just Benchmark. I think it has some contact information.

David: Linked to their Twitter feed.

Ben: Which, of course, lists their announced portfolio companies in a Twitter list. I assumed that was always the case. I assume they just never updated their website because they thought that would be a way to keep the mystery a little better or at least keep their operations simple. They were actually the very first venture capital firm to have a website in the early '90s.

David: I didn't know that.

Ben: I guess in the mid-90s. They were very early to adopt it. We'll put links to this Wayback Machine. It's just awesome. It is hilariously goofy. You can find directions on how to drive to pitch them.

They evolved it a few times. It got more and more modern. Then, Matt Cohler joins the firm and says, hey, I think we really need to update our website. This is embarrassing.

David: I actually heard the story. It was the opposite. The other existing partners when he joined were like, you're the new guy. For your initiation ritual, you're coming from Facebook, you deal with the website.

Ben: I actually don't know which direction it was. Anyway, I think he worked on it a little bit. He came up with some ideas. He needed to make it more Web 2.0, more interactive, and incorporate live things.

Ultimately, one problem was it ended up putting Benchmark too far forward. It was almost taking credit for these entrepreneurs' success.

That is antithetical to everything Benchmark stands for. They want to be in the background. They want to be entrepreneurial. They want to be that quiet confidant and partner. They think that the best founders will be attracted to the idea that they're not taking credit by featuring those companies on the website, which is an interesting rationale for it.

I think what really happened, or at least what also happened, is Matt was showing it to the rest of the partnership in these early revisions and got a whole lot of feedback and a whole lot of opinions, and it ultimately ended in just saying, hey, actually, I think we shouldn't have a website at all because I don't want to deal with this.

David: Which also added up really because it totally added to the mystique, especially in that Fab Four era. It's so great.

All right, let's land this plane.

Ben: Let's land this plane. Let's talk about power. I think that's a good place to start it before we get into the playbook. I'm not sure there's a more perfect and pure illustration of counter positioning than how Benchmark started.

I think it goes deeper than just, oh, if you are a very powerful, very wealthy senior GP at a different firm, you'd have to give up a lot of your economics and no one would do that, therefore, no one's going to do it. Other firms were not set up to exclusively have partners that were truly equal to each other in value.

Price is what you pay, value is what you get. Price is what you pay the carry that you have to pay someone out and the salary that you have to pay someone, and value is what you get in terms of them bringing great deals and then contributing something to the partnership.

No other firm was set up to have equal value employees. You couldn't make everyone equal because it wouldn't solve the problem. Every other firm couldn't do this. It doesn't mean that this is better, but it is for sure that no other firm will set up to actually do this.

David: A hundred percent. I don't know where this falls on this, but because of everything we talked about this whole episode and because of this all-star team dynamic of for this model to work, everybody has to be an all-star and has to bring it all the time and you have to be committed and capable of being the best on the field, it's also a barrier to entry to other firms starting and copying the model. Sure, you can try and do that, but you got to be the best.

Ben: Other firms have. Lots of firms out there have equal partnerships and no associates, but none of them have 25X to a $500 million fund. It's almost like every decision you make is very risky because once it falls apart, it's done for good because you're not going to attract the next Bill Gurley if you've been mediocre for a couple of funds.

David: The next Bill Gurley doesn't think that the other partners are...

Ben: Exactly. I think one funny thing is realizing how much this faded away. When you're an upstart, you need to be really loud and overt about this stuff. When you're on top, you can let the community speak for you, which is what they do now.

But I love this from Benchmark's 1997 website. This just says it in prose, "Many venture firms recently raised mega funds." They're actually laying out here why you should go with us, not other firms, but the numbers in this are really funny. "Mega funds capitalized at more than $40 million per partner. This can lead to overextension and a lack of accessibility and responsiveness to portfolio companies. Some investors have been known to hold as many as 20 board seats at one time!"

David: That was before people learned the trick of just don't take board seats.

Ben: I love that they just were like, oh, I don't know. Let's just type this all out.

David: Back in that era that early, everything we talked about at the top of the show, these guys were pirates. It was great. I love it.

Ben: Totally. There's another interesting quote in there where you can really hear Dave Beirne's background coming from executive search and being in a very services-forward business. That was not the common belief among venture capitalists at that time. The belief was we walk on water and people would be happy to work for us and take our money. I think Dave Beirne really brought this we are service providers mentality to it.

David: I think that's also very Bob Kagle. That ethos, they all share that.

