• 45 min read

Notes on Benchmark Capital

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Benchmark Capital is a venture capital firm known for its early-stage investments and a unique, focused approach. The firm’s philosophy centers on maintaining a small, dedicated team to foster deepest connections and support for startups.

(Updated, 9/13/2024)

💛: “Allen This is awesome — and includes a bunch of stuff we didn’t find!!!”- David Rosenthal, Acquired Podcast host

Table of Content

How Benchmark Operate

Fund Style

Bill

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing.

Benchmark’s goal is to avoid the generational struggles that have hobbled other Valley firms: Young people end up the hustlers and the old people sit in place. That’s the biggest secret of Benchmark. When our founders were at the peak of their powers, they handed us the keys.

Matt

Venture investing work is really hard if you aspire to do it well. My partners and I wake up every day being fully aware that the present and future define success in the startup world, that it’s a ground war not an air war, and we just go do our best to do the work every single day. We focus on just one thing - working with extraordinary entrepreneurs through early-stage venture investing in software companies, from infrastructure to mobile apps, mostly in San Francisco/Silicon Valley - and we keep our fund size and our team small.

We’re a small team with a singular focus and we prefer to spend our time and energy looking for great startups and working shoulder-to-shoulder with extraordinary entrepreneurs to help them fulfill their companies’ potential. We believe that venture capital is a high-touch, highly personal, sub-scale service business, and our ambition and aspiration is to help you scale your business, not to use your business to scale our own.

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Staying Small

Gurley:

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

Cohler:

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

Gurley:

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

Being VC is harder than before

Peter:

On a relative basis, the venture capitalist business today is harder than what it was, earlier in my career. It is a business that is defined by shoe-leather, hustle, energy and intensity. It is one of those few careers where the older you get; your probability of success goes down. So, after two decades in the venture capital business, you are less likely to find the next Google or Facebook. There are number of possible reasons for that. Success, in a venture business, can imprison you in your current board commitments. Second, success can lead you to believe wrongly that you have some special divine gifts of being able to make the companies you invest in successful. The reality is that you play a small part.

Third, as you are successful, you have an image that great entrepreneurs will come and find you, which is just not the case; you need to go find them. That energy and motivation to be outbound is something that success can work against because your calendar is filled with people who want to meet you rather than people you should be trying to find.

Success creates diversions and distractions that take you off the core discipline. Business, in itself, is an activity contest. It is about the number of hours you invest along with intensity and hustle that you put into it. The minute you back off, you degrade quickly. If you are not passionate about your job, you won’t sustain in this career.

Operators-turned VCs and investor-only VCs

Matt

Venture investing and operating roles are both ultimately about enabling companies to achieve their goals and reach their full potential, but the specific goals and specific skills required to achieve those goals are different. Depending on what sort of operating role and context you’ve been in, you may or may not find venture investing work to be right for you.

Eric

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

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

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

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

Sarah

One, you have an immediate level of empathy for the founders because it’s so freaking hard. Two, I’m much more interested than I used to be in the thought process that got to the metric they’re focused on today because that reflects how they’re running their company.

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

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

On looking for in a partner

Fenton

I think it starts with this very basic question. I ask my partners this question every few months: We’re founding a new firm. How do we go hire? And that’s a very different question than who do we want to add to Benchmark.

And so when you think of it from that primitive state of refounding, and I think Benchmark has been founded a few times, I think some companies say this to try and convince people that they’re, You don’t have to be a founder, you can come be a founder here. I actually think that’s true here, because the culture, while it carries that through line of attracting a certain kind of person who wants to be in a non hierarchical structure, who wants a firm that amplifies their strengths, and that buttresses their weaknesses. Like we speak to a certain kind of investor. But if we start with that question, and that’s how I’ve thought about it with the people we brought on, which is if I were leaving Benchmark to start the next Benchmark, would I hire this person? Would I want to convince them to cofound with me, because in a sense, I’m not hiring them. And it’s a weird conversation, which is why I think we can recruit some great people, is that we’re not really hiring them. We’re asking them to found the next version of whatever this is that we have. It’s not like a band, where you say, Here is Neil Young with a new lineup.

