Recently, I made my way down to the relatively new offices of Benchmark in the still-sketchy Tenderloin area of San Francisco for a visit with the foursome that now runs the famous venture firm. That would be Peter Fenton, Matt Cohler, Mitch Lasky and Bill Gurley, who feel a little like a band on a run.
Indeed so. With investments in such hits as Instagram, Uber, Snapchat, Twitter and New Relic, the group is trying to style itself as an artisanal VC rather than a corporate one.
Bokay, I’ll bite into the over-priced cheese!
Here’s the first part of our conversation — which was recorded and only slightly edited for clarity in a few places — which came just as the firm closed its eighth fund of $425 million. (I will publish the second part tomorrow):
Re/code: So why did you move here?
Fenton: I think it was behavioral more than strategic. We were spending so much time in San Francisco, it begged the question that we are a field-based business — our customers, the people we serve, are the entrepreneurs, and two-thirds of our investments since I joined the firm in 2007 were in San Francisco.
So between the commute time, really being in the climate and serving the entrepreneurs, it was better to be closer than farther away. And I think there is a structural set of reasons that led to San Francisco being more the epicenter today than it was in the past. We believe they are durable.
The Google and eBay and Yahoo and Facebook buses — which are of course of great notoriety today — allowed young grads, engineers who have a choice of living in the city or suburbia, they’ve invariably picked here. So that created a pool of engineering talent that, when they went on to start new companies, are more likely to do it in San Francisco than in some strip mall in Mountain View. And so we followed the entrepreneurs in that respect.
And we picked a particular neighborhood that challenges us to engage with the city’s non-technical, non-technology population. And it’s, at times, uncomfortable. This is not a neighborhood that’s gentrified and may never be. The Tenderloin, in particular, I think because of the SROs, may never be. And we are at peace with that in the sense that it forces us to engage with the city that has a set of challenges that it has to overcome.
What does that mean, to “overcome?”
Fenton: There aren’t great ladders between the community and the technology world. Over the next 10 years, our hope is that we can build those. We start with education, in and around the Tenderloin, taking advantage of the fact that you have some of the most extreme success of our country juxtaposed to abject poverty. And I think there is an opportunity in San Francisco to try and form some integration rather than just root out and make them the “other” and not engage.
But it’s hard. This city challenges your ability to move in any linear direction, with all the different agendas that exist. I mean free Wi-Fi was a battle … and why is that?
What is the set-up here?
Cohler: We are a small partnership; we’re a small fund and pretty focused on one thing. So we have some space here that we use, we have some space here that we sublease out to Quip — Bret Taylor’s startup, that Peter is on the board of. The short answer is that we have three floors, which makes it seem like we have some massive enterprise, which is not the case at all.
What has changed in the VC community — is there a difference between a San Francisco-based one and a Silicon Valley one?
Lasky: I’m not sure there is much of a difference between an SV venture firm and a San Francisco venture firm. But I think the constituency I am trying to serve here [has been impacted by] what’s happening — and I think we have Jeff Bezos to thank, or to blame — that infrastructure is no longer, you don’t need the same physical infrastructure. The Valley served that period in the market.
Now, it is much more about design and the second order of things that are really making the difference in terms of the San Francisco startups.
Cohler: As Peter said, this is very much a field-based job, so it’s not like we’re sitting around the office anyway. So, to some extent, the offices are just meeting spaces for us. We have an office in Silicon Valley, too, but that’s just a meeting space.
Have there also been structural changes in how VCs operate?
Fenton: I think there has been, probably for the first time … I have been in this business for 15 years, like Bill, where strategy is starting to show up and create a different approach and style. It used to be that firms were just made up of different personality types, but they basically had the same strategy, which was to raise some money, put it to work over a period of three to four years and do your best. Benchmark, I think, has a very explicit strategy, which we’ve been open about: Our belief that this is more of a guild than a corporation. So, we try to think of it as artisans practicing a craft.
So, you’re making cheese?
Fenton: Yes, fine cheese [laughs]. That particular strategy, which we’re defined by, because we love the day-to-day work with the entrepreneurs, prevents us from scaling. We don’t have an ability to offload any part of our relationship in the way we practice it, to anyone other than ourselves. So, there’s no associates, no principals, there is really nothing beyond the group of people here and our assistants who keep our lives sane. That’s a strategy.
Another perfectly cogent strategy is to try and build a certain set of services that you use to differentiate. That requires a set of skills and talents that for whatever reason, because we lack the capacity to do it or the abilities or the desire, it’s not how we choose to practice the business. And so I think it’s fun, because we don’t say this to be glib — we have tremendous respect for our peers — I think an environment that gets more competitive is better for everybody. It forces us to be more differentiated and explicit about what we do and it’s better for the entrepreneur as it obviously increases available services and choice.
