They’re Lying About Investing… Here’s How To Get Rich | Bill Gurley

This is a punch line. You've been waiting patiently for this long answer, but there's this phrase that Josh Wolf of Lux Capital has. He says, 'Chips on shoulders put chips in pockets.'

And by the way, this concept of chips on shoulders, had I done that, like my venture career might have ended a lot sooner.

I'll give you a few. And the first one I borrowed from Jeff Bezos.

I'm glad to be here.

The main thing is that I had been fortunate enough to be involved with a different company a short time before that called Open Table where you make reservations for restaurants. And the bet that we made when we backed Open Table that there'd be a network effect that if you got more people on the system, you'd get more restaurants on the system. You got more restaurants on the system, be more compelling to get people on the system and that you'd basically build a very high likelihood of a network effect where it would tilt towards there being a single player. And when we made that bet, a couple of my partners pushed back and said, you know, no one's made money selling tech to restaurants because SMB sale, you know, the economics are tough. And our push back to them was, but if the network effect works, the sales will get easier. And I could tell you a story that was a proof point on that that's really cool if you want. But I'm going to get to your question next. I then started thinking to myself, if you could put a digital infrastructure on top of other industries, in what ways would that unlock power? And in the restaurant case with Open Table, you can say, I have eight people and we want to eat Mexican on Thursday night at 8:00 p.m. and do a parametric search. Before Open Table, you could not do that. You'd have to call each one of them. And so it unlocked a consumer value proposition that didn't exist and the more I thought about that problem and at the time I was traveling as a venture capitalist, visit a city and I had traveled as a sell-side analyst on Wall Street and you know, before Uber you would go to Chicago and you couldn't really get a rental car because the parking's too hard. So, you'd have to hire a black car service and you'd get back to the office and be going through your T&E's and you would have spent as much on the black car that day as the plane flight back and forth. And 90% of the time the driver's just sitting there waiting for you to come out of your meeting. And so it dawned on me that if you could have a fabric on top of that, you would have this hyper level of efficiency unlocked. And I went and met with all of the startups at the time that were thinking about that and the vast majority were in the taxi space and so they were trying to put a layer on top of taxis and the more I looked at those there was a couple problems that were really big which is one in most markets taxis are either a monopoly or a duopoly. So there's these people that have a lot of power that aren't going to listen to you. It's regulated so you couldn't move the price up and down. And I knew that if you wanted to create a digital marketplace, you want to use price to cause liquidity, to get drivers to come out at the right time, like you'd hate to give up price in a digital marketplace or auction. Like you never would. And then they're a crappy user experience and putting a network on top of it wasn't going to get rid of that because I think they're a crappy user experience because it's a duopoly or a monopoly, you don't have true competition, regulatory lock-in. So, this is a punch line. You've been waiting patiently for this long answer, but I said to my partners, if we ever see a company that's putting a layer on top of the black cars, we should run at it. We sought the investment pretty hard, and that's what happened.

Well, and Garrett Camp, who was the co-founder with Travis, probably had the same idea. Like I don't, one thing that I believe about startups is ideas are a dime a dozen. A lot of people have the same idea at the same time. A lot of founders will go they ripped me off they copied it. But you know things happen like you guys started a podcast other people start podcasts like it's not unique. It's the execution that differentiates who's the winner.

I'll give you a few. And the first one I borrowed from Jeff Bezos. I had the opportunity to chat with him a number of times, but one time I asked him, 'How in the world have you made so many incredible angel bets while you're running Amazon?' because it's not like he's got a lot of free time. He said, 'I only look for one thing, the determinism of the founder.' He said, 'I want to believe this person's going to go do this. Come hell or high water, whether I get involved or not, nothing's going to stop them.' And that's the trait he's looking for. I thought that was interesting. The second thing I would say is the job, the founder job requires salesmanship at a level that's probably easy to underestimate and very hard to achieve. If you are the founder, you are first of all, you're selling the customers you're selling to. Second, you're selling to get investors. Third, you're selling to get employees. You're also the chief culture officer for the company, and that's a sales job. And then, you're also the chief PR person, which is the external audience, and that's a sales job. So, you just have to be good at some form of sales. Different people sell in different ways. There are quiet killers that sell, you know, that way and there are people that pound the table that sell that way. There's lots of ways, but you have to be good at it.

And if you fund a timid founder, you're going to lose.

