The Exchanges

Q from history is the only thing that gets us out of sort of trench warfare is asymmetry and weaponry, right? So, how, how are you dictating, like, how are you determining escaping this competition so that you have an asymmetric outcome where maybe there's one or two players and they play nicely, maybe there's, uh, it's a winner-take-all market, or how, how do you, how do you work through that?

A Yeah, there are different flavors of working through it. So, The, the strongest, strongest sign is a network effect, and that, and that's why I spend a huge amount of my time looking at social companies or marketplaces because they both have network effects, and you just have a dynamic with those companies where they're able to get their flywheel spinning fast enough They're able to tip a market, and, and once you tip a market, the space between you and the competition just gets wider and wider. The other, uh, type of company that doesn't necessarily have a network effect, but I, I also love, are companies that actually go after a space that is underestimated from the outside, and because it's underestimated, it actually doesn't invite competition. So, or, or the competition isn't strong competition. So, you know, I'm on the board of a company called Chainalysis, and Chainalysis is, it's in the kind of blockchain crypto space where they have built a, a technology that lets law enforcement agencies, government, uh, agencies investigate transactions on any of the current blockchains, the crypto, the Bitcoin blockchain, Ethereum, et cetera. And, and make sure that there's no illicit activity. And then the companies that are regulated and want to participate in this cryptocurrency ecosystem, but have to make sure that they're not in the middle of some money laundering, they need a …

AI assessment note: “The, the strongest, strongest sign is a network effect”

Q What are some of the lessons you learned about scaling Pinterest that apply outside of Pinterest after you left?

A Oh gosh, Shane. There's so many, you know, the first thing, and this is one of the things that the founders with whom I work, uh, hear me talk about all the time is that kind of what you measure matters. So, you know, I remember at Pinterest at one point, our growth team decided that the metric that they were going to base their success on their, their OKR on was monthly active users. You know, so this lowest common denominator thing, if someone, a user comes to your product once in the month, They count as an MAU and OKR is objective and key results. It's just a way for a company to have a team say, this is our main objective for a quarter, as an example, and the key results are the key projects that will move the metric on that objective. And, and what happens is that if you choose the wrong metric, so MAUs in this case, you actually end up optimizing for the wrong thing. You know, the product that you build opto, like you end up deciding on different features that you're going to build that optimize for something that's the top of the funnel base as, as an example here. All startups are incredibly resource constrained, right? Like there's even despite that there, there being so much capital chasing startups, at the end of the day, you're still a capital constrained environment where as a founder, you have to make sure that you're allocating your dollars in the way that will …

AI assessment note: “one of the things that the founders with whom I work... is that kind of what you measure matters”

Q this sort of like pain today, gain tomorrow versus companies that are using money to acquire customers, but don't actually have a viable product. They're giving it away for free or they're the incentives are just so huge that customers are signing up for it, but they can't quite figure out that there is no runway there. How do you think about that? Or am I thinking about that wrong?

A So number one is that you're looking for early evidence that what the founder believes will be true, which is that the contribution margins will expand over time or that the unit, you know, the cost to acquire a new user will go down or whatever it may be so that you can get to a place of profitability on the customer level. You're looking for evidence that that actually is starting to happen, that it's getting better, that you can, you can see You, you can extrapolate from the, the points that you do have, that there is a path there. The second thing is, is really just the founders understanding numeracy of, of their business. You know, there's, uh, there's a very big difference between a founder, uh, who may, you know, they're, they wave a little bit that this is the way it's going to be. And, and then actually seeing the reality of the numbers and they're not being a great Uh, connection between what the founder understands of their business and the, and the facts, the brutal facts on the ground. Um, and by the way, that kind of really facing the brutal facts, I think that's a Jim Collins concept that I love, is so, so important. And then, and then there's the, the founder, um, I remember this with, uh, Francis, the CEO of Sonder, a company I invested in, that he just knew every number in his business. Like, cold, and he knew exactly how he was gonna make them better over ti…

AI assessment note: “you're looking for early evidence that what the founder believes will be true”

Q a couple of podcasts ago, I was talking with Chris Cordell, who is the chief of staff to Stuart Butterfield at Slack. And she's, she mentioned something, and I'd love to hear your opinion on this, where when you identified somebody who didn't fit the role, she said, just let them go. Don't transfer them internally. Don't give them another job. How, what do you, what's your reaction to that?

