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The Boys of Benchmark, Part 2: Snapchat Is More Than Sexting and Other Investment Theories

"The remote control to the world is now your phone." Also: Bitcoin!


As part of an occasional series of deep-dive interviews with tech and media players — you can read one on Disney’s Bob Iger here and VC Reid Hoffman here — I posted the first part of a long interview I did with the four partners at Benchmark. That would be Peter Fenton, Matt Cohler, Mitch Lasky and Bill Gurley, who now preside over the storied Silicon Valley venture firm.

In that, they discussed the diversity in the industry (not much!) and their move to the Tenderloin of San Francisco (uncomfortable, but needed) and characterized themselves as “artisans” rather than, you know, VCs.

Here’s the second part, in which they discuss investments (Benchmark hits include Instagram, Uber, Snapchat, Twitter and New Relic), the state of the market and where it’s all headed:

Let’s talk about your theory of investment these days.

Fenton: In our investment portfolio, there is a common theme that we fall in love with a person and their mission beyond their sector or theme.

Gurley: A lot of times you rationalize where you focus after the fact.

Fenton: In each investment, we get very passionate about it, dreaming about it in its full potential. I can’t stop talking about Snapchat, because it’s created such a phenomenon where, from a distance, particularly people who don’t use it can’t understand how it can be used for anything but sexting. Yet people who use it are using it at a level where we’ve never seen. The geometric growth of Snapchat into a person’s life as a form of primal communications is really interesting.

And this idea of ephemerality, in a world where we have been trying to become celebrities of our own life and you document it on Facebook and it gets put up by everyone to see: Snapchat flipped all that around and said, “You’re in control of communications,” and it’s about capturing now moments.

And, to me, that gets back to how do you stay relevant, which is how are the patterns of people’s use of technology shaping the way they live in the world. And this cuts across everything, from the way they’re sharing pictures to how you find a mate, and you’re going across the spectrum of the different things you are doing in the world, and so that leads you to some of the things Matt talked about.

The remote control to the world is now your phone, so there is a set of things that build off a successful investment like Uber, where you start to build off the person who comes in and talks about the next version of that. Although we are not backing any “Ubers for X.”

Gurley: I actually view it as a negative sign from a cyclical standpoint, because people don’t do that in market troughs, they don’t fund all these near-variants. That kinda copycat behavior only happens …

Fenton: It can be a head fake, too. I was at Accel when I was pitched YouTube, and it was pitched as “Flickr for video.” So, when people start to write “don’t say this for that,” it turns out YouTube was YouTube for YouTube.

Lasky: To your point, we’re not unaware of the massive move toward mobility and toward the cloud that I think are churning, like the protocolization of currency, that are creating the kind of grinding glacial movement that are a lot of what Peter is talking lies on top of a lot of those trends.

So you mentioned bitcoin — is that a focus?

Cohler: I think we’re all interested in bitcoin, because it is a fundamental enabling technology disruption: In payment, in the way the financial structure we have today works, beyond payments in all kinds of ways. It touches on all kinds of things. We’re working on all kinds of things. It helps to be long on the price of bitcoin, but you don’t have to be long to believe in the enabling technology.

What else is interesting to you?

Gurley: The rise of this smartphone as an embedded system is not how people describe it, but anybody that wanted to do anything prior to this smartphone that had anything to do with an embedded system had to go to basically develop a device that cost $2,500 to land.

So now, all of a sudden, you write an app for free and you get to leverage all this stuff, including the maps and stuff. So companies like Zillow are spending 50 percent of their R&D on realtor-facing apps that are all on these devices that are in the field.

And Uber would not be possible without it. There’s all this white space that would not be possible without this, that are based on this embedded system that is so cheap to develop for. So a lot of our companies are spending a lot of their cycles on putting apps in people’s hands out in the field at the time that they would be doing things.

Lasky: The Android system is super interesting to me on a worldwide basis and what’s happening there. Here in the cocoon of the Valley, you look around the table here and you don’t see an Android phone. I think on a global basis, what’s happening with Android is incredibly interesting and there’s really big trends brewing under the surface.

And, more broadly, I get painted as sort of the games investor, but I think what that reflects is that games have been on the leading edge of some trends in audience aggregation, and how modern audiences are formed in a pull rather than push. You don’t have Hollywood marketing and spending $75 million for a film. And I am fascinated by that, and what interests me about the games business is those dynamics of a modern audience.

Fenton: The phenomenon of Snapchat is real. Every though we thought everything was done, I think we are seeing self-expression mutate again because of the ubiquity of smartphones and the ubiquity of media capture. So I am certain there will be something that comes up over live video. It’s been tried and tried and tried, but his idea of live video that you can share with some people, with a geo-dimension of it, it feels like we are vulnerable to these evolutions of the way we express.

