The Exchanges

Q those companies and those technologies achieving scale. I'm really intrigued because in your episode with Jason, you stated your role to discover network effect businesses before they take flight. With that in mind, and kind of having seen the scaling of two incredible businesses firsthand on founding teams and as the founder, what are the leading indicators to you, do you think, that suggest potential in a network effect business?

A So there are a few things. So one is just that the definition of a network effect business is one that for every additional user, the product experience gets, gets better for every existing user. So by definition, you've got a, you want to see increasing retention by cohorts. So the later the cohorts, the retention rates are going up as more users are being added. So that's critical in terms of understanding those metrics. But the other piece is really about understanding kind of defensibility. And part of that is fragmentation. So You know, there's a phrase in marketplace that marketplace businesses, that fragmentation aids the aggregator. And so understanding what is the degree of fragmentation in a marketplace, and often the more fragmented and the less multi-tenanting, either the kind of less cost usage between substitute platforms, the more defensibility is. So that's, that's really the second. And then third is the, you know, what is the ability of the marketplace to create and extract economic values? If the market is not big enough, or the gross margins are not significant enough, then you just can't build a viable business. So, so those are things that I think about when it comes to looking at the sustainability and viability of network affair businesses.

AI assessment note: “you want to see increasing retention by cohorts... what is the degree of fragmentation”

Q The other aspect that I do have to pick up on is, you mentioned the crash that you experienced there with first minute, and then also with, with Trulia, with kind of the macro crashes. I'm intrigued. Given the two firsthand experiences of market crashes, how do you think that experience fundamentally affects maybe your investing mentality today?

A Yeah, no, I seem to have either kind of really bad luck or good luck being in travel in 2001 after nine 11 and real estate in 2008. So, I think the observations are that I think this is, again, in retrospect, it's easy, but the biggest and most valuable businesses are those that built Precisely the point when there's market corrections. You look at travel, you think of booking.com, you think of Expedia, all really built out of the first dot-com collapse in nine 11. Then in real estate, you look at Zillow and Trulia and Airbnb really came out of the kind of housing collapse and the great recession, and although it sort of seems very smart to say that all those were obvious contrarian bets at the time, it certainly didn't feel like that. So again, that, that contrarian mindset when others are not investing, perhaps that is the time to invest. A number of other things that impact my investing today is one is about capital efficiency. Both companies had the efficiency to ride out the storm, opportunistically raising money. Perhaps we didn't need it. You know, Trulia, we raised money just before the market crash. Last minute went public in March, 2000. And then as I mentioned earlier around culture, when the going gets tough, if you're creating a culture, We empower people. They feel recognized and rewarded. Then they will stick with you when the going gets tough. So we certainly ha…

AI assessment note: “A number of other things that impact my investing today is one is about capital efficiency.”

Q ahead, but I do have two subsequent questions from your intro there. You mentioned on your time with Last Minute when you were on Twist with Jason, you mentioned that there were things you did right and things you did very wrong with Last Minute. If you were to, maybe a very harsh question of me, but to pick the biggest from each, what would you say they would be?

A Great question. So I think on the biggest right things, I think I'll probably say two things stand out. So one is building a really incredible brand. Very early on, last minute, we built this remarkable brand through PR and online marketing, creative, and we did that incredibly cheaply, and that's kind of stood the test of time, which was enormous. The second was, you know, 20 years ago, building a Silicon Valley culture in London was sort of never seen before, and they built An incredible kind of Silicon Valley culture in the heart of London, which really stood the test of time, particularly when things got tough. That was really incredible. I guess the biggest wrong thing, I think, you know, history is a great guide, and you look at the online travel space in Europe, and you look at booking.com, whose parent companies were something like a hundred billion dollars, and, you know, the X is a hundred X compared to the last minute. So I think, you know, what that comes down to, and the observations around focus, particularly for these network effects, Businesses focusing on the most profitable and fragmented part of the business, and the European hotel markets, that last minute was in like seven, eight countries, and sort of seven-ish product lines, and was doing so many things. It was so incredible, but it's really, when you take a look at Booking.com, their focus was just unden…

AI assessment note: “on the biggest right things... I guess the biggest wrong thing, I think”

Q The other aspect that I do have to pick up on is, you mentioned the crash that you experienced there with first minute, and then also with, with Trulia, with kind of the macro crashes. I'm intrigued. Given the two firsthand experiences of market crashes, how do you think that experience fundamentally affects maybe your investing mentality today?