A I would, I would say that's right, 95% of the time. Like all, all roles, sometimes you should break it. Uh, particularly, you know, at the early, early stages of a company, when you're going through hypergrowth, you're, you're bringing in these, these athletes, and, and the company gets more specialized over time, and, and so roles have to evolve. But, but I absolutely agree, you know, the 95% scenario, there is a, Non-confrontational weakness to this kind of transfer, which is that you're telling someone, hey, not that I don't think that you're scaling with the company, but hey, let's find another role for you in the company, and you can become someone else's problem, or, you know, it's, one of my partners, Ari Vishria, has told me this, uh, framework that he had at LoudCloud when they were hiring Which was that they would interview people, and they would rate someone on a scale of one to 10. And you had to be an eight, nine, or 10 average in order to be hired. And, and the thesis was is that sevens kill companies. And what that means is that, you know, when someone is a four, you just know they're not doing the job, they're not up for it, and let's, let's take them out of the system. But the problem with the seven Is that you don't get to that point because that person will have glimmers of being able to do the job. They'll, maybe they'll be super cultural carriers. They'll h…

AI assessment note: “I would say that's right, 95% of the time.”

Q Talk to me a little bit about some of the considerations of integrating founders into an existing culture, because, uh, that sounds like it's, it's really good or really bad. Like, can you have a team of founders? Can you, how does that work?

A It's, it's a good question. I, I think you'd be lucky to have a team of founders. All people that work in a company are on a spectrum where on, on one side you have the founders where their identity is the company. They You know, they don't ask what their job is. They ask what the company needs. They work nights and weekends. It's like, it's, it's an all in pursuit versus on the other side of the spectrum, you know, to be as, you know, almost as hyperbolic as possible. It's like the, the mercenary, the person who will just go wherever they're paid the most. And when you, when you find those people who are super impactful on, on the founder side of the spectrum, What is really important is that their identity, they want their identity to be the company. And so you have to make sure that they're really, really aligned with the mission of what you're doing, because then they're gonna go all in on it. But if it's just, you know, grafting someone on because they want a soft landing for their company, but they don't really care about what your company is doing, then that feels like it's not a, not, not a path for success.

AI assessment note: “make sure that they're really, really aligned with the mission of what you're doing”

Q What are the things that you see yourself saying over and over again across the different boards that you're on?

A So one of the things, one of the first things I, I say is this kind of concept I call the net present value of pain, which is, you know, when you're, when you're running a company, there's so many decisions all the time that you need to be making and so many optimizations. And a lot of times there, there are some decisions that you kind of want to procrastinate on. You know, it may be a decision to cut a product that you had loved and you, and you don't pursue. More often than not, it's, it's people things, you know, someone who's not scaling in the role, um, and has to be leveled or let go. And, and what I always remind founders is that pain today postponed until tomorrow is going to be harder. It's, it's like taking a loan out on the pain. And particularly in the early stages of a company, if you have the wrong head of product, And you know it, but you're like, hey, I'm just gonna wait a few more months until I get this other role right before I address this thing. The compounding problems that happen, that you ship the wrong things, you hire the wrong people, like the, the problem, you have to nip these things in the bud, otherwise there's these cascading effects that happen that make it a bigger and bigger deal when you actually get to that decision. Another thing I, I always remind people of is something I learned from my, my partner at Greylock, Reid Hoffman, which is tha…

AI assessment note: “one of the first things I, I say is this kind of concept I call”

Q I want to come back a little bit at a higher level to the role of boards. Where do you think boards go wrong with, um, startups with all companies?

