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 notable bets (Uber, Dropbox), paying each general partner exactly the same and for continue to raise funds of a similar size over the course of several years and not balloon in size.
We were talking at Fatan important annual event for the European startup ecosystem, so of course I asked why the company made such a big appearance, given that it is quite difficult to get the Benchmark team to appear together in Silicon Valley.
Victor Lazarte, an entrepreneur at the gaming firm who joined Benchmark five months ago as its newest GP, admitted there was “no business reason” for Benchmark to come in other than its interest in understanding all things “excellent”. . (Helsinki is really great.)
Larzarte was equally candid when the conversation turned to rising valuations in recent years and I asked about his own gaming company, Wildlife Studios. It raised a $60 million Series A round from Benchmark in 2019 at a $1.3 billion valuation and, less than a year later, was assigned a $3 billion valuation when Vulcan Capital led a follow-up round of $120 million. Larzarte said the company had actually made “like, no progress” between rounds, but because Benchmark had funded the company, “everyone” then wanted to invest in the company. (He said that, in retrospect, taking out too much money at too high a valuation so quickly was a “mistake”.)
Most recently, we talked about how strange it is to experience a general recession and a boom in AI investment at the same time. On this front, the team has been clear in its assessment that today’s large but closed major language model companies are not going to be the breakaway winners that many expect them to be. (It’s worth noting: Benchmark is not an investor in such closed LLM companies, including OpenAI and Anthropic.) You can follow our discussion in this longer relay; In the meantime, you can find some excerpts below, slightly edited for clarity.
On Benchmark’s views on the sweeping trend of artificial intelligence in everything, partner Miles Grimshaw said that we will collectively be surprised at how regressive our current use of software will be in 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 mashing rocks together to make fire. In two years, it will be surprising that you had to click all those buttons in Salesforce and navigate and that it didn’t do more for you. User expectations of what’s possible are rising, and you have tectonic forces that can benefit from imaginative, creative founders.
I think the question [ties to] the startup opportunity versus an existing opportunity. You can never tell founders where to go — we don’t do that. But one of the places you might avoid – the pitfalls – is: don’t be Microsoft. Do not be [part of] the Copilot game [meaning Microsoft’s AI-productivity tool that’s powered by OpenAI’s ChatGPT]. That’s what they do. It serves their business model. It serves the environment of their products very well. But be more creative and ambitious than Copilot.
Peter Fenton, the most senior member of the Benchmark team, weighed in to add that:
We didn’t invest in a big language model. Perhaps this is unique to Benchmark, but our view is capital intensive [companies are tricky]. We’ve been to a few – we’ve all taken Uber here [to the event] today [and that was a Benchmark portfolio company]. And capital-intensive businesses and venture-backed companies have historically not been great partners.
Us [belief] is that open source will end up having a profound effect on the ecosystem. We are all, in a way, soldiers in the army who “destroy anything that becomes capital intensive and overbuilt” and then spread a developer-driven world. And those experiences in AI will be created by developers who imagine things that no one can understand in a big model language, because they serve a different kind of cross-platform need. So yes, we hope so [the closed LLM companies] i manage We love innovation. But I was particularly drawn to the idea that there’s an open-source founder that will probably outdo almost everything you can do with capital.
Other takeaways from our conversation include Fenton discussing a major failure of Benchmark that came up during the conversation (accidentally, honestly), which is Airbnb.
You mentioned Airbnb. This is one of those on our long list of deep regrets. When I got into the industry, you could buy 20% to 25% of a company in a Series A investment for a number that today sounds like a seed round — $7 million to $10 million. Because we had a property limit that was impossible to reach [when Airbnb was first fundraising], we missed the chance. And we kind of relaxed that as a constraint because it’s not about what Benchmark can own. They are: What are the company’s capabilities?
We also talked about what a Benchmark company is doing 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 large percentage of them [were] essentially at the establishment of the company. So more often than not, it’s actually two people who see an opportunity, and we get there before they even quit their last job to start this company.
We really focus, ideally, on being the first board member, the first partner to a founder when they start that journey and in a large percentage of cases being the first money [that] two people stand up for their idea.
Speaking of board seats, I asked about the latest trend in Silicon Valley, that of VCs who say 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 take a board seat where possible.
It’s an interesting hack, the venture business, where we encode a relationship usually with money. But then we participate in the governance structure of the board and the person who takes our money, we have power, in theory. With governance structures and boards, you can hire and fire the CEO. This is the board’s biggest job.
In my view, truly great businesses are built with boards that are partnered with the CEO, that have an eye on the horizon of what is possible to be bigger than any one person. And I think the integrity of that structure has been tested throughout our C corp business model. [When the industry] we moved to encryption, got rid of tables. we said, “Who needs boards? Who needs the company building and all that?’ And it created interesting token value, but I don’t think it created equity value. . .
My point is that we’re going through a period of time where the idea of governance—we just went through it in OpenAI—is seeping into the top of people’s consciousness. And we can see what happens when governance structures are misaligned. And I personally feel that working with a great CEO is deeply strengthened by knowing that I carry the fiduciary responsibilities that they carry close to their heart and that if I’m not serving on the board, I can be effective, but it’s not the same.
Finally, going back to this valuation discussion with Lazarte, I wondered how Benchmark advises its startups on valuations, given that the higher their subsequent valuation, the better in some ways for earlier investors, but, some times, so much the worse for the founders. they may have fewer options when their companies become overvalued. Here’s what he had to say:
When I worked 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 to be transparent, we were in a period where there were a lot of deals chasing capital, and there’s the fact that once Benchmark invests in a company, everybody wants to invest in the company. So this second round we did, we didn’t really make any progress. But there were so many that I was interested too [was thinking that] we are a company from Brazil and we are looking to move to Silicon Valley. And we’ve always been very low profile. But like all of a sudden, it was, “Oh, Benchmark invested,” and these people came along. And then I made the decision, okay there are these funds that [are being] invested [at] twice the valuation when really not much progress was made. And I made the decision, okay, with more money, maybe we can do more.
But in retrospect, I think I and many of the founders . . .made the mistake of raising too much capital. The problem is when you raise too much capital, you start going in unnatural directions, you start deploying more capital than is natural in this business. And then you grow your team, but bigger teams often don’t produce more. In fact, they produce less. And once you do that, you have to go through the painstaking process of whittling down the team. So the best founders don’t try to maximize for unnatural valuations, because that distracts from the core purpose of building the company.
