PETER FENTON IS A partner at the venture capital firm Benchmark, before which, he spent seven years as a partner with Accel. The list of businesses he has invested in includes Hortonworks, New Relic, Polyvore, Quip, Twitter, Yelp, Zendesk, and Zuora. He is also a helicopter pilot and serves on the boards of the San Francisco Opera and the California Academy of Sciences. What is most interesting to me about Benchmark is that it has a very explicit strategy of being what Fenton has called “more of a guild than a corporation.” Fenton has a BA in philosophy from Stanford University and an MBA from the Stanford Graduate School of Business.
1. “The principal question that we focus on before an investment is the quality of the person we’re going to work with. There are three attributes that I try to be reductionist about that define the greatness that we see in our world. First, I think there’s just a profound, deep, innate motivation. Second, I think there’s a common trait that I would call the ability to learn. The third thing is perhaps the most obvious, which is the ability to attract great people.”
Fenton efficiently conveys three key points here: (1) Motivated people are far more likely to persevere through inevitable adversity and do the necessary hard work; (2) the ability to be a learning machine means a business can adapt and grow in an uncertain world; and (3) the ability to recruit people to a mission or cause rather than just a business is essential. One commonality in what Fenton says is a strong focus on building the business rather than finance or deal terms. Grounded in business fundamentals, his advice applies to a new bakery, a grocery store, or a startup. Without a sound underlying business, a startup will not be successful. When an entrepreneur is building a business, he or she should not seek a cheerleader as their venture capitalist—they should find someone who has extensive relevant business skills and is willing to work alongside the entrepreneur to build the business.
2. “The great entrepreneurs have found they need to find complements. If you look at yourself and reflect on your skills and your talents and your unique abilities, you’ll find that everybody has their gaps.”
Everyone has strengths and weaknesses. Having the right partners and colleagues is a way to create a force multiplier by filling in gaps in your skills and talents. As an example, Warren Buffett has said, “One plus one with Charlie Munger and me certainly adds up to more than two. CEOs get into trouble by surrounding themselves with sycophants. It’s beneficial to have a partner who will say, ‘You’re not thinking straight.’ ” The Harvard professor and expert bridge player Richard Zeckhauser similarly describes why one plus one equals more than two: “Most big investment payouts come when money is combined with complementary skills, such as knowing how to develop new technologies.” The lesson is simple: If your strength is technical, find people who have other skills, and vice versa. If you like novelty, find someone with complementary skills and talents that will “make the trains run on time.” Additional skills and abilities are not only a key to great partnerships, but better investing results.
3. “Some venture capitalists aren’t in touch with the human realities of running a company, and they have a false sense of the ability to predict things and be certain about the future. When you are running a company, you don’t know much of anything about the next six, twelve months; you’re working through a lot of ambiguity.”
Strong teams that can adapt when conditions and opportunities change create tremendous optionality for a business given the reality of an uncertain and unknown business environment. Since venture capital is a search for rare but massive financial payoffs that can be harvested by finding mispriced convexity, it should surprise no one that Fenton focuses on solving challenges associated with ambiguity and being humble about the ability to predict the future. Staying humble and agile is the best way to deal with risk, uncertainty, and ignorance.
4. “The term we like to use is ‘shoulder to shoulder,’ where there’s a real depth of engagement, and we don’t know how to create more time in the day for that. So the business model we have doesn’t scale. And the core premise of the Benchmark model has always been optimizing for the depth of the relationship with the specific companies we’re working with.”
Every Benchmark partner I have known loves to actively participate in the creation of a new and valuable business. These partners want to work alongside the team running the business. This approach is just part of who they are. It engenders fun, and increases their competence. If you like novelty, uncertainty, solving puzzles, and making a positive difference, what could be more fun?
5. “There’s no substitute for creating the magic of the product in capturing our attention. And if that doesn’t occur, and it’s more about getting money from a venture firm to enable that, I challenge the assumption that you need us. We want to do company-building and to do that we need to be committed exclusively in a matrimonial kind of way where we can give our heart, and our souls, and our energies to a company.”
