Despite many advances in industry transparency over the past decade, much about the actual "jobs of a VC" remains locked inside venture's apprenticeship model and institutional knowledge at firms. We aim to change that with the VC Fundamentals series: our goal is to draw back the curtain on the actual tasks that VCs do day-to-day, how you can learn them, and ultimately what's required to succeed. We hope this series will be helpful both to anyone looking to break into the industry (and even to those who are already practicing), and also for entrepreneurs and consumers of venture capital to understand more about the motivations and activities of VCs across the table.
We continue our VC Fundamentals series with Company Building — everything that happens after you write the check. We catalog the different categories, strategies and tactics for VCs to "add value" to their portfolio companies, from direct involvement to portfolio services to simply doing nothing (often better than many alternatives!). For both of us, this is the best and most fun part of being an investor, and we hope that shines through in this episode. Here's to building great companies!
1. The goals of Company Building:
2. The four categories of company building:
3. Activities you actually do:
4. And perhaps the most important Company Building advice of all: Don't Freak Out.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Hello Acquired Limited Partners, and welcome to another installment of our VC fundamentals series. This thing has taken on a life of its own. I think, David, you and I have both gotten the feedback that some people have even described the LP show as the fundamental series, or the VC fundamental series, so clearly we're having a lot of strong feedback on this.
And no, that it doesn't mean that we're not doing any of the other stuff, too, or formally classifying a lot of the other shows as sort of startup fundamentals; things like pricing, hiring and all that. But I'm excited to do another one of these because folks have really expressed that it's interesting to get the look behind the curtain, and frankly—we’ll talk about even people who've been in the job for a while—it's nice to hear how other people think about it.
David: Totally. I mean, we kind of debated even doing this in the beginning because we’re like, well, there are a lot of blog posts out there about how to be a VC, but it's not quite the same as what we're talking about here, which is how does this stuff really happen? What are people really thinking behind the scene? Not some polished blog post, but what are the nuts and bolts?
It's funny I was hanging out with a good friend this morning. He's a GP at a super big, well-established firm. He said that they're thinking about changing up something about their structure, thinking about some stuff internally.
Ben: Bringing all the crypto?
David: No, like a run of the mill type thing. But we just never done this before, we don't know how to do it, so we reached out as a firm to another couple of firms that have the structure and do it, to start to understand from them, and it sounds like this is what we're doing here on the LP show because even if you've been in the industry for a while, so much of this knowledge is siloed and locked away in organizations, and we're hopefully going to unlock it.
Ben: Absolutely. This one, in particular, is on company building, and I think this is sort of the exciting one. Speaking from the investor side, there are loads and loads of people who talk about picking, sort of how you make investment decisions as if it's like a stock-picking exercise to invest in early-stage startups.
As we know, it's very different in a lot of ways, but this is sort of the fun part as the investor because early-stage venture investing—at least from the lead investor side—is an active investor game. You have tons of responsibilities on the government side. You have tons of opportunities to create value for the company. It is not always the case that the investors do create value, but the way that these investments are structured is the investors can be very involved in the company, unlike (say) a public company where you're a passive investor that has nothing to do with actively creating value inside the entity.
This being an asset class that has active involvement by capital in company building, means there are lots of different ways that people could go about helping that company create value. I think what we're going to do today is break down what those things are, debate the merits of them, decide when we think those things are and are not helpful, and offer some examples of things we've seen work in the past. David, does that about cover it?
David: That sounds great to me. It's funny you said that this is the fun part. I totally agree this is the fun part, but you know there are plenty of investors out there that think this is not the fun part; there are lots of ways to do this. Quick definition. By company building, you basically already described it, but we're talking about everything that happens after you make the investment. We've already covered sourcing, we've already covered initial investment decisions. You wrote the check, the deal closed. Now what?
Ben: You went through the one way door and made that decision. Now, you live with that decision and try to make the most of it for a long time.
David: Yup. To start it off, we thought we would talk about what you are really trying to do here with company building. The first one, Ben, you've already mentioned is obvious. In theory, you’re trying to add value to your investments, VCs adding value—this is like a trip, this is what they’re supposed to do.
Ben: What can I do to be helpful?
David: Trying to be helpful. Less obviously, though, although still pretty obvious, the second kind of purpose for doing this is to increase your likelihood of sourcing, finding, winning your next investments. That can really come in one of two ways through your company building work. Directly, it can come from people that you meet within your portfolio companies, people farther down in the org. Whether you work with them directly or you get exposed to their work through your involvement with the company, great. If they're really talented, they might go start a company. That's another really important reason to take this seriously and think about doing company building.
There's also indirect, too, just your reputation. If you develop a reputation as somebody who's really good at this, entrepreneurs love working with, feel like you're adding a lot to their company and what they're building, then word is going to get around and that's going to make it easier for you to source and find your next deal. Obviously increasing value but also I think it is important to keep in mind there is this other aspect of it, too.
Ben: Yes. The single turn game that you're optimizing is you made this investment, so you want to make it as valuable as possible, the iterative game that you're playing is your own 50-year reputation here, and trying to increase the value of future investments.
David: Yup. I guess the last thing we should say on this, too—the what are you trying to do, and why are you doing this—there's a class of VCs and investors—certainly by no means all, and I don't even think a majority, but I definitely fall in this class, I think you do too, Ben—who just like doing this. This is the fun stuff. I would do this even if I wasn't invested in the company; I do sometimes.
Ben: Yeah, I think David. That's mostly what you're doing with your time now.
Ben: For this class of investors, whether it's why they got into the game or how they got to the game, David, you probably represent more the why, of the reason that you wanted to stop being an investment banker and get into VC is to be able to work on companies in the nitty-gritty level. Meanwhile for me, I accidentally became an investor because this is the sort of stuff that I was doing more in the writing software, shipping, being a PM, starting companies, and eventually through the startup studio, ending up deploying capital as well through PSL ventures. I think you and I represent some of the why and the how of really enjoying this part of being a VC.
David: I think Bill Curley used to talk about in interviews and stuff, he probably still doesn’t know because he's not being paid for it, but he used to say, I would do the job even if I don't get paid for it. Now, he's not getting paid for it and he’s still doing the job, so I relate doing the same thing.
Just like we did with sourcing, we went through all the activities you do and things you can do around company building. We're going to put them into some different buckets first, then we'll talk about what the actual activities are, how they work, how you do them, how they impact companies, et cetera. First, we're going to do these categories.
Ben: One thing before diving into the categories here, just a point that I want to make, is that there are so many caveats out here to avoid being a trope, so we're going to make all of them. Partly as a defense mechanism but also just to say how we feel about these things.
An investor is never going to be as deep in what the company actually does as the entrepreneur. It's not even like throwing shade at an investor or to say that. It's really just the fact that an entrepreneur is starting a company because it's their life's work and their obsession. An investor is diversified across a broad set of them.
By natural forces, the VC will always have a wider purview across companies and pattern match across different situations that are common between different companies at the stage that they operate. That's from the purview perspective. They'll also have a set of deep horizontal relationships that they can replicate from previous companies. This could be things like PR or other platforms, portfolio, services, or things like customer relationships with Fortune 500 buyers (in the case of enterprise software).
The important thing here that's worth identifying is to figure out what activities are best for a company to do in-house by those who are actually deepest on the subject matter based on their unique depth, versus what is high leverage to get out of an investor who has that thin slice perspective across companies and industries.
David: And we're going to get into this, like are you getting it from your investor person, or are you getting it from a portfolio services team at the firm? Where are you going to do it?
The first bucket is when you are getting value as a company or you (as an investor) giving value to the company directly. It's you; one person. Or maybe the investment team at the firm that's working on this portfolio company. Some firms are structured like that, but more often one person.
This is stuff like you are joining the board of the company. Or depending on the stage and your tech size, maybe you're being a board observer. Or even if you're not on the board at all, you're the investment lead. We'll talk more about board work, board memberships, board meetings later, but that's going to be a lot of the context of your direct interactions with the company.
Also, other sorts of more informal relationships that you have with the CEO, with founders, with other people deeper down in the organization.
I would say, in some ways, the purest but best most easily graspable example for most people of a firm that primarily operates in this bucket is Benchmark. They don't have any portfolio services, it's as them, it's just the DPs. They talk about this all the time, the craft of investing is what they do. Each DP is making an investment, he or she is serving on the board, it's their relationship with the founders that is the primary activity of what they do.
