AboutWriting

Notes on Matt Cohler (Benchmark)

Framer's Component Picker

Venture Investment

VC vs. Operator

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.

The key goals and the key skills in venture are:

  • Surfacing potential new early-stage investments. This takes extreme curiosity, a strong living network of relationships across an ecosystem, the desire to be operating at the ground level all the time, and the hustle to keep doing it
  • Developing a clear point of view on the potential of a startup: the entrepreneur, the product and business, and possible impact and durability of the company. This takes specific types of judgment - judgment on entrepreneurial talent, on product and business models, and on the potential impact those specific forces could have on a specific market
  • Winning the opportunity to invest in and work with great startups. The best startup venture funding rounds are almost always highly competitive, and winning the right to invest takes the ability to be persuasive in the right ways
  • Helping the company to achieve its full potential through team-building, future rounds of financing (up to and beyond an IPO) and strategic focus. This too is about persuasion in and about influencing key decisions (hopefully well!) without having control

Some of these skills are also important in an operating role, but not all of them are - and just as importantly, some of the key skills required in an operating role can be unimportant or even counter-productive in venture. In particular, venture is not about having direct control over operating decisions such as setting and owning near-term operational goals and managing people and teams directly. Former CEOs in particular sometimes struggle with transitioning to a venture role where they're not directly in charge.

Being able to advise entrepreneurs on operational issues and decisions as a venture investor can certainly be valuable, but entrepreneurs shouldn't be picking their venture investors on the basis of how good those investors are at operating, they should be picking their venture investors on the basis of how good they are at venture investment work. There's a reason why many of the greatest venture investors of all time didn't have senior careers as operators prior to going into venture - Mike Moritz, Fred Wilson, John Doerr and my partners Bill Gurley and Peter Fenton all come to mind.

Why do you think Benchmark Capital has been so successful?

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.

"My job is not to predict the future, it's to notice the present first." What do you notice these days?

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.

What are the most important factors that you look for when considering a new investment?

An entrepreneur with vision, the ability to tell a compelling story, and the ability to recruit fantastic operating execs; and a product and business model with the potential to drive a sharp wedge through a market, reshape and grow that market, and command a durable leadership position in it. Network-effect and marketplace models (as seen in companies like Facebook, LinkedIn, Uber, Snapchat, ResearchGate, Instagram, Twitter and Tinder) are not the only ways to do this, but they're the ones I understand the best and believe in the most.

Major red flags in an investment?

A few red flags that come to mind:

  • Generating demand primarily through direct paid marketing. Users and customers acquired through direct-response advertising tend to be of lower quality than those acquired organically, and acquiring this way gets harder and more competitive as you get bigger - not a great foundation, and from an investment perspective, not great evidence that you're creating something people deeply want
  • Having no competitors. There are exceptions but most of the time no competition means no opportunity. Most people don't realize that Thefacebook, LinkedIn and Instagram all had lots of now-forgotten competitors in their early years.
  • Having a huge incumbent addressable market. This might sound counterintuitive, but when you're trying to build something new or disruptive within a huge existing market it can be much harder to get into a position of leverage and leadership than if you start with a smaller market and grow or reshape it over time. Thefacebook/Facebook, Uber and even Google (in terms of the web search advertising market) are all great examples of this

Series A

Benchmark is very much open for business and my partners and I are meeting with entrepreneurs about Series A investments every single day. The Series A market is the most durable and consistent part of the post-angel fundraising cycle because it represents the point at which an idea or an MVP product turns into a true company and starts to incur people costs. Series A financings are usually mostly about those people costs, the costs of salary and benefits and office space required to build a small and growing team, and those sorts of costs per unit don't change by orders of magnitude over time in the same way that other technology costs can. Series A valuations and team salaries go up and down cyclically but only to a small degree.

Entrepreneurs and investors should always be thinking about this round of funding in terms of the next round of funding, so the bigger question is what's going on with Series B and beyond. That's a topic for another question, but for now suffice it to say that we've been living in an unprecedented environment over the past several years where the cost of capital has been meaningfully lower for "late-stage private" companies than for equivalent public companies. This has led to all kinds of locally rational but global strange behavior, as has been much discussed lately. This was never going to be scalable as a phenomenon simply because the scale and liquidity of capital available in public markets is so much greater than in private ones.

Facebook vs. LinkedIn

Early days of LinkedIn, How much of a focus was there on monetization, and who was their target customer?

There wasn't a lot of focus on it, but there was more than zero. We launched our first revenue line less than 18 months after launching the product. It's worth noting that Thefacebook also had revenue in the form of ads from nearly the first day it launched (and so I've never understood the random narrative that many great product entrepreneurs don't care about business and revenue!) Growing the network was always by far the most important thing, but having some efforts on monetization early helped us to learn and develop muscle memory around revenue systems and business operations, to start to grow with advertisers as well as with users, and to delay fundraising.

