Partner at DFJ, Draper Fisher Jurvetson
DFJ's Josh Stein On Early-Stage Investing | Ask A VC
DFJ Managing Director Josh Stein has backed and invested in Box, Chartbeat, LendKey, Selligy, SugarCRM, Swell, AngelList, Redfin, Tremor Video, and Twilio. Stein explains why DFJ is often the first institutional money in a startup. Stein talks about what he looks for in an entrepreneur and an idea. Leena Rao talks with Josh Stein, Managing Director of Draper Fisher Jurvetson.
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About Josh Stein
In a 2017 session, Josh Stein, a partner at Draper Fisher Jurvetson (DFJ), discussed the qualities of a great SaaS CEO. He argued that a great CEO makes the company's vision "something that transcends the company and captures the imagination," citing Elon Musk as an example. Stein identified three distinct break points for CEOs, occurring at roughly 40–50, 200, and 1,000 employees, where communication, span of control, and external focus become critical challenges. He also stated that the role of a CEO is to be a "magnet" for talent and capital, and that the "people stuff" — including leadership, processes, and managing career aspirations — often trips founders up. Stein noted that while skills like public speaking or conducting reviews can be learned, the CEO must be committed to "go to school on the side" and learn continuously. In a 2013 interview, Stein described DFJ's approach to early-stage investing, stating that the firm looks for "great people who can sell us and get us hooked on an idea," who are motivated by solving a problem rather than by money. He noted that because it is now cheaper and faster to start a company, he would advise a SaaS founder without at least a minimum viable product or customer conversations to "go do that and come back." Stein commented that product-market fit is a "moving target" and that he is more interested in a founder's "demonstration of skill and competence." He also described AngelList as a complementary tool for deal flow, though he noted DFJ had not used its syndicate model.
Transcript (19 segments)
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Interviewer0:12
Josh Stein, Josh, welcome. Thank you. I'm especially excited because we are in our new AskC studio, so thank you so much for joining us on this inaugural day in the set. I want to go into just a few of your investments before we start. You've backed and invested in Box, Chartbeat, Len, Key, Saly, SugarCRM, Swell, AngelList, Redin, Tremor Video, and Twilio. Quite a portfolio of diverse companies, not just enterprise but also consumer. But I want to talk a little bit about how you find these companies really early. You've mentioned that you are sometimes the first check when they're only a team of two or three people. I know that was the way with Box.
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Josh Stein1:11
Build the company, but it's about great people who are motivated, less by money but by wanting to change some problem, and are really persistent. It's really hard to build a startup, so you need people that are going to stick with it.
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Interviewer1:23
So what was it about Aaron and Dylan from Box that first kind of caught you?
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Josh Stein1:26
Great product, very smart guys, very passionate. In our first meeting, I asked them a ton of questions. They knew rock-solid answers to about half of them. The ones they didn't, they said they didn't know, and by 2 a.m. that night they sent me like a 15-page document answering them.
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Interviewer1:42
Wow. And what about some of the other entrepreneurs that you've worked with?
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Josh Stein1:45
Similar stuff. SugarCRM was three guys in a room. They built a product just with the three of them that was, I would say, 80% feature complete with Salesforce. If you look at how backwards the incentives are, those are the people who really build the great businesses.
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Interviewer2:17
What do you think the biggest change in the entrepreneur has been? Because you've been doing this now 10 years, you've seen probably countless, I don't know, thousands of companies?
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Josh Stein2:25
Yeah, probably. How has the entrepreneur evolved over the past 10 years? I think that entrepreneurs have gotten even younger. Part of it is there's so much more information about how you start a company, how you raise capital, and how you get started. It's also become a lot easier. The tools and the raw ingredients, like the infrastructure you would need, you can get from AWS or from Twilio that you'd have to raise a lot of money before to spend a lot of time setting up. So it's so much easier to start a company. There's so much better information that I think you're seeing younger entrepreneurs. Also, having the benefit of every generation, there have been these technical shifts that have made a startup possible. With the iPhone, with Android, with SaaS, with the move to delivering applications from being delivered locally on a client to being delivered through the web, it's made it so easy for people to bring ideas to fruition.