A Yeah, no, I seem to have either kind of really bad luck or good luck being in travel in 2001 after nine 11 and real estate in 2008. So, I think the observations are that I think this is, again, in retrospect, it's easy, but the biggest and most valuable businesses are those that built Precisely the point when there's market corrections. You look at travel, you think of booking.com, you think of Expedia, all really built out of the first dot-com collapse in nine 11. Then in real estate, you look at Zillow and Trulia and Airbnb really came out of the kind of housing collapse and the great recession, and although it sort of seems very smart to say that all those were obvious contrarian bets at the time, it certainly didn't feel like that. So again, that, that contrarian mindset when others are not investing, perhaps that is the time to invest. A number of other things that impact my investing today is one is about capital efficiency. Both companies had the efficiency to ride out the storm, opportunistically raising money. Perhaps we didn't need it. You know, Trulia, we raised money just before the market crash. Last minute went public in March, 2000. And then as I mentioned earlier around culture, when the going gets tough, if you're creating a culture, We empower people. They feel recognized and rewarded. Then they will stick with you when the going gets tough. So we certainly ha…

AI assessment note: “A number of other things that impact my investing today is one is about capital efficiency.”

Q ahead, but I do have two subsequent questions from your intro there. You mentioned on your time with Last Minute when you were on Twist with Jason, you mentioned that there were things you did right and things you did very wrong with Last Minute. If you were to, maybe a very harsh question of me, but to pick the biggest from each, what would you say they would be?

A Great question. So I think on the biggest right things, I think I'll probably say two things stand out. So one is building a really incredible brand. Very early on, last minute, we built this remarkable brand through PR and online marketing, creative, and we did that incredibly cheaply, and that's kind of stood the test of time, which was enormous. The second was, you know, 20 years ago, building a Silicon Valley culture in London was sort of never seen before, and they built An incredible kind of Silicon Valley culture in the heart of London, which really stood the test of time, particularly when things got tough. That was really incredible. I guess the biggest wrong thing, I think, you know, history is a great guide, and you look at the online travel space in Europe, and you look at booking.com, whose parent companies were something like a hundred billion dollars, and, you know, the X is a hundred X compared to the last minute. So I think, you know, what that comes down to, and the observations around focus, particularly for these network effects, Businesses focusing on the most profitable and fragmented part of the business, and the European hotel markets, that last minute was in like seven, eight countries, and sort of seven-ish product lines, and was doing so many things. It was so incredible, but it's really, when you take a look at Booking.com, their focus was just unden…

AI assessment note: “I think on the biggest right things... I guess the biggest wrong thing”

Q Can I ask, with this kind of extreme emphasis on culture, one aspect which I really struggle on today as an investor is just assessing market timing risk, be it in AR, VR, be it in drones, be it in self-driving cars, be it in blockchain. How do you think about market timing risk today as an investor, given this importance of startup timing?

A Yeah, I think it's super interesting. I think what's really important is it's not about whether you're Earlier or later than your competitors on an absolute basis. It's really about who can achieve the necessary scale to be a breakout leader when they're closer to this critical mass point. When everything changes, who has got that necessary scale? And thinking about investor, are you able to fund that company to achieve that scale, or is that company about to achieve that scale? And you mentioned blockchain specifically. I think this is classic. It's a great example where While the technologies have been around for a decade, it's really only last year that you've seen this kind of massive transition in that market. And that's really going back to the kind of this three core tenets. It's the, the technology has been around, it's been evolving kind of incrementally, but the economic impetus, which is in part being driven by speculation, but with a long-term view of really transforming parts of our society and economy, has kind of really accelerated the pace. And then culturally, It was like, not that long ago, like, people involved in blockchain businesses were seen to be facilitating fraud and money laundering and drug trafficking, and now it's like, you know, there's sort of very serious kind of hedge funds and banks and kind of organizations really building it, so what is exci…