I might push back on that. I'm going to add two things and then come to your point. It took me probably my entire career to fully come to grips with this. They have to be good at product. And it's just real like most of these companies are able to break through because of some technology dislocation or disruption and being good at product means you can see through that better than others. And so that's important, really important. Then lastly, they're almost all hyper curious learners. And so the only way you can navigate the new thing, AI is the new thing now, is to be in it every day. Like if you have a founder that hasn't put a clawbot together yet, like that's a problem. The thing I was going to say to you about had they done it before, you know, one of the amazing things about Travis, the founder of Uber, is his previous two didn't work out. And there's this phrase that Josh Wolf of Lux Capital has. He says, 'Chips on shoulders put chips in pockets.' And so it may just be that having not succeeded before gave you more firepower, more of that first thing, the determinism. So I wouldn't sort only on that. If someone failed five times, and also you can look at how they failed, like was it effort or was it the market didn't pan out the way you thought it would and that kind of thing. In the first three or four years working with Travis, I had this sense that he recognized the uniqueness of the product market fit of what he had built, and that those first two tries didn't have that. Like you could have put the best operator on top of what they were doing and it wouldn't have mattered. And that he, I think I said publicly once, he felt an obligation to the entrepreneurial society of America which doesn't exist but as an idea to give it everything he had because he knew that these kind of pitches don't come along all the time. Does that make sense?

I borrowed it from Josh Wolf like to be clear.

Yeah, one of the things that you develop as a venture capitalist is an instinct for the types of businesses that can scale and be valuable. And one of the benefits I believe I had of working on Wall Street for four years before I became a venture capitalist is I had a sense of the type of business structure that could scale and become really really big. And so I haven't spent a ton of time in the type of business you're in, I'm going to give it a go, but with that qualification going in. Obviously, the king of the kings is Jimmy Donaldson, you know, Mr. Beast. Like he's actually profiled in my book, which I hope we get to talk about. But, you know, he started with just an affection for YouTube. Like he had a very strong affection for YouTube and I think considered it a game of sorts and how do you win the game and I think that's true in this category as well. There's people that are good at it, part of the product. And by the way, I would add one more thing to that list earlier of founders. Many of our best founders had a go-to-market advantage. They figured out some structural way to get customers in an advantageous way to whatever the traditional method was. I'll give a little behind the scenes in promoting my book. I was approached by cold called by someone I had never met who said, 'You're really good at X and Twitter, but you have no profile on Instagram whatsoever.' And he said, 'Let me work for 30 days free and see what I can do.' He's done it. Like I went from 50 to 15,000 followers in like 4 weeks. And so there are tools, anytime you're in a new world and by the way, there are techniques of the craft that will let you soar higher and faster and in a service business, you know, it's hard to tell the difference between go-to-market and product and because those things get all intertwined and how you promote yourself and whatnot.

Yeah. And this eventually like it could even tie into the book but I had two careers before venture capital. You know I was a computer scientist as an undergraduate degree. I worked as an engineer for two years at Compaq Computer Corporation in Houston. Then got my MBA. I then did four years as a sell-side analyst before I became a venture capitalist. When I was at the MBA program here at the University of Texas, I thought about being a venture capitalist and couldn't figure out a way to affect it. And so I had this other fascination with the people that were doing the research on the public tech companies. And I found my way over there and into that career. Both in the engineering career and in the sell-side analyst career. After a couple of years, I asked myself, I didn't read a book that said do this. I just somehow did it instinctively. I said one day I just reflected, is this what I want to be doing 30 years from now. And in both those cases, after a couple years of working there, it was no. And it was pretty clear in my brain. Bezos has this thing called the regret minimization framework. I don't know if you heard about it, but when he was thinking about starting Amazon, he was a very successful employee at D.E. Shaw, one of the top hedge funds, and David Shaw was trying to talk him out of leaving. And he said to himself, he came up with this idea. He said, 'If I were 80 and giving myself advice, what would I do?' And I think they're similar. Mine's from the bottom up and his from top down. But like the answer was no. And so once I realized that, I started looking for what was next. I'd always had in the back of my mind this little tinkling and interest in venture capital and I got a phone call while I was proactively thinking I'm going to leave that gave me an opportunity to move to the Bay Area and I jumped at it.

Stephen Covey who is famous well before you were born but has this book The Seven Habits. And one of them is begin with the end in mind and imagine yourself at the funeral. So there's a through line in all those concepts.

