Venture Investing With The VC Who Invested in Insta and Figma (with John Lilly)

I'm glad to be here, Hannah. Thanks for having me.

Well, yeah, I can explain what venture capital is. That's my sort of area of the world. VC, venture capital, is a very Silicon Valley and now global phenomenon, but it's been around for I don't know probably the 40s or 50s when Bessemer and Greylock and some others started and they really got to prominence in the 80s and 90s with the rise of Apple and Amazon. But the idea is that you try to invest, you know, usually a few hundred thousand to a few million dollars in very very early stage companies. Almost always technology companies or something new, technology that's enabling something new and you're trying to turn you know $10 million into $10 billion. It's not a super complicated idea. You're doing you know an adventure risk. You're putting money at risk that banks, it started because like banks wouldn't fund things like Intel and Fairchild which are really the genesis of a lot of the early investments that were made in Silicon Valley.

Oh yeah. Well, that's why they call it venture capital and it's changed over the years, but it used to be, you know, you'd spend months with a company and they say, 'Okay, well, I think they've got this new chip process like Intel or Fairchild did.' Or you know Sequoia who famously did one of the first rounds of Apple had a memo about oh we've got this interesting young guy he's kind of brash Steve Jobs and Steve Wozniak and they build this thing but like you know I don't know if it's going to work or not but if they're pretty smart and like we have to you know pay a lot to be a part of it but you know it might work. And so a lot of times you're like I said you're doing things that banks or other kinds of capital wouldn't support and public markets wouldn't do because like they look kind of crazy. When we invested in Instagram by the time we did that it was obvious to me that it was going to be a big company, but you know, Kevin came in and he's like, 'Look, what if you could point at any point on the globe and like see what's happening right there, right now with pictures taken by just normal humans.' And he was really clear that that was the vision of what was going to exist in the world. He could see it, but like it sounded ridiculous for like...

Well, we invested in probably 2013. We wired the check four days before they got bought by Facebook. So, by the time we invested, they were adding like a million users a day and then Mark, you know, invited Kevin over to his house and didn't let him go until they signed a deal. But I just use it as an example. It's the same, you know, Airbnb when they came in and they said, 'Look, we think there's going to be a business where people are not going to go to hotels anymore. Everybody's going to sleep on somebody else's couch.' And to, you know, talking to a bunch of pretty wealthy guys that are investing in a room, they're like, 'That sounds bad. Why would we do that?' But Brian Chesky presented and Reid Hoffman said, 'No, look, it's working. Like whether we do it or not, it's...' Reid's like, 'Well, it sounds kind of interesting and whether I would do it or not, maybe I would, maybe I wouldn't, but we can see in the data that they've already given us like this looks like it might work.' And so a lot of times like things look like they won't work and they do. Mostly they don't. And so like most companies fail and it's just the truth of it. And so you invest and you're like well there's a lot of things we don't know. We really like the founder. We think she's amazing or we really think that everyone in the world since they've got phones they're going to want stuff to do on it and so let's go find things like Twitter or Facebook to do on it. And so it's all over the map. But you kind of go in assuming that what's going to be hard, the status quo exists this way because a lot of people are making money on the status quo and so you're trying to upset that because of some new technology or some new capability or some new idea and most things don't work. But the things that work almost always are very spectacular in the way they work.

Yeah. Yeah, I mean we should talk about stages of capital like there's seed stage and institutional capital and that kind of stuff over time but like for a venture capitalist what you do is you go raise money from what are called limited partners, LPs, and you as a venture capitalist what's called a general partner, a general partnership might be four or five partners that are making investments with some associates and some other staff, a team of recruiters or marketers or things like that and then they might raise money so call it $250 million or half a billion or a billion. And so that's the fund and they raise that from limited partners. And so limited partners are anyone from like big institutions like the Yale and Harvard and Stanford endowments to corporate venture funds to high net worth individuals who are putting in $5 or $10 or $50 million into the fund to invest. But the idea is that these limited partners, they say, well, we're going to give you this fund, you know, a billion dollars and you're going to try to invest that over three or four years depending on the circumstance. And you might invest that across 40 companies, say, so 40 companies and you got a billion dollars. And the idea is that in seven to 10 years, you want to get back three billion or four billion or five billion against that billion. So you might two or three or four or five exit. And it's all over the map. Like a lot of funds don't return. And like you really want to be in the top quartile. There's a real difference between high performing funds and most funds. And in a portfolio of 40 or 50 companies, people say it's a power law distribution. So most of the companies will give you your money back at 1x. A lot of companies will return zero. And then in any fund, you're hoping for two or three companies that will return the whole fund. So if the fund's a billion dollars and you invest $50 million in a company, you're hoping that two or three of these companies each give you back more than a billion dollars. Bill Gurley from Benchmark famously said, you know, you can only lose your money one time, but you can make multiples on each investment. So, you might be able to make 10 or 100 times on a company, but you can only lose what you put in. It's asymmetric return and that's the whole thing that makes it possible.