And I think that’s kind of fun, because it is a anti-hierarchical, anti-legacy, anti-permanence theory, which is that everything is ephemeral. And every firm is ephemeral in the totality of existence. We’re just this little blip in getting us more in touch with that finitude of this Benchmark, this Benchmark will be gone in three to five years. There’ll be a new group. Not entirely, but certain people, myself included, we’re finite. So I come to that question of like, who wants to refound? And then there’s other layers on top of that, which is, what’s not represented in the group that’s part of the firm we want to found? And it could be experience base, it could be personality type, it could be… but it’s far less quantitative than it is qualitative. So I think one of the things we’d like to add to the firm going forward, Eric, having been a failed CEO—successful CEO, actually, because he sold the company, and he says failed, but he’s not exactly right. I think having people who are around the table that have had more recent and relevant direct experience, building a startup will be great for the firm. And we’re gonna add that.

And it’s not that we can’t do our job without it, and we’re not defined by having experienced, we’re defined by the quality of people, the questions we ask. But it’s a nice thing to have in the room. Eric represents it, Sarah was at Pinterest for a long time, I think saw that. But we want to add more of that. So you tune it against that sort of core note of founder-level quality, which means they have to share culturally, this sort of sense of they’re serving entrepreneurs, they don’t want their name on the website. They don’t seek opportunities for a go at self expression. Because no question you could rationalize it. Well, if you’re doing that, it’s because you can draw attention to the companies. Yeah, maybe. There’s always some way to think about everything and analyte this kind to yourself. But that’s where we are. And I think we have an average age, right now, in the late 30s. It’s an interesting thing to think about. If we hadn’t done the work of the founders all firing themselves, our average age would be mid 50s—actually it’s not true, it would be early 60s, even with the current partners. And so the fact that we continue to rejuvenate and keep it in that essential core is I think, really, to me, the model propagates that way, because it’s destroying itself constantly.

How Benchmark Think

Predict Future vs. Present

Matt

First of all I should clarify that when I talked about noticing the present first, I meant it in the context of surfacing and pursuing new investment opportunities. Once a venture investor is actually working with a company it’s critically important for that person to be able to see around corners–not to predict the future many years out, but to have the experience, pattern-recognition and judgment to know what’s coming next and to help an entrepreneur and company make good decisions by making use of that knowledge.

That said, there are lots of interesting things going on right now. Three that are top-of-mind for me and my partners are the fundraising and capital markets environment, the maturing of the mobile ecosystem, and the increasing startup activity in areas that seem like they may turn out to be better opportunities for big companies than for new ones, such as AI and machine learning where a massive amount of data and compute is required to make something work.

Peter:

At Accel I was taught, ‘we need to have a prepared mind’ at really thinking about a segment, a category, and its coherence. So I came to Benchmark and I didn’t know if I agreed with that. And my partner said, “don’t you do that shit here.” Throw that crystal ball out, you can’t predict anything. What you can do is recognize when lightning strikes.

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

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

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

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

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

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

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

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

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

Best example:

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Bill:

Businesses are complex adaptive systems that cannot be modeled with certainty.

The past can be a poor guide for the future if the future offering is materially different than the past. Let’s first dive into the TAM assumption. In choosing to use the historical size of the taxi and limousine market, Damodaran is making an implicit assumption that the future will look quite like the past. In other words, the arrival of a product or service like Uber will have zero impact on the overall market size of the car-for-hire transportation market. There are multiple reasons why this is a flawed assumption.

When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process.

On looking for in an entrepreneur

Mitch:

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

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

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

Peter:

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

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

Staying Humble

Peter:

I think it’s a confluence of variables that the best you can do is be conscious of them, because then you have a chance to transcend them. The first is ego. And the great next company is likely to be started by somebody that’s totally unknown. And they don’t know that you did these things 10 years ago, or that you’re this or that, and maybe they can find you online and have some… but the probability that they’re going to reach out to you is really low. So if you let your ego develop, then you start to assume great people will come find you. But they don’t. Typically, and I think this is the true, and the super majority of cases for us, we call them cold.

And it’s hard if you think you’re successful, to do something that you were doing when you were 26. The same cold call: Hey, I’m Logan, and you don’t know who I am but…so ego gives you a set of assumptions about what’s going to come your way that are typically wrong. And as a double negative, though, because you then get the opportunities of people who want to talk to famous people, or well known people, and so you have a flow of opportunities, either from your historical investments that are historical—and that that can be great, by the way, but it’s on average, you build more of a perturbation in the signals from that fresh question of what’s the most interesting new thing right now.