AI assessment note: “It's really about who can achieve the necessary scale to be a breakout leader”

Q well here, Pete, with that capital efficiency focus, because with Jason, you said about being at Trulia, and during that time, you had a culture of frugality, but were aggressive on market share, and listening, it kind of seemed paradoxical to me, so I'm intrigued. How do you think about culture of frugality and aggressive on market share, and when's that right time to really pour fuel on the fire?

A Yeah, I think that the reality about networking for businesses is that they create so much value that they are winner-take-most or winner-take-all, Capitalize words. The way that I think about this is sort of frugality is not about being cheap. It's really looking for the points of leverage in the business. So that's hiring a bunch of engineers to kind of build a great product experience, and that has compounding impact, then do that. If that's about spending money to buy and to acquire users or salespeople, then, and you think that's the maximum use of leverage, then go do that. I think it's really about just finding these compounding investments that give you an unfair advantage. Versus the incumbents. You know, when is the right time to kind of double down? I think the consumer internet world and the, similarly in the kind of enterprise side, it's so competitive, and we're increasingly transparent competitors can see what, what your startup is doing. They have a sort of access to open metrics. So when you start to kind of see that spark, when you start to see that product market fit, then it's essential to scale extremely rapidly. Spending significantly to capture market share, and doing that when you can, you know, spending really as much as you can, depending on your balance sheet, your ability to raise capital, and when you're not having significant inefficiency in their …

AI assessment note: “when you start to see that product market fit, then it's essential to scale”

Q What would you most like to change in the world of Silicon Valley?

A A lot of things, but I think it's odd is, is I think the kind of process is really still incredibly medieval. When you look at the sort of impact of technology in almost every part of our society, you know, the venture capital process and fundraising process itself is probably antiquated. Investors meet founders in all sorts of kind of random ways and places and evaluate things in all sorts of different ways, and I think there is, it's going to be a sea change. I think just in the same way that Wall Street has been transformed by technology over the last decade and platform businesses have built, I think you'll see the same thing in Silicon Valley, where technology will transform it and platforms will be built.

AI assessment note: “the venture capital process and fundraising process itself is probably antiquated.”

Q those companies and those technologies achieving scale. I'm really intrigued because in your episode with Jason, you stated your role to discover network effect businesses before they take flight. With that in mind, and kind of having seen the scaling of two incredible businesses firsthand on founding teams and as the founder, what are the leading indicators to you, do you think, that suggest potential in a network effect business?

A So there are a few things. So one is just that the definition of a network effect business is one that for every additional user, the product experience gets, gets better for every existing user. So by definition, you've got a, you want to see increasing retention by cohorts. So the later the cohorts, the retention rates are going up as more users are being added. So that's critical in terms of understanding those metrics. But the other piece is really about understanding kind of defensibility. And part of that is fragmentation. So You know, there's a phrase in marketplace that marketplace businesses, that fragmentation aids the aggregator. And so understanding what is the degree of fragmentation in a marketplace, and often the more fragmented and the less multi-tenanting, either the kind of less cost usage between substitute platforms, the more defensibility is. So that's, that's really the second. And then third is the, you know, what is the ability of the marketplace to create and extract economic values? If the market is not big enough, or the gross margins are not significant enough, then you just can't build a viable business. So, so those are things that I think about when it comes to looking at the sustainability and viability of network affair businesses.

AI assessment note: “you want to see increasing retention by cohorts.”

Q My word, I'm so enjoying this interview for advice, because I need some help there. Say you're now investing with NFX, and your heart's telling you, I love the entrepreneur, this is so exciting, but your head sees inherent flaws in business model, flaws as an investment opportunity from the analytical perspective. How do you address that with an investor hat on?