And by the way, this concept of chips on shoulders like had I done that like my venture career might have ended a lot sooner. Wow. But yeah, I mean it took me forever to realize that some of the best venture capitalists have this miss list. And the reason they have the miss list is because they're really effective at putting themselves in the right position to have the opportunity, which is a prerequisite to actually making the great investments. And so I was able to forgive myself a little bit in the years that followed because of that. And you're not going to bat a thousand. There's no way. It's a great learning exercise that happened. So yeah, I met Larry and Sergey. I was very early in my career. I brought them into the partnership and they presented and we failed to lay chase. And I always use that phrase because someone say you passed. Well, if I say I passed, it meant I had a chance. Like I don't know if we could have got to the finish line but after we failed to lay chase two of the best venture capitalists in the history of venture capital John Doerr and Mike Moritz did the deal and so talk about a moment of reflection like as a young venture capitalist like okay I got to the right place I was pursuing this thing and then I stepped back our firm did and they ran at it and so you know I got to start taking notes. It's like I did something wrong. There were a lot of, venture capital is a weird world where you start to build mental models, you know, it becomes a game of pattern recognition. But if you build too many of those, you're going to miss something. When you miss something, it has an asymmetric return. So if I invest 5 million, it goes to zero. I lost one times my money. If I failed to put 5 million in Google, it's a much bigger number by like three orders of magnitude. You have to learn to bias yourself. My partner Bruce Dunlevie came up with a phrase, what could go right? Like you have to think that way. And I will tell you in the history of Benchmark, we didn't spend much time sweating why we made a bet that didn't work. But we would obsess over why we missed the winners. We would analyze it once, four times a year we would study the deals our competitors did. You know at the time Yahoo stock had, so this is a search company. Yahoo stock had, Yahoo what you may not know this, Yahoo was considered a precursor as a search leader to Google, incumbent if you will, their stock had fallen from 82 to 10. Part of the dot crash the company was, Excite another player in that space was going bankrupt. And so you had some market signals that were not positive. Larry and Sergey were two PhD students that were insisting on being co-CEOs. PhD students as CEOs and co-CEOs are both red flags. Now they ended up working that out, you know. But it's a red flag. And so you have there's two data points, you know, that weren't positive. Yeah. Made the wrong decision, but like I maybe it was fuel for the rest of my career.

Well, so I will tell you, I have to give all of the credit to the founders of Benchmark, of which I am not one. So I was one of the first non-founders to be asked to join. But the founders had worked in what are traditionally hierarchical partnerships. So a lot of law firms, a lot of professional service firms are structured in a hierarchical way. And what that means is there's entry level, mid-level, junior partner, senior partner, managing partner and all those people make a different salary and all those people have a different set of the economics. They believed that at those firms they were at the young people were doing the majority of the work and the senior people were taking the majority of the economics. So when they founded Benchmark...

No not in venture because you mostly use external money. Limited partners. They had an idea when they birthed Benchmark that it was going to be an equal partnership and that everyone would make the exact same economics, have the exact same decision-making power and I got invited into that. Which was awesome because...

It was at the time for sure. It's been mimicked a little bit since then. And there's some downsides to it which I could tell you about, but that was the structure. As a young person entering the business, I worked for a year and a half for a firm that was hierarchical and I was the junior person and when they came after me like it was such an easy yes because you were just going to all of a sudden be advanced to the level that they were at. And there are like 10 amazing positive dynamics of that structure that I believe strongly in and there are a few negatives. But what a wonderful place to get invited in because I had four very experienced people that were rooting for me. Because if I found great investments, they got to share in that success. Whereas in that hierarchical firm, the young people come in pretty sharp elbowed because it's up or out, you know, and I got to climb or I win, you lose kind of thing. It doesn't exist. That culture was amazing.

Never look over your shoulder. Yeah. We couldn't scale anything. If you have, you been to our website? It's just a flash page. We are completely ineffective at any execution on our own. But it's good because I remember Matt Kohler joined us. He said I want to make the website great and we said go for it. He realized no one else was going to do any work on it. And after a while it got unwieldy and all this stuff and he came into a partner meeting. He said I'm going to take down the website and we said okay. They put a flash page up and venture business is a service business and the less we have overhead of running our business meant more time in the field with founders. So, I think it was a great decision. It created an amazing culture for someone who is a go-getter on their own like because you're out trying to find new investments. You're out working with the companies. We're together on Monday, but that's it. And then you're outside. And if you're a self-starter and someone who's comfortable with that, if you're somebody who needs to learn and need structure and all that, it's not that. And they just hired Jack Altman, you know, so it also tilts towards youth.