Gurley: There has been this fundamental difference that’s always been different at Benchmark around the equal partnership model. I think other firms try and talk to it as they kind of need to recruit. But I don’t think they actually live it and I don’t think their economics are structured that way. But, to what Peter said, there are some amazing venture capital firms that don’t choose that model.
Talk about recent changes at the big firms, some of which seem rocky.
Fenton: I think generational change is one of the hardest things in a venture capital firm, and it’s one of the few things they actually spend time working on: Making phone calls, doing due diligence — it’s the predominant question you get from a limited partner.
There’s a sublimation of someone’s ego that has to occur to be able to effect generational change. So, the historical narrative is: A partner ages, they get more economics and, as the younger person comes in and produces, the older partners take an unfair share of the economics from the younger partner’s perspective. Well, the older partner says, “I gave you the platform, I gave you the training, I’m getting my just desserts.”
By creating an equal partnership model, what Benchmark is saying is, “You’re all in or you’re all out.” And I think that idea of a binary state requires you to say, as our partners have, “We are willing to give the franchise to the people on the field 24/7.”
Lasky: It also catalyzes that intergenerational change, because it requires you to raise your hand and say, “I’m not going to be able to be all in on the next one,” and then, therefore, it forces those hard decisions, where in other firms, maybe those hard decisions get kicked down the road.
Gurley: I think the model also allows you to go out and get people like Matt Cohler that would be tough to recruit into a starting position at a firm.
Fenton: I think it’s always easy to look at prior success as an indicator of the future. But the problem with venture is that we are at the best of our job seven to 15 years in, so what matters the most is that young people are coming into the firm, learning the business and they are going to be peaking when they are still hyper-relevant.
Not to toot our own horn, but you look at Matt and being super relevant in your mid-30s and having five-plus years of venture investing is the dream scenario. The instincts of that is what made Snapchat work, or when Matt took an Uber ride in San Francisco, he said, “We’re going to invest in this company.” So, you have to be so engaged with the phenomenon on a primary level, versus when you’re older, you can abstract things away, like saying “I can’t make sense of that Snapchat thing” is something you would have heard from an older generation.
So, how do you stay relevant, Matt?
Cohler: [Laughs] I think it is really just about being curious. I think in some ways, the youngest person in our partnership is Mitch, actually, because he’s a hacker. Mitch literally is on top of many things like the infrastructure technologies we look at and invest in well in advance of them ever contemplating venture rounds, in some cases in advance of them even becoming companies, as a user.
I think one of the things that works really well for us as such a small partnership is just being able to bring everybody’s distinct personalities. I think like a lot of good partnerships, we have a lot of individual attributes amongst us and also a lot of shared values at the core, and being able to pull all that in at any opportunity is really helpful.
What’s your shared value?
Cohler: I think our shared value is around how we see what makes sense for us to practice this business. Which is, as Peter and Bill talked about, that world view that for us, we don’t aspire to scale. It’s something that we view as a very hands-on, feet-on-the-street, ground work, every day, always pushing, working alongside the entrepreneurs sort of artisan business, as opposed to a corporation. Again, there’s more than one way to do it, it’s just those are the values that resonate with us.
Lasky: I’d add to that, because this is really subtle and it’s really hard to pull off inside these organizations, it’s being incredibly competitive, but not with each other. It’s very difficult to pull off, since when you have someone who’s hyper-competitive, they don’t have a boundary. We’re super cooperative internally and hyper-competitive externally.
Cohler: That requires a sublimation of individual egos.
Fenton: Well, we’re all deeply flawed too. In different ways. Complementary flaws is one of the shared values.
We underestimate the value of just spending time together. The firm when I joined, it was six and it grew to seven partners, you feel entropy when you get to a certain level. And so, we have come down to the current team, every Monday we do a dinner and invite a guest of some sort. And there is something about the idea that we respect each other as investors and admire each other as friends and partners.
In most firms, you can get one of those things — there’s a lot of admiration, but no respect, or respect, but you never want to get in the same room as the person. Nine out of 10 partnerships I see are set up so the internal competition makes it hard to view your partner as a true peer because you always want to know: Am I doing better or worse?
What about the needs for diversity in the tech industry and also at this table?
Cohler: The lack of diversity at this table reflects the lack of diversity in the industry. We’re a very small and very focused and very selective partnership. We would love nothing more than to bring that — because I do think we have a lot of diversity, for four white guys. Believe it or not, we’re pretty different people, with a lot of common ground between us. Diversity with a shared core we think is the most powerful thing that exists, and we would love to add to that on multiple dimensions and would love nothing more than that.
I think the group of people we have, we are always looking for a new Benchmark partner all the time, every day. The group of people we have to look at that are the people who have demonstrated leadership in the industry, and it is what it is.