A So I think that the margin, obviously you've got to consider both, but at the margin, it does come down to the heart. You know, at the early, early stages, there is so much about passion involved in really foreseeing success, and if you as an investor are not passionate about this, you're not feeling the true passion for the entrepreneurs, you're not seeing that passion in them, then I think it's a pass, even if you think it's a really kind of smart, analytical perspective. So, you know, at the margin, really trust the intuitive nature, and follow your heart, because life is long, and the road is hard, and You need that kind of passion and assistance to see you through the really tough times.

AI assessment note: “at the margin, really trust the intuitive nature, and follow your heart”

Q Can I ask, with this kind of extreme emphasis on culture, one aspect which I really struggle on today as an investor is just assessing market timing risk, be it in AR, VR, be it in drones, be it in self-driving cars, be it in blockchain. How do you think about market timing risk today as an investor, given this importance of startup timing?

A Yeah, I think it's super interesting. I think what's really important is it's not about whether you're Earlier or later than your competitors on an absolute basis. It's really about who can achieve the necessary scale to be a breakout leader when they're closer to this critical mass point. When everything changes, who has got that necessary scale? And thinking about investor, are you able to fund that company to achieve that scale, or is that company about to achieve that scale? And you mentioned blockchain specifically. I think this is classic. It's a great example where While the technologies have been around for a decade, it's really only last year that you've seen this kind of massive transition in that market. And that's really going back to the kind of this three core tenets. It's the, the technology has been around, it's been evolving kind of incrementally, but the economic impetus, which is in part being driven by speculation, but with a long-term view of really transforming parts of our society and economy, has kind of really accelerated the pace. And then culturally, It was like, not that long ago, like, people involved in blockchain businesses were seen to be facilitating fraud and money laundering and drug trafficking, and now it's like, you know, there's sort of very serious kind of hedge funds and banks and kind of organizations really building it, so what is exci…

AI assessment note: “It's really about who can achieve the necessary scale to be a breakout leader”

Q well here, Pete, with that capital efficiency focus, because with Jason, you said about being at Trulia, and during that time, you had a culture of frugality, but were aggressive on market share, and listening, it kind of seemed paradoxical to me, so I'm intrigued. How do you think about culture of frugality and aggressive on market share, and when's that right time to really pour fuel on the fire?

A Yeah, I think that the reality about networking for businesses is that they create so much value that they are winner-take-most or winner-take-all, Capitalize words. The way that I think about this is sort of frugality is not about being cheap. It's really looking for the points of leverage in the business. So that's hiring a bunch of engineers to kind of build a great product experience, and that has compounding impact, then do that. If that's about spending money to buy and to acquire users or salespeople, then, and you think that's the maximum use of leverage, then go do that. I think it's really about just finding these compounding investments that give you an unfair advantage. Versus the incumbents. You know, when is the right time to kind of double down? I think the consumer internet world and the, similarly in the kind of enterprise side, it's so competitive, and we're increasingly transparent competitors can see what, what your startup is doing. They have a sort of access to open metrics. So when you start to kind of see that spark, when you start to see that product market fit, then it's essential to scale extremely rapidly. Spending significantly to capture market share, and doing that when you can, you know, spending really as much as you can, depending on your balance sheet, your ability to raise capital, and when you're not having significant inefficiency in their …

AI assessment note: “when you start to see that spark, when you start to see that product market fit”

Q My word, I'm so enjoying this interview for advice, because I need some help there. Say you're now investing with NFX, and your heart's telling you, I love the entrepreneur, this is so exciting, but your head sees inherent flaws in business model, flaws as an investment opportunity from the analytical perspective. How do you address that with an investor hat on?

A So I think that the margin, obviously you've got to consider both, but at the margin, it does come down to the heart. You know, at the early, early stages, there is so much about passion involved in really foreseeing success, and if you as an investor are not passionate about this, you're not feeling the true passion for the entrepreneurs, you're not seeing that passion in them, then I think it's a pass, even if you think it's a really kind of smart, analytical perspective. So, you know, at the margin, really trust the intuitive nature, and follow your heart, because life is long, and the road is hard, and You need that kind of passion and assistance to see you through the really tough times.

AI assessment note: “at the margin, it does come down to the heart.”