Ben: Yup, and we talked about this. I like bringing in the chronology here. We've talked about this in other parts of the VC fundamental series, but this is sort of the historical way that it always was. If you think about the origin of venture capital, it's a pool of 3–6 (frankly) men at that point in time, but people coming together—this is the 60s—to basically invest their own money and some of other people's money. That's what you get is you get capital on the relationship with that one person and the VC wasn't a professionalized asset class. Firms didn't have career progressions and people across all these different skill sets that we have now, but it's interesting to understand origins. That's all you used to get.
David: That's classic venture capital.
Ben: Yes, there is much more specialization of labor now.
David: Yeah, so now to jump to the complete opposite end of the spectrum. I would categorize this bucket as active/portfolio services. The canonical example here is Andreessen Horowitz. When they came on the scene in 2009, they were firms that did a little bit of this before, but they were the first. They were like, nope, we are a big firm. Lots of people here, some of which are on the investing team, some of which are GPs, but most of the people here are not on the investing team. They are on the talent and recruiting team, they are on biz-dev teams, they’re on market development which is helping customers and biz-dev partners, they're doing PR. Sometimes, they're even doing data science, design, or engineering for our portfolio companies. This was a radical shift at the time.
Ben: I called it specialization of labor, but that's really what it is. I said it jokingly in the past, but if you think about that economic theory of if you're deploying capital into people—when I'm saying deploying capital now, I mean paying with management fees—at the firm who are specialists in what they do, then the sum of all of that can be greater than if you just had generalist doing all of that and being pretty good at all of it instead of excellent at just one thing.
Before, funds were smaller. There weren’t enough management fees to hire 150 people or whatever Andreessen is, but when you have enough fees to go around, then you actually can hire the best PR person or the best executive recruiter. The economic theory behind that is that you can get much more leverage on those fee dollars to grow the value of your investments.
David: It's a fool's errand and unrealistic to think that somebody who’s an investing general partner at the firm is also going to be world-class at PR, recruiting, or whatever. They're going to have areas they spike in and areas they don't. The thesis behind building a firm like this is we can just bring in the world-class people, have them in-house, offer those directly as services to our portfolio companies versus the companies hiring third-party agencies to do this stuff. Great. It makes sense.
People have all sorts of opinion about the efficacy of these services, which we won't get into as much now, but the point I want to make that, Ben, you probably (I assume) would agree, there is a vast difference in how this works and is structured in a studio model like PSL versus a pure venture firm model.
Ben: The reason I think—to just articulate my view of that—is how a venture capital platform—we're going to probably keep referring to Andreessen Horowitz because they're the most exaggerated example on the spectrum—
David: But pretty much every firm except Benchmark these days had some degree of this that they've adopted.
Ben: Exactly, and the difference between that and the studio is really that the studio resources are really around of pre-founding, pre-launch getting the company off the ground, whereas the portfolio services or platform are really about once the company is already formed and capital has gone in, parachuting these people to do work alongside the company as it scales. Sometimes, that can be incredibly high leverage.
A good example is I've heard great things about OpenView. They're sort of Series B-focused B2B SaaS. They have a whole go-to-market team. I think you actually pay for it. Someone from OpenView can correct me if I'm wrong on that, but they’re much like Emergence because they're so focused on B2B SaaS companies, go-to-market, growth, sales. It's super high leverage to have these people who are specialists parachuted and work with your company. But in a lot of cases, it's harder to squint and see how somebody at the firm who isn’t a part of the company is actually going to help as much.
David: Especially (I think) once you get into engineering, design, or data selling, then you really got to squint in those cases.
Ben: Totally depends on how it's structured. Yeah, I think on those, there are existing examples. There's a firm I know that will basically lend an engineer for an entire year. They will be embedded in the company. The closer they look to actually joining the company and being an employee in those types of situations, usually the better they work out, in my experience.
Just to finish the thought of juxtaposing against a studio. On the studio, no one's ever really parachuting in because there was nothing there before the studio folks started working on it with the founder. So, that tension isn't really there. Obviously, I'm excited about the studio model because I helped start PSL.
David: Started in a studio.
Ben: Yeah. The whole notion of so-and-so expert from that venture firm coming in, telling us what to do or making suggestions, and then leaving, you don't have that sort of tension, friction that you would in a later stage platform team.
David: Right, I mean you're the first ones building it. What’s interesting here is for the past 10 years or so, in the Andreessen era of venture capital, that's been the model of what I'm calling active or your portfolio services approach. It's interesting that there's another spin on this approach that is (in some ways) super old school but is now coming back around in a modern context, and I call it the network approach.
In the old days, this is what Kleiner Perkins was all about. In the glory days of Kleiner Perkins, Keiretsu with Kleiner Perkins, and then in the John Doerr glory days, this was if Kleiner invested in your company, they were super actively encouraging all of their companies to work together, give each other deals, sell services to each other, do partnerships together, acquire each other, all of these things. Keiretsu is obviously the Japanese conglomerate approach.
Kleiner itself wasn't providing any headcount, people, services here. They were saying, no. Like you guys, we have a portfolio of literally the best startups out there. You guys should be helping each other. Interestingly, I feel like this has come back into vogue in a weird way. It's more like community mindset advice now. From everything I've heard, I think First Round does a really good job of this. They have so many companies, First Round, of course, has been great, but the canonical example here's YC. The network of being within YC, they have several thousand companies that have gone through YC.
Ben: A hundred-ish of batch 120 or something like that a year, 250 a year.
David: What they had was they supersized. The steroid years where they had 200 plus in each batch. They've dialed it down a bit. Anyway, they have all sorts of communities or discussion forums, Q&A.
Actually, Michael Seibel was just on Patrick's show, on Invest Like The Best, and he talked a lot about this. It's really interesting. It's this modern community focus spin (obviously) on a much bigger scale for both First Round and YC, obviously, then Kleiner by bringing this idea back. You could maybe even say, the Acquired community is sort of an unbundled version of this.
Ben: I was about to bring it to the bundle. If you think about early venture capital days, again, in some ways, it was just capital that you got. Of course, you've got the relationship with the board member but likely more just for governance than it was actually adding significant value to the company. With the exception of the Arthur Rock and Don Valentines of the world, of which there weren't many then. That was just capital. But now because there's competition, so much competition to deploy this capital, it comes bundled with all these other value-added services. Again, we say value-added services almost in a cheeky way because I think it's easy to make fun of what value gets really added and all that.
David: But it's true.
Ben: It's totally true.
David: The next bucket, I think this is probably the biggest value driver. I don't know. You could debate, but it's certainly really big and real. I call this passive to differentiate from active and direct, but this is the brand halo effect. This is if a top firm leads you around, if Benchmark does you’re A, if Sequoia does your C, they’re your growth tender or whatever, if Softbank does your growth round [...] but, whatever your sector is and stage, if the top one, two, or maybe three firm leads your round, you're going to be a hot company, and the brand of that investor in that context in that stage is going to transfer into the portfolio company.
Ben: Now, let's talk about where that's an actual value add. I think now, we’re getting into a rhythm here, David. I think this is actually a pretty good format, for one of us to keep checking the other person on. How does that actually add value? I understand that’s a service that’s listed on the firm's website. How does that add value?
David: I don't know. Do any firms actually list that? Like we’re the top firm, and thus, if we invest in you, you will be awesome? Somebody should just do that.
Ben: In much less direct words, yes, but there's obviously the impact on your next fundraiser. It's never easy to fundraise, likely because you raised from that firm at a high valuation, and now you have incredibly high expectations in your company (especially for the next round), but there’s sort of an almost momentum trading effect where you become worth more because you were able to raise from that firm. I want to, for a moment, just tuck that away and not call that value creation. It's like paper value creation. Where does that really manifest? I know you want to get a word in, but I just want to make this point.
David: Keep going, I'm taking notes here.
Ben: For the right types of companies, I think that that is really value creative in customer legitimacy. If you're a B2B SaaS company selling to the enterprise, and you get a top firm to invest in you that the CIO of that company has heard of, and that company has been referenced in the Wall Street Journal, it's a little old school to say that.
David: We're talking about the Kleiner Keiretsu days.
Ben: Right, then you could see how that could legitimately improve the likelihood that you're going to be able to sell that buyer. Now, the next level that would be like if your board member or one of the people on the platform team actually makes an introduction and has a relationship with that customer—that's even better—or specifically scoping to brand halo, David, I think the biggest value that I would at least put here on the record is that it's customer legitimacy and hiring legitimacy.