Ben: Good point. It says, "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."

David: It's so funny that they felt the need to spell all this out. Today, you would never write this. It'd be like, if you have to tell me this, [...].

Ben: Right. I love the $20 million a partner too. It's like, well, we could only raise $85 million.

David: $85 million divided by 5 partners is $15 million. A lot of this is history, but yes, counter positioning, you are so right. This is one of the clearest examples we've ever had.

Ben: Yes. The other one that is extremely obvious to me is branding. The definition of branding is if I hand you an identical commodity with an unbranded or brand B on it, you are not willing to pay as much as you would pay for brand A or Tiffany's. This couldn't be more true. Benchmark and all VCs are in the business of selling American green dollars. And Benchmark's American green dollars...

David: Cost a lot more.

Ben: Yes. I really would want to do the analysis of (again) price is what you pay, value is what you get. Lots of times, entrepreneurs take a deal where Benchmark is asking for more of their company, aka a lower valuation in exchange for the same amount of dollars. Then, the question of value is what you get. How much should entrepreneurs be willing?

David: I've talked to multiple entrepreneurs where it's not just lower. It's the lowest, and they still do it.

Ben: Right. Is Benchmark's money worth twice as much as a competing term sheet? That might be ridiculous. Is there a 20% premium? Definitely.

It's like, what are some easy ways to get back into this? Because there's the squishier stuff of all the feedback we got around, it's so meaningful to have them on my board.

We talk all the time. They're one of the smartest people in the world. They have these amazing networks, so they can help me recruit this fantastic executive team. They know the CEO of all these amazing people who can be customers. That sounds a little squishier but definitely valuable.

The thing that is not squishy at all is it has to be close to 100% of Benchmark companies that raise a Series B. You're completely derisking your next round of capital by becoming a Benchmark partner. It costs Benchmark nothing to have that asset, but they now have that asset because the only people that revere Benchmark more than founders are VCs. Now that they have that asset, they just get better deals on everything because even when they deploy the same amount of dollars that Joe Schmo VC does, their dollars are worth more because it comes with a great Series B.

David: This is the perfect segue to jump to any other powers we want to talk about. Those are the two obvious ones to me.

Now, here's the question in the current environment. Totally agree with everything you said. Sequoia does their own thing. Andreessen has their way of doing things. There are other great firms out there too like Buffalo. But in aggregate, the rest of the industry has had to figure out a way to respond competitively to this. In aggregate, the response has trended towards responding to this being that if you take money from Benchmark, you are almost guaranteed your next round on good terms.

Ben: Which is true at Sequoia, Andreessen Horowitz, and probably Founders Fund. Unfortunately, those people also could lead the rounds they signal whereas Benchmark can't.

David: Here's where I'm going with. The aggregate industry response to that has been, okay, we'll raise more money, and then we can also provide you the same thing. We'll just bring the money. Benchmark has very explicitly not done that.

Ben: Yes. And part of it is operational. It's funny. I came into this research wanting to believe they create all this mysticism so intentionally. I think they embrace it. I think they embrace the opacity and mystique of Benchmark, but I think most of it actually originally stems from work we want to do and work we don't want to do. They only bring partners who want to do a very particular style and craft of venture capital investing. Those people end up perpetuating the resistance to, I don't want to be a growth stage investor. I don't want to deal with the conflict of a founder looking to me for their Series B or C.

David: That's when things are going sideways for the company. It's also a conflict when things are going well. We talked to a founder about this where things are going well, and he had a great point.

He was like, all of my other VCs have these growth funds and they do a lot of seed. Whenever I go to raise a new round, all the conflicts come out. It's like everybody's trying to ram money down the throat, outside investors, inside investors, blah, blah, blah. I think this is a legitimate point to make. They can help make the best round come together without the conflict of having to force more of their own money down the company's throat.

Ben: Where this shows up for a founder is how nice is it to have your board member be someone that you're not pitching? Board meetings aren't pitches because they are not your next round of capital. That is the thing.

With PSL Ventures, having a $100 million fund, the awesome thing for me is we're also not your next round of capital. We aren't going to lead your Series A, so you actually get to have a more real relationship.

I do think for Benchmark, I suspect they've done some bridge rounds here and there, or their participation in a round signals something to the next round investor. It's not perfect. You do need to keep your lead investor excited about your company, but they definitely have a lot less of a conflict then.

