The transcript from this week’s, MiB: Bill Gurley, Benchmark, is below.
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VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, boy, do I have an extra special guest, venture capitalist Bill Gurley of Benchmark. What a rock star. He — he’s been just right at the forefront of everything that’s been going on in venture capital over the past 20 years — Grubhub, OpenTable, Zillow.
He was one of the very first investors into Uber, was a board member there, really just a fascinating career from a design engineer at Compaq to becoming an — a Wall Street analyst. It turns out he’s the lead analyst on the Amazon IPO to eventually becoming a — a V.C. at — at Benchmark where really he just has tremendous insight into entrepreneurs and technology and to think about things like the network effect and what is this technology also parallel to, and where can we see scale and leverage in capital all come together in a way that — that is unique. Just really a — a fascinating, fascinating person, very forthcoming, including about things that were really challenging periods of his career that I would imagine wasn’t a whole lot of fun.
If you read the book “Super Pumped” about Uber, really he’s the only guy that comes through that — that whole book with his reputation intact. He’s really the only good guy in the book. And the book is an amazing, amazing story about Uber, which in and of itself is — is just madness. So, if you are all remotely interested in venture capital investing, technology, direct listings, replacing IPOs, I think you’re going to find this conversation to be absolutely fascinating.
So, with no further ado, my conversation with Benchmark’s Bill Gurley.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Bill Gurley. He is a legendary venture capital investor at Benchmark where he’s been since 1999. Some of his better-known investments have included Grubhub, NextDoor, OpenTable, Zillow and, of course, Uber.
He is a member of the Board of Trustees of the Santa Fe Institute, and he is considered one of the most influential deal makers in technology. In 2016, he was named TechCrunch’s V.C. of the year.
Bill Gurley, welcome to Bloomberg.
BILL GURLEY, VENTURE CAPITALIST, BENCHMARK: Thanks for having me, Barry.
RITHOLTZ: Yeah, this is overdue. We were supposed to get together a couple of years ago, and then events intervened. Let’s start with your early career.
You began as a design engineer at Compaq. What does a design engineer do? And what sort of lessons did you take away from that experience at Compaq?
GURLEY: You know, the — the job I fell into at Compaq, which was super, super interesting for a person with a brain like mine, we — we were a bit of a — like a fire squad that came in when there were problems. So, when they were bringing new computers to market, they would pass them off to the test group, and the test group would take all the latest and greatest software. And back then it was like Banyan VINES and — running 3Com Ethernet adapters, a lot of stuff that doesn’t exist anymore today.
But inevitably, they would break and — and someone had to figure out why. And the — the people that are doing the hardware design work didn’t have enough understanding of how the software work to kind of reverse engineer the failure, and so we kind of lived in between these two groups.
What was — what was fun about it is that, you know, often times they were holding up shipping until we could get our job done. So, it was just kind of — they’d put us in a room with a bunch of peaches and expect us to work like 18-hour days until we found the problem. But it was fun because it was, you know, shortened scope. It’d usually be like one day to a week before we’d figured out. And it felt important because everyone was kind of waiting on us, and it was fun.
And it was super interesting, I think, also for me just because of the problem-solving nature of the whole thing. I don’t even know if a group like that exist anymore.
RITHOLTZ: So when you’re involved in both hardware and software — we’re talking 30 plus years ago — how magical did the software look? Was it still all potential? You’re dealing with both hardware and software. What — what intrigued you?
GURLEY: Well, client server was starting to happen already and — and — and there are different ways. You know, I have no idea how they do this today because the clock speeds are so dramatically faster. But there are different types of analysis tools that you could run either virtually in the background or, you know, and we plug this thing called an ICE (ph), which is a Medusa head-like thing on top of the processor where you can measure every pin. And you’d watch the signals go by, and you — you try and reverse the software failure all the way down to where something was happening on the — on the mother board that was causing a raise conditioner (ph) or this kind of thing.
And there are always odd things like you could, you know, make it really cold and the failure would go away, and then you knew you had some type of analog rise-time problem. But — but it was fun. I mean, you — you really had to understand how the system worked all the way through or you couldn’t — you couldn’t pull that — that down.
You know, the — the funny thing is, you know, when we were — we were already running into situations where the equipment that you would put on it to measure would — would mess with it. And back then, you know, I think the last thing I worked on was a 4650. And I can’t imagine how they do it today like I just — I mean, I know they do it, but I just can’t imagine because of the clock speed. We would have never imagined back then the clock speeds would be as fast as they are today.
RITHOLTZ: Yeah, Moore’s law just keeps on compounding. So — so you — you moved to Wall Street as a research analyst in the 1990’s, what led you to cover tech stocks?
GURLEY: Well, somewhere along the way while I was — had become an engineer and was working at Compaq, I started trading stocks and I can’t remember exactly how I fell into it. I’m sure I — I — I have a vivid memory of reading Peter Lynch’s book. And I also remember Prodigy. You remember Prodigy, which …
GURLEY: … was kind of a precursor to AOL with …
GURLEY: … (inaudible).
GURLEY: You could get a trading account on Prodigy, and so I was buying stock. And one of the ones I bought — you know, if you read — read that Peter Lynch book, was it “One Up on Wall Street,” was that …
RITHOLTZ: Yeah, yeah, exactly.
GURLEY: You know, he said buy stocks of companies you love. Well, I was doing a ton of programming in Borland — Borland Turbo Pascal. And I love the Quattro spreadsheet. I liked it way better than Lotus, and we’re using those tools every day. And so, I bought — I bought the Borland stock on the IPO, like the day of the IPO. I don’t think I got allocation, really big conversation for direct listing. I don’t think I got allocation through Prodigy, but I bought it the day of the offering.
