Venture Capital in 2018 with Aileen Lee (Cowboy Ventures), Megan Quinn (Spark Capital), Sarah Tavel (Benchmark Capital) | Disrupt SF (Day 1)
11:35PM Sep 5, 2018
So with that we're gonna put our hands together for alien Lee from cowboy ventures, Megan Quinn from spark capital and Sarah Tavel from benchmark capital along with our moderator, Connie Louisa.
This vd VC discussion is always one of my favorites at these disrupt events, because the industry is always changing. I think a couple of years, we were sort of talking about the speed with which VC funds were raising new funds, which was sort of alarming to their investors. Last year, we talked a little bit about Uber and whether the ethics of founders had changed compared to their predecessors this year, there are sort of new, interesting developments, mega rounds SoftBank, even more broadly, whether Silicon Valley, which has sort of long been the center of the startup universe is maybe losing its gravitational mobile. I'm so excited that you guys are here. Thank you so much. I thought we could talk maybe first about the last, which is whether Silicon Valley is on the wane. There's this much discussed article that came out last week in the economist posing this question, alien. Yeah, that's about it. Did you read the story,
I did not read the story. But I, you know, it's common, probably, for all of us, around boardrooms, to be talking about that hiring challenges in the Bay Area. And when companies get to a certain size, it often comes up that they're thinking about moving or opening up a second office because it's too expensive to live here. And I know that there's a lot of people trying to work on that problem in the Bay Area. And I'm hopeful that we're going to be successful because it you know, it's an amazing place to live. And we've made it really challenging to be able to live here and, and not be super worried about being able to make ends meet. So it's, we have one portfolio company that was in the Bay Area, and they decided, purposeful, to move to Colorado, because when they thought about building out their team and being able to recruit talent, they decided it was going to be easier to do in Colorado. So we're definitely starting to see that more. Are you
seeing sort of teams headquartered here, maybe it's sort of like the architects of innovation are in the Bay Area, and they're outsourcing the rest of the staff are you seeing sort of, you know, teams based elsewhere when we are seeing innovation everywhere. So a couple of examples. We're investors in a company called Pinto to product experience platform. It's based in Raleigh, North Carolina. I don't think my other portfolio companies will mind me saying this of our let's call it 28 growth stage. portfolio companies Pendle has the easiest time recruiting around, not just local talent, and the Research Triangle, but actually pulling really great talent from San Francisco, Chicago, New York, we have another investment in a company called envision, it is a platform for designers. And it is fully district, so 700 plus people, 42 plus countries, and no headquarter abstract, which is in the United States, which also is distributed for no reason automatic. And for the reasons that alien was mentioning before, when we make a growth stage investment in a bay area company these days, we often say post investment, go to sf.com draw three hour circle around San Francisco, where they have direct flights, find a city that has a university and open up a second office as quickly as possible.
I mean, like, like I am, I, I used to believe very strongly that you had to have your, if you want to build a multi billion dollar company, you had to be based here like you could build a company that is up to a couple hundred million dollars in market cap basically everywhere. But the rare companies that actually get to that escape velocity, I have just for a long, long time believe that they were that you had to be here. And I would always tell people, when they would say like, Oh, it's just it's I'm in Austin, or New York, or wherever it is, it's so much easier for me to recruit I always had this Well, that's a local maxima, and you want to find the global maximum of talent. And so you have to be here. And it's for me, also, in the last couple of years, I've stopped giving that so because it is just amazing how competitive it is for talent here and how expensive it's become for talent, especially when you're competing against, you know, the big incumbents like Facebook and everybody else that have these gushing cash wells, and they're in their businesses. And so they can afford to pay people way more than you would otherwise hope to pay. If you're if you're a startup that said, I do still believe that if you want to go through escape velocity, if you are in hyper growth, you want to have people who have been there before I mean, when I was an operator at Pinterest and saw the
ability to crew people from Facebook and Google who have been there before it just helped us so much and so it's it's it is this like given take right now that we haven't fully since shakeout. Well, that's very interesting. So one sort of wrinkle on the article was talking about these big companies, a Facebook, alphabet, Amazon and the fact that they pay people so much, and it's hard to compete with them, these sort of startups are toiling in their shadow. But I'm a little bit interested in knowing whether you think it's sort of the beginning of the end or the end of the beginning with these companies. When you look down the road, do you see, you know, like a fewer and fewer companies that are getting absorbed by these mega companies, which in many cases, you know, talk with startups but end up developing their own technologies in house or do you think that sort of, as has happened historically, you know, invariably, people will spin out of the companies out of, you know, Airbnb and Uber and rise to sort of compete with them.