David: I think those are the two. I had three areas where I think this is real: customer legitimacy, biz-dev—again, depending on your industry—hiring for sure, too. There are lots, we see it, too. If you get funded by Sequoia or if you get funded by Benchmark, all of the sudden, overnight it's going to become easier at every stage of your hiring funnel, to attract candidates that they're going to be more interested in you, and then ultimately closing them. I would say those two are very real, but I think by far the biggest value of the brand halo effect is in raising your next round.
Particularly, if it’s an early stage, I think there’s decline as you go. If Sequoia leads your D, I don't know that it's going to make it all that much easier to raise your E, unless you also are from Sequoia. If Sequoia leads your seed, for sure you're going to get a ton of looks, you're going to get a ton of inbound, you're going to get a ton of pre-emptive interest in your A, even before anybody really knows what you're doing. Now, we can argue whether that's good, bad, right, and wrong, but that's just the reality.
Ben: Yeah, super fair.
David: I think that's the biggest area where the halo effect helps. Similarly, there are two kinds of valances to the halo effect. There's the firm halo effect, like you were just talking about, Sequoia, Benchmark, Emergence in SaaS, et cetera. This is (I think) a big reason why Hamilton talked about on our show—there's good research on this—that there's persistence in the top-performing venture capital firms. The brand of those firms are worth a lot.
Interestingly, there's another valence, too, and that’s the individual brand and platforms. The canonical example here is Fred Wilson at Union Square. Union Square is a great firm, great brand, but especially in the early days, Fred was the OG out there blogging and creating a VC. That really did so much for him obviously in USV, but also for his portfolio companies. That was a platform, and now all of a sudden, he could really help those companies. It improved his ability to get into deals. It was great.
Ben: Right, the quality of his relationships improves, and therefore whatever relationships he's able to bring to bear to the companies that he works with are improved because so many more people know him from reaching out because of his blog.
David: He’s had a huge reach. Brad Feld, similarly, it was as he said, he doesn’t blog every day like Fred but also was part of this early movement. Today, this is happening again, like Turner Novak on Twitter. Great, super smart. He's building a great platform on Twitter. Patrick, obviously, on Invest Like the Best in his new venture fund Positive Sum. There's a lot of interesting new stuff happening here.
Ben: David, because you referenced the persistence of returns in venture as an asset class, and you just brought up Patrick’s show, Patrick just had Michael Mauboussin on. I think Michael's been three of my carve-outs on the main show. He was a lead analyst or something at Credit Suisse First Boston, and now he's at Morgan Stanley, Columbia professor.
David: Does he teach Ben Graham's old course now?
Ben: I don't know.
David: I think he might.
Ben: Interesting. He just puts out these prolific papers, books, and talks, and I think I've recommended Untangling Skill And Luck, the presentation that he gave at Google as a carve-out once, but his most recent paper analyses the flows of capital into public and private markets, the performance over time, the variance between firms, the variance from company to company by asset class. It's a really interesting and very approachable digestible paper. He went on Patrick’s show to talk about it. I read the whole paper.
One of the very interesting takeaways is (I think) the venture of all the asset classes he studied, which mostly focus on venture capital, public markets, and leveraged buyout firms. Of the three—as (sort of) most people know—hedge fund managers have an incredible reversion to the mean.
David: Zero persistence of performance.
Ben: Exactly. The top five firms or people, one year or one decade are completely not to be seen at all the next decade, and maybe not even the next year, and it totally rotates. But among venture firms you have this tremendous persistence, where even for decades you have a firm that did well, that continues to do well in the future. I think this notion of what you're referring to of the accumulation, frankly, if we want to go Hamilton Helmer on this, the power that accumulates for a venture firm, where—
David: It’s brand power. It's 100% brand.
Ben: It's exactly what it is. You have higher-quality relationships with downstream investors (which we'll talk about). You have higher-quality relationships with potential customers, potential employees, and of course the most important one, higher-quality relationships with the next entrepreneur that you're going to fund. That's why you just have this tremendous amount of, at least in the paper he doesn't specify the answer, but he hypothesizes because he's a good scientist. There's no way to know the answer for sure, that the persistence largely comes from the brand halo that comes from being able to attract the next great entrepreneur because you've had great returns in the past, so by being a company in your fund, maybe it's casual, and they'll cause your company to generate a great return, too.
David: The point I want to try and land here is that it's real, it is a self-fulfilling prophecy, it's ephemeral, but it's also real. If you are funded by one of these firms, you will feel it.
Ben: Because we're here, and because people who are listening to this episode have almost certainly listened to our Sequoia episodes, we did ask Doug Leone about this directly at the end of the Sequoia Part II Episode. Almost no way Doug was going to say it on our show that it's easier at Sequoia now than it used to be because they have this brand halo. In fact, he said the very opposite, which was that we have to not become complacent and it's all about our next investment.
David: Yeah, the great quote about the chickens running around in the back.
Ben: For sure.
David: You got to go listen to the episode, I can't do it justice.
Ben: For sure, especially and that Doug voice. It was unset on that episode, but is absolutely what we're talking about here is that firms like Sequoia have just an unbelievable brand halo that creates that persistence of returns over time.
David: The final bucket is a fun one that definitely bears discussing, and that is simply done with nothing. It's very rare, and this is (I think) where a lot of the rightly justified teasing of the VC industry comes from, of everybody trying to add value, but this is sort of just following the Hippocratic Oath, the “First, Do No Harm” maxim. I'm not even going to pretend to add value, I'm just, instead, going to focus on making good investment decisions, and that's all I'm going to do.
There's a funny story. I'll tell on this friend who—I'll just say because it was so long in the past—worked at Eventbrite in the early days. We've just had Kevin and Julia on the show, they're raising one of the early rounds, after the Sequoia round. He's talking to one of the VCs and the VC said, when it comes to VCs adding value to your company, it's like 10% of the folks out there are really good. They're really going to add value and help you build your company. Probably, 70% of folks out there are going to actually detract value from your company if you follow all of their advice. Then, there's the middle, where it's neutral. My friend was like, who are you? He was like, I'm not going to tell you anything. You're just going to take my money, and you're never going to hear from me again. I think they did end up going with him.
This is a totally viable approach. They would probably protest here, although I’ll be interested in their reaction. I would put the founder’s fund in this bucket. They have a good brand and there's definitely some halo effect from that brand, but I think they're pretty open about, we focus on making investment decisions, every investment decision initial and follow-on—we’ll get to follow-on later in this series; we make a first principal decision on each of those—and if we can help your company, we’ll help your company, but don't count on that from us. We're just here to provide capital.
Ben: Right, that's not why you should go with us. Yeah, that's interesting. I think to your point, to get one more anecdote, I asked a founder fairly recently—in the last couple of years—about a certain firm. I said, what percentage of the net value came from the capital? This person was like, 110%.
David: It’s negative 10% from everything else.
Ben: Yes. There are many people who do worse than providing absolutely no value. I will say another thing here. A good question to ask if you're an entrepreneur is what's your follow on strategy? I can't remember if we’re going to get to this in the outline, but a way that a funder—especially an early-stage funder—can be helpful later is by continuing to participate in future rounds, by continuing to signal to the market. I have inside information and I'm still excited.
If you want to be skeptical and round portfolio services to zero—there are some you should and some you shouldn't—this is definitely one that’s unquestionably value created for a company, which is being able to generate positive signals in the market by using your own capital.
David: A positive signal in the market. Also, if you truly really hit a rough patch—a beautiful example of this is Smartsheet, the great company in Seattle—and nobody else is willing to fund you, this VC firm has a track record and the capital available. As long as you're trying, they're going to give you capital to do that. Madrona did this multiple times with Smartsheet. The company really struggled in the early days, and now it's a $5 billion-plus public company, so there is a lot of value to that.
Ben: Do you remember what Madrona owned according to the S1?
David: Almost 30% and it was through doing these multiple bridge rounds and inside rounds funding the company when nobody else would.
Ben: What early-stage fund gets to own 30% at IPO of a multi-billion dollar company? It's incredibly rare because of the future dilution that happens, and it's because of exactly what you're talking about, is continuing to support through rough patches.
David: Yeah, and talk about value creation. You're capturing some of that value by getting more equity in the company. The company would have died. Not only is it not dead, it's a multi-billion dollar public company, so this stuff is real.
This is also a good place to make the point, I was going to do this later but we should have done it upfront. There certainly are VCs who either don't think this aspect of being a VC, the company building part is that important. Some of them just abdicate altogether and I respect that in the do-nothing bucket, but this is people's lives that you're affecting here. I think it's really important to keep that mindset as a VC, especially if you're a board member or close to it. The decisions that get made impact these companies, impact people's lives. You really need to take that responsibility. I certainly do take that with a high degree of responsibility.