So — so that kind of thing was already happening in my brain. I ended up — I ended up leaving Compaq and going to business school before I transitioned into Wall Street. And I think when I got to business school and started really understanding, you know, different companies, and reading about companies, and — and that fun that I was having, thinking about stocks and stock prices, I — when I — when I really started reading, you know, magazines, “Wall Street Journal,” “Fortune,” I noticed that these analysts were quoted a lot, especially Goldman had this killer team with Dan Benton, Ric Sherland (ph), you know, and they — they owned it, like every — like the top five tech analyst at Goldman were all — all considered to be the accent.
Their names would just come up and up and up. So, you know, and I was getting a little more spirited, and you’d read stories about people knocking on doors. So, I spent a week in the summer of my — in between my two-business school just begging for meetings on Wall Street, including with — with Dan and — and Ric (ph).
RITHOLTZ: And you end up at C.S. First Boston where it turns out that you end up as the lead analyst for an IPO for a little company called Amazon. Tell us what that experience was like. And did anybody have any idea then what Amazon might become? Forget what it is. Was it even …
GURLEY: Hey …
RITHOLTZ: … the …
GURLEY: … you skipped about four years so — which is fine.
RITHOLTZ: So, what’s in between?
GURLEY: But I didn’t — so — I — it’s kind of interesting because it involves someone I know — I know you — you think quite highly of. So, I ended up getting a job. I — ended up getting turned down by every firm except for one, which was Credit Suisse First Boston. And the Research Director there was a guy named Al Jackson who I still talk to today.
And, you know, I went to Texas. In my entering class, we went around the room and say wherever who’s from, you know, Wharton, Harvard. Like there was — I was the only one that wasn’t like those five schools.
GURLEY: And, you know, Al just felt like taking a bet on me. And I don’t know where I’d be today if he hadn’t that done that. I show up and they were going to assign me passive components with some obscure category.
And Charlie Wolf, I don’t know if you’ve ever heard of him. He …
RITHOLTZ: Oh, I know Charlie Wolf very well. He covered Apple when nobody liked Apple.
GURLEY: Yeah. So, Charlie was the P.C. analyst and …
GURLEY: … two weeks after I showed up, Charlie said he wanted to retire and teach more at Columbia. And I mean — so just talk about wild fortune. And so, I went into my apartment and spent all weekend writing this kind of assessment of the P.C. industry and went in and begged Al for — for Charlie’s job and he gave it to him.
RITHOLTZ: That’s amazing.
GURLEY: And then Charlie, you know, stayed on the payroll part-time and became a mentor and helped me with all my work and kind of was my shepherd and was incredible. And then, you know, the — the other party just couldn’t be more fortunate. You know, my first weekend I’ve become friends with the food analyst.
RITHOLTZ: You’re talking about Michael Mauboussin, I assume.
GURLEY: Correct, correct. The sequence of fortunate events is so like mindboggling. So, I — I get to know Mike. Mike hands me a — a book called “Valuation” that McKinsey had written and another one by Stern Stewart all about return on invested capital, which he’s using in the food space.
Out of curiosity and because he’s pushing me, I run the numbers for all of the P.C. manufacturers, and it turns out Dell is crushing everyone on this metric that no one is using in the — in the analysis of that market. And it also turns out that they’ve got an options scandal problem and a laptop battery problem, and the stocks trading it six times earnings.
And so through — through using that methodology that Michael taught me spending a ton of time with Tom Meredith who was the CFO at Dell at the time, you know, we went to a strong buy when everyone was — was — had a sell rating, which is the only strong buy I ever did in my career. And I think the stock went up 100X in the public market in there. So …
RITHOLTZ: Amazing. So — so now let’s — let’s fast forward to the Amazon IPO. You’re the lead analyst. Tell us about that experience.
GURLEY: Yeah. So, I — in my third year as an analyst at CSFB, I was about to — I was about to jump ship and go to the buy-side. I’ve been spending a bunch of time with Capital Group actually who I think the world of — you know, I still — still keep in touch with people there all the way until today.
And Frank Quattrone called me out of the blue, and he said, “I’ve heard a lot about you. We’re leaving Morgan Stanley. We’re going to start this boutique tech investment bank called DMG Technology Group, and you really want us to join — I really want you to join.”
And I called Roger McNamee because I — — I — I was looking for some advice, and Roger was a client of mine at CSFB. And he said, “You got to meet with Frank. You have to meet with Frank.”
And so I met with Frank. He — he — he asked, “What do you want to do long-term?” And I said, “I’d love to be a venture capitalist. And he said, “Tell you what, come work for me. I’ll move you to Silicon Valley. I’ll introduce you to every V.C. that I know.” So that was a pretty good — that was a pretty good offer.
When — when I got together …
RITHOLTZ: Turned down, isn’t it?
GURLEY: … with Frank we’ve — yeah. Well, Frank and I then started — he said — he said, “What else?” And I said, “Well, I don’t really want to cover PCs anymore because they’re going to — they’re going to merge with the big box group, and I’m going to have to cover H.P. and Deck (ph), and I — that’s boring.”
He goes, “Well, what do you want to cover?” And I said, “This Internet thing is popping up. Let’s do that.” He said fine.
So, this is the pre Spitzer-Wall (ph), so the bankers and the research analyst spent a lot more time together. But I had already, I believe, reached out, you know, to Bezos one way or another, just paying attention to what was happening with the Internet and made a couple trips up to Seattle to speak with him. Got to know him pretty well. We’re still close friends today, and he’s a large investor in Benchmark.
And — and, you know, we — it — it — it — luckily, we got to know him before it happened, there ended up being a bake-off. And it was — it was, you know — I think Morgan Stanley was in before us and Goldman after us that meetings were at the Kleiner building on Sand Hill. And somehow, we won the mandate.