And so the trappings of success, and ego is a facet of that, the aging of the network… And I think there are other pathologies that people experience. And one of them is just the nature of wealth, and how that tends to impact—it happens with entrepreneurs too—the hours in the day. So you map the 24 hours that you spend when you’re at the beginning of your venture career versus the middle versus the end. And there’s a pretty profound shift for many people. One of the things I’m struggling with, I always struggle with, is making enough time to go find that next great young entrepreneur—

I’m on 12 boards. So I still do it. And I have to rely more on the instincts now that I have on the person than I do on due diligence or meeting all 10 companies that are in this area. And so that puts me at risk. I’m more likely to commit quickly, and decisively. And I’m committing for 10 years. These are all conflating factors. One of the dimensions I think you have more control over than you know, is mental agility and freshness. If you assume that there’s a requirement of equality of curiosity, and you take that as a ground condition of being a Benchmark partner, and I certainly do, then I have to be just as wildly curious as I was when I was 26, or 32, or 42.> And I find that for some people that ages, and it fatigues, and they get a little bit more, Well, let me tell you about my… you sit in a board meeting, you get to hear about: I’ve been doing this for X number of years, and you’re like Ugh. Like, I want to be part of the team that destroys that generation.

So in a sense, I want to destroy my prior self through the creative process, the curious process of discovering what’s violent and new and interesting. I’ll give a good example that. For a long time, AI was not a good place to invest. In fact, a honeypot for a particularly bad kind of investor that didn’t understand that economic value is not created in science, per se, it is created in the construct of a company and a product, and value capture and value creation aren’t the same thing. And if you wanted to make money in ML, you needed to build the vertical product. And so ML was sort of the icing on the cake. And if you just looked at the icing, you wouldn’t see the cake. That’s shifting quickly. And the perturbations, the violence, and the pace of movement in ML and AI requires you to come at it fresh as if you’d never been an investor and say, Okay, imagine this thing’s happening, where we’re able to look at a whole ecosystem being lit up, where historically you would have been killed if you wanted to invest in it. Now, it may be THE thing to be investing in.

And so that’s hard to let go of. And for a while, I even go back to the beginning of my venture career, consumer internet was a good way to get out of the venture business if you had been doing it in 99 and 2000, because most of those companies had failed. But then you wouldn’t have done Facebook. So these ageing aspects, if you’re conscious of them, you can undermine them. I think it’s not specific to venture. There are some jobs though, and I think particularly you look at someone like Stan Druckenmiller, where 30 years of experience makes you a lot better. And in venture, I think you have to lay out, it makes you a lot better in some ways, it makes you a lot worse and other ways, and if you’re conscious of it, you have a chance to overcome that, I think.

Eric:

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

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

Peter:

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

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

Some other off the top of my head business lessons. I’d be a fraction of myself without my partners. Venture is a shoe-leather business, you can only be great if you are out looking engaging and hustling. Never turn down a company on valuation. It’s a mental trap, and allows for weak thinking.

Board’s are responsible to ensure the integrity of the Strategy, Stucture, and Staff. If the strategy is clear, the structure of the org should be aligned to that strategy, and the staff should be aligned to that org modelEntrepreneurial culture and professional culture will be in constant tension and conflict, and the art of the CEO is to balance both, and most CEOs don’tAlways, always pull the future forward on the organization you wantThe only time to lose fierce optimism is when you’re out of money, in all other scenarios greatness is on the horizon

What I’ve learned about people…the biggest lesson is that, simply put, the magic of human connection is the reason to do this job forever. The joy of being a partner, in the fullest sense, to a leader on the heroic journey of a startup inspires everything I want to contribute to this world.

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

Enterprise vs. Consumer

Peter:

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

Consumer businesses are little less mechanical and have a more nuanced approach in both product design and its development. This is why Twitter is very different from Airbnb. E-commerce turns out to be more mechanical. A lot of it depends on the CEO’s ability to understand the sensibilities of what consumers want; this will have a huge impact on the underlying success of the product.