Ben: For sure.
David: Those are the buckets that we just covered. Direct, you personally, active in portfolio services, passive and brand halo effect, and the do-nothing approach.
Ben: I will say one more note on the do-nothing approach. Being a supportive board member—this a great Brad Feld one—who's there to ask questions and not even necessarily offer heavy-handed opinions. Foundry Group is notoriously good at this. Be there, listen. They're helpful in many ways. They have kind of a Benchmark-ey approach of we’re partners and not that much else. They famously have the mesh network approach where each company helps each other rather than this top-down, heavy, heavy services thing.
Their ethos is very much like, we invested in you. We'll continue to make (obviously) decisions about future financings and things like that, but we're here to be supportive for you. Not necessarily that active but do table stakes, supportive things as humans to make sure that you can operate at your very best. That could be loosely qualified under do no harm, but it's amazing how value—
David: I would put that way more than doing no harm.
David: That's the most evolved, I think. Do no harm while also being actively caring about and helpful.
Let's talk about the actual stuff. We've been talking about buckets, we've been talking about value, company building. What do you actually do? What are we talking about here?
Ben: David, we’ve talked about it, and it’s value. What do you mean? Why do we need to get any more specific than that?
David: Tell me what you do here.
Ben: This is like the always sunny episode where Frank goes back to work. Frank is Danny DeVito for anyone who hasn't watched. He goes back to this weird 1980s conglomerate that he started 30 years before this episode, and he's in his suit, tie, and everything. At some point, Charlie asked him, hey, what does the company make? He looks at him and he goes, I don't know what you mean. They're like, what do we make? He goes, we make money. He's like, no, what do you produce? He's like, money. It's left unsaid the entire episode what this 1980s pinstripe company actually does.
David: It sounds just like a VC. Oh, boy. That was an episode of Silicon Valley. First, we're going to talk about the routine, probably going to do this in every company, the good stuff, and the day-to-day stuff. The first and biggest bucket of this is board work and board meetings, specifically.
Ben, as you mentioned, there are two elements to a board and board works. There's the governance element of it, and that's everything from setting the plan for the year—the financial plan for the year, the organizational plan for the year and approving that, hiring and firing, doing various shareholder approvals like option grants and stuff like that. That's important but fine.
Ben: The stuff that gets written down in the meeting minutes.
David: Yup. The stuff that the layers take down and then paper afterward. Then there's the advising aspect of being a board member. This is input and perspective on company strategy, operations, various topics, recruiting a lot of that, and then certainly fundraising and future financings.
I'm actually going to talk about that outside at the board context because I think it makes more sense there, but that also gets wrapped into many board meetings. We'll go into the nuts and bolts of some of that, but I think it's interesting here to pause first. I was thinking about this and my time in VC starting over 10 years ago now. Wow, crazy.
Ben: Grandpa Rosenthal.
David: I know. I think there's been a pretty big evolution of how boards and board meetings operate over the last 10 years as there have been lots of changes in the venture industry. When I first joined, it was a legacy of a lot of what we talked about. Board meetings were 6–8 times a year. They were super formal, old school. Every major company decision and strategy was hashed out at them, sometimes across multiple discussions before, during, and after the board meetings.
Ben: And even early-stage.
David: Yes, even Series A-stage companies. These are three- to four-hour sessions, the entire executive team, the entire board, nobody would call in, it's all in person. Usually, there's a dinner the night before or afterward where the discussion continues. It was very heavyweight.
Now, the pros and cons of this, which we'll get into. I think one thing that's really interesting that is more lost now, but was a big pro of that approach was, it was focused on everybody working together as a team. The board worked together. Even though you had different board members from different venture firms, in the context of this company and everybody coming together, everybody was on the same page. You're working as a team across the aisle, so to speak.
Ben: Which, actually, from a fiduciary perspective makes a lot of sense because not only are our board members fiduciaries to their firms and the investors that are the pool of capital for their firm, but when you join the board of a company you're also a fiduciary to that company. Of course, it would make sense that you have this camaraderie, teamwork, and an incredible amount of time together to work as a group.
David: You literally become a director. It's called directors and officers insurance for a reason. You're an official position of the company and you should be working as a team. The days where everything looked just like that are pretty much behind us. I think now, lots of companies can do and should occasionally operate in that function, but it's not constant.
It used to be that that was the only context of board work. Now, things are much more real-time, much more iterative, much more fluid and informal. Most of the actual work discussions strategy, both setting and operations happen outside of a formal context like that. They're in an informal one on one or small group discussions. They're over phone calls, they're over text, and they're over Slack. It's like everything in our business world today. It's 24/7. It's not a moment in time.
Ben: There are two things that are a part of this. One is what you just said like everything became the always-on world and the conversations happen in real-time and through many communication channels. The other one is that so much money flooded into venture capital as an asset class that every check at every stage got 2–3 times larger, so you have seed rounds that used to be $500,000 that are now $2–$5 million, that can be 10 times larger.
Suddenly, you have these checks being written for $3–$4 million when a company has done virtually nothing yet and has no customers. It depends on not anybody is going to go out and raise $4 million for a company without having any customers but lots of people do. You've got an amount of governance that tends to come with that. You're not putting $4 million in on a safe, not having any governance rights associated with it, and saying like, well, all right. My capital is there and let me know what’s the next round. That's the thing you would do for $100,000.
You have a board member now because there's governance associated with putting that significant amount of capital in, but the company is actually not mature enough to do things like 6–8 times a year board meetings where everybody comes, you review the numbers, you review the pipeline, and you talk about the hiring plan because your hiring plan is going to be like, yeah, we want to add two devs this year before we hopefully launch and then hopefully find product-market fit. The amount of capital is mapped to the governance requirement of having a board, but the company maturity is completely mismatched from where it used to be when you had a board.
David: That is absolutely true. I think that's one of the reasons why this all started moving in this direction. Again, we will debate here rightly or wrongly, pros and cons. I think that has also kept trickling down that even as companies get larger, we start maturing more. The numbers of companies that (I think) are strictly in the old school board practices format these days are pretty few, even larger companies that are mature enough. They do board meetings, but they don't do them six or eight times a year. They do four times a year. Some companies, those four times a year are really like, everybody prepares ahead of time.
It's a big lift. It's a big thing. I know companies like this where the actual board meetings are an hour or 90 minutes. Lots of people do it over Zoom. It's literally just about the governance approvals, and you're in and out.
Ben: I'm on an early stage board where literally it's just a notion doc, so there are no big, expansive 40-, 50-page decks. We do board meetings four times a year, and every other week there's a catch-up call; that's 30 minutes. It's exactly the high-resolution thing you were talking about. It's like many more one-off conversations, but not convening the whole board in a big formalized setting as often.
David: Yup. An obvious pro to this is business and life doesn't happen in six-day week chunks anymore. Everything is real-time. You need to be much more reactive in terms of strategy, in terms of operations, and in terms of being dialed into a company. That's all good. I think what's lost is some of this time to reflect, time to step back, and some of this team element, too. When you're doing these high-resolution, more individual conversations, you're doing it with one-off board members. You're not getting the whole camaraderie approach.
Ben: The thing you're trading and you are getting there is by having more touchpoints with more of your investors, there's more opportunity for them to add value. We started this section promising what that value was going to be so we should get to that, but just a tease. If you learn something new about your customer segment, you say, do you know anyone in the XYZ industry? You can get that information much more real-time, get a potential customer introduction in much more real-time, or you open a headcount. Boom. You can quickly inform your board.
David: Get some leads, find the right search firm, et cetera.
Ben: Exactly. You can move more quickly on those things and tap the network and resources of your investor.
David: We should say, too, this is a great part of the reason why a friend of the pod, John [...] started [...] with his co-founders, providing a platform for governance, for companies as people are moving towards this more higher resolution, more iterative board structure. Some of the governance gets lost, so, shout out to John, and thanks for sponsoring our last special.
What actually happens in these board meetings and some of these decisions, whether you're doing it in a formal or an informal process?
Ben: Usually, you save anything that's like Robert's Rule of Order type stuff for the end. I was on board last year where the CEO would ask the lawyers what the magical incantation was that we needed to say to approve the previous minutes.
Someone moves to approve and there's a second, and for anyone who hasn't been in a boardroom setting before it will shock you that you actually do all that. It feels like you're either in a British court or a fraternity house, but one or the other. It feels odd to be doing.
David: You might as well be saying these things in Latin.