But we have to be optimists on the ladder. Yeah, like, I know,
yeah, you wouldn't do this job. Exactly,
exactly. And so like, and i and i, you see the talent coming out of these companies. And they're extraordinarily and so I believe that they will continue to innovate and find opportunities. But to the first part of your question, you know, I think we have a situation right now where for multiple reasons that we can get into the companies that have been the acquirers in the past and have created the liquidity that funds our businesses, that keeps kind of this virtuous cycle happening in the valley, they've been far less acquisitive in that has created its own notifications, where you see companies staying private longer, you see, you know, there's big second, at least big secondary markets happening, you've seen a lot of just the access of private capital that is happening and, and, and no exits. So that'll be the big thing that we're all
very few Aqua hires, like, whereas, you know, maybe five or 10 years ago, companies was raid, raise a seed and get lucky and get bought by Dropbox, or Twitter or private company for 50 or hundred million dollars, which could be a great outcome for the seed investors if they got in at a good valuation, and a great outcome for the employees. But those don't really happen anymore, either. And then I think that also changes the dynamic around and it's important for founders and employees to understand that when they join a company like that outcome is much less likely than it was before. And so you have to be joining a team knowing that and when you raise venture funding, that you have to build something that's really going to scale Otherwise, the likelihood of getting liquidity or an outcome is is much less than it used to be.
And maybe that you know, is why we're seeing some of the mega trends that we're seeing. But before we get into that, I am wondering so as an early stage investor you are confronted with this issue where it used to be easier to you know see us a team you know get absorbed and you'd have your nice you know, three x exit in a short period time Are you very reliant on now on the secondary market before exiting, right? If I can, we're not, you know, we're,
although maybe we should be if you guys want airway
we're just trying to help, we kind of do the old fashioned way where we're trying to help people build companies that are going to be sustainable and durable and competitive in terms of building I mean, I think things have changed a lot in the past 10 years that we talked a lot about culture and like being able to recruit different kinds of people to create more resilience in the company. We talked about how, like, we used to try and convince companies to move from other places to the Bay Area, we'd be like, we don't think you have to move to they're not going to be like, we'd never do that anymore. But now, I mean, I think they're because companies are staying private longer, it is very helpful that there's a secondary market because people need to build a pay their bills. And so giving founders and employees some liquidity so that they want to stay and keep growing. The company I think can be helpful thing is not how we get out. Is there
a point in which that's acceptable? So there was a case fairly recently reported that Travis Vander sand and the CEO of bird which is a very popular e scooter company had raised I think, a few hundred million dollars, maybe back in January, February and had taken money off the table now, bird is just now I think approaching it's sort of official one year mark. So on the one hand, that seems very soon. Yes. I guess on the other, I think the argument was, well, he was giving opportunities to investors, they couldn't have led into the round. Otherwise, I don't know. I'm just wondering if you have any thoughts on that. Megan do yeah,
this is where some context really matters. So I'm going to pull back a little bit, there's just been tremendous growth on the late stage investing side, from a capital perspective, every venture fund, with the exception of that to next to me, you know, have raised growth funds and to have growth practices and growth investors, there's obviously SoftBank. They're more non traditional investors, whether its strategic or sovereign wealth funds than ever before. So there's just a tremendous amount of capital available and dry powder on the late stage. And quite frankly, there's never been a better time in the history of mankind to raise late stage private capital. So as a result, we're all looking around about how can we invest and allocate this money, which is our job and there's a menu of things we can do. So we can go earlier into a company's lifecycle, which we do a little bit and we start encroaching maybe a bit on some venture stage opportunities take a bit more risk, we could go later, you know, we could change our hurdle rate of three to five x. But that's not what we've told our LPs we're going to do, we could expand our aperture geographically, as we've talked about, which we're definitely doing,
or we can double down on the winners. And so basically, every growth stage investor has the same menu of option. And you're seeing a lot of the doubling down on the winners. In the first six months of this year alone, there was nearly 100 hundred million dollar rounds. And somewhere, as I mentioned to you backstage beforehand, referred to them to me today as a p IPO. So a private IPO. And the reason that they're calling him at his peak is secondary tends to be a part of these large rounds, yes, both for the founders and employees to give them some liquidity to make some of their risk off the table, but also to free up some space on the cap table and to return some capital to the early stage investors. And given how much capital there is available at the late stage. I think that's only going to continue, we don't see any pullback on the late stage in terms of amount of capital there. And in fact, I think, frankly, if you're a growth stage ish entrepreneur, and you're not even considering one of these types of rounds, you are at risk of, you know, bringing a nail file to a bazooka fight.