Well, I think it's a lot of different ways. There's no one way to do it. There's lots of ways to win. And because of this power law, you only have to be right a few times to be a really really good investor and have really good returns for your fund. You can be wrong a lot and be right a few times and still be excellent. My former partner David Sze at Greylock famously invested in Facebook and Roblox and others. He used to say, 'Look, the job is you need to see all the interesting companies and entrepreneurs that are starting. You need to win the right to invest in them. You need to decide whether you want to invest in them and then you need to help them build the company.' And seeing, you're talking about sourcing. So every investor is different in this way. For me, I'm technical by background. I went to Stanford. I've lived here in Silicon Valley for a long time and I just try to be around the most interesting people I can. So with Instagram for example, I just noticed my friends using Instagram and in particular I noticed a professional photographer friend of mine using it and he has these amazing photos. He's like an underwater digital photographer before that was really very common. And what I noticed is that he started distributing his photos to us, all his friends over Instagram, which was funny because at the time Instagram was like basically filters. And so you put a filter on and make any photo look kind of artsy with a filter. And I'm like, Eric, why are you doing this? Because like your photos are super high quality. And Instagram's like for sharing photos that aren't very high quality. And he's like, 'Well, I'm using it because it helps me connect to my networks over Facebook and Twitter and all these makes it easy to get them out to all the people.' That was a signal for me. Oh, well, because he's doing this this way, like it made me more relevant to lots and lots of people. And so then I started sort of chasing Instagram and trying to get in front of Kevin and Mike, the founders, and eventually started interacting with Kevin and trying to help him along the way. But that one was more like, well, I noticed a thing in the wild that people were using. Let's try to hook on to it and figure out how to get connected up. And we did. We invested in Instagram eventually. Figma was different. So Figma, I got a note from three people in a weekend. DJ Patil, he coined the term data science. He worked at LinkedIn for a long time. He was the US chief data scientist for a long time. Jeff Weiner, who's the former CEO of LinkedIn. And another person, they said, 'Look, you got to meet this kid, Dylan.' And they all said kid because he was 20 and so I met him over a weekend and we, I didn't invest then, we can talk about that story and how that unfolded in a little bit but for that situation it was like everybody said go meet this guy. For Kevin and Mike it was like here's an app super interesting let's go do it. I teach at Stanford a lot which is where my background is and sometimes people say hey John I saw you teach can I talk to you about my startup and we do that. You want to be as broad as you can to just see as much as you can. And seeing is the first step. And sometimes it's the hardest because you don't know what percentage of the world's interesting stuff you're seeing at any given time.

Yeah. And this was super hard for me. So I'm an engineer by background. And so, for me, I want to see a problem and then I want like, okay, I want to understand it. So, I'm going to ask a ton of questions and figure out how to do it and then I can start to like think about how to solve the problem. So like for an engineer it would be like I want to see the thing then I want to decide whether I like it then I want to win it then I want to go build it and this is the hardest thing for me as a VC was that really the order's flipped because if you talk to an entrepreneur and you want to totally understand things before you decide whether you're interested what the entrepreneur is going to infer from that conversation is like oh you may not believe everything because like the act of entrepreneurship is fundamentally like I'm going to go change the world I'm going to do this thing nobody's ever done it before and nobody can see it except for me. And so what happens when you're an entrepreneur, you start a company is that everyone tells you you're an idiot for like years. Say, well, this is stupid and this won't work and this is why this has never happened before. And so entrepreneurs at some level, you're just looking for somebody else who believes, who can see it. And so like when an entrepreneur is pitching a VC, if the VC comes back and says, 'Well, what about this and what about this and this seems wrong?' An entrepreneur is like, 'Yeah, no kidding. I haven't figured all this stuff out. So, I'm going to go find somebody who can see what might go right as opposed to all the things that might go wrong.' And so, for me, I had to kind of start to flip it around. So, like maybe just believe that the entrepreneur is right and awesome and then just make sure I can do enough stuff so that they want to work with me and then we can get into it and we can figure out whether it's a match and whether it's a good fit for how I work and how they work and that kind of stuff.