Ben: Yeah, so of course, there are those things. The things that tend to happen are a review of the business. You're talking about how you did since your last board meeting on KPIs including the financial ones. You're doing forward-looking forecasting, both on finances and what those KPIs are for next time—debating them, what should our goals be? The CEO comes with a recommendation. The board formally or informally approves the plan, and it could be a budget plan, or it could be here are the targets that we want to hit on various KPIs in our business.
Basically, the purpose is to get everyone aligned. If those goals get hit, then everyone looks at each other and says that was a success and we all agreed on that plan. And you don't end up in a situation where the CEO is over executing something and the board is like, wait, wait, wait, even if we succeeded at that thing, we wouldn't be happy about it.
It's a lot around alignment, and it's an opportunity—hopefully, if you pick the right investors—to be able to tap the collective wisdom of a group of people who should weigh in on what your goals should be for your particular industry or business model in order to set you up for success.
David: Right. It's like, our plan is to go 100% this year, is that good or bad? Well, it really depends on the context. If your industry is going 400%, then you really suck and win. But if your industry is going 20%, then you're doing great. Also, at some point in time in the transition from an early-stage company to a mid and growth-stage company, when you find product-market fit, there's a really important process that Hamilton talks about in 7 Powers of finding your power. You've gone from invention to now you have to figure out what's your power and what's your defensibility.
Again, a lot of VCs and board members harm more than they help here, but having somebody who's really good, engaged, and deeply thinking about your business, your industry, the dynamics, and has the experience and pattern recognition can really help here.
Ben: The things I discussed a minute ago were largely execution topics or tactics, and David here, you're talking about strategy. The other part of the board's responsibility is to set a strategy for the company.
The CEO similarly comes with recommendations but usually will come with, here are the open topics that I really want to discuss here. Here's my thinking on it, but let's decide as a group. If this is a 2-hour board meeting, let's take an hour and work on this meaty topic because I think it’s the most important, highest leverage use of all of your minds in this collective forum. Because rarely like you said David, are we actually all together to be able to quickly get on the same page and not be trading a bunch of one-off emails that are hard to get alignment on when the company could go a lot of different directions.
David: If you like this stuff like I do, and I suspect you do too, Ben. This is the really, really fun stuff, at least for me. When there's a question like this and a formal board meeting, I just have so much fun. Preparing before the meeting, usually, the CEO or the management team will send out a deck, a narrative, or some materials in advance.
What I try and do is get those, give them a quick glance just to understand what the context is. But then before reading them in detail, I like to think like, okay, I'm going to take a step back. What's my perspective coming into this? Write that down. What do I think the most important issues are? What do I think the biggest needle movers are? And then what I like to do is actually go back—again, still before reading this board iteration materials—go read the past one and be like, okay, what was important then? What's changed since then? Then sit down and try and prepare like, okay, coming into this board meeting, what's my perspective on what's going to be the biggest needle movers?
There's an old Sequoia blog post about questions to ask yourself as a board member pre and during board meetings, and I think these are good. First is, are we executing? We, meaning the company. Are we executing, innovating, hiring, building a management team, growing the customer base, doing so according to the last plan that we laid out? Depending on the answer to that question, is that plan still good enough to win, or do we need a new plan and new targets?
It's missing the power development, but again, that's specific to a certain stage. The more you can be asking yourself these questions ahead of time and during, the better you're going to be prepared to help.
Ben: Bringing in the way that we opened this episode by saying that the entrepreneur will, of course, be the most domain deep in their business, and the investor offers a valuable but different perspective by seeing lots of businesses.
There's a similar thing here, which is what you're talking about, where the investor has fresh eyes, and there's value in having fresh eyes. A way to add value as a board member is if you are a smart person who's experienced in this area and has fresh eyes, that on its own a priori is valuable.
If you can establish a good partnership where you trust the crap out of the management team for being incredibly deep and deferring to them on most important decisions because they have the most data, but bringing your fresh eyes and saying, hey, I haven't thought about this as much as you. Here's my opinion and why I'm thinking about this. Let's have a debate, and do you see where I'm coming from? Now I can understand where you're coming from because you actually do have more data. That tension in itself just has value.
David: For the right type of person, that's just so fun.
Ben: This is a thing that is not on your agenda, but it came up and I want to talk about it here. We've made snarky references a few times to VCs detracting value. I want to pose the question, do you think that is all because of misaligned incentives? Or do VCs detract value for other reasons? While you think about it, I'll offer a little more context.
VCs are dual fiduciaries. They have a fiduciary responsibility to their investors and to the company. Basically, what that means is they want to maximize the value creation, both for their investors, but then for all shareholders of that company. There are lots of places that incentives could get misaligned.
David: But do they really care about the other shareholders?
Ben: The way that VCs could ostensibly detract value, that's not because of incentive misalignment, but really just because they're trying really hard but it doesn't actually move the needle. It’s more ineffective portfolio services where you can distract and waste a lot of time if it's a very specialized company that needs to hire from a very specific talent pool but the firm's talent resource has no ability to access that talent pool.
I'm just throwing out an example of a way that the firm—with its attempt to create value—could actually take away time, focus from the business, and detract value. I'm actually having a hard time coming up with other ways beyond misaligned incentives that value detraction occurs.
David: I'm really glad you asked this question because I think this is an important thing to think about and reflect on. I wonder if actually the industry has moved past this would be my answer. My hypothesis is some of the valued detraction in the past—and to the extent, it still goes on currently—is due to misaligned incentives. That's real. That happens for sure.
I think a lot of the trope about this in the past was like, old white dude—who doesn't get it anymore—in a Patagonia vest at the meeting just spouting off about some random stuff. Clearly this person has no idea what they're talking about and didn't even read the deck. I think that actually happens a lot less if at all anymore. I think it used to happen because VC was this sleepy industry that was really hard to get into and even harder to get fired once you're in it. You just had all these people around that didn't need to be around anymore or didn't deserve to be around.
The industry has gotten so much more open and competitive since then that I think you have a lot more aggressively intelligent, sharp, and doing work to stay at the top of their game people in the industry now. I think that probably happens less if this person has no idea what they're talking about.
Ben: Because you as a board member represent three things. You represent, obviously, the company, your firm, but then also yourself in the world in the way that this whole solo capitalist rolling fund, build a social media presence thing happening. You have a lot more people who now have a third pull, which is to build their brand in addition to the dual fiduciary. That actually creates more misalignment.
David: Oh, we're all into misalignment?
Ben: Misalignment. Yeah. Where you have people who are noisier on Twitter but less helpful to the company than they would represent. Obviously, the chickens have to come home to roost there. If you're legitimately not adding value, then you can't build a big reputation of adding value.
David: I think that's probably more harmless because people like that often aren't actually board members or influential advisors to these companies. It's just noise.
Ben: It's so really hard to get on the cap table, and then when they don't show up, they're neutral.
David: Yeah. Because the industry was so much smaller, there weren't that many firms, and there weren't that many people at these firms, you have VCs who owned a lot of your company, were on your board, and didn't read your decks and didn't even remember what you did. I think those days are over.
Ben: Yeah. I have a buddy who's the head of product at a late-stage unicorn IPO spec target who is telling me that in board meetings, everyone looks around the room like the executive team toward the CEO to know if they should listen when a board member spouts off. There's really only one member that they consistently listened to, and otherwise, there's placation that goes on where everyone lauds and says great idea. Thank you.
David: That brings up the next important point, which is how you should behave during these meetings? Like many things, Bill Gurley had a lot of good sayings and writings about this. I think it is really important, just like you're saying, Ben. In the context of these meetings, keep a filter on yourself. Everything you think about saying during a board meeting, you should ask it in your head first. Think about whether it's going to add value at that moment, if you should ask it in a one on one or over email afterward, or if you should not ask it at all.
Ben: I love this. Even Bill, I've heard referenced this as the write it down philosophy. When you have a thought you write it down. And then by the end of the meeting, you have a big list and then you decide what of those things actually should be addressed in the room.
David: Yup. In the room, by a follow-up, or not at all. I really love this because—Ben and probably listeners as you know—I'm naturally not like this at all in my day to day life. I love spouting ideas, but there is something sacred in a board meeting. Again, back to like this is a company, this is people's lives, and this is serious work. You better take this seriously. You should write down your thoughts and think about them before you say them.
Then follow-ups after the meeting related to this. What I like to do—and I shamelessly rip this right off of Bill Gurley—is then send the CEO, the whole management team, or the founders a follow up email after reflecting on it and writing it myself. Like, okay, here's my understanding of what I think we decided is the most important thing. Here are maybe some follow-ups that I didn't bring up during the meeting that might be worth pursuing.