How were the strategies for early growth at LinkedIn different from Facebook?

The early growth patterns at LinkedIn and Facebook were very different, even though the goal was the same as for every network-effect or marketplace startup: go from nothing to something which gets better and better as it gets bigger, by tipping into liquidity. All of the great network-effect and marketplace companies I've had the privilege to be involved with have solved this problem, from LinkedIn and Facebook to Instagram, Uber, Snapchat, ResearchGate, Twitter and Tinder. The means to the end have changed over time as the underlying platforms and distribution channels have changed, but the goal is always the same.

Getting to liquidity in a network or marketplace always starts with getting past a classic chicken-and-egg problem: a marketplace or network is only valuable once there are lots of people there, so how do you get people to participate before there are lots of people there? Having a small initial surface area where you're trying to tip a network or marketplace into liquidity always makes this easier: when there are fewer people you need to entice to participate in order to reach a tipping point, the odds of getting a large enough % of those people to do so go way up. And importantly, you can get to that liquidity more quickly when you're starting with a small surface area. Time is a really important and often-overlooked aspect of network growth - if a network takes too long to tip then you can end up in the self-fulfilling vicious circle of a long bad party.

At Thefacebook we started with American undergraduate schools. These all have the huge benefit of being small, clearly defined spaces, which made it possible for us to tip each one of them very quickly. In many cases it was literally a matter of hours from the time we opened a new school to the time when most people in that school were using the product actively. The specific things we had to do to make this work over and over again were deciding which schools to prioritize opening when; doing a lot of (unpaid!) offline and grassroots local guerrilla marketing; and collecting and bottling-up demand from schools we weren't ready to launch yet then unleashing all of that pent-up demand at once when we were ready to launch a new school. Initially each school was its own island, and then once we had enough schools we started to link the schools together which lead to network effects both within and across schools. It's worth noting that these early chapters at Facebook involved very little true "viral marketing" or "growth hacking" and the early growth at Thefacebook was more linear than exponential as a function of the limitations on who could sign up. I remember being surprised to see how few typical viral mechanisms were built into the product when I first started exploring it in 2004, even by the standards of that time. But those limitations on who could sign up and use Thefacebook were crucial to the core utility of the product for its early users, drove unprecedented engagement numbers, and set a fantastic foundation for the future.

At LinkedIn we didn't have the benefit of a small, clearly-defined initial surface area to go after at the start given the way the product has always worked, so we had to resort to - and in several cases invent - viral mechanisms for growth. In 2003 when LinkedIn launched (many people don't realize that LinkedIn launched almost a year before Thefacebook!) the two primary distribution channels available to us were web search and email. LinkedIn profiles and content weren't showing up meaningfully in search results so we couldn't make much use of SEO. This was because we were very concerned about user privacy and control - in 2003 LinkedIn was actually the first service of any real size where people were putting their full first and last name on a user-generated profile online, and there were originally no pictures on user profiles by design. So email virality was the primary channel available to us for distribution. Like with all exponential functions there was a long initial tail on this viral growth, and Thefacebook actually reached 1,000,000 users much faster than LinkedIn despite not having virality engineered into the product. But once LinkedIn did tip it went from being a curiosity to a service with profound utility. It required a visionary entrepreneur, patient investors, and a team willing to run lots of scrappy experiments to get there.

SEO and email are still both good tools for distribution and growth today, but as the platform has shifted to mobile other things have become at least as important. There's no unpaid mobile distribution platform which is as low-friction and easy as the SEO, email, the MySpace platform (through which YouTube grew) and the Facebook platform (through which Instagram and Pinterest grew) channels were in the Web 2.0 era. If anything this has raised the bar on the importance of finding a way to tip quickly into small networks or marketplaces then expand from there. Uber and Snapchat are both great examples of this: Uber started by focusing on black cars in San Francisco, making that market tip on both the demand and supply side, then launching additional city-level marketplaces from there; Snapchat started with a product that was immediately useful for people using it in a "network" of as few as 2 (or arguably even 1) person thanks to its initial focus on a new form of private communication and private sharing, and grew from there.

Career Advice

Figure out what your comparative advantage is and play to your strengths. In a hyper-competitive world it's not enough to be really good at something, you also need to be better at it than all of the other good people who are trying to do it too, who are vying for the same opportunity. Nobody's great at everything - in fact even the most extraordinary people are only great at a very small number of things - and people and organizations waste a lot of time trying to develop "well rounded" skillsets. Wouldn't it be better if you and your teammates were sharp than round?