I mean, I do wonder if all this late stage funding is going to kill venture capital, though? I mean, you know, so much money is looking for these deals, and they're going in earlier and earlier, your portfolio company brandless recently raised a big round from SoftBank. Yep. How did you feel about that? It's a three years old. Yeah,
no less, much less. Okay. Very young company. It's a huge opportunity and a huge vision at brandless. And I think one of the advantages of SoftBank is there thinking really big, you know, whereas there is a lot of growth money and, and some of the growth investors are strategic thinkers like Megan. But a lot of them come at it more like an actuary would, right, where it's all about the numbers and what like, what have you done for me lately in terms of like, you know, it's, it's like a proxy ology exam. And in terms of metrics, and
a lot of growth, investors aren't stepping back and thinking about the big picture in terms of big trends, macro trends, and also how do you swing for the fences. And I think that is one of the benefits and attributes of SoftBank is where they're really looking to build huge companies, and they're willing to kind of back that up with the capital. And I think that does can have some advantages. But soft banks, definitely a riddle. I mean, as a growth stage investor, you know, from a day to day basis, it doesn't really change our job. You know, I say that if we're looking at the same deal, one of us is looking at the wrong deal. Because if you're a company who can absorb 100 to $300 million, you're probably at a different scale of where we're investing where we ideally are the first growth check in that being said, we do see companies who no pun intended, I don't necessarily know have a vision for how they put that capital to work. But they're bringing it on board, because we've created an ecosystem of haves and have nots, right, you're going to be one or the other, you obviously want to be in the half. Yeah. Well,
Sarah, you're very famous colleague at benchmark, Bill Gurley had noted in a recent interview that quote, if your competitors going to raise 150 million, and you want to be conservative and only raised 20 million, you're going to get run over? So is the is the answer to play catch up? I mean, how do you compete, I mean, you can sort of say, you know,
it only changes landscape so much. But I mean, I feel like it's been investing the sums So recently, and sort of the grand scheme of things to it, sort of, sort of hard to know what what the long term ramifications are going to be look like, I mean, to your question earlier, like, I do worry about all this capital in the market. Like,
ultimately, what our jobs are, is to find opportunities where an entrepreneur can take $1 and turn it into five or 10 and, and then and then eventually get to some kind of outcomes get to liquidity point, and then, you know, recognize a return on our capital. And what happens when companies are able to raise so much more capital, they, it becomes this arms race where everybody ends up spending a lot of money, and you're, you're, you know, if you have one company, and they're, you know, they have the 20 and then another company raises 150, then they start spending money on sales and marketing in a way that isn't actually if you were to think about on an IRR basis, which is, you know, really what you should be thinking about, it's not a good return on that capital, but then they're growing really quickly. And then this company still has to raise capital, I mean, they need capital in order to grow. And so then they raised and it is this terrible thing where you just wonder, how is it all going to end, right. And, you know, I think like, there are a lot of companies right now that are very cash consumptive. And it is the era of being one of those companies like the bird versus line thing happening right now, in the scooter world like that is that is to me, such a, like a boiling down of everything happening in the kind of not just Silicon Valley because bird is non Silicon Valley. And, and lime is actually Chinese import. But it's everything happening and what maybe that is actually a boiling down of all the things that Sure, yeah, that's true, LA, you know, yeah, company. And so there are the, you know, the rare companies like Stitch Fix, and our partners that just raised $42 million, and then built a public company, multi billion dollar company, those are still going to be the, you know, the prizes, I think, in our in our minds of like, how you can build a company, despite all the money happening everywhere else,
right. That being said, we should note that there are definitely companies that raise a tremendous amount of capital and they're able to execute with that capital, they actually able to put it to work in a way that is really meaningful and efficient, I can pick on one of our own slack is famous for being able to raise capital and