Contrastingly, it is more determined in the enterprise business. You know companies need a certain X, Y and Z; so, you build that. You have more control because you know you are building something that people are going to pay for. Most stress in a start-up comes from lack of control. Enterprise businesses have more control. What they don’t have is the amplitude of success that consumer companies have had. If you take the last decade or two, all $300 billion market cap companies are consumer enterprises. We have a $50 billion market cap company in Salesforce, which has been a great success in the enterprise space in the last 20 years. But that’s one. There are a handful of companies in $10-15 billion market cap; Workday is about 20 billion. Then, you have some $1-3 billion companies. Typically, in an enterprise business, if you are successful you are likely to be a $1-3 billion company but if the consumer business is successful, you can go on to scale to around $100-300 billion.

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

Downturn

Gurley:

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

Over Valued

Layoff

Benchmark never changes our investment cycle due to economic swings

Our firm has a very unique focus. Around 85 to 90 percent of our funds are deployed on first-money and early-stage investments. And our approach has become even more unique because so many of our competitors have gone multistage. And once you start doing late-stage things, the current environment has a drastic impact. But if you’re doing early-stage, these kinds of swings don’t really put you off the next incremental investment. There have been plenty of great companies started in the troughs to suggest that there’s no reason to stop investing.

The same thing is true at the peaks. There were firms that pulled out in ‘96 because they thought things had expanded too broadly, and they missed three of the greatest years of returns in the history of the business. We really try to learn from our mistakes. We tried to expand internationally once, but it didn’t work for us. So in about 2006, 2007, we capitulated and went back. And our conviction in our focus was even stronger, because we saw that we did better work once we refocused.

We had that on our mind as everyone in the Valley started expanding in more recent times. And I will tell you, for the six or seven years prior to the past year, people would meet with us and tell us that we were stupid, that we were leaving money on the table. But in the past six months, that’s all reverted. Now it’s all, oh, you guys are still brilliant. There is another reason why I like our model. We’re running much smaller funds than some of our peers, who probably pull down ten times the capital we do each year. Those firms have massive management fees as a result. As an investor, I just take more pride in us doing well when our limited partners are doing well. So if the majority of our compensation is on the carry side instead of the fee side, I just feel better about it.

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

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

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

The the part that rhymes, if you want to call it that, is the lived reality of valuation resets. It’s been common across the cycle shifts, where public markets are wired up to be very nimble and agile and resets. Now, they still take six months time, sometimes they take longer, but broadly we’ve seen a catastrophic loss of value in the public tech stocks, 80% loss of value. That’s not happened in the private sector. How does it happen the private sector? Slowly, and because so much money got put into the balance sheets of the companies that could raise it in the last 18 months, many of them, and broadly, in our portfolio, in the ecosystem, that got to higher valuations, are buying time. And there’s a Maybe the market will recover by the time we need to get out there again. We’ll see. But that reset takes more time in the private market, and it can lead to these weird distortions of the practical consideration of Is my equity grant real? And I think it stresses companies to sort of face the music in a sense, to say, Okay, let’s know that we’re not our valuation today. You never are, it’s just a point in time…

And so you say, Okay, isn’t it nice that we’re private, and we don’t have to deal with that problem? It’s like, you have to deal with that problem, it’s just that it’s not liquid. So I think it requires the great… the great companies will come back to that question of, Where are we in five to seven years if we manifest our strategy? How do we not let the stress of the financial market wreck that opportunity set? And you’re gonna see a non-trivial number of companies. My instinct is that this is what rhymes with maybe more like 2000, or 2003, is that some percent, 25%, 50% of the companies are going to severely impair their five to seven year opportunity because of the access to capital problem.

They’ll be in denial about the need to cut, they’ll be in denial about the, Hey, if I just do this—this is a common conversation—we can get this valuation if we just do this. It’s like no, you don’t understand. If you just do what your plans were, you’re still going to have an 80% lower valuation. And Whoa. And I’m struck particularly with younger people who say, We’re going to grow into our multiple. The multiples gone! And so that part rhymes, which is the sense of denial. What doesn’t rhyme, and I think this is the part which I will say that. I think one of the greatest traits of a good investor is a sense of bewilderment of not just being agnostic, but being really careful about any certainties. And I’m quite bewildered by the nature of inflation this time around.