David: Yeah. It's a different motion than just about everybody else in the industry. I think this is the right point here to say too. Obviously, we know all of the current generations of Benchmark partners and we've had a bunch of them on the show in the past. We know lots of folks in the ecosystem.

There's always this question with any VC and with Benchmark too of, XYZ VC says they're dedicated to the craft and they do all this, but how can we help? We've talked to enough people. We've lived. We can genuinely say that's not the case with Benchmark. They really do the grit. Everybody we talked to you grind. We've seen it. They actually do it.

Ben: It's also the benefit of not having other responsibilities. None of them are managers. None of them have any other career aspirations, so they literally can dedicate 100% of their time to their portfolio of companies that they currently work with and the next set of companies they could work with.

I also will say it is surprising to me whenever I meet with a Benchmark partner how much time they have for me. It feels like a buffet-esque schedule. A lot of times, I meet with people in our racket and they're back-to-back in 30-minute meetings all day.

It never feels like that. I'm like, don't you guys have something more important to be doing? But the architecture of the partnership is such that you can allow for a lot of breathing room in your calendar.

David: Yes. Should they have a growth fund or not?

Ben: It's a good question.

David: It's an interesting question to discuss.

Ben: This is the moment where we should see the Benchmark model really work.

David: Right. Last year was the moment where it should really not work. Actually, I think it continued to work pretty well through the previous cycle. But if it really, really works this market and this year, it should be a good year.

Ben: All right, let's go into the playbook. The first thing that I just want to say after doing the research is they are just not a thesis-driven firm. I think a lot of people want you to have a thesis and they've been so good historically, especially the Fab Four. Maybe a little less today, but definitely the Fab Four of saying, no, I don't have themes. I don't have a thesis. I don't have an area I invest in. We just follow the founders. I'm good at understanding if something is unbelievably compelling, I can these days model it out more, project, work on trends, and in the old days, understand someone's personality more and their gut more, but either way, the partners aren't coming in with I believe this market is going to be the huge thing and that's why I'm betting on these 10 companies.

David: I think part of the DNA or the culture of the firm is they're all learning machines. I think that is what they screen for you though. That takes so many forums, but one obviously fun forum that I can't believe we haven't talked about yet is they do these dinners.

They started during the Fab Four era. They have this custom-built table in the office on Monday nights after the partner meeting. They do these dinners. They invite somebody. Bezos comes every year. This is crazy

Ben: Right. Public company CEOs.

David: Yeah, Michael Lewis and blah, blah, blah. Part of that I'm sure is just fun, but one of the things they do in those dinners—and I'm sure one of the reasons they started them—is they bring the CEOs of companies they missed in. Brian Chesky has come to those dinners. Tony Xu from DoorDash has come to those dinners. When they miss, they want to know why and then they want to adjust.

Ben: That's a great way to phrase it. It's funny. A playbook theme that I had was that they are experimental. I think it dovetails off of what you were just saying.

I came into the research thinking Benchmark has had one opinion about what venture capital should be and always did that. That's just not true. All these .com partnerships, playing around with mezzanine investing, and even recently trying growth investing in 2011. At the beginning of the Fab Four era, they did a late-stage growth investment in Dropbox in their $4 billion dollar round. Weird, right? Israel, Europe, and doing the billion-dollar fund.

David: They made some noises in the most recent fund announcement about they might do some public company investing.

Ben: They held an open table for a long time while it was still public. I think this is something that puts a fine point on the analytical side of Benchmark and particularly, Bill Gurley's analytical side.

I also came in thinking they know when to sell. They always sell going into the IPO or they sell a lot because they know that they are private investors and the goal is to get into the companies that are going IPO for the most and then exit near IPO. But actually, I think what they are is in some ways value investors. They're good at understanding the intrinsic value of something, which I think is why we saw them dump WeWork and why they were holding open table while still public in the terrible whatever that was, 2008, 2009, or 2010, that era where it was just massively undervalued because lots of public companies were massively undervalued. I think that illustrates for me that sure, there are lots of "rules for how Benchmark works", but the main thing that they're good at is breaking them when it makes sense to break them.

David: I think we could go on on some more playbooks here. I've got plenty. One I want to highlight quickly is just the all-star team aspect of Benchmark.

We've beat that horse plenty through this episode, but if Sequoia is the Yankees, Benchmark is the All-Star team. Those are two very different conceptions. I think we might have an opportunity to do some more Benchmark playbook discussions.

Ben: I think I know where you're going with this. Yes, I think we may too.