I — I — to this day it’s one of my favorite trivia questions who was lead left on the Amazon IPO because not many people will be able to say Deutsche Morgan Grenfell, but — but there — there is a photo of it on the Internet if you do a search.
To be fair …
RITHOLTZ: I assume you still have a book somewhere, right? Don’t you have a keepsake?
GURLEY: I do, I do, I do. I have the prospectus, and — and I also — my — my assistant at the time, Juliet Wilson, who — who is — who is really great, she had this idea that we would find the pitch book.
And she found a company in San Francisco that was open all night that would bind the book for you. The bankers thought we are not because they love to put pages in it the last minute in these like …
GURLEY: … three ring binders, but they agreed to it. And so, like she drove to the city like 2 a.m. and — and we — we use bound pitch books for the — and I still have a copy of that, which is kind of cool.
RITHOLTZ: That’s quite amazing. How did you value companies back then when there wasn’t a lot of revenue, there certainly wasn’t any profit? There were eyeballs, there were clicks. How do you put evaluation on — on a — a relatively young startup?
GURLEY: You know, I — I got that opportunity to jump to venture only 13 months after I joined Frank and I did. And so, I was — I — I had left the equity research business by the time stuffs started going really crazy — in — in — in ’99. And so, I started thinking about it as a — as an investor and less as a research analyst, but I didn’t — I wasn’t forced into that quandary.
I — I wrote a blog post way back then know about proxy valuations. And I noted that people like John Malone, you know, had been able to convince Wall Street to think about homes pass (ph) instead of, you know, a P/E multiple, and that there’s a value for home pass (ph) (inaudible) grow homes pass. And there — so there are other people at that time that had been successful at kind of changing the — on how you think about things.
But, of course, in ’99, 2000, things just went super nutty (ph). They may be super nutty (ph) again. And — and it — it — it can cause a lot of anxiety for someone who was brought up rooted in financial history and, you know, someone who’s — who felt like a study partner of Mike Mauboussin like it’s — it’s hard when you see craziness.
RITHOLTZ: So you’re not an especially big fan of initial public offerings. What’s the problem with traditional IPOs?
GURLEY: There’s a problem that’s been inherent for a very long time, and then there’s a problem that’s gotten way worse in the past five years. The problem that’s been around for a very long time, you know, Bill Hamburg was pushing on this over 20 years ago. You know, he — he said it’s an insider’s game and it’s rigged. And he was one of the insiders, you know.
And Pierre at eBay got upset about it. Larry and Sergey got upset about it, you know, so I — I think that — and — and NetSuite, you know, got upset about it. Allison was upset and, as a result, the team at — at NetSuite. And so, I think it’s always important when this topic comes up to highlight that there are plenty other people in Silicon Valley that were ringing this bell before I was. I’m just the latest person to pick up the baton.
There’s two real problems that have been exacerbated recently. One is they don’t let everyone bid. So, you’re — you’re — there’s a very restricted set of people who get to decide if they, you know, get — if they want to buy stock in (inaudible). And it’s — it’s not everybody. There’s not even any oversight as to who gets let into that circle.
And then the second thing is they don’t use price just — they — they don’t use supply and demand to set the price and determine who gets the shares. They literally have human saying we think the price should be this and we’re going to give it to this many people.
GURLEY: It’s no shock that that has resulted in misprices. And now there’s 40 years of underpricing data. Professor Jay Ritter at University of Florida has aggregated all this on its website. He keeps it up-to-date, so I just get the point in his stuff (ph).
Those numbers have gotten insane recently. So, the previous two years were $6 billion and $7 billion one day underpricing and then 2020 was $35 billion.
RITHOLTZ: So, Bill, some people might say at least on Wall Street that that’s not a bug, that’s a feature.
GURLEY: Oh, maybe for that client. You know, the — the — I — I do think that all of it makes sense when you realize that the key customer of the investment bank is the institutional shareholder firm.
GURLEY: (inaudible) Fidelitys, and T. Rowes, and Capital Groups. That is the customer that’s being served. And I guess that’s fine to a certain extent except the banker acts as if they’re looking after your best interests also.
There’s — there’s no high dollar transaction that you’ll do in your life, Barry, where you use the same agent as the counterpart.
RITHOLTZ: Right, right.
GURLEY: It’s the only one. There — there literally isn’t — you wouldn’t do that M&A transaction. You don’t …
RITHOLTZ: No, of course, not.
GURLEY: … you don’t do it when you sell a house. You always get your own, you know, agent to look at your best interest. So it’s bizarre how much trust there is when people go into that process. And I think that trust gets taken advantage of.
When I was on Wall Street, there were these huge sales forces in every region. And when you did an IPO, there was variable compensation for people that could play shares. And even between the banks, there’s this thing called “jump ball economics,” where your bank was encouraged to outperform the other bank. So, the — they used to use this word “distribution.” I’m looking to get this offering out and got to go sell it, right?
The sales force at the two largest investment bank today is one-tenth the size of West Bank then (inaudible) have the people anymore. And what they’ve done is they now focused the majority of the IPO process on like the top 20 account. So, there’s no effort anymore to push it out, it’s just more of an effort to see what these people want.
And they’ve settled in on an optimization function, which is truly remarkable that they get — that this actually passes muster. But they tell each and every CEO and CFO and — and board that come to go public that their goal should be being 30 to 50X over (inaudible).
RITHOLTZ: Wow, that’s amazing.
GURLEY: Supply and demand was understood 300 or 400 years ago. How you could sell the most important asset in your firm, which is your stock, into a process where you’re being told that 30 to 50X oversubscribed is optimization, it — it shocked, it’s literally shocking to me.
