Notes about Benchmark Capital: Why So Special?
Some of its most successful rivals say Benchmark is the firm they admire— and fear—the most:
“They benefit from being extremely focused” - Jim Goetz, Sequoia
Roelof Botha, who leads Sequoia’s domestic operations, said Benchmark’s structure gives the partners “incredible clarity” to spot lucrative technologies.
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. -Bill Gurley
People
Active GPs
- Sarah Tavel
- Eric Vishria
- Peter Fenton
- Chetan Puttagunta
- Miles Grimshaw
Inactive
Andy: Andy Rachleff
Matt: Matt Cohler
Bill: Bill Gurley
Mitch: Mitch Lasky
Why Benchmark Is Special
1. Young Generation
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. - Bill Gurley
2. Philosophy
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.
- Is there an untapped market or unmet need that the idea connects with in an organic way, and can you show evidence of momentum?
- 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.
- Can the founders organize a team to execute the idea in a really great product or service? Ideas are worthless without proper execution.
Bill:
I think all VCs work hard to create a narrative for founders/entrepreneurs that is beneficial to that VC's position on the field.
We invest as an alternative to seed (or pre-seed or pre-pre-seed :)) all the time. Love getting in on the ground floor. And we have confidence in our views on categories and GTM approaches, so unafraid to start that early.
Eric:
For Benchmark specifically we often write the very first check to a company - no seed, no pre-seed, no dollars prior, and those types of investments are among our most successful invesments. NewRelic, Nextdoor, Elastic, Discord, Docker, Confluent and Cerebras are some examples where we were the very first investor with many others examples in the earlier stages of development. To be clear, we didn’t lead seed rounds in any of those, they were straight A rounds - lead investor, priced round, board seat… So the takeaway is early stage != seed or pre-seed.
A couple other parts of the question are interesting. Why do “VCs talk” at all? Biggest reason is they are marketing to the next entrepreneurs. Why do they “talk about making early stage investments”? A VC’s job is to find, win the right to invest in, and support great companies. A typical VC will see easily 100 new pitches a year and invest in 1 or 2 (I personally see ~200 a year). Seeing pitches early is often an advantage to “finding” and “winning the right to invest in” parts of the job. So, talking about early stage is all about being able to see companies as early as possible in order to develop the option to invest in the case that it is the 1% that the VC falls in love with.
Responding to a "request for startup" in the Open Source space: We're not top down like that. It is so organic. When an entrepreneur pitches and tells a story that provides an insight that makes you think about the world differently, that's when I get really, really excited. And that's why it is really hard to be top-down and why we don't tend to be particularly thesis-driven.
Predict Future vs. Present
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…
(Allen's note: Houseparty was shut down by Epic (2021). Sketch lost the battle to Figma (2022))
Gurley:
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.
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.