What's great about that too is, once again, you have a written record that you can then reference before the next board meeting of like, great. Okay. This is what I thought last time. This is what I said. It's a good discussion, kicking off point with the management team itself, but then you can keep yourself like, okay. Yup, I got this cadence. Here's the last time, here's this time, and here's next time.
Ben: There's so much information that comes at all of us all the time, and the news cycles are so short. I don't just mean that in a new cycle sense. I mean that in a company sense too. So much around the company happens so quickly. Especially, because all these investments tend to be in developing industries that it's actually very useful, not for any sort of like, now I have a written record. I can use it in any nefarious way. It's more like, it would be great to really have that codified somewhere what we decided so that I can remind myself because this stuff changes so fast.
Ben: Especially because GPs at established venture firms who've been investing for 5+ years, if that's who you have on their board, they're on 10 other boards or more. Any shortcuts to be able to get high leverage on time and make it the most effective and hopefully value-adding to the company in the time that the management team has with that board member, the better.
David: Totally. All right. I think that wraps it for board work unless there's anything else you wanted to add.
Ben: To summarize it, the best thing you can usually do in a boardroom as a board member is to stay quiet, be thoughtful, write stuff down, and then follow up about it. The second most valuable thing you can do is think about—if you have divergent opinions on strategy or on execution—am I qualified to push that we should do something else. Because the management team has very likely thought about it much more than the investor. What is the reason that you are entitled to believe that we should go another direction?
David: To be clear, that doesn't have to be I have this direct experience. It could be like, no, I'm going to go do some research and think about this and see what other context is out there, and can I bring this other context and perspective?
Ben: That's an important one. Thirdly, I think there's, in what way is my firm or my network a shortcut for this company to figure it out?
David: Totally. Again, whether in a formal or an informal board context, this is the primary conduit for your firm's resources to come to bear for and help this company. That's board meetings. The next buckets will be shorter than the board meetings, we promise, but it is just like a board meeting. So long.
Ben: You should really listen to this as a pleasure podcast—what you do in your free time.
David: But we have such fun banter.
Ben: Yeah. You keep telling yourself that.
David: Oh, man. I am a VC. I can't get away. The next bucket is future financings, raising your next round, and exits. This is an area where investors can have a huge impact on companies because you do this and see this all the time. Founders do this very infrequently, and especially if they are early stage first time founders, like not at all. You may have just led their first-round or even their second-round. Great, they've done this one or two times. The next time they do this, they're still neophytes, essentially.
Ben: This is the exact thing that we were talking about recently with regulatory capture where the regulators and the CEOs of the insurance companies see each other much more often than the innovators who are trying to do something outside of regulations. The regulators are beholden to the big company CEOs.
This works the same way when you're thinking about that next round of financing. What Series A entrepreneur has had 10 years of relationship building with Series B financers? You're going to have one or two contacts, whereas this venture firm is playing an iterative game.
David: Maybe if they were a VC before starting the company. I find myself continuingly—even 10 years into doing this—surprised in having to reset this calibration. Because it's so natural to us like, oh, yeah. I know lots of investors. I know people at every firm. This is what I do. Entrepreneurs don't.
Ben: It's an abnormal thing to have relationships with 100 VCs.
David: There's obviously your network and direct introductions. For early-stage founders, there's lots of coaching on the pitch, on the context, on the positioning, on the process, how you manage the process, and then depending on the strength of your relationships with people at various firms that are considering investing—the backchannel, and the helping.
Another great Gurley quote that he used to say is people think being a VC is all about like you invest, you make these decisions, and then you get in board meetings to talk about company strategy. Mostly what you're doing is selling. You are selling.
Ben: You're selling the next round investors to come in. You're selling candidates. I've thought about this as a younger person who's writing checks. Even if you don't feel that it's a big deal to talk to you, if a CEO is selling hard for an employee to join the company and they say, look, we've had a lot of conversations. Do you want to talk with our board members? The office carries weight for someone who's new to the company. To be able to speak with a board member, get their different perspective on it—it's just a very different thing than talking with someone that you've talked to 10 times about joining the company.
David: The thing I was going to add to what you're saying in a recruiting context is we're talking about more mid-level people, not like senior execs are going to expect to talk to a board member. But if you, as a board member, talk to more middle or junior level people in the company during a recruiting process, it shows you care. Almost no matter what you say, you care, and that is a huge differentiator.
Ben: That's a great point. Leaning on investors to help you raise that next round and to recruit, this is the no brainer way to add value. This is the structural systemic way that investors can add value. It's not quite table stakes because it doesn't say in the docs that the investor should help you raise your next round, but that is the thing that they are uniquely positioned to do.
If you're a founder, you should lean aggressively on that investor to run through your deck over and over and over and over again. Put yourself through their cauldron of revenue on the deck, coaching you on your deck, and coaching you on how to navigate that next fundraise. Because as good an entrepreneur is at telling their story, a VC is 10 times better in understanding how it will be received by other VCs who have similar incentives to them.
David: It's a specific context. I've been thinking about this with one company, in particular, I've been working with. As a founder and the CEO, you're telling your story in lots of different contexts. You're telling it to customers, you're telling it to recruits, but an investor context is a specific context that is often different from those other contexts.
An experienced VC, who's already invested in your company, is going to be able to help you shape that positioning. If you're talking to a customer, you should talk about what a customer is going to get out of using this. A VC is not going to care as much about what your customers get out of it. They want to know is this market big, why is this an opportunity, and why are you going to win?
Ben: Yeah. That was a mistake I made for a long time as a founder was having similar sales decks to pitch decks. The most glaring example is investors want to know how big your gross margin is, and customers want to know how small your gross margin is. Customers aren't going to think about it in that exact way, but you want to almost pitch exact opposite things to both of them.
David: Again, not to say investors don't care that you serve your customers. Well, they do. They want you to do that, but in the service of building a big company. This is an important nuance. It only really comes with experience in building your network within the investor community, but we're talking about selling.
On behalf of your portfolio companies as they're raising their next round. Selling like a salesperson is not going to work. If you start calling up other VCs you know and you're laying it on thick with the pitch, that's probably not going to go over very well, especially with more experienced ones. They're going to be like, okay, why is David calling me and pitching this one so hard?
Again, it comes back to positioning. What I think you want to get to overtime—that leads to being successful at this—is you really get to know other VCs in your network, what they are looking for. The reality is—especially once you become more seasoned as a venture investor—you know your strike zone. You know the deals that you're going to do that you're looking for, and you're just going to do those. It's going to be really hard for you to get across the line to do something that's not in your strike zone.
If you can start to learn in your network, what are the strike zones of people in your network? Then you can be like, okay, great. This company is raising around this set of investors. This is in their strike zone. I can call them and say like, yup, you're going to love this because of X. Great. And then I just saved the entrepreneur a ton of time from going and throwing balls to investors that aren't going to swing.
Ben: We have a thing in PSL that we call fundraising as a service. That's basically like the process of building your pipeline, the investor pipeline, who you should be pitching at what firms and when, and scheduling the cadence of that. Actually, it's interesting being in Seattle pre-COVID. It was, when should you plan on scheduling your trips to the valley? What days of the week should that be? And when are you going to have come back for partner meetings?
Your existing investors are going to be—in addition to telling your story—the very best at understanding who you should be pitching, when, and what your funnel looks like. Have them run this as a CRM process with you because again, this is a thing that is a structural component where no matter how good the entrepreneur is, they do it once, twice, or three times. The VCs, they're in and out of this all the time.
David: Then there are exits, which is basically the same thing except with acquirers, bankers, or specs, et cetera instead of other VCs. It's interesting, some firms invest a lot in this. Benchmark is actually really, really great at this. If you look at their portfolio companies and their exits, the time to exit for a lot of their big winners is vastly shorter than the rest of the markets like Snap, Instagram, Duo Security, Stitch Fix, and Zillow. All these things have gone public or been bought six years or less.
Ben: Play in the IRR game more than the cash on cash game.
David: Yeah, and there's value to that like some of these companies should be public companies or acquired. I think this is one of the reasons why Gurley campaigned so hard against staying private longer and probably why Uber was such a thorn in everybody's side because it's against their ethos.
Interestingly, Sequoia is the opposite here. They really don't care. If things are going well, if your company is doing well, they just want to be a compounding shareholder as long as possible. You could be public, you could be private—really don't care. Roelof is still on the board of Sequoia, still a large shareholder in Square years after going public. Don't care.