RITHOLTZ: So, let’s talk about an alternative like direct listings. How do they work and what are their advantages versus a traditional IPO?
GURLEY: Yeah, so like 40 years ago people built algorithms into exchanges that allows you to match supply and demand to determine price. And every single stock these days, every day when it opens, goes through that process, right?
Every morning, you know, you got to start trading a stock. How do you determine which price? Where does the first trade happened? And it’s all just a simple matter of matching supply and demand. The most highly used algorithm is called price time, which is if — if you put in a bid at the price that they eventually open that or if you put a bid — a penny above the price they open at, you automatically get billed if you’re at that price whoever had the order in first. So that’s the price and the time. That’s exactly how every stocks opened every day on both the Nasdaq and the NYSE.
And here is the best part. That same technique is used the day after a hand allocated IPO. So every company that does an IPO does a direct listing the — the very next morning except the only people allowed to sell, you know, I hear are the ones that you gave the stock to the night before, which is also perverse. But the technique that I think the most elegant thing about the direct listing is it uses the systems that are already in place.
And so if you talk to the guys at Citadel (ph) that have done all four of the high profile direct listing, they — they actually, you know, will tell you, yeah, this is just like how we open every other stock or just like we open a stock after an IPO the other day before.
And now I — I had a front row seat on USANA because we were an investor there, but they just start announcing a range. People (inaudible) their — their bids and their offers and eventually a block trade, and then you’re often going, but it’s completely blind so no one gets an allocation because of who they are or their brand, and it’s all tied to that algorithm of price and time.
And so on — just to prove — and — and — and here’s another great thing because it’s in this network already because they’re using these systems at the exchanges, it’s connected to all brokerages. So, for a direct listing, you want to go on Robinhood, you want to go on Schwab, put in an order for one share at 14 bucks. If that’s above the opening price, you get it filled, right? And that’s — that’s the — the — I said there are two parts, you know, using algorithm supply and demand to set price, but also being available to every shareholder on the exchange and you get both of those, which is way better.
It’s just — it’s like, to me, the — the — the onus on why we would do something should be on why would we ever have someone sitting there, you know, hand allocating and hand determining price. It makes no sense. We hope — we sell every bond in this country, you know, with this type of system. And it — and I — and I hope one day that every one of these IPOs will work.
RITHOLTZ: So, Bill, how does a direct listing compare to say the way Google went public with that sort of reverse Dutch auction?
GURLEY: Well, I’d say three things about that. So — so, first of all, because they were trying to do it in a — in a innovative manner it was bespoke. And so, I think Morgan Stanley hired like 200 engineers to build the system, and it was a one-off. That’s different from what I just described with direct listings where they’re using this process and systems that have been in place for 20, 30 years at the Nasdaq and NYSE. So, obviously, one of those is better than the other.
For any retail investors that want to do Google, they had to go open an account, I think, at Hambrecht & Quist or something like it wasn’t tied to the open exchange the way this is, so you didn’t have all of that.
And then — and then lastly, you know, you — you — you — because it was the first one, your auction participants just didn’t have a lot of experience. And …
GURLEY: … there’s this great legendary story that Bill Miller was trying to figure out how much he should put in on the Google auction. And he — he apparently hired a bunch of auction specialists to come brief his team on how to think about this.
And somewhere like the second day someone realized that all the auction theorists were starting by saying, assuming you have participants who are experienced, but all the auction theorists based on people having experience, and he then realized everyone is going to be an experienced here. They’re going to be conservative. They’re going to underbid, and he put in a huge order.
RITHOLTZ: And got filled.
GURLEY: It’s a great story.
GURLEY: He did …
RITHOLTZ: So …
GURLEY: … he did, he got filled. So, there were no experience and — and — and a much — a much less — less efficient tech stack relative to what we have today.
RITHOLTZ: So when you do a direct listing, do you still have the rest of the trappings? Is there still a road show? Do you need to sort of show you where is the bankers or do you just, you know, list and go public?
GURLEY: So, there’s a misunderstanding on this point and — and it was partially driven by there was a — they’re a group of naysayers who said you could only do a direct listing if you’re extremely well-known brand, which I think was — was — was, quite frankly, B.S. from the beginning.
I think, you know, with USANA having a successful direct listing, it’s — it’s not a — not a household brand. I think we kind of blown that up. But the other thing was they thought yet that the in-person roadshow was — was tremendously important, and you can only do that with an IPO.
Well, of course, with COVID that’s been proven wrong. I think every IPO now is — is virtual. But — but the — the bigger point I would make is the amount of information you can share is actually a superset of an IPO. So, you — you have way more opportunity to educate.
All four direct listings have used the equivalent of an investor day, so like four to eight hours of information dissemination from different parts of the company, which you would never get on a traditional IPO.
And — and Slack then decided that, in addition to the investor day, they wanted to do the standard roadshow, and that was — that was available. And — and so they did both, so they were able actually to do even more.
Daniel Ek interestingly at — at Spotify felt strongly that he felt — and this tied to open access — he wanted every investor to have the exact same information. And so he was uncomfortable doing the road show because he wanted the retail investors to not be at a disadvantage to the institutional investors.
RITHOLTZ: That — that’s really interesting. Are there any legal or regulatory impediments to direct listings becoming more popular or is it just simply there’s an entrenched IPO process and it’s what so many people are used to?
GURLEY: Yeah. I — I think there’s a lot of that interesting. You know, when you take your company public, for many CEOs and founders and CFOs, they may do it once in their lifetime. And so, it carries this kind of special — like important, and I think that weight of importance causes conservatism because people are like, oh, my god, I can’t screw this up.