A Ooh, how much time do we have? Um, one of the things that I always tell founders is you have to make sure that the board members that you bring on are as much on the same side of the table as you about the future, like where the company is headed and the future of the company, because You know, people, whomever you have around the table in the boardroom, even an observer, you know, I think people kind of think of it as, oh, board of directors, like this person's on the board, and this one's an observer, so the observer doesn't matter. That's so, so wrong, because things rarely come to a vote. It's always about what's that conversation around the table. And someone who has a seat at the table is participating in whatever strategic conversation you're having can really change the direction of a company. And, and so you want to make sure that the judgment of the people that you bring around the table is like super high and that they're going to push you in the ways that you need to be pushed and want to be pushed and that they're aligned on the vision and the mission of the company. Otherwise, it just creates another tax on your execution where you end up having to spend time convincing someone who maybe was never on board with the direction of the company that you're going in. And so, so one is just like finding those people who aren't cheerleaders, like will help, will show you …

AI assessment note: “Number two is, you know, and I've seen this, is kind of the micromanagement”

Q lot of these tech companies, especially ones that have gone public recently, don't seem to generate any cash for their shareholders. In fact, they consume cash for their shareholders. How do you think about this? How do you feel this plays out? Like, what are your thoughts on this? Cause you have a very different vantage point than I do from the outside looking in or the inside looking out.

A There's kind of two things that I think about there, Shane. The first is that there's a cash flow thing that you have to look at, which is it may be that up front you have to invest money in, you know, in marketing and sales, whatever it may be, in order to sign a customer that will become very, very profitable for you over a longer period of time. And so even though there's burn up front that you have to accept, Over a longer period of time. It's a profit making machine. It's, it's a machine that you can put a dollar in and get five, 10 dollars, whatever it may be back. And, and when you have that type of machine, you want to be as aggressive as you can at growing because it's going to be a positive IR IRR for you. And it leads to the second point, which is that, you know, something that I, I think a lot about and in the companies that I look to invest in is companies that can escape competition. You know, the companies that escape competition ultimately are the ones that get to a place where they're incredibly profitable. They generate a lot of cash for their shareholders. They are able to create great experiences for their, for their customers. And, and, but you're not going to be able to escape competition overnight. There's going to be a lot of investing that you have to do in sales and product in, you know, the engineering side. And, and more and more you have competition…

AI assessment note: “even though there's burn up front... Over a longer period of time. It's a profit making machine.”

Q you can make it work in the suburbs where there's, you know, deliveries are more complicated, uh, signing up people might be easier, but the whole network and the operations are going to be a lot more complicated. Then that translates into it working in the city. Whereas In this case, working in the city might not translate to working into the suburbs, or am I thinking about this wrong?

A No, that, that's absolutely true. I mean, you see that in so many different industries. I remember I was, uh, uh, lucky to observe the board of diapers.com, and those guys started by selling diapers, wipes, and formula. It was like a two percent gross margin business, but if you can get really good At making the economics work for a business that has that level of gross margin, and then you start to add more, you know, higher gross margin products to the basket. The DNA of the company, the habits of the company get forged in this really, really resource constrained environment that only creates benefits from there. That said, I wouldn't say that you should choose a market necessarily to pick the hard thing. I actually think that you want to pick something that is easy to win, to, to tip the market, you know, and, and, and it, you know, there was ways in which going after the suburbs was harder than going, like, operationally harder, harder probably from an economic perspective, although I'm not positive, than like going after the city, but it was ultimately easier to get to that tipping point, and that's what I think you really want to maximize for.

AI assessment note: “No, that, that's absolutely true. I mean, you see that in so many”

Q as a VC, her concept of the net present value of pain and how it applies, why every strength has a corresponding weakness, where boards go wrong, assessing the performance of a CEO, lessons from rapidly scaling Pinterest, and so much more. It's time to listen and learn. You studied philosophy, not computer science or business. How has that shaped the way that you approach your job as a VC?