Ben: You get burned from Apple once in the ‘70s and you forever are changed as an organization.
David: Yup. It is amazing just how the histories of various firms shape their organizational dynamics and strategies.
Ben: You raise the exact same point that your investor is going to have way more downstream investor relationships than you are. It's not as true because it's more industry-specific, but there's a chance that it's also true for potential acquirers. Where a good CEO is constantly doing business development with potential acquirers, potential partners, and people in the ecosystem to be on their radar, but if you have an investor that invests a lot in this space or maybe knows the corp dev person at that company.
The exec who's going to potentially sponsor an acquisition came from one of their former portfolio companies, something like that. Not only is it a different Rolodex, but it's potentially a broader Rolodex if the company wants to think more creatively about who we should sell to that isn't one of the obvious three people that I've developed deep relationships with.
David: Yup. It's like the IM thread conversation between Matt Cohler and Kevin Systrom came out in the antitrust hearings, which was so great. We did a little YouTube discussion of that. Matt was the senior executive at Facebook. He reported to Zuck. Of course, he's going to help navigate that for Kevin and Instagram when that acquisition process got started.
Ben: Yup. Great point.
David: Everything we've said so far is neutral to good things. I think it's worth spending a few minutes on the challenging stuff of company building. Two buckets I want to talk about here. The first is—in my mind—the really, really hardest hard stuff. Everything else is easy compared to this, and that's co-founder and executive turnover. This is super hard. There's a bunch of different approaches. The old school VCs made it easy. They were just looking to fire the founders as soon as possible after the investment. That was one approach.
New School VCs, I think we're now coming out of this era post-Uber and a lot of stuff that's happened. Never fire founders approached that VCs took for a long time. The reality is probably the right fit is somewhere in between. You for sure don't want founders to leave the business. That is bad no matter what, but sometimes it's necessary, hard, and things happen.
I don't think too much to say around a prescription on how to do this because every situation is unique. This is so emotionally painful and draining for everyone, especially if you really care about the company. I have some thoughts, but I don't know. Ben, anything else you want to add to tee this up?
Ben: Yeah, two things. One is—getting back to the checks being bigger now—more money is going into less mature companies. It's more likely than an organic founder breakup is going to happen after it's been capitalized. A lot of the time, founders or any relationship doesn't have to get tested until it gets hard. And so you don't really know if you're a good fit until there's something hard and scaling, or dealing with how to spend money when you didn't use to have resources and now have resources. Those can create friction.
David: Also, just virtue of running a company of any size together for more than a few months and then going into years is hard. It's like a marriage.
Ben: Totally. That's point number one. Point number two was quite the tee up. That co-founders are actually less wedded to than investors. I don't mean emotionally. But from a doc's perspective, it's pretty wild that when you bring on a preferred shareholder, especially a board member, especially one with all the rights that come with being a board member and standard NVCA or anyone else's stocks.
Whether or not you like each other, you're pretty much in it. Unless there's something really, really drastic that happens that meaningfully would impact the financials for a firm. Like the firm decides to totally write off the investment, sell all their shares, or something very, very unusual.
The far more common thing is a founder breakup, and founders are early in their vesting. They're only bound by an employment agreement. The founder could walk away. They own 10%, 20%, or 30% of the company—whatever is vested. It sucks that there's all of this equity that's already been doled out that you no longer have to incentivize people, but it's a relatively clean break.
You don't get a clean break with your investors. There is this very interesting like if there's a founder breakup, the thing that endures is whoever stays continues to deal with the investor pretty much no matter what.
David: There are really two types of departures that you deal with at any company. One is simply like a person is not the right person for the role that they are currently in anymore. That's the pretty straightforward thing. Usually, this happens with non-CEO founders, although, sometimes CEOs are no longer the right CEO for the company (for whatever reason).
Those situations are not easy at all, but the easier version of this is if everyone can step back and be rational, either immediately or with some time. Usually, people know when they're not in the right role, they aren't happy, and they aren't fulfilled. In many cases, there is still a role for that person at the company, just a different type of role. Maybe a founder becomes a board member or something like that. Again, I don't want to say this is easy, but when I see these scenarios, it's like, okay. This isn't going to be fun, but we can get through it.
The much harder scenarios—I think mostly what you're talking about, Ben, which is real breakups. It's not motivated by somebody's role or performance. It's motivated by an interpersonal dynamic between co-founders where the relationship has broken. In those cases, it sucks because it's like a divorce. As a board member, you can be like, let's get a coach in here. Let's get therapy. Let's get couples counseling. If it's done, though, it's done, and it's hard.
When that happens, I'm curious what your experience has been with this Ben, because it happens a lot, especially with these early-stage companies. I've seen a bunch of these and I think generally when this happens, it's almost like a Horcrux from Harry Potter. You're splitting the soul of the company when someone leaves like this, and you're never going to get that back. Companies can still recover, do okay, and go on to new lives, but it's a major blow when this happens.
Ben: It depends if they had already bottled lightning, then yes. But if they hadn't bottled lightning, then what is true is you're stuck with the—I don't know what that right Harry Potter analogy is, but whatever's left after the Horcrux, you're left with the soul of the people who are still there. If what you had before was magic, then it's a bummer because it's very difficult to find the magic again.
If you didn’t, it could be a good thing and is often a good thing. Let's go back to the topic of this episode, which is actually company building. The job of a VC helping in the company building process. In these situations, how can the investor do that? David, how can I be helpful?
David: Stepping back and thinking about, with what has departed from the company, is there still potential for magic here to be created? If you're already well along the way of building a company and scaling, that's one thing, but pre that. If the answer to that is yes, then it's supporting the remaining founder or founders in the post-divorce period (so to speak), and this is hard to do. I've never done it but having seen this a bunch now, I wish I had and I think I will be going forward. If you think there's really not going to be potential for magic going forward, just shutting down the company. Because I think in that case, it's just going to be much better.
I experienced this once a number of years ago with a company I was on the board of and something like this happened. There was an angel investor in the company who was a retired Sequoia partner. He emailed the board and he was like, look, when this would happen at Sequoia, we would shut down the company immediately.
We were all like, no, no, we're not going to do that. We're going to salvage it. There's a path going forward. He was right. There was no path going forward. It would have been better—saved years of everyone's life—if we had just been like, nope, you're all talented people, but this configuration? Not going to work. Let's shut it down, return the capital, and move onto our next things.
Ben: Fascinating. There's another interesting data point that's related. I'll think of the name of the post and we'll put it in the show notes, but it's a Fred Wilson post. To bring back our AVC conversation from earlier from a few years ago about pivot versus shutdown. He has taken the contrarian take that most people take which is, look, everything you have before is baggage. Your team, your capital, and the capital structure.
David: Cap table.
Ben: Yeah. In all likelihood, if you have a new idea, you should just go start a new company, get new investors on board, get new stakeholders—employees, everyone on board for your new idea—and don't cart all the old baggage of the old thing along with it. There's no right answer here.
For anybody thinking about that, it's a great blog post because it's weighing the pros and cons of taking all the assets and accumulated goodwill in the world and the cohesion that we've built in the past. Is there enough transferrable stuff to bring with us where it's actually better than starting over? Even though starting over is going to really suck. It might be hard to raise money. It might be hard to get it off the ground again. It might be hard to rehire the team. It's just an interesting set of tradeoffs to think through.
David: Totally. I'm glad you brought that up. It's such a good post. We'll try and link to it below. But if we can't get it in there, just google AVC Fred Wilson pivots.
Ben: If it's on the internet, we're going to put it in.
David: You’re putting the stake in the ground. We're putting it in the notes. That's our commitment. Pivots, that's the last discussion here. This is sometimes related to co-founder departures, but I want to separate it out. This is interesting. I agree with a lot of the Fred Wilson posts about this. Having seen and lived through a bunch of pivots, and legacy cap tables, and all that, it is very worth considering shutting down, returning capital, starting anew, and fundraising.
Regardless of how you do this from a corporate structure, I love these moments personally when you've got a team. That the team is still committed and wants to work together. They've had an experience where they tried to do something and it didn't work, but they still want to work together. Those moments are just magic for me because now you can throw away all the rose-colored glasses, all the baggage, all the sacred cows, and everybody can commit to rationality.
I find there's hyper-clarity that happens around then, and yet you have to find an idea and something that could potentially have product-market fit. But everybody's so motivated because nobody wants to experience what they just experienced of slogging through not having a product-market fit. I love moments like this.