Yeah, I think you would say that when you start, you're using data as much as you can to try to figure out like where to look, where to see who's interesting, that kind of stuff. You use judgment, I think, in the middle, and then I think you use data. Once you say, I think this is the right thing to do, then you try to go use data that might tell you why you're wrong. You're not looking for confirmatory data so much. You're looking for try to tell you why you're wrong. So I think there's like this data sandwich, data at the beginning and the end, but a lot of it's judgment in the middle. The numbers like after my first year of being a VC, I think I saw 600 companies my first year as a VC and I invested in four.

Four is a lot. Yeah. I mean, at a firm like Greylock where I was, you're taking a board seat for everyone. You're writing a multi-million dollar check for every company, and you're going to be on the journey with these companies for five or 10 years each. And so if you add two or three or four a year, pretty quickly you're on 15 or 20 boards, which is too many. And so four was a lot, especially for my first year to do. I did Tumblr and Dropbox and a couple others.

Well, they were not garage startups by then. I was doing a little bit later stage in those companies, but yeah, Tumblr and Dropbox both did very well and continue to be in the world. But that means that like for 600 companies, I've invested in four. I probably seriously looked at eight. And you know, I probably did follow-up meetings with 40 or 50 where I took two meetings. And then for like 530 companies, I had 50 minutes with them start to finish and a follow-up email or follow-up conversation. So, it's a lot. And I think that a lot of it's pattern recognition which I think works for you sometimes when markets are consistent and it works against you sometimes when markets are chaotic like they are now. But yeah, it's a lot of judgment.

Well, Kevin and Mike, like so they started Instagram, they got funded by Benchmark and they were growing and it was kind of like it was clearly working, but they were still very small. It was like 11 people, something like that. And so I met with Kevin and Mike and we got along. They're Stanford guys, too. And we had a lot of background and friends in common. And so they were easy to talk to, product people like me. And we talked, but they said, 'You know what? We really need a DevOps engineer. We really need somebody to help us keep these servers up because things are going great.' I did what I could to get them more interested. So I said, 'Hey, do you want to meet Reid Hoffman or David Sze? David invested in Facebook, Reid, you know, founder of LinkedIn.' But they said, 'Yeah, well that's cool. We like David. We like Reid. We like you, but we really need an engineer.' And so one of the people who was working at Greylock at the time, it's a guy named Dan Portillo, who I worked with at Mozilla and before that as well, and he was a recruiter for us and he found him a guy. So they had been looking for this person for like over a year and Dan said, 'I think here's a perfect person. I think you should talk to him.' And they ended up hiring him. I think he was employee number 12 or 13 at Instagram. But then Kevin eventually called and said, 'Okay, we're raising now and want to talk to you guys. I want to talk about the raise.' And the reason really was we helped him recruit a person.