One open question I have going forward—and I just want to leave listeners with this at the end of the playbook—is really around consumer investing in the future going forward because all of their biggest wins in the past have been consumer companies. Uber, Snap, eBay, Riot, Twitter—Discord is still privately held but will be a big win—were all very contrarian bets at first.

We've talked about people who thought they were idiots for investing in eBay because big consumer investments seem really weird. As more and more prestige has accrued to the firm, will they try and keep that prestigious track record going, or will they do really weird consumer stuff? Are they going to do more of these near-risk-free early-stage enterprise investments?

If you look at the partner team right now, they're set up really well to do that. In the current partnership, Sarah no doubt is a primarily consumer investor, but she seems like the only one that's really actually focused on it.

The swim lanes are not as clear as they were in the Fab Four era. I think their next partner will be really telling on this, and it'll be interesting to see does Benchmark stay a great breakout consumer investing firm, or do they look a lot more like high-performing SaaS B2B enterprise investors?

David: It's also just a weird moment in the consumer investing landscape right now too.

Ben: That is probably the counterargument. The Fab Four era was at the beginning of mobile, so when there's a massive disruptive paradigm and IPOs that could be $100-sh billion IPOs could get built, that's probably the right time.

Until it becomes clear with machine learning, AR, or crypto that we have the next iPhone moment, maybe this fund is the time to be going more enterprise, and then we'll come back to the consumer. I don't know.

David: How are we going to grade this thing?

Ben: Let me throw something out. I think grading is a relic of the past on Acquired.

David: Oh, boom. I love it.

Ben: I'd like to pull a Benchmark here and say grading made a lot of sense for us until it didn't.

David: You are Kevin Harvey in 2004 in the partner meeting being like, why am I getting on a plane to go to Europe? I need to be here.

Ben: There are just too many episodes that are this style where we're like, let's cover this incredible story. We just named two of the highest returning venture funds of all time. What do we grade them, A+? This is stupid.

David: Yeah, What are we going to say here? Done.

Ben: Grading to be revisited in some future episode where it makes sense to do that.

David: Or not. It's stupid. The grade is obvious. I'm at five hours and eight minutes recording here. If you don't know the grade, whatever.

Ben: Yes, dead.

David: Carveouts.

Ben: I have two. One of them is directly related to this episode. Literally everyone listening to this should go watch Runnin' Down a Dream on YouTube. It is a talk that Bill Gurley gave to a roomful of MBAs at the University of Texas. It's inspiring, informative, educational, and slightly analytical, but mostly, it's the best of VC pattern matching applied to helping people understand what to do with their lives. Bill's just a terrific speaker.

David: Heartily seconded.

Ben: My second one is the SmartLess podcast. If you watched Arrested Development and you like Jason Bateman and Will Arnett, it is the two of them and Sean Hayes who is on Will & Grace. It is so funny. It is just some of the best bullshitting of people sitting around.

They have guests on. I just listened to Chris Pratt. There's a Bradley Cooper episode. They're so entertaining. It's just great to leave on in the background. I want to bring some SmartLess to Acquired.

David: I do the same thing. This is related to the Benchmark dinner thing. There's so much we can learn and bring from other podcasts, other shows, and other mediums that are not at all our world business and tech to make Acquired better. It's so good.

I'm [...]. My related to the episode carveout, I already mentioned it earlier, but go listen to Mitch on Invest Like the Best. It's such a good episode. They're just so, so entertaining, both Mitch and Patrick. That's my related.

Then, my unrelated one, I'm going to go with a recarveout but an updated and expanded one. I mentioned Ursula Le Guin on the amazon.com episode where I started the Earthsea cycle. I'm now four books in and it's really good. She's really good. It's a very, very different science fiction. All of her stuff is so different from one another. Highly recommend.

Ben: All right. Our thank you to Fundrise, Pilot, and our good friends at NZS capital. There are links in the show notes to all of those things including downloading NZS's white paper and clicking the link to join us in a Zoom call in October where we actually get to talk to them. That's going to be awesome.

Fundrise, you can email notvc@fundrise.com and raise money from them or invest in their fund. It's amazing. Everyone can do both. You have to be running a growth company to do the first thing, but anyone can invest.

We would love to have you in Slack with 13,000 other smart, courteous, and kind people in the Acquired community, acquired.fm/slack. We got a job board, acquired.fm/jobs. Find your next great career move. Finally, we have merch, acquired.fm/store.

With that, listeners, thank you so much. We will see you next time.

David: We'll see you next time.