Gurley: A lot of these consumer phenomena, we’ve found, have a lot to do with the go-to-market strategy of the individual — the way Zuckerberg brought Facebook out or the way Jeremy Stoppelman brought Yelp out. And a lot of it is this on-the-field playbook on how you light this fire, and so it allows for this phenomenon where we can say, “No one has gotten this right. But someone will put together the pieces right.”

Lasky: Think about how transformative Grindr has been in that community. Before, you had to go to a segregated place, and now you can go anywhere and find the gay people anywhere in the world. I think those things can be socially transformative.

I think Matt said something relatively profound about this: That our job is not to see the future, it’s to see the present very clearly. And that speaks to what a lot of us have been taking about, not to try to get too far ahead of ourselves, not to assume we are smarter than the people out there … but to try and be open.

Fenton: Lightning in a bottle — it’s impossible to predict that. You know, “We had everything lined up, but somehow it didn’t work,” versus just really feeling the momentum around Snapchat and saying, “Something happened here.” Clearly, let’s figure out what’s going on. It’s not sexting. It’s mostly women, just showing their faces. So, you unpack these things and there’s a humility associated with recognizing the luck factor.

Let’s talk about the market in general — how do you look at it?

Cohler: We try to stay pretty focused and pretty clear in our approach and, again, we’re trying not to scale and we’re really selective about which entrepreneurs and companies we back, so we keep the fund small and that makes it less difficult to raise a fund than would be the case, all things being equal, if you were trying to raise a $1 billion fund. And we’re very fortunate that we’ve got very supportive LPs.

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.

Do any of you want to run a company?

Lasky: No, I do not have any desire to do that right now.

Fenton: The one thing that makes us so non-threatening to the people we work with is that we really have no clear skills. [Laughter] So we’re never a threat to take over the job of the CEO.

Cohler: These guys have been in the venture business for 15 years and, in some ways, I kind of have too, because I don’t have any skills and [what I am doing now is] kind of what I did all along at LinkedIn and Facebook.

How do you look at the macroeconomy?

Lasky: I saw a horrible tweet that I think had been retweeted by the science fiction writer William Gibson that said: “In the future, everyone will be employed for 15 minutes.”

Cohler: Venture capital is a job, that is — at least to me, when I was working in startups — looks pretty easy. But it’s actually pretty hard. And it’s kind of like, well, you know what it is that needs to happen, it’s just actually hard to do it.

And that’s true of this set of issues too, everybody knows and agrees — nobody is a macroeconomist — but immigration reform is really important; science, technology, math and education are really important; investment in women and girls is really important. We know these things have to happen, but actually causing them to happen is really tough. This is a really tough job that we have, but I think the President’s job is even harder.

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.

Fenton: 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.

Lasky: And then those pigeons always come home to roost. The cyclicality of the public markets is such that earnings will become important.

Fenton: 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.

Is M&A the answer?

Gurley: Last year it wasn’t.

Fenton: But you look at Nest. Nest may have burst a dam of corporate development interest. Because people broadly, I think, think of that as being a highly strategic, bold move. Clearly, they have an empowered leader at the company that can pull it off. So you could see that now playing out in every corporate development office.

Lasky: There’s lots of capital on corporate balance sheets, lots of cash.

Gurley: That gets into the issue. Amazon has always been frugal around M&A, Apple hasn’t been particularly aggressive. I guess you could see eBay become more acquisitive over time. [CEO John] Donahoe has been talking a lot about his success with integration, so that could happen. It will be interesting to see if [Apple CEO Tim] Cook changes his mind. I know he’s got a lot of pressure to, but maybe that does the opposite.

What about Yahoo?

Gurley: You know more than we do. [Laughter]

Fenton: Well, as the Asian assets bear more fruit …

Lasky: That could open up a lot.

Last question: What one area that you haven’t invested in would you like to? Robotics, something crazy?

Lasky: Drones.

Cohler: Bitcoin.

Gurley: I’m spending a lot of time looking at [healthcare]. I think there are a lot of ways that these tools that we’ve learned from social media and mobile platforms could have a huge impact. The unfortunate thing, the more I learn, is that it is one of the most messed-up industries you could possibly find. And the way our government has gotten involved with the practitioners, over a very long period of time, has created a hornet’s nest that may or may not be possible to disrupt.

Fenton: Mine’s a non-Benchmark-specific thing. I am very motivated this this year, maybe in the next couple years, to invest in connecting the San Francisco population that has nothing to do with our industry with those that do. And it’s got to be through education.

It would be appalling and a shame if we looked back in five years and we did not transform people’s lives because of the success of a small group of people who had done well. It’s a great opportunity.

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