Apr 4, 2022 · 47m · capital-allocators
Steve Papa – Entrepreneur's Perspective on Venture, Venture is Eating the Investment World 13 (Capital Allocators, EP.244)
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In this episode of Capital Allocators, host Ted Seides interviews entrepreneur and investor Steve Papa to explore his journey from pioneering faceted search at Endeca to incubating multi-billion-dollar technology ventures like Toast. Papa shares deep operational insights on weathering market crashes, building technical defensibility, evaluating founders, and conducting rigorous manager diligence.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21.3% of the talking time here. How this is scored →
Ted as informed peer 1.2 Guest teaching 4.2 Guest disagreement 1.2 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 39:45 Debunking VC genius narratives
Steve candidly critiques traditional venture capitalists who claim to be geniuses despite being wrong most of the time, arguing their success is strictly portfolio theory and cultivated luck.
Hardest push from Ted ▶ 13:21 Comparing market crash dynamicsTed introduces a comparison between the 2000 tech downturn and current venture market conditions to press Steve on cyclical parallels.
Biggest teaching moment ▶ 11:10 Explaining the mathematical need for faceted searchSteve walks through the mathematical impossibility of navigating deep hierarchical catalogs on eBay and how that insight led to the creation of faceted search.
Ted holds their own ▶ 36:46 Probing regional VC ecosystem dynamicsTed leverages Steve's experience with West Coast firms rejecting East Coast deals to steer the conversation into structural ecosystem differences between Boston and Silicon Valley.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Steve Papa's Early Career and Foundations in Computing | 1 | 4 | 1 | 0 | Ted opens with a simple conversational prompt about Steve's early background. Steve provides a detailed historical overview of early 1990s enterprise computing at AT&T, NCR, Inktomi, and Akamai. | |
| The Genesis of Endeca and Faceted Search | 1 | 5 | 1 | 0 | Ted asks for the origin story of Endeca. Steve explains the mathematical 'million or none' search problem discovered on eBay and the resulting invention of faceted navigation. | |
| Navigating the 2001 Tech Crash and Funding Endeca | 2 | 4 | 1 | 0 | Ted draws a comparison between the 2000 market downturn and the modern environment. Steve gently refines the comparison before recounting closing their 2001 Series A round amidst the immediate aftermath of 9/11. | |
| Talent Acquisition and Team Building Strategy | 1 | 4 | 1 | 0 | Ted asks about talent development strategy. Steve explains the Venrock single-page evaluation framework and contrasts late-90s founder hiring fads with practical team execution. | |
| The $1.1 Billion Acquisition by Oracle | 1 | 4 | 1 | 0 | Ted inquires about navigating venture relationships through an exit. Steve recounts how positioning the business as an 'information access server' became a strategic constraint and explains the rapid acquisition by Oracle. | |
| Strategic Reflections and M&A Dynamics | 1 | 4 | 1 | 0 | Ted prompts Steve for overarching lessons from the Endeca journey. Steve details maintaining M&A relationships and highlights how competitors like Fast and Autonomy engaged in financial fraud. | |
| Transitioning to Whiteboard Investing in Overlooked Sectors | 1 | 4 | 1 | 0 | Ted asks about Steve's transition into angel and whiteboard investing. Steve details contrarian investing in out-of-favor categories like silicon hardware rather than chasing consumer app trends. | |
| Identifying Adaptability and Founder Diligence | 1 | 5 | 2 | 0 | Ted asks how Steve identifies adaptable founders and backed Toast. Steve gives a detailed breakdown of founder diligence failures, early VC skepticism toward Toast's payments model, and navigating COVID lockdowns. | |
| Regional Venture Dynamics: Boston vs. Silicon Valley | 2 | 4 | 2 | 0 | Ted asks for a comparison of Boston versus Silicon Valley venture ecosystems. Steve contrasts Boston's historical preference for hired-gun CEOs and singles/doubles with Silicon Valley's swing-for-the-fences culture, while puncturing VC hype cycles with portfolio math. | |
| Emerging Technological Themes: Automation and Reshoring | 1 | 4 | 1 | 0 | Ted asks about forward-looking themes and advice for allocators conducting VC due diligence. Steve notes macro trends around automation/reshoring and surprises Ted by pointing out allocators rarely do backdoor reference checks on VCs. |
Statements from this episode (30)
Papa: Walmart's 1993 10TB Data Warehouse Cost $80M with 10,000 Disks
“So when we talk about big data back in 1993 was the 10 terabyte Walmart data warehouse that cost eighty million dollars. That's how far things have come. That system had close to 10,000 hard disks to make it go.”
Papa: Product Pricing Databases Require Three-Click Search for Monetization
“The only way you could monetize such a database is if someone could find something within three clicks. If they had to spend a lot of time looking for that pricing information, they weren't going to use it.”
Papa: Endeca's Founding Was the Birth of Modern Faceted Search
“And that was the birth of guided navigation or faceted search, which is everywhere on the internet today. You use it all the time and you don't even realize it.”
Papa: 2001 saw first year-over-year decline in global IT spending
“And the world of IT spend froze in 2001. It was the first year over year decline.”
Papa: Endeca was down to under two months of cash in August 2001
“By the time we got to August, 2001, we had less than two months cash left.”