There's a lot of diverging opinions, lots of investors are like, man, if there's a pivot, I don't want to have anything to do with it. I just want to bail. Nothing good comes from that. I am of the complete opposite opinion.
Ben: Yeah. There's something special when you lose it all and you feel like you have nothing left to lose. There's immense clarity that comes from that. When you were trying to do something really hard that wasn't working, there's a weight that's lifted off your chest off everybody, including the investors. Looking at each other and saying, we're going to just stop trying to do that now because it's not working. That frees a management team up to be creative again. Oftentimes, you can't be creative when you feel that weight on you.
David, I'm stealing from your next section here a little bit. But the most valuable you can be as an investor at this point is if you are committing to—yeah, we're going to do a pivot—lifting that weight off and enabling the creativity and new-found motivation to go run hard at something to let that happen.
David: I think there are two elements to that. Once you're into it, which is great and valuable—I think even less so because a lot of that motivation is just going to come from the team internally. I think now this is super, super hard.
Looking back on my past 10 years working with companies, one of my moments that I just know I'm going to remember for the rest of my career is helping a team identify that they need to do this. Because sometimes, when you're a team and you're running it hard at something and it's not working, but you're so locked into it. You've got the blinders on. You're pushing that boulder up the hill. You don't want to give up. And you don't want to be a quitter. This has happened one time in my career where I was just like, guys.
Ben: No one wants to be the one who said, this isn't working, because you don't want to be the black sheep of the group. You're a little bit of a detached third party as the investor. You can be the one when everybody knows it's in zombie mode, but no one wants to be the one to flag it.
David: Again, this is delicate. You've got to keep in mind, this is a company, this is real, and this is important—people's lives and work. But there's also the upside. If you can say, look, this isn't working. Let's find something that is, and it gets into that freeing moment. It's just so much fun.
Ben: Yeah. Again, this is where breadth versus depth, and I think that's probably the theme of this episode is figuring out when to apply the values of depth and the company bringing everything to bear on that side. It makes sense to index heavily on breadth when the investor can bring their world view to bear. This is definitely one of those where, David, how did you know what it looks like when something is working and what it looks like when something is not? It's because you've been involved with companies that were working before at a similar stage with a similar business model.
David: And companies that were not working.
Ben: Right. It's almost like rather than looking at a world that's made up of a bunch of mysterious shapes, you're the one who has the glasses that helps you make sense of the shapes.
David: I'll point out to bolster my case for any investors that are screaming at us on the other side of it's not worth your time. Here is a shortlist of companies—most of which we've had as main topic episodes on the show, some of which we haven't, and need to—that were pivots born out of moments almost exactly like this.
Ben: Seed stage, very early pivots.
David: Yup. Pinterest, Instagram, Discord, Slack, Twitch, and PayPal. All of those born out of moments like this.
Ben: Yup. It’s a great point.
David: Now, which isn't to say, if you pivot, you're going to be successful. But there is this freeing weight.
Ben: Massive survivorship bias in that list.
David: Exactly. It really is a fun moment. It's my favorite company building moment when that can happen.
Ben: All right. Bring us home. What are some truths that you've experienced that have worked for you?
David: You jump in, too. Wrapping up a point here, I think there is a great deal of truth to this first, do no harm ethos. Also maybe having some—especially early in your career, but even as you go on—self-compassion. You are going to make some mistakes. You're going to F-up some companies. It's going to happen. I've done it. Everyone's done it. Even the best investors have done it. It doesn't mean you shouldn't beat yourself up about that. It doesn't mean that you shouldn't take the weight of responsibility super seriously. If you choose to engage deeply as a company builder, that's going to happen. Try like hell not to have it happen.
Two, I always talk about this with Jenny, my wife, a lot of doing what makes sense. That's a perspective you can bring as a board member VC, outside the breadth perspective of, hey, I'm not sure what we're doing here makes sense, or doing this might make sense. Having an honest conversation around that is great.
I think the point I want to make here is fostering relationships with the founders of companies and management teams where you can get to that point. Rather than they're trying to impress you, or you're trying to impress them. The faster you can just get to, okay, nope, we're on the same page. We're on the same team. Let's figure out what makes sense and do that.
Ben: I'm going to steal your next one because I think I've experienced it and it's so valuable. The shock absorber. I've experienced it on both sides. When you're running a company, many times a day, your ups and downs are spiking enormously. Especially when you're younger and less experienced, you don't self-soothe or self-smooth those. You just let them grab you.
This company is going to the moon when this customer sends a nice affirming email that they're interested in continuing. Or that investor says, yeah, I'll take that second meeting. My team's really leaning in. There’s a whole episode to be done around how to interpret investor speak. Then it's the worst thing ever and the company's screwed when a key hire tells you they're leaving on the very same day that a customer says they had a budget freeze.
These things just happen. This is the nature of startups. You're so nascent. If you're doing your job right, you're moving so fast that there are lots of these things in play that are just coming at you all the time.
By just being the steady hand and being non-reactive to the spikes when they happen and only paying attention to, hey, this thing's been happening a lot over the last couple of months. That's when we talk about it. We don't over-index on little things when they're happening, and we don't blow things out of proportion. We being the royal we in this one, we the investors understand that the founder likely is in a more temperamental mental state because they have a more difficult, more trying job. They've put more on the line than the investors have of their personal livelihood. Being able to say, hey, I'm coming at this from a different mental perspective than you are. I'm going to do the job of smoothing for you.
Not explicitly but everybody is always looking to the other shareholders in their company to validate or invalidate their thinking. If you're a board member and a CEO comes to you and says, this is the worst thing ever. By just not repeating back, you're right. This is the worst thing ever. You don't even have to say anything positive, but by not doubling down on the negativity, you can do a lot.
David: The best way I've ever had this put to me is as a CEO, you're freaking out a lot of the time, especially an early-stage CEO. Your job as an investor is not to freak out. The CEO is freaking out. If you freak out, it's going to be a freakout amplification feedback cycle. You need to break that feedback cycle.
The last two I have here are related. I’ve only just come to be noodling on this in my own life and career. But I think one of the best ways you can help be a company builder—and this is also related to making investment decisions—is understanding how and why people are going to succeed and fail at different things. I generally believe and I'm coming to believe the way the people are going to really succeed at something—and really the only way the people are going to really succeed at something—is if they just have a deep internal desire to do it.
To the extent we've had any success with Acquired, you and I just love doing this. You can't fake this. We've talked about Bill Gurley, Runnin’ Down a Dream talk that he gave on YouTube, which is so good. I think this is what he's trying to say, if you love something or you really, really want something, you're probably going to succeed at it.
Commensurately, if you don't, you probably won't. In your role in a company building activities as a VC or an investor, you can help calibrate and align that stuff within a company. That can be a really powerful role to play. Not one that you want to be parachuting in, changing roles, and messing stuff up all the time, but understanding the motivation of people and how that drives their behaviors can just go a long, long way.
Ben: All right. Well, that's a great place to leave it.
David: Indeed. I hope everyone has enjoyed this deep dive on company building. Next time, we are going to go in a very different direction and cover portfolio management within a firm, which sounds boring. But this includes stuff like follow-on investment decisions. Should you bridge a company that's struggling? Should you not? How do you allocate a fund across a whole set of companies and opportunities?
Ben: How many companies should be in a fund to be risk-diversified enough? How should you think about which companies are the higher risk higher reward bets versus the lower risk lower reward? Should you blend those two things in a single portfolio? Stay tuned.
David: Stay tuned. Thank you all for being part of this community here in the LP program and Acquired yourselves. Also, people have asked us recently about the team’s memberships for the LP program, for their teams, either venture funds, companies, or workers. We definitely do that. If you're interested, email us or DM us on Slack and we can get you and your team hooked up with that.
Ben: Yup. There's a call to action here around sharing with your friends. I don't really care if you share the LP show with your friends. We just have this belief that if people listen to the main show, they like it, and they're a practitioner and a company builder themselves that they'll find their way here. Sure, if you think this content is valuable. But if you like the main show and you like what we do here, pick your favorite episode, share it with a friend or a colleague who you think would really enjoy it. Share it on social media, if you're open to that sort of thing.
As David and I have recently rediscovered, we are a massively inorganic growth engine, which is the gift of inexpensive but the curse of lack of repeatability. To the extent where you want to help more people discover Acquired, that is how you can help. Thanks so much, those of you who have already shouted it from their local hilltops.
David: Indeed. Always, always appreciated. Thanks for being here. Thanks for being LPs, and we'll see you next time.
Ben: See you next time.
Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.
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