Q who was one of the first kind of financial controllers at Amazon, and they said that every business has an invisible asymptote. Basically, the inhibitor of growth that you have to foresee to prevent that being a ceiling on your growth. Would you agree that every business has this invisible asymptote? And how do you kind of think about that when inserting yourself into a business at such early stages?

A So I think there is this sort of invisible asymptote. The classic example is something like Netflix, which is just a company I admire enormously. You look back and you see, well, this DVD business was pretty good and really showed Blockbuster a thing or two. And then this streaming business, well, that's Pretty damn good as well. On top of that, there's this, um, online original content creation, and it's remarkable that a company like Netflix is able to do these three different businesses during its lifetime and build an enormous company. So I think there's, you know, there's a real view in Silicon Valley today, particularly with founder-driven companies that are able to transform their businesses moving from one business, which may be a pure software business, to being what I often call a software plus businesses. They're Providing additional leverage, whether that's capital, whether that's operational expertise, whether that's investments in some of that content, they're able to transform these businesses, and that enables them to break through these invisible asymptotes.

AI assessment note: “So I think there is this sort of invisible asymptote.”

Q who was one of the first kind of financial controllers at Amazon, and they said that every business has an invisible asymptote. Basically, the inhibitor of growth that you have to foresee to prevent that being a ceiling on your growth. Would you agree that every business has this invisible asymptote? And how do you kind of think about that when inserting yourself into a business at such early stages?

A So I think there is this sort of invisible asymptote. The classic example is something like Netflix, which is just a company I admire enormously. You look back and you see, well, this DVD business was pretty good and really showed Blockbuster a thing or two. And then this streaming business, well, that's Pretty damn good as well. On top of that, there's this, um, online original content creation, and it's remarkable that a company like Netflix is able to do these three different businesses during its lifetime and build an enormous company. So I think there's, you know, there's a real view in Silicon Valley today, particularly with founder-driven companies that are able to transform their businesses moving from one business, which may be a pure software business, to being what I often call a software plus businesses. They're Providing additional leverage, whether that's capital, whether that's operational expertise, whether that's investments in some of that content, they're able to transform these businesses, and that enables them to break through these invisible asymptotes.

AI assessment note: “So I think there is this sort of invisible asymptote.”

Q and open distribution was the biggest challenge facing consumer startups today. So for me, although obviously there's the natural referral and each incremental user adds value, today it costs so much to acquire new customers with incumbency advantages on distribution channels that actually it's still an inherently expensive business to scale. How do you think about this and what leads your thinking on the effectiveness kind of of consumer channels?

A It's a really interesting point. I think at this time in 2018, it's just like, there's not a sort of obvious free and open distribution channel that is driving a whole bunch of startup innovation. Really, behind every great startup wave over the last several decades, it's been driven by that distribution, whether that's the internet and the web browser, whether that's ecosystem, whether that's Facebook or Google, and it's just not clear what that is today. And I think the fundamental premise is that defensibility can be driven by a number of things, brand or scale or embedding. And network effects, sort of, by definition, are less capital efficient, require less marketing dollars or less salespeople, but obviously in today's environments, that's somewhat diminished. Building sort of core, building business on top of core distribution platforms like Facebook and Google is just so much harder these days, but fundamentally, you look back over the sort of course of history and see these network effect businesses are tremendously capital efficient. The classic example is eBay. You know, eBay back 20 years ago, I, I think you, you mentioned Peter Fenton. I think eBay said they didn't even spend the initial investment from benchmark. It was so capital efficient, and they grew incredibly quickly, and it was a time when eBay was thought to be the superior business to, to Amazon. Obvious…

AI assessment note: “there's not a sort of obvious free and open distribution channel”

Q ego check. Remember, it's just me and you, and you're giving advice to me here, Pete. You said about the ego check. Is there a Framework for doing it? Is it a consulting with a career coach? Is it a asking yourself in the mirror? You know, am I all I'm stacked up to be? Is there a framework to really check your ego at the door, so to speak?