Papa: Endeca reached a $2M Q4 2001 after near-zero revenue that year
“The other thing to note here is we went from having no revenue all year, or virtually none, because we had one customer from the year before, to doing a two million dollar quarter in Q-IV, which was a very strong quarter.”
Papa: Post-2000 VCs Shifted Completely from Backing Inexperience to Seasoned Operators
“In 99, the temporal wisdom was back folks without experience because they'll see new ways of solving problems. So it became an asset to be inexperienced. Once we got through 2000, the pendulum swung all the way back hard. All investors wanted to see is that yo…”
Papa: Improving site performance 1-2% yields a 10% sales increase
“You improve site performance a percent or two, you're going to sell 10% more, believe it or not.”
Papa: Endeca counted half of the top 100 e-commerce sites as customers
“We had half of the top 100 e-commerce sites.”
Papa: IBM spent $20M on Endeca software it couldn't build internally
“They spent twenty million dollars on us over the years and were using us for very important internal applications that they could not power with their own software.”
Papa: BEA Systems Was the Only Public Tech Stock with Strong Multiples in 2001
“It turned out the only publicly traded company that still had a good multiple in 2001 was BEA Systems.”
Papa: SAP Invested in Endeca but Refused to Discuss Acquiring It
“One of them was SAP. They were an investor in the company, and I couldn't get their corporate development team to even talk to us.”
Papa: Oracle Finalized the $1.1B Endeca Deal in Six Weeks
“From first email to announcement with Oracle was six weeks, a testament to how fast Oracle can align their teams and make something happen.”
Papa: Acquiring Endeca Made Oracle the Dominant On-Prem E-Commerce Vendor Overnight
“They basically overnight went from competing for every deal with IBM to suddenly being the dominant on-prem e-commerce company.”
Papa: Endeca could have exited to Amazon around 2005
“There were two other moments we could have exited the business. One was around 2005 where Amazon was very attracted to what we were doing.”
Papa: Reframing Endeca as e-commerce sooner could have rivaled Shopify
“If I had framed the world as e-commerce sooner, we probably would have had a much longer runway as an independent company. We would have at least had a chance to enter the world of Shopify, but we didn't.”
Papa: 2012 silicon spinout generates over $1M weekly, tracks 2023 IPO
“And sure enough, I spun a silicon company out of a university in Europe in 2012. And they're on track to go public next year. They're now up over a million a week.”
Papa: Solving hard technical problems creates intrinsic assets without needing consumer eyeballs
“I focused on harder technical problems where if we just solve the technical problem, we have a base asset versus you have to get to a bunch of eyeballs before you have an asset.”
Papa: Whiteboard startup success requires founders to reinvent themselves every six months
“But there are people that can reinvent themselves every six months, which is what you need to do if you're going to be a success in an entrepreneurial company from a whiteboard. What you have to do for that first six months is very different than the next.”
Papa: A founder unable to get former co-workers to invest is a red flag
“That is the number one thing to focus on, is to really get to know someone, get to know people that have worked with them, and I've had folks that I've put money behind that they couldn't get any of their former co-workers to invest behind them. Pretty big red…”
Toast founders built second commerce app on Apple App Store
“In fact, they were the second mobile app in the Apple App Store for commerce after Amazon.”
Papa Seeded Toast With $500K Expecting an Early Acqui-Hire
“I'll commit the first 500 K. If you pay me that back in the next few years, you'll get most of the equity back. Pretty aggressive terms because it was going to be an acqui-hire and I should get some return if it is. 250 K into that, they started to displace th…”
Toast laid off half its workforce eight weeks after February 2020 funding
“They just closed the financing in February. They were gearing up to double the size of the company, double the team, And by the end of March, probably eight weeks after that closed, instead we were announcing we had to let go half the company because we couldn…”
Toast had only two VC firms competing to invest in fall 2015
“In fact, the only two firms that were competing to back it at a reasonable valuation were my two lead investors at Indeca that fall.”
Papa: Early-stage venture will always be regional because trust requires prior relationships
“One of the reasons you're always going to have some regional nature in the earlier stages of these is if you're backing great people, it tends to be someone you already know. You're going to have more confidence. You're going to stretch more. You're going to s…”
Papa: Boston VC historically replaced founders with hired-gun CEOs to flip companies
“Historically, Boston was more conservative and they wouldn't swing for the fences. The Boston venture scene was very much, we're going to put in place a hired gun CEO. When that person's done vesting, they're going to want to flip the company and go to their n…”
Papa: Silicon Valley refused to fund Kiva Systems' hardware before Boston backed it
“My favorite example is Kiva Systems, the robot company that Amazon bought. No one would back hardware in Silicon Valley when they were being founded. Came to Boston, found folks interested in backing what today we call hard tech.”
Papa: VCs succeed through luck and portfolio theory, not picking genius
“The thing about venture capital is you have folks that are wrong more than half the time, yet claim their geniuses that they knew exactly the right companies to pick. It's really portfolio theory. That's their friend. They're getting lucky. It'd be much more h…”
Papa: Founders must contextualize advice because mentors project personal experience
“The other bit of advice I always give the entrepreneur is when people give you advice, remember you're the only one that can contextualize it to your business. When people give advice, they're typically contextualizing it to what made them successful, which ma…”