And I think bankers take advantage of that. I — I see often an IPO is like a grand southern wedding, right, where they — they tell you, you know, oh, no cost, it’s too much, right? You got to have every bell and whistle here. You want this to be …
GURLEY: … spectacular. And that seduction, I think, plays a part of the whole thing.
It’s interesting to me when you look at the thread that goes through the type of entrepreneur who really stands up and says, “You know, I need to do this because this is what’s right.” And Larry and Sergey did that. Daniel Ek did that.
You know, Tobi of Shopify said, “Man, if I ever had another chance I would definitely do a direct listing.” And — and — and I — I have to believe. I — I would bet a lot, a lot, a lot of money that Bezos would do the direct listing if he were coming out today.
I just think, you know, that — I think it takes a certain amount of hot spot and a certain amount of conviction to kind of go against the grain, but the more of these that are under our belt we’ve got roadblocks and coin-based coming soon, I think — I think the more momentum there’ll be.
Obviously, there’s one piece that — that — that is missing still today, but there’s a lot of progress on is adding primary capital to it. Stacey Cunningham who runs the NYSE really, really pushed hard on making this happen. And Commissioner Clayton and his last act, I think, two days before he stepped away as chairman of the SEC pushed that through. And so, it’s now legal to do it and they’re going to — you know, it’ll take a few companies to be the first one through the door. I don’t think there’s any technical issues with adding primary capital.
RITHOLTZ: Quite fascinating.
RITHOLTZ: So, Bill, let’s talk a little bit about Uber. You are one of the earliest investors. You — you participated in the A rounds. What did you see at that stage that got you so excited?
GURLEY: We — we had made this investment at OpenTable. And the — it’s not like a flyer at the time. I think it’s — I don’t think it looks that way now. But we — we made this bet that if you could get this flywheel moving that connecting all of the world’s restaurants would create a very special experience for the consumer. And, you know, prior to OpenTable, you couldn’t say, oh — oh, well, I need a table for six and would love Chinese in San Francisco on Saturday, and then immediately get a response. Like that was an impossibility.
And so my partnership and I started asking what other industries could you put this network later on and — and have an aha experience for the consumer. And the one — the one that intrigued me just in terms of like fundamental research and thinking was — was cars, so I just thought if you put a network on cars, you know, there’s so much inefficiency especially around black cars.
You know, you would — you’d spend as much on a business trip. You fly Chicago for a day, you’d spend as much on the black car that — that you rode around in all days you did the flight. And most of the time, they’re just sitting there. And then God forbid you come out and you can’t find them or you’re calling them, right, just all this weight.
And so, I just started proactively meeting with companies. And I met with probably three or four companies that have built this network layer on top of taxis and spent a lot of time with those companies.
It struck me the more I learned about it that most taxis were oligopolies in …
GURLEY: … in cities. They are highly regulated so you couldn’t mess around with price, which isn’t optimal for a — for a marketplace.
There were — there was all kind of — of ugliness around people that have tried to sell technology to them before. They were installing devices in the dash and stuff, and so there’s just a lot that — that kind of didn’t look great the more I dug into that. And so I kind of came back to a partnership and just said, “Hey, if you ever see anyone doing this around black cars instead of taxis, let’s — let’s talk to him.” And — and that’s what happened.
Garrett, and Travis, and Ryan Graves, you know, started doing this thing right in their backyard. There was exactly what we are talking about internally, and so we smothered. We actually met with them before the seed round.
GURLEY: And my partners couldn’t quite get there, but six months later we let the eight, so — and — and no regrets.
RITHOLTZ: To say the least. So — so you were not only a very engaged board member at Uber, you were Travis’ — Travis Kalanick who’s the CEO, you — you have been described as his consiglieri. How difficult of a role does that put you in where you’re both an investor into the company, but a cheerleader and so one of the founders and the CEO?
GURLEY: You know, I think — I think that — that is the role we play as early-stage venture capitalists, that we always take a board seat at Benchmark. I think that’s a role we play in every company.
And I think it is the most nuanced difficult part of the job to be simultaneously a friend and partner who’s trying to help develop and mentor a founder and — and — and shepherd them all in their — in their journey, hopefully, you know, above and beyond and pass, you know, yourself into — into the public market and simultaneously have a fiduciary duty job as a board member to look after the interests of shareholders.
And it’s tough. I — you know, a lot of — there’s lots of different stories with a lot of different founders, a lot of different investors that have been through that. In this particular case, you know, it’s well-known that became — they got — they got increasingly difficult.
And — and I would say, you know, that’s not optimal like — like in — in — in the — in the perfect scenario, you know, you have something like — like Bezos in Amazon where the founder is able to — to rise and scale and — and do extremely well into the public markets and beyond, but it don’t always work out that way.
RITHOLTZ: So, I’ve been a — a — a user of Uber for God knows how long, and I watched the rise and fall and rise again. And that led me to read the book “Super Pumped” The Battle for Uber.”
You’re the only guy in the whole book who comes out with your reputation intact. Everybody else in the book is — I — I don’t know any of these people, so I can’t say how accurate it is, but everybody comes across as, you know, either a jerk or an egotist or just so sharp-elbowed. You seem to be the only men — the only person of character in the book. Have you read it? And — and if you have, is it remotely accurate?
GURLEY: I have not read it, Barry. My wife read it and — and echoed what you just said.
I chose not to read it just because I didn’t necessarily want to live it again.
GURLEY: But that’s probably not fair to the Oscar (ph). I probably should at some point. So, I don’t know, I can’t speak to that because I — I haven’t read it in detail.
RITHOLTZ: Understandable. So ultimately, Travis gets forced out, and the next day you resign from the board. And — and you show your support for him stating, “There’ll be many pages in the history books devoted to — at Travis K …
RITHOLTZ: … that’s his Twitter handle.”