Yeah, industry structure is one a ton of people miss. I tell you know everybody likes to on MBAs out in Silicon Valley, but like there's some good business and there's some bad businesses and like knowing that is important and I always tell people to read the first two chapters of Competitive Strategy by Michael Porter because like if you're building a product and trying to sell into a consolidated industry, it's really tough. Like you want a fragmented industry where you can sell into. Part of what I loved about both Open Table and Uber, it's easier to build a network effect if supply is not, if supply is limited. I can't, you know how many people have tilted against Ticketmaster and whatnot like you just can't get the venues on because they're already committed to this other thing. It's not disruptive enough. And Live Nation's rolled them all up. Like that makes it tough. And so industry structure is one that I think a lot of entrepreneurs don't think through. You know, they just don't know. It's not stupidity, it's ignorance.

It started with Open Table, but yeah.

You know, every venture capitalist is going to that starts to have success if they have a reputation in an area. There's a bit of a mini network effect there. Because the founders know you know more about it, but they also know that you validate them if you back it. And so it's, and you know Ashim Shandre at Greylock in security like this guy's run a truck through it like and if a security company wants to stand out boy if Ashim backs them next you know so that becomes a little network effect in and of itself and I think it just related to the timing of when I entered the business what disruption was allowing for at that moment in time getting these smartphones out in everybody's hands it just was a kind of a perfect storm for me to develop an expertise in.

I stopped doing new investments four years ago and focused on this book. So, I'm going to eventually be an old fogy that can't answer that question. From where I sit, 98% of venture capitalists are only looking at AI and they're AI all day long. They don't want to see another business. And in the past 5 weeks, the valuations on the non-AI companies have been cut in half. And so that mentality is going to be reinforced even more. And so there's just no oxygen. If you ran a PE firm, like maybe you should run around and roll up some of these older businesses because the venture capitalists could give a, like they do not care if you're not AI right now. I could take both sides. I could debate both sides of whether that's smart or not from defending the industry point of view. The most money in venture capital is always made when the new wave happens and the incumbents are put at threat and your ability to jump in front of the wave and ride it. It's just been reinforced over and over and over again. And that's happening now.

Group think, you know, contrarian investing is where you can make the most money. Those would be the reasons not to. But it is what it is. Like the one thing I would advise any entrepreneur is if you think you can somehow sell around that or get over that, you're fooling yourself. Like that is the game on the field right now.

That is correct. Tuesday.

Yes.

Yeah. So I spent the majority of my career using writing as a differentiator. It turns out I also think it helps you think. I think Bezos would agree with that. He has an annual letter. Buffett has an annual letter. Like I think some people say teaching is the best way to learn. And I think when you write your ideas down, it forces you to think about are they intellectually consistent? How would someone think if they read this? But it also creates fly paper for deal flow and your reputation and network. I mean a lot of VCs are doing podcasts for that reason. And so I had always done that and I developed a habit of keeping ideas and I had idea folders for probably three or four times the number of things that eventually ended up being a blog post. So when ideas would come in my head, I would write them down. I got in a habit of that. One day I was reading biographies and I read there was a window in my time when I really was obsessed with biographies and I read these three in a row that were seemingly very different business or they were in different fields but I saw this throughline and I wrote down one of those notes as if I might do a blog post and this was 10 years ago. It wasn't recent. I just let it sit there to see if it would germinate or not and I knew it didn't have anything to do with venture. All my other blog posts were about technology and founders and that kind of thing. One day the University of Texas where I went to school, the dean of the business school asked if I would talk to the MBA students and I said, 'Hey, I've got this idea I'd like to put in front of him. Is that okay?' He said, 'Sure.' And so I developed it a little more into a presentation which I gave at the University of Texas on this called Running Down a Dream about how to succeed and thrive in your dream job. Any of your entrepreneurs or any of your listeners that want to excel, I think this book I think will really speak to them. Anyway, they put that on YouTube. People started to see it and notice it and people started telling me, 'You should really make that a book.' One of those people that noticed it was James Clear, who might be the bestselling non-fiction author right now. Atomic Habits has sold 20 million copies, I think, still number two on the how-to list at New York Times five years later. And he posted it on his website. So that's like a little hey maybe this is interesting.

The name of the book's Running Down a Dream.