A Yeah, you know, it's funny, like, I, I think most people misunderstand what philosophy is. I, I, I think that people probably, when you say that you studied philosophy, they imagine a bunch of, you know, guys in three-piece suits sitting around a table drinking cognac and pontificating on the meaning of life, but it, it is a little different. Um, you know, this, of course, philosophy is this, is this big umbrella But the type of philosophy that I studied in college was a very analytical version of philosophy where, you know, it's, it's underpinned by logic. Um, and you learn a level of intellectual rigor that you don't even realize it. It's kind of like you think you can be rigorous in your thinking, and then you have to write a philosophy essay or read a philosophy essay where you have to, you know, You're, you're, you're breaking things down into premises. You have to think through thought experiments to imagine all the corner cases and, and preempt like any objections that someone might have on your argument. And, and the level of rigor that you learn actually has made such a difference in my life. Like when I was doing product at Pinterest, you know, a product document where you're making a recommendation on a product is actually very similar to a philosophy proof. Like you have hypotheses. You know, about how users behave, how they'll accept a different, you know, a new fe…

AI assessment note: “the level of rigor that you learn actually has made such a difference”

Q You strike me as a very structured, thinker, process-oriented person when it comes to making decisions. Can you peel back the curtain there a little bit and walk us through maybe your personal process for making decisions, whether it's to invest in a company or even at a board level? How are you structuring those things in your mind?

A Yeah, you know, I think it's, it's kind of the way my brain is, and it's why, you know, one of the things that I, I try to do a lot is, is synthesize the world in a way and reduce it so that I can have a framework from which to reason. You know, it is this kind of building patterns so that you can see the topology of the world in a way that is higher resolution than if you, if you didn't have some of those mental models from which to, to reason. And so, for me, like, you know, I ask myself, like, I meet with a lot of social products all the time, and you can see them growing really quickly, and one of the first frameworks that I actually wrote about to help me figure out, like, which are the ones we should invest in is this thing I wrote called the hierarchy of engagement, which is, how do I know if something's growing really quickly if it's actually going to be something that endures? For marketplaces, like, you know, I see a lot of companies, there's so many founders who orient themselves towards hitting this one million dollars of annualized GMV. You know, there's kind of these ideas that go around, which is that to raise your series A, you have to hit a certain metric. There are ways to hit milestones that are more vanity metric than the actual kind of authentic, real intellectual rigor around kind of, am I, am I really doing the hard work to get to this milestone? And so i…

AI assessment note: “synthesize the world in a way and reduce it so that I can have a framework”

Q interesting way that are there businesses that go after, you know, Amazon would be an example, I think where they, they have a low margin and then they, they lower it over time and that's how they get bigger and bigger and bigger and bigger. Uh, and then you can't really compete with them if they're constantly lowering margin, at least playing that game. How do you think about that?

A Back to the, the concept I articulated before of, of tipping a market. One of the wonderful things that happens when you tip a market is that your organic growth starts to explode, you know, because your value proposition relative to any other substitute becomes just so much better that you would be stupid as a buyer not to go, you know, it's almost an IQ test. Are you going to, where are you going to buy from? And so, What the beauty is of, you know, a company like Amazon that's able to articulate a flywheel very clearly is that they don't have to spend money on the acquisition side. And they have, of course, because they have so much more inventory that they can, they can make their margin off of a very, very, every skew that you could possibly want versus any individual, uh, product. And, and it's just, I mean, how do you compete with that A flywheel that's spinning at that magnitude. It's, it's, ah, you end up, you know, it's just a very, very difficult thing as we, as we've seen over the last 10 years.

AI assessment note: “What the beauty is of, you know, a company like Amazon”

Q and become Michael Jordan. So maybe you can go into some more detail on sort of what are the mental models that, what are some other mental models that you're thinking about or frameworks that you're using when you're sort of, uh, internally structuring your decision. I imagine opportunity cost is one of them, but what, what else keeps coming up over and over again? What are the timeless ones?

A Opportunity cost is such a huge one. Um, you know, at Benchmark, our model of investing is that we have decided that we're not going to scale our business. You know, we, we haven't grown our fund size, and, and it's just five general partners right now, and it's a kind of this rare structure of an equal partnership. And, and we don't delegate any part of our job. Kind of our aspiration for any company that we are on the board of is that we are the hardest working, most impactful board member that you have around the table. And so there's no talent partner to whom I can delegate a search for. There's no associate who's going to dig in on your model for me. There's no, uh, marketing person who's going to help you think through PR. It's, It's, you got me and the rest of my, my partnership. And so it means that when you take a board seat, the level of commitment that, that kind of promise you are making to the founder is, I really think, at a very different level than other people. You know, I'm on, you know, seven boards right now, and, and I am on these talent calls every week for some of my companies where we're We're doing a search for a CRO as an example, and it will always be me and then the talent partners of the other firms as opposed to the partner itself. And it's, and it's just a very different level of service. And I think when it's me on the call, helping kind of figur…

AI assessment note: “Opportunity cost is such a huge one. Um, you know, at Benchmark”

Q Well, what's the most interesting thing that you've seen, uh, or a most surprising thing that you've seen recently in terms of, uh, startups?