Startup founders who want only to raise money from investors are shortchanging themselves. Money is not scarce if you have the right opportunity and the right team. Fenton is saying that if all you want is money, Benchmark is not the right firm for you. What the best founders want is value-added capital. The most successful venture capitalists deliver superior financial results again and again for a reason: They add business value, not just capital, to the startups in their portfolios.
6. “We love the day-to-day work with the entrepreneurs, which prevents us from scaling. We don’t have an ability to offload any part of our relationship in the way we practice it to anyone other than ourselves. So, there are no associates, no principals; there is nothing beyond the group of people here and our assistants who keep our lives sane. That’s a strategy. Another perfectly sensible strategy is to try and build a particular set of services that you use to differentiate.”
There are different ways to be successful in the venture capital business. Benchmark’s approach works very well for them. It suits the personalities of the partners and makes them happier. Other venture capitalists have adopted a platform approach that involves more people than just the partners providing a greater range of services.
7. “The attributes of the great board meetings that I can point to are focused on asking tough questions and applying critical thinking, as opposed to just updates. A lot of the entrepreneurs I work with, I encourage to get rid of the PowerPoint. A typical board meeting will have thirty to sixty PowerPoint slides. So, I ask entrepreneurs I work with to think about that as a Word document, and can you reduce it down to something we can read before the board meeting, so we don’t sit there looking at slides for three hours.”
If you cannot describe what you want to do in simple declarative sentences in a written document, you have not thought it through. I am a fan of Amazon’s “write a Word document describing the purpose of the meeting if you are the one who called it” approach.
8. “There is a ten-year-plus learning curve for being any good at the venture business.”
No one is born with all the skills needed to be a successful investor. You learn these skills on the job over a period of years. What makes it difficult to apply these skills is the fact that we all have biases and dysfunctional heuristics that cause us to make emotionally and psychologically based mistakes. The best way to learn how to invest is to invest. If you have the right process in place, making mistakes can make you smarter. Or not, if you are not paying attention or willing to change.
9. “Be a learn-it-all, not a know-it-all.”
This quote is a version of a simple Charlie Munger philosophy: Be a learning machine. A “know-it-all” approach to both investing and life is a great way to experience big falls as a result of hubris. If you never encounter situations in which your decisions are wrong, it is strong evidence that there is far less learning taking place than is optimal. If you have not destroyed a cherished idea at least once a year (Charlie Munger’s standard), you probably have a broken learning process.
10. “The saying that we like to have at Benchmark is that good judgment comes from experience, which comes from bad judgment. So, we get it wrong a lot, but what’s interesting is when you get it right.”
Munger’s approach to investing is again applicable here: Pay attention to your mistakes and the mistakes of others. Learn and adapt. Make new mistakes. All these methods will help you deal with the fact that life and the investing environment require people to make decisions in an environment typified by risk, uncertainty, and ignorance. Individuals who do best with uncertainty are those who know how to adapt to change. If you think you can stop learning and that you “know it all,” you are in big trouble.
11. “What we discovered is you can take product-driven entrepreneurs and back them in the enterprise market and achieve orders of magnitude more scale than you could with a sales-driven model.”
When the dogs love eating the dog food and tell other dogs how good the dog food tastes, any business will scale better. As a bonus, a product-driven business involves more creativity and is more fun. When products and services drive founders instead of sales, businesses make better products and services. In an age when it is so easy to get information on which products and services work well and which do not, better products and services mean better scaling, because information about the quality of those products and services will spread by word of mouth, and customers will be acquired organically.
12. “What you hope for is that the product model and the business model play off of one another, and so that’s what we look for … can you get resonance where if I use the product in a certain way, it’ll open up the economic opportunity? Google is the best example of that, of course, where the product model is the business model.”
The biggest successes in the venture business all involve feedback. You cannot deliver the scaling qualities needed to generate grand-slam financial returns without creating at least one nonlinear phenomenon that comes from positive feedback. What is most desired in a startup is a phenomenon in which several types of mutually reinforcing positive feedback loops are present. Creating and sustaining virtuous cycles is both powerful and rare; Facebook’s outcomes are an example of this. But when you create the right network of positive feedback loops, it can be almost magical. Alignment of the product model, the business model, and the growth is particularly magical. Fenton has generated far more than his share of magic. Repeated success in the venture business is truly unique.