Very few entrepreneurs have had such a lasting impact on the world. That was a good couple of years ago with the passage of time. Do you feel the same? How — how was your perspective changed since — since you stepped down in 2017?
GURLEY: Yeah, I mean, there — Travis had and probably still does, has qualities that are particularly unique. He is really, really, really bright. He is tireless like — like he will outwork you.
I think at one point in time, you know, I said, I — I’d — I’d be afraid of having money in it in a company that he’s competing with just because I doubt you’re going to work as hard as he is. So, combination of — of intelligence and — and remarkably hard worker.
And I also think because — and this is an interesting thing to look out for as a venture capitalist because his first two companies didn’t have huge success when he realized he had product market fit, I think he leaned into it with a — with a — with an amount of — of recognition of how special that is.
You know, I think, you know, so for better or for worse, some people get started on companies. They just aren’t as good as other companies. And you know, the famous saying like, you know, Buffett, when a bad business meets a good management team it’s the business who comes out with its reputation intact.
GURLEY: And I really think Travis knew that this was special, and so he went after it. A great recruiter was able to bring in a lot of great people fearless like — like he launched the business in China when every — every single founder in the — in the U.S. has been told to give up on China and was able to parlay it into a, you know, pretty big ownership position in B.D., which Hoover still has today. So, a lot of amazing quality.
RITHOLTZ: So, the challenging question is where did it go off the tracks? I mean, he clearly builds a behemoth, and arguably Uber is going to be around and going to influence transportation, and food delivery, and self-driving cars, and go down the list for a long time. Where did it go off the rails?
GURLEY: You know, like I said earlier, I think — I think if a — if a venture capitalist is doing their best work, you know, this doesn’t happen, right, like you’re able to help shepherd and mentor the founder so that they can — can rise to the occasion and — and scale alongside the company.
A lot of — a lot of VCs had a very special weapon over the years a gentleman named Bill Campbell that you may have heard about from time to time …
GURLEY: … who is known as the legendary coach of Silicon Valley. You know, when he — he — you know, he spent time with Bezos early on, not a lot, but a year or two. He spent an immense amount of time With — with Steve Jobs and he spent an immense amount of time with Larry and Sergey. Most people don’t know this, but he was still running the management team meeting at Google 10 years after they went public.
And so, you know, he, fortunately, passed. I think — I think he — you know, I think if we had had the opportunity to introduce him to Travis, he might have been super helpful in that way, I don’t know. It’s those kinds of things I think about in — in retrospect.
Everything got so big so fast, and the money got so big so fast that I think it can impact — I think it can impact perspective that people have. And — and I think it just got away from us.
GURLEY: At one point that year, you know, we were losing market share pretty dramatically. And, you know, the Marketing Department had brand surveys, you know, that were in a free fall. We had five or six investigations that were underway.
I was on special committee conference calls, you know, every week. And, you know, it looked like that the fate of the company was at stake. And — and I, you know, and — and after that, some of — some of the most touching moments, you know, I — I’ve been out in a restaurant in San Francisco where a random employee will come to me and say, “Hey, thank you — thank you for what you guys did. You know, you helped save the company.”
And so while I — I would simultaneously say I wish I could have done a better job so that we are never in that place, you know, second to that I think the work that we did was, you know, well, in retrospect I — I look back on as one of the hardest things I’ve ever done, but something I am actually quite proud of because of the number of constituents, you know, shareholders, employees, drivers that — that — that were impacted by — by ensuring the company was success.
RITHOLTZ: That seems pretty reasonable. Let’s talk a little bit about the state of venture investing today. The Nasdaq was getting shellacked up until Tuesday last week where it popped 500 points over four percent. How do you look at the era we’re in today relative to when you were coming up in the 90’s and that entire dot com implosion?
GURLEY: Yeah, the dot com boom, you know, it’s super interesting to have that at the very beginning of my venture career because I saw both the mania and then the correction. You know, really before I ever got off the ground, you know, I was doing early-stage investing so the companies I had backed in that window are pretty small, but I watched it all.
And, you know, as someone who’s a student of financial history, I read all the (inaudible) books, you know, I’ve read all about these types of things and they’re known, like they’re known when the world gets more speculative that happen from time to time.
In — in the — in the dot com boom we had a lot of companies going public with like $1 million of quarterly revenue, so it’s different. There was like any company could go public, but they were all these little bitty tiny companies.
Today is quite different and that this — this — this market has become speculative is — has arisen on the backend of what do you want — you know, because this goes back including like Uber (inaudible) and the vision fund. It’s — it’s on the back of like six years of massive amounts of capital availability.
And so, it’s not uncommon for the amount of capital a company is raised before they go public to be in the $500 million to a $1 billion range now across a wide variety of companies. And so — and the companies are becoming probably, you know, they’re not profitable, which we could talk about. Most of them have pretty significant revenue run rates.
RITHOLTZ: Bill, what do you think is more important, having a strong revenue ramp for an early company or profitability?
GURLEY: Yes. So — so look, I’m about to say something that I think is pretty obvious to people that have been around investing for a long time. So, the most interesting thing about this past five years has been the near zero interest rate environment. It’s probably a result of every country in the — around — around the globe deciding it’s OK to print money.
You know, and so there’s no way for money — there’s no interest rates anywhere. And, you know, when you talk to whether it’s someone like Buffett or Druckenmiller or — or Howard Marks, these people that follow macro way more than any venture capitalist would, they know that when interest rates go to near zero speculation abounds. People are looking for a home for their money.
And I even asked the question you just asked me of Mike Mauboussin. I said if interest rates go zero based on all your valuation work, what matters more, growth or profitability? You’d say growth unquestionably.