Well, right and so I mean we talked about the Figma story too. So Figma I met Dylan when it was really just Dylan and co-founder Evan and two other people. He came to a coffee shop near my house on a Saturday and gave me a demo and he was probably 20, 21 years old and he was showing me something working in the web browser because I previously run Mozilla, made Firefox, and I have fairly deep experience in web technology and he just wanted to show me this graphics thing kind of like Photoshop working in the browser and it was amazing and I said that's amazing and it's incredible that you guys did this and it's, I love that you're using a brand new technology that we worked on at Mozilla and like it's just been possible. So that's all really cool, but I don't think this is a business. So I love you. I think this is awesome. However, not for me to invest. And so I passed. So I think I hurt Dylan's feelings because like he's expecting the Mozilla guy to say, 'This is incredible. How can I be involved?' And I wasn't, but I was impressed with him. And he's like, 'Okay, well that's a bummer, but can we have breakfast next month because I just want to see if we can chat about some stuff.' I said, 'Of course. I'll spend whatever time you want.' And because you're an interesting guy, you're doing interesting stuff. And so we'd have breakfast and we'd go in, we'd have stuff to talk about and we'd always come out with a longer list than we had going in of new things to talk about. And he'd say, 'Can we do this again in 6 weeks?' It's like, 'Okay, sure. Let's do that.' And we just liked being around each other and like talking about technology and product. And then eventually he said, 'Well, I've got something new I want to show you.' And he showed it to me. And it was more interesting because it was more like what Figma is today. But I just learned to like him and trust his judgment. And then I noticed all the things he did to follow up. So there'd be times when he'd say, 'Well, what do you think about this?' I'm like, 'Well, I don't know an answer to that, but I think you should go talk to this person.' You know, former CEO of Adobe, like I mentioned one time, Bruce Chizen, and like 6 weeks later when I had breakfast with Dylan, he's like, 'Okay, I talked to Bruce. Here's what he said.' I'm like, 'Well, how did you get to Bruce?' He's like, 'Well, I asked this person and this person, this person.' And I just really loved his grit and his determination and his follow-through and his non-defensiveness. And so for that one, we just built a relationship over a year, year and a half. By the time he did the A, I mean it's just obvious we should work together.

Yeah, that's right. And so partly it's a fit issue. So like there are companies that I didn't invest in that have gotten huge and they'd come in and they'd pitch and they were clearly talented and I just like, you know, I don't think I can do it. I'm not transactional in this way or I don't match or like I like asking product questions and they don't like getting product questions asked. And so to his internal credit, I mentioned to Reid one time. There's a company that got very big, a consumer company that we could have invested in the A and we didn't because I told Reid, it's like I had this meeting and I think this thing might work, but man, I do not get along with the founders. I just don't think I can do it even though I think it might make us money. And you know, Reid's point is like look, the job is not to be in every interesting company. The job is to be in enough interesting companies to provide really good return to your investors. So, if it's not a fit, that's okay. Just find other good things that aren't a fit.

Yeah, that's it. I mean, there's some things that you need that have such velocity that you really have to pay attention to and like work through your feelings. There are the things that could work but like maybe are just better for other investors to do. You know, Reid was perfect for Brian Chesky in Airbnb and he was just such a good match and such a good adviser and confidant. Reid was perfect for Sam Altman when they started OpenAI and Reid would not have been as good at companies like mine. So like with Figma and that kind of stuff. But yeah, I think the fit between a founder and investor is a big deal because it's a very trust-oriented relationship. So over time you just try to be useful to the entrepreneur so that they call you whether things on good days they call you on bad days and that's the main thing.

Well I mean yeah I think that at some level you try to forget about the capital. So at some level you're trying to say look I'm in the boat with the founder. I'm in the boat with the company. I'm part of the company. And yes, I have capital that I put in. I'm trying to turn it into more capital, but really I'm part of the team. That's how I work at least. Not everybody's, I mean other people are like, 'Well, let's just put money in and let the entrepreneur run.' That's not really how I work the best. I like to be involved.

So I don't know if it's useful or not is the actual truth. As to how I lean on it, you know, I only know one way to be and it's to be me and I'm an engineer and I think like this stuff. Some of the world's best investors are not deep technically. You know, Reid was a symbolic systems at Stanford, which is and a philosophy major at Oxford. And so like he's like not as technical, not certainly not a computer scientist. Mike Moritz was a journalist, you know, wrote the book about Disney before becoming a VC. I think lots of people are bankers, very successful. And so I think being a good investor doesn't depend on you being technical. I think it does depend on you being curious and interested and wondering about what's true that you may not think is true yet. And so I think curiosity is the main thing. I personally am interested in the technology. So I fall back and I ask interesting questions about how things work and that kind of stuff. But I'm not sure that's the most relevant thing for whether a venture is going to be successful or not.