slack need as much as it's, I mean, of course, Stewart Butterfield has been at the startup game a long time, and he see something coming, which is why I mean, he seems to have more money than he's so but you know, and sorry to interrupt, Megan. But like, without question, that there are some categories where you have a winner take most or winner take all opportunity, which is, you know, fundamentally companies that have network effects or have, you know, like slack like Uber, and in those companies, there is a real use for the cap, because once you win the market, then you get to this really wonderful place where you can invest a lot less in sales and marketing and really start to reap the profitability of your model. But it takes a very disciplined founder and CEO and executive team to be able to operate under those circumstances, hundred percent. And I
think that speaking to founder quality is such a fascinating and just Uber competitive environment right now. Whereas maybe a decade ago, you know, founder had to have certain skills and I think now because of this potential arms race doesn't have to be that way, right? If you look at like a tough to needle or chewy, right, like or a Viva, right, you can build some great companies Stitch Fix, not raising a ton of capital, but you know, being able to navigate these choices are forks in the road means that the CEO has to not only like generally have like fantastic products ends, be really smart about technology, be an awesome recruiter, they have to be really smart about like, understanding the trade offs when it comes to growth and financial planning and scenarios and, and be a great storyteller as well as building relationships. Because being able to tell the story when you're a one or two year old company to raise $100 million or $300 million is it takes a different I think, a different skill set than what people had 10 years ago.
We could talk about this endlessly. We only have a few minutes left. I did want to ask you because it's one of the other huge trends sort of impacting the Silicon Valley ecosystem. crypto Icos you know I feel like last year there was sort of more concerned about Icos now there's been a couple of you know, fraudulent cases, the headlines. So, in the least I'm sorry.
But I do wonder if we're not paying attention to what's happening. Global. I mean, do you think that this is going to impact your work is initial coin offerings going to like have a meaningful impact on bc now, I you know, I thought about it a lot more I would say in q4 of last year,
I don't think about it as much right now. I just think that there are a lot of people have gotten burned by taking an equity or joining a company that was going to have a big Ico but didn't actually have a business and hadn't built the technology yet. And, you know, both I think financially they haven't worked out but also like, people want to work on real products, they want to ship real stuff. Yeah. And
growth stage, there's been no impact because again, that's not the profile of a company that we would invest in a napkin or a two page white paper is not a growth stage investment from dirty standpoint, right. So even if they're raising growth size rounds, that is not a growth stage companies. And so we don't run into that at all.
Yeah, I mean, there's a lot regulatory things that have been happening that have been basically shutting down that Ico market hasn't existed. And in late 2017, I guess it was, but they're happening in token sales still there, just structuring them a little differently. But I think that what people found when in that first craze was, you know, this is maybe a little bit of a humble brag, but like, This job is really hard, it it's really hard to invest in companies and find the ones that succeed. It's not about being, you know, investing in a bunch of different companies and as, as an index, especially, kind of, in, in today's environment in and I think that what is what we're starting to see what projects like auger coming out is that, you know, the, the premise or the kind of assumptions driving a lot of these token sales was that, you know, you had economic incentives with the blockchain and, and this kind of ability, there's like this real true ticket, like technological disruption with the blockchain. I mean, I'm a big believer in the space, but those are not sufficient by themselves to create networks, you know, two sided marketplaces and, and it's really hard and you need a company around it, you don't just need code. And so I think that's what's starting to evolve. And I my own like belief, if I would, you know, if I had a crystal ball is that what is happening now, in Ico market is going to look a lot more like what happened with open source, you know, 10 years ago, it's kind of going to be the open source 2.0 and we're going to have plain vanilla c corpse supporting new protocols that will have, you know, tokens on the balance sheet to you know, to kind of incentivize continued development in that protocol and will have VC right back into the into this ecosystem.
Well, I'm talking to the head of the SEC San Francisco be around a little bit more about this guys. Thank you so much for joining us wish we had more time thanks for having Thank you.