Yesterday in Helsinki, this editor interviewed four of the six general partners at Benchmark, the nearly 30-year-old Silicon Valley firm known for some high-profile bets (Uber, Dropbox), where it pays each general partner in exactly the same way, and in exchange for continuing to collect Money of a similar size over many years rather than a balloon in size.
We were talking in claya major annual event for the European startup ecosystem, so I naturally wondered why the company was putting on such a big show, since it’s hard enough to get the Benchmark team to appear in Silicon Valley together.
Victor Lazzarte, a gaming company entrepreneur who joined Benchmark five months ago as its newest general practitioner, admitted there was “no business reason” for Benchmark coming other than its interest in understanding all things “exceptional”. (Helsinki is really cool.)
Larzart was equally frank when the conversation turned to soaring valuations in recent years, and I asked him about his own gaming company, Wildlife Studios, which raised a Series A round from Benchmark in 2019 at a valuation of $1.3 billion, and less than a year later, was set at a valuation of $3 billion when Vulcan Capital led a subsequent round. The company didn’t make any progress between rounds, but because Benchmark funded the company, “everyone” later wanted to invest in the company, Larzart said. (He said that, in retrospect, getting a lot of money at a very high valuation so quickly was a “mistake.”)
Not lastly, we talked about how strange it is to live through a general recession and a boom in AI investing at the same time. On this front, the team has been clear in its assessment that today’s high-flying but shuttered large language modeling companies will not be the breakout winners many expect. (Note: It is not an investor in these closed LLM companies, including OpenAI and Anthropic.) You can follow our conversation for longer Broadcasting; Meanwhile, you can find some excerpts below, slightly edited for clarity.
Regarding Benchmark’s views on the sweeping trend of AI in everything, partner Miles Grimshaw said that we will collectively be surprised at how backwards our current use of software will look just a few years from now.
I think if we look back at ourselves in a few years — maybe even a year — we’ll feel like we were primates, smashing rocks together to make a fire. In a couple of years, it’ll be weird that you had to click all these buttons in Salesforce and navigate, and they didn’t do much for you. User expectations are rising about what is possible, and there are tectonic forces at play that creative and creative founders can leverage.
I think the question [ties to] Startup Opportunity vs Existing Opportunity. You can never tell founders where to go – that’s not what we do. But one place you should probably avoid – the traps – is: Don’t be Microsoft. do not be [part of] Copilot game [meaning Microsoft’s AI-productivity tool that’s powered by OpenAI’s ChatGPT]. This is what they do. It serves their business model. It serves their product environment very well. But be more creative and ambitious than just a co-pilot.
Peter Fenton, a senior member of the Benchmark team, chimed in to add:
We haven’t invested in a big language model. This is perhaps unique to Benchmark, but our view is capital intensive [companies are tricky]. We’ve been in some – we’ve all taken Ubers here [to the event] today [and that was a Benchmark portfolio company]. Capital-intensive and venture-backed companies have historically not been great partners.
our [belief] is that open source will eventually have a profound impact on the ecosystem. We are all, in a way, soldiers in the army of “tear down anything capital-intensive and over-build” and then deploy a developer-driven world. And these AI experiences will be built by developers who imagine things that no one can understand in a big language model, because they serve a different kind of horizontal need for the platform. So yes, hopefully [the closed LLM companies] I did well. We love innovation. But I was particularly drawn to the idea of an open source founder who would potentially outperform almost everything you can do with capital.
Other excerpts from our conversation include Fenton discussing a big Benchmark bug that came up during the chat (accidentally, frankly), namely Airbnb.
You mentioned Airbnb. This is one of those on our long list of deep regrets. When I joined the industry, you could buy 20% to 25% of a company in a Series A investment for a number that today looks like a seed round – $7 million to $10 million. Because we had an ownership limit that was impossible to achieve [when Airbnb was first fundraising]We missed the opportunity. And we kind of relaxed that as a constraint because it’s not a question of what Benchmark can own. It’s: What is the company’s potential?
We also talked about what makes the company a benchmark in 2023, with GP Sarah Tavel saying the focus remains very much on emerging teams:
Of the investments we’ve made so far this year, a significant percentage of them are [were] Actually when the company is established. More often than not, two people actually see the opportunity, and we reach that opportunity before they leave their last job to start that company.
We’re really focused on, ideally, being the first board member, the first partner of the founder as they embark on this journey, and a large percentage of the time, being the first money [that] Two people brainstorm their idea.
Speaking of board seats, we asked about the latest trend in Silicon Valley, which is that of venture capitalists saying board seats don’t matter because the real information between founders and investors is transferred between board meetings. Here, Fenton suggested that as a fiduciary, it would be almost negligent for a VC not to have a seat on the board where possible.
It’s an interesting hack, business, where we typically codify the relationship with money. But then we join the board management structure, and the person who takes our money, we have power over them, in theory. Through the structures and boards of directors, you can appoint and fire the CEO. This is the Council’s biggest task.
In my view, truly great companies are built by boards that have a partnership with the CEO, and who have a view of what is possible that is bigger than any one person. I believe the integrity of this structure has been tested throughout our entire C Corp business model. [When the industry] We moved to cryptocurrencies, got rid of the boards; We said: Who needs the panels? Who needs to build the company and all that stuff? It created an interesting token value, but I don’t think it contributed to building value for the shares. . .
My sense is that we’re moving through a period of time where the idea of governance — which we just went through at OpenAI — is seeping into the top of people’s consciousness. We can see what happens when governance structures are not compatible. And I have a personal view that my partnership with a great CEO is greatly enhanced by the knowledge that I hold the fiduciary responsibilities they hold close to their hearts, and that if I don’t serve on the board, I can. It’s effective, but it’s not the same.
Finally, returning to the valuation discussion with Lazzaretti, we wondered how Benchmark advises its startups on valuations, given that the higher their subsequent valuation, the better in some ways for early investors, but in some ways, the worse for founders, who may They have fewer options when their companies become overvalued. Here’s what he had to say:
When partnered with Benchmark [as a founder in 2019]I really wanted to work with Peter because I felt like he was someone who could help me transform the company, and I was lucky that he wanted to work with me, right? And then, just for transparency, we were in a period where there were a lot of capital chasing deals, and there’s the fact that after Benchmark invests in a company, everyone wants to invest in the company. So, in this second round that we raised, we didn’t make any progress. But there were a lot of people interested and me [was thinking that] We are a company from Brazil and we are trying to move to Silicon Valley. And we were always pretty low key. But like all of a sudden, it was, “Oh, Benchmark invested,” and there were these people coming. Then I made a decision, okay, there’s this money that [are being] invested [at] Poor evaluation when not much progress has really been made. And I made the decision, well, with more money, maybe we could do more.
But looking back, I think me and a lot of the founders. . You made the mistake of raising too much capital. The problem is that when you raise too much capital, you start going in unnatural directions, and you start distributing more capital than is normal in this business. Then you grow your team, but larger teams, oftentimes, don’t produce more. In fact, they produce less. Once you do that, you have to go through the painful process of downsizing the team. So the best founders don’t try to maximize abnormal valuations, because that distracts from the primary goal of building the company.