RITHOLTZ: You know, I — I think he’s right.
GURLEY: Just because you’re not — yeah. And that’s what we’re seeing, you know. The — the — these companies that are coming public almost no one cares whether their — their core profitability exist, but if they’re growing north of 50 percent, they love that.
When you combine that with the money that’s out there, it leads to pretty manic discussions, you know, within a boardroom because the right answer, at least in the short run, might be to increase that burn rate to really high levels of certainly unprecedented in the history of American business and push the gas (ph).
GURLEY: And it — it — it — it did makes for a wild ride.
RITHOLTZ: To say the least. So, the froth sounds like it’s similar to the 90’s, but the underlying conditions of zero percent interest rate, lots of capital, but also lots of companies with big revenue and — and taking market share or just developing brand new markets, that seems a little more advanced, a little more sophisticated than what was being thrown up against the wall in the 90’s.
GURLEY: Probably. And then there’s this — there’s this other esoteric corner of the whole thing that’s super interesting, which is once people get comfortable using capital as a weapon, all the sudden, the private companies are the ones that are being provocateurs with more money against the public incumbents. And no one would have ever imagined that 20 years ago.
But I think Amazon did it to Wal-Mart, and everyone made fun of him the whole way up. You can just …
GURLEY: … you can just imagine yourself being in the Wal-Mart boardroom for those 20 years and how much dismissiveness there was probably about Amazon’s lack of profitability, right? And because Bezos won over Wall Street, he was given a green light to spend and lose money while Wal-Mart is being held to a P/E or EBITDA multiple. And that’s got to be super frustrating.
I think — I think, you know, Netflix did it also, right, where everyone sitting there going, but you don’t make money, but you don’t make money and read — got Wall Street to believe in what he was doing, which I think is a critical part of this, and then was allowed to lose way more money than any of the production companies that he was ultimately competing with and took massive share.
And so now that — that — that Silicon Valley entrepreneurs have been trained that that’s a game you can go play, it’s being done on a massive scale. I mean, you look at something like what’s the — what’s the India-based hotel company? OYO? Like …
GURLEY: … they’re just building hotel, like they’re literally building hotels with venture dollars. It’s got to be immensely frustrating if someone is competing with them.
RITHOLTZ: Well, you know, when — when you look at Amazon, I remember the very first investor letter that Jeff Bezos pens and then — and he said, “Hey, we’re not going to be profitable for 20 years, we’re going to build this out and take market share, and we hope our investors are patient with us,” and he was pretty true to his word. I mean, but for Amazon Web Services, he could have gone a full 20 years without showing any profit.
GURLEY: Yeah, there’s one thing about that letter I’d love to — to make a point about just in case. There’s any entrepreneurs that’s ever going to write another one of those letters.
Bezos came from Wall Street, you know …
GURLEY: … he understood shareholders, and I think that letter that — I don’t have it in front of me, but I think he says to our share owners or — like that’s the intro. And …
GURLEY: … he talks to the shareholder in an immensely respectful way in their language and is telling them how they will have a synergistic relationship.
Ever since that Bezos letter, a ton of — of spirited founders — I think that what he was saying was I’m going to do it my way. And there was an element of that, but it was in this respectful tone of — of empathy to the shareholder. Since then a lot of his (inaudible) got just right. I’m going to do whatever I want. If you don’t like it, you could shove it basically. And that’s not what he did. So, I think that’s interesting how that’s evolved.
RITHOLTZ: To say the very least. So — so we were talking about the — go ahead.
GURLEY: By the way, on this capital as a weapon thing, I think one really interesting thing to watch in the next five years is going to be the consumer banking industry in the U.S. So there are probably six different intensely capitalized companies that are new age banks, you know, from SoFi to Wealthfront to, you know, a firm, which went out and coin-based and Robinhood.
And as they’re doing things that I don’t think — there’s one of them called Chime. So, Chime, if you take them your direct deposit with your check, you know, your earnings check from your work, they give you the cash two days early. Do you think Wells Fargo board would ever teller the management team, “Yeah, we should do that, too.”
I don’t think they’ll ever consider this hyper — you know, using capital as a weapon in a hyper aggressive way is coming to — to consumer banking, right? It’s already here, and then I think it’s going to be super interesting to watch the incumbents over the next three to four years.
RITHOLTZ: So, no doubt that finances is going to go through some changes. You’ve written about the role tech could play in transforming healthcare. Tell us a little bit about that sector and what can technology do.
GURLEY: You know, I’ve been thinking about this a lot lately just because I — I’ve been running some numbers on the PCR testing in — in the U.S., which are mind-numbing. We — we have a massive problem in the U.S. health care system, just massive, that is almost entirely tied to regulatory capture.
And there’s another big, big problem, which is the employer just shouldn’t be involved at all. In all of the G20, we’re the only country where the employer pays for health care. And it — it just obfuscates everything.
There’s also — like — like the person that’s paying isn’t present at the time of the transaction, no one knows the price until after the transaction is already done, and then they fight about it. I mean, it’s just — it couldn’t be more perverse. And I think we’re going from like ’17 to ’18 to — towards 20 percent of GDP.
And other countries aren’t like that. I mean, they’re playing in countries with very similar health profiles that are half that or — or even less. And so I’d like to believe technology can be a part of that. I think with Doug (inaudible) is interesting, but it may require legislation also.
Trump was pushing on some price transparency stuff that I thought was interesting. I think most favored nations with drug manufacturers like you shouldn’t — I think that’s an OK rule, right? You can’t sell drugs for — for $0.10 in Canada and — and $2.50 here, like why not? That sounds realistic, I mean.