A Well, you know, the thing that has just been so fascinating over this past year is, you know, is, is kind of the effect of shelter in place. It is, uh, transformative in so many different ways. You know, there's a class of companies where the future has been pulled forward, you know, or things that would have been on that three to five year roadmap Become on the, like, we need to do it now roadmap, you know, the kind of, like, and there's, you see that in the, in the success of a lot of these software businesses right now, and it's, you know, we've seen the benefit of that, and it's, and it's, it's just transformative, and then, of course, there's this change to the way we work, where we had always, you know, the default answer had always been, we're going to have an office, and we're all going to be co-located, And we're going to go into a room together and we're going to, you know, get through that, you know, roadmap planning together. And like, that's the way we're going to work. That was the default. And, and now, of course, everything's changed. You know, we are, we are in a place where the default has been completely changed to the mirror image. And we're having to make decisions now, all these companies of will the new default That we have now persist post shelter in place.

AI assessment note: “the thing that has just been so fascinating over this past year is... effect of shelter in place”

Q One of the things I want to come back to that you said was sort of identifying people that can't scale in their role. What are the early warning signs that people can't, aren't scaling in their role, that there's problems on the horizon, that action is necessary?

A I'll, I'll describe what you see for the people who do scale, which is they're just learning machines. You know, it's such a growth mindset thing where everybody has different ways of learning. Like I have Uh, one of my founders, uh, is a PhD and he's someone who his way of learning and pushing his, his horizons and what he's able to do is to, is to read, is to study, is to kind of, you know, he's a learning machine from whatever he can consume in terms of content. Some people, you know, their way of learning and pushing their own envelope is to surround themselves with CEOs that are a step ahead of them. And, and find great mentors who, who push them and hold them accountable. Some people might, you know, find coaches, you know, that actually help them through that. But the founders who I see, the founders and, and, and leaders are not afraid to be vulnerable. Like, that they understand that they are works in progress and, and then figure out the ways to constantly, constantly grow, evolve, and push their own abilities. And, and it's the people who I think aren't willing to admit to themselves or whomever they work that they don't know something, or they're not letting themselves have that learning moment of accepting that they don't know something, that they tend to just hold themselves back and, and not scale as a company scales.

AI assessment note: “I'll, I'll describe what you see for the people who do scale”

Q Speaking of Pinterest, you led some acquisitions while you were there. What was that process like? Can you walk me through sort of like the end to end, all the way from identifying the acquisitions to integrating the cultures?

A Yeah, you know, well, the acquisitions that I worked on, it was, was super early in Pinterest, uh, time. I think I did three kind of, of the first acquisitions that we made there, and so they were primarily, with one exception, more just the talent. I, I have a hypothesis, uh, that I believe that founders are just a unique type of person. You know, they are, um, it's part of why I love to do what I do. It's, it's, um, I think that it's just such a different DNA of Person. And, and what tends to happen in a company, in a startup, uh, or, you know, a company like Pinterest that's going through hypergrowth is that you're constantly recruiting, and you have a recruiting team, and the recruiting team is doing everything they can to find the Google engineer, the Facebook engineer, the Twitter person, whoever it may be, and to have them come into the company. But it's all the same type of DNA. It's the type of person who joins a company At a, a stage where it's more secure, where you have a more specific role, you know, you're, you're looking for a little bit more certainty and structure versus the person who's a founder. Like they, you know, risk loving, responsibility seeking. It's not about what my job is. It's about what the company needs, you know, action oriented, high, high degree of urgency. And so I think it's so important to constantly inject that type of DNA into a company …

AI assessment note: “they were primarily, with one exception, more just the talent.”