A I guess I don't have a sort of specific ego. I don't have a specific kind of framework as I think about this, but I, I spend a lot of time having founder to founder interactions and kind of talking through this in sort of closed circles. So seeing it's just me and you on this, then it was just like, Having these kind of like frank and open discussions, I had quarterly dinners with peers, and we talked through all this stuff, something that you can't do with necessarily your investors, and it was just a incredibly insightful and rewarding conversation to realize that others are going through the same thing, and then you're really at the bleeding edge of startup tactics and kind of hiring and your first-time CEOs, and so learning from my peers, I always found was sort of way more valuable than learning from sort of board members and often coaches, quite frankly.

AI assessment note: “I don't have a specific kind of framework as I think about this”

Q and open distribution was the biggest challenge facing consumer startups today. So for me, although obviously there's the natural referral and each incremental user adds value, today it costs so much to acquire new customers with incumbency advantages on distribution channels that actually it's still an inherently expensive business to scale. How do you think about this and what leads your thinking on the effectiveness kind of of consumer channels?

A It's a really interesting point. I think at this time in 2018, it's just like, there's not a sort of obvious free and open distribution channel that is driving a whole bunch of startup innovation. Really, behind every great startup wave over the last several decades, it's been driven by that distribution, whether that's the internet and the web browser, whether that's ecosystem, whether that's Facebook or Google, and it's just not clear what that is today. And I think the fundamental premise is that defensibility can be driven by a number of things, brand or scale or embedding. And network effects, sort of, by definition, are less capital efficient, require less marketing dollars or less salespeople, but obviously in today's environments, that's somewhat diminished. Building sort of core, building business on top of core distribution platforms like Facebook and Google is just so much harder these days, but fundamentally, you look back over the sort of course of history and see these network effect businesses are tremendously capital efficient. The classic example is eBay. You know, eBay back 20 years ago, I, I think you, you mentioned Peter Fenton. I think eBay said they didn't even spend the initial investment from benchmark. It was so capital efficient, and they grew incredibly quickly, and it was a time when eBay was thought to be the superior business to, to Amazon. Obvious…

AI assessment note: “there's not a sort of obvious free and open distribution channel that is driving”

Q Can I ask, in terms of kind of value extraction, we had Josh Brinlinger from Jackson Square on the show, and he said that not all GMVs equal. From your experience, is that something you'd very much agree with? And how do you think about that kind of value creation versus value extraction component?

A Well, I think it's fundamentally about value creation. When you think about startups, that has to be the guiding light for the entrepreneur and the founder. You know, I, I think when, you know, yes, every GMB is not created, not created equal. I think the, the stuff that we think about is very much driven by growth rates. Like what is the growth rate? Where's that coming from? You know, I spent much of my career focused on growth at Trulia and last minute. And so deeply understanding growth and how do you get scale pretty early on? And then again, when it comes to the stage where we're thinking about, we don't often have that many metrics, you know, the seed stage, there are some metrics, but it really comes down to the team and really comes down to what is the market opportunity that the founders are focused on. Those are the most important stuff for us to think about.

AI assessment note: “I think it's fundamentally about value creation... yes, every GMB is not created equal.”

Q Can I ask, in terms of kind of value extraction, we had Josh Brinlinger from Jackson Square on the show, and he said that not all GMVs equal. From your experience, is that something you'd very much agree with? And how do you think about that kind of value creation versus value extraction component?

A Well, I think it's fundamentally about value creation. When you think about startups, that has to be the guiding light for the entrepreneur and the founder. You know, I, I think when, you know, yes, every GMB is not created, not created equal. I think the, the stuff that we think about is very much driven by growth rates. Like what is the growth rate? Where's that coming from? You know, I spent much of my career focused on growth at Trulia and last minute. And so deeply understanding growth and how do you get scale pretty early on? And then again, when it comes to the stage where we're thinking about, we don't often have that many metrics, you know, the seed stage, there are some metrics, but it really comes down to the team and really comes down to what is the market opportunity that the founders are focused on. Those are the most important stuff for us to think about.

AI assessment note: “yes, every GMB is not created, not created equal.”