The analogy that people have used, which makes sense to me, is it’s more like cancer than the other flus that we’ve had. And in the venture business, I’ve seen two or three flus. One was very cute in 2008. It was a little more sustained than 2000 to 2004, maybe it’s 2001 to 2004. This is the cancer in the sense that it tends to compound towards negative, and it gets worse and worse and worse until it gets fixed through chemotherapy, which is called high interest rates. We could imagine, it’s not out of the realm of possibility, interest rates being above CPI to reset the economy. And that means what, 8, 9, 10% interest rates? Well, they were 20% in the 1980s. So if we get to that level, I think the question our companies don’t really have a point of view about is when the cost of capital goes up 3-5x, maybe 10x, is some sub segment of what we’re doing no longer economically viable? And that’s probably the case, if you believe that the inflation remedy is 12, 15% interest rates. We’re far away from that. And maybe it can course correct, maybe, but so this is where I think it’s really different. And what does that mean practically, day to day? It doesn’t really impact the Series A business, crazy as it is, because we still look for the same… I say Series A, I’m also putting a lass around what people call seed today.

And preseed and prepreseed. Because those companies are not going to be exposed to the stresses of the cost of capital at this scale until five to seven years down the road, at which point there’ll be some new reality, among other reasons. The terminal value may be different, but the nature of the alchemy of venture is all intact. I’m in the process right now of working with a former entrepreneur, and we’re starting a company, he’s starting it in them, and it feels like a great time to be starting a company.

I think this is the human story that—I don’t know how you can sever your emotional attenuation to the suffering that real people go through during a period like this. It’s sort of one thing to say, Face the music, and You guys are all sinners in the hands of an angry God. It’s another to say, Ugh, and it’s gonna suck for a lot of people. And I think what I’ve tried to invest more in now with the founders I’m lucky enough to work with is building their emotional capabilities to deal with this. Because it is really vicious and hard. And there was a lot of stress during COVID, and from a CEO role it’s so lonely, and then the number of the issues that they had to not be silent on, the issues that our society has systemically.

This is a different, more exhausting phenomenon. I’m more worried about how that may take somebody who’s the next Tobi and cripple them in some fundamental ways from being in their full potential. So being a resource for our founders, to not just shame them into this is brutal times, but how do we help you get through this so that you’re stronger through it? And that’s really, I think, a unique role we can play because we’re in the sense, like, as a founder, we have an unconditional commitment to the business… I mean, in theory, until we sell the stock when it’s public, whereas employees are… and regrettably in some cases, you make them conditional. But we can be there through this, and I think give them some sense of continuity and ballast and that’s when it’s hardest for us to do our job. But we have to do it.

I put jealousy and schaudenfreud up there as probably the worst human vices. And they tend to lead to cruelty, which is THE worst human vice, from my vantage point. So, yeah, it is going to be very challenging for anybody that has high exposure for the last three years to get back to even. It may take a very long time, and what does that mean to those funds and our access to capital? Right now, there’s still this weird reality distortion, right? Because the marked values don’t reflect the If everyone had to raise money tomorrow, what’s the real value? If you told all of them, Guess what, your portfolio’s down indexed to what the public market’s down, I think that the LPs would be quite surprised. Not that they don’t know that instinctively. And they’re all trying to do the right thing and stay true to the… But how does that impact the capital long term? I think you have the same basic phenomenon, which is that private venture investing doesn’t outperform the NASDAQ. And that that is a bitter pill that people have to swallow. Now, there’s the tautological statement that the top 10% of the funds outperform… Okay… And if you’re 10% this time, you have a higher probability being top 10% next time, yeah…

Side Notes

Benchmark wasn’t always true to its credo. During the dot-com bubble, it made a bid to go global, opening offices in London and Tel Aviv. Though the results were solid, the firm dynamics grew increasingly strained. Gurley missed out on Skype by trying to hand the investment off to his European partners, and the different offices struggled not to step on each other’s toes.

By 2007 they began to scrap the experiment, spinning out the firm’s European and Israeli units. “We weren’t doing it for a little more money, we were doing it because we thought the brand had an international appeal,” says Fenton. “But if you have a small equal partnership, you can’t have a leadership figure. And to run an international partnership, you need a CEO.”

Being small can have its downsides: Some major tech companies have slipped through Benchmark’s grasp.

The biggest misses

Instagram

Kevin mentioned Matt Choler was very helpful during the acq in Lex’s Podcast.

Uber

When Uber was hit with a wave of scandals, Benchmark led an investor group to demand Kalanick step down. Other investors and Kalanick accused the firm of fighting dirty.

Former Uber CEO Travis Kalanick shared a story at the All-In Summit 2024 about how he was fired by Benchmark: …that’s when (his mother passed away) they (Benchmark) went in for the kill…

Sources