A: An entrepreneur with vision, the ability to tell a compelling story, and the ability to recruit fantastic operating execs; and a product and business model with the potential to drive a sharp wedge through a market, reshape and grow that market, and command a durable leadership position in it. Network-effect and marketplace models (as seen in companies like Facebook, LinkedIn, Uber, Snapchat, ResearchGate, Instagram, Twitter and Tinder) are not the only ways to do this, but they're the ones I understand the best and believe in the most.
A: A few red flags that come to mind:
- Generating demand primarily through direct paid marketing. Users and customers acquired through direct-response advertising tend to be of lower quality than those acquired organically, and acquiring this way gets harder and more competitive as you get bigger - not a great foundation, and from an investment perspective, not great evidence that you're creating something people deeply want
- Having no competitors. There are exceptions but most of the time no competition means no opportunity. Most people don't realize that Thefacebook, LinkedIn and Instagram all had lots of now-forgotten competitors in their early years
- Having a huge incumbent addressable market. This might sound counterintuitive, but when you're trying to build something new or disruptive within a huge existing market it can be much harder to get into a position of leverage and leadership than if you start with a smaller market and grow or reshape it over time. Thefacebook/Facebook, Uber and even Google (in terms of the web search advertising market) are all great examples of this.
A: The Series A market is fine! Benchmark is very much open for business and my partners and I are meeting with entrepreneurs about Series A investments every single day. The Series A market is the most durable and consistent part of the post-angel fundraising cycle because it represents the point at which an idea or an MVP product turns into a true company and starts to incur people costs. Series A financings are usually mostly about those people costs, the costs of salary and benefits and office space required to build a small and growing team, and those sorts of costs per unit don't change by orders of magnitude over time in the same way that other technology costs can. Series A valuations and team salaries go up and down cyclically but only to a small degree.
Entrepreneurs and investors should always be thinking about this round of funding in terms of the next round of funding, so the bigger question is what's going on with Series B and beyond. That's a topic for another question, but for now suffice it to say that we've been living in an unprecedented environment over the past several years where the cost of capital has been meaningfully lower for "late-stage private" companies than for equivalent public companies. This has led to all kinds of locally rational but global strange behavior, as has been much discussed lately. This was never going to be scalable as a phenomenon simply because the scale and liquidity of capital available in public markets is so much greater than in private ones.
- Facebook: How were the strategies for early growth at LinkedIn different from Facebook?
- Venture Capital: You were quoted in 2012 about VC as saying: "My job is not to predict the future, it's to notice the present first." What do you notice these days?
- Uber: Bill Gurley is on the Uber board, but didn't Matt Cohler source the deal? Who knew Travis originally?