Yeah. Yeah, I mean depending on the company, things may or may not may be more technical depending on what part of the sector you're investing in, that kind of stuff. Code is getting a little bit less important now with the advent of AI and cloud code and that kind of stuff. But I would say that it's hard to have a technical team in-house that would be broad enough and deep enough. And so what you end up having is lots of friends. And so you end up trying to develop relationships just like in your sourcing which is like you're trying to develop relationships with high taste engineers and high taste technical people who you can call and say hey do you know about quantum computing or what do you know about caching for inference or whatever and then you're trying to say well if you can develop a network of engineers and product people inside the world's most advanced companies in this stuff you can get to ground truth much more quickly than you could trying to be a generalist engineer who looks at everything. You know, I'll often call Dylan to ask about things related to design or product or, you know, you might call, you know, Luis at Duolingo, but to talk about education companies or, you know, things like that. So, you're really trying to build a network of collaborative people.

Well, there's no recipe and there's no insure and I would say the other thing that's true is as an investor you have to develop a genuine humility which is like you don't matter that much. So, I've been involved with Figma for probably 12 years now and I really do try to be Dylan's first call and I'm lead independent director now and that kind of stuff. But Dylan would have been successful whether I was involved or not. I'm very proud of the stuff that I've done and I know that I've changed the course of things along the way, but Dylan was always going to run through walls and figure out how to make it work because of who he is and the entrepreneur he is. And so I think sometimes you get a little wrapped around the axle. It's like, well, what about my contribution and that kind of stuff, but like the truth is entrepreneurs are the sun, investors are the moon. So investors are only reflected light relative to entrepreneurs. And I really believe that. And I think that it's easy when you're talking about these huge amounts of money to get this turned around and say, 'Oh, well, capital allocation is the main thing.' But it's not like building the thing is the main thing. And so what I would say is that you're making a decision early. I believe in this team and this mission and this project and I'm going to try to figure out all the things that I can do to make that as successful as possible, but I'm involved in the project. It's not my project. The project is run by the team. And so when you start there and it's like, well, I'm in service to the team. What can I do to help? And so for me, I can ask pointy questions. I can say, hey, this is great, but can you do it a little faster? Like sort of silly like VC things are like that's great but can you do 10 times that much revenue like dumb VC comments to say but I can also recruit I can get on the phone with people I can say you know I see a lot of companies and this is the one that really makes sense because that compared to others here are their metrics and so you'd be crazy not to get on this rocket ship or I can introduce them to other people or you know I can do lots of things like that.

Of course. So Instagram was early in my career. It was two or three years in and like I said, we had been chasing Kevin for a little bit and by the time he raised, he's like, 'Okay, I'm ready to raise because the wheels are coming off place. They're growing so fast.' He came in, he pitched. It was not a unanimous decision inside our firm. We kind of decided to join hands with Sequoia and do it together. It took about two months to close. So what happens is you decide to invest. You give out a term sheet. You negotiate the terms with the founder. You give them a term sheet. You sign it and then you do a bunch of legal diligence and like always the legal stuff takes all the time. So it takes like two or three weeks or two or three months and so it took us a month or two to close Instagram. We closed on a Thursday and we wired the check on a Thursday and then by Monday they announced they were getting acquired by Facebook for a billion dollars. And so for us that was a 2x return because we were investing at about a $500 million valuation. And so it was a 2x return in 4 days. And I remember getting a message from Dave Swensen who famously ran the Yale endowment for years and he kind of built this model where endowments invest in venture capital firms and he's like this is probably the best IRR ever which IRR you know internal rate of return. So the percentage that it grows if you kind of double in 4 days is pretty good. If you could double your money every four days you'd be in pretty good shape pretty fast.

You'd be pretty good. But it's a funny thing because at once a year or so firms have meetings with their limited partners and you know I got up in front of our limited partner not so long after that and I said look this was a two times return quick so I'm not going to apologize for that. I'm proud of it but this is not the game we're playing. I'm not trying to do a 2x return. I'm trying to do a 100x return or a thousand x return. So the game wasn't to sell Instagram for a billion. The game we really felt like this is going to be a multi-tens of billion dollar company. Some level it's a success and some level it's a failure and like a lot of things it's all like that. So right now compared to you know early investments in OpenAI or Anthropic everything looks like a failure because those companies have shot up so fast over the years but for me it was a good journey and a good lesson you know.