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Interviewer3:34
I want to go into some of our reader questions. This one is really interesting. It may actually really put you in the hot seat. Is VC turning into growth equity? VC is increasingly acquiring product, removing technical risk, and substantial revenue, which is removing financial risk. Thus the only risk left is operational growth. Who is going to do the early-stage VC?
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Josh Stein4:10
I understand the point, but I'm not sure I totally agree with the premise. The definition of growth equity in my mind is an investor who believes they've mitigated the loss of risk of capital, so losing your investment, having a zero. I think almost all the investments that we do at the Series A or Series B level still have that risk of being, if we're wrong, it's a zero most likely. There's a huge valuation inflection, always has been, for investors where once they know they're not going to lose money, it's just a question of what's the return, and it gets much more of a commodity the money. One thing you're seeing is, because it is cheaper to start a company and it's faster, companies have more traction now when they're approaching a VC than they did. We tell them, 'Why don't you go do that and come back and talk to us?' because it's so easy to get started and get those things going. You're talking about a couple of months and maybe $50,000 or $100,000 to get that done, as opposed to two years. When I was an entrepreneur 10 years ago, it might take you 18 months to get to that stage.
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Interviewer5:29
Kind of dovetailing off that, a lot of entrepreneurs, founders, investors talk about product-market fit. When do you expect an entrepreneur or founder to have that? Is that post-seed? As you said, it's easier to build a company. Sometimes apps have already been launched by the time they get seed funding. When do you find product-market fit?
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Josh Stein5:50
I actually think product-market fit is a moving target that changes over time. I don't think it's something you achieve and then it's set in stone. Box is a good example. The initial product was for consumers, and they shifted to enterprise. So I'm looking more for a demonstration of a skill set and competence than a static concept of 'aha, now the product is proven.' To that person's question, I don't think the risk is removed. I think they're underestimating the degree to which things continue to evolve over time.
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Interviewer6:34
That makes sense. What's another company? We use Box a little bit, but I'm really curious about SugarCRM. You also invested fairly early. In terms of that journey, did they shift product-market fit in any way?
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Josh Stein6:49
Definitely. When we invested in SugarCRM, again, it was three guys in a single room, and they had released the product for free on SourceForge. You could see the downloads. People were downloading the product for free, and they were also interestingly starting to translate it into lots of languages. So you could feel like there was this ecosystem that was going to be built around it, but they hadn't sold anything yet. There was zero revenue when we invested. Over time, if you look at Sugar today, the open-source aspect of it is still important, but it's actually become more about an architectural differentiation and almost a philosophy of CRM about being for the user. So it's really evolved quite a bit. It used to be about if you were an open-source person, you would have a bias toward SugarCRM. Now it's actually really different.
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Interviewer7:51
That does make sense. Moving on to another one of your investments, AngelList. There's been a lot of talk that AngelList is going to be the seed stage de facto vehicle. Do you think it will eventually replace VCs one day? I'm curious how you feel about that because you're an investor.
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Josh Stein8:27
I think people sometimes think too zero-sum. I actually think AngelList complements VC and is like an accelerator for both VC and for entrepreneurs. It's going to make that matching process easier. VCs want to get capital to great entrepreneurs, just like great entrepreneurs want the capital, and so AngelList makes it easier for us to connect. I think that's a net win-win for everybody, including AngelList. The syndicates product, for example, is going to make it easier for very influential angels to bring more money from our limited partners to invest. We've done a number of deals from AngelList that we sourced from AngelList, and it's been a very effective source of deal flow for us. That's what I mean when I say it's win-win. It's been a deal for us and it's also helped the entrepreneur get funded.
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Interviewer9:26
It's funny, I saw a tweet just a few hours ago that said, 'If you're an investor and you're not on AngelList, that's like a red flag.'
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Josh Stein9:33
I think that's right. I think it would be like not being on Twitter or not being on LinkedIn. I do think it's an important way in which people are interacting. I think what Naval has done with AngelList is remarkable. I've known Naval for 20 years, and he is hands down one of the smartest people I've ever met. I could have made the AngelList investment just based simply on that fact, but we also think that what they've done is...
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Interviewer9:54
Right.