But — but it’s hard because of the capture. You know, there’s so much money involved and there’s all these rules. The rules are written by the incumbent. HIPAA protects the incumbents, not — not the consumer, right? And there — and there’s — there’s — there’s 20 versions of HIPAA. I mean, it s — it’s very, very messy.
RITHOLTZ: You know, it’s funny you — you mentioned why are the employers involved. When you look at the first CARES Act, rather than sending money directly to small businesses or directly to employees, they put the companies in the middle, they gave companies loans and said, “Hey, we’ll lend you money to cover salaries if these people continue to work.”
You know, there’s a history — there’s a long history of not wanting to appear socialist and send checks to people, so we pretend by putting businesses in the middle. But, you know, ultimately, money from the government ends up being directed to people and whether you want to put a business in between or not.
I totally agree with you. There’s just no reason why anybody is running a business has to also be running a small medical practice on the side. It doesn’t make any sense.
GURLEY: They hate it, they hate it. They’re no good at it and they hate it, and it’s — it’s ridiculous. But — but all the obfuscation makes it easier for the people that are in the system. And so, no one — you know, no one is going to complain about it at a carrier or at a health care provider.
I assume this was the motivation we’ve got Amazon at J.P. Morgan and who — I forget who else was in that thing off the ground, but it looks like that …
RITHOLTZ: (Inaudible), yeah.
GURLEY: … it looks like that lost momentum, too, right? It — it is a …
GURLEY: … you know, if you consider me tilting against direct listings for — for a couple of years had any impact whatsoever, I imagine it’s a 100X harder push …
GURLEY: … tilt against the system, but I’m sure plenty of people have, but — but it’s hard.
RITHOLTZ: Yeah, for sure. So, we were talking about the dot com implosion early in your career. Fast forward a few years to the great financial crisis, you end up writing a very pressing letter to the companies Benchmark had invested in basically how to survive the Great Depression, too, without firing everybody, basically saying there are risks, but there are also lots of opportunities. Tell us a little bit about your thinking when you sent that email out to all of your — your companies.
GURLEY: Yeah, I think it’s the exact same time Sequoia had circulated that deck. Where was it? Good times wherever you go — after (inaudible).
Look, I — I — I think because I’ve studied the history of finance so much, I have a great deal of respect for making hard decisions for focus on profitability, for being good stewards of capital. And emotionally, I deal way better with scenarios like that than when things are — are a mania and (inaudible) because the conversations that you’re having with someone are quick. People have to make very smart decisions very fast, really good entrepreneurs really thrive in moments like that and you see people really rise to the occasion.
In — in a world — in a world that’s bubbly, you know, the things that are rewarded are being more speculative. And the very right answer may be to take on excessive amounts of risk that — that is just not as intuitive to me. And so, I have no trouble kind of delivering that message at that moment in time. And — and I — I take immense pride in seeing founders or a company survive, you know, a time period like that.
So, a handful of our companies this past March, you know, had to live through something like that because, you know, if you were focused on certain industries, COVID just wiped them out, like the revenue went away. And how you scramble, you know, is — is hard. It’s — but — but it’s super rewarding.
RITHOLTZ: So, I know you are stepping back a bit from Benchmark, you’re not participating in the next fund they’re raising. What are you going to do now? What are the plans looking forward?
GURLEY: You know, I don’t know yet, Barry. I’ve been spending a lot of time talking to a lot of people who have kind of done V2 of themselves.
I’m 53 so I — I feel like I’ve got a lot of energy left. I love entrepreneurs and I love investing. I have a great deal of respect for — for it.
I love talking to founders, executives, investors. And I’m trying to figure that out. I still sit on 10 boards and have a lot of work to do at Benchmark. I’m going to see all those through. But I’m — I’m still in the — I’m still in the learning phase of what’s next.
RITHOLTZ: Quite fascinating. So …
GURLEY: If you have a good idea, let me know.
RITHOLTZ: … well, if you’re looking for a side gig in New York, there’s always a desk in my office for you. I don’t know if you want to give up the nice weather out there.
So — so let’s jump to our — our favorite questions that we ask all of our guests. Tell us what you’re streaming these days. Give us your favorite Netflix or Amazon Prime or — or podcast you’re listening to. What — what’s keeping you entertained during lockdown?
GURLEY: Yeah, you know, I — I don’t know if I have anything particular unique. I — I went through Queen’s Gambit in a couple of days, and the Loop and Thing (ph) is pretty good.
I — I’d — I’d probably — if people are thinking about this, I’d go back to an — an old one that I just adore in case because I don’t think everyone’s watched this, but Justified has some of the best writing that I’ve ever seen. It’s just fantastic.
RITHOLTZ: Quite interesting. You had hinted at some of your mentors, but let’s give everybody their due. Who helped shape your career both on Wall Street and in Silicon Valley?
GURLEY: Yeah. So, I think I mentioned them all, but Charlie Wolf and Mike Mauboussin at — at CSFB unquestionably had a huge massive impact on my career direction. And then obviously, Frank Quattrone bringing me out to the valley, and — and getting to know Bezos early on, I’d say all of those things. And then the entire — the entire founding team at Benchmark that brought me on because I wasn’t a founder and taught me everything they knew. So super fortunate to have lots of different mentors.
RITHOLTZ: Let’s talk about books. What are some of your favorites and what are you reading right now?
GURLEY: My favorite book of all time is a book called “Complexity,” about the rise of the Santa Fe Institute where I’m now fortune enough to serve on the board. It’s really an analysis of multi-variable nonlinear systems and how they behave. And that includes things like stock market or weather, the pandemics.
And a lot of the tools that we think are scientific like linear interpolation actually don’t work very well in these chaotic systems. And I just — it — one of the early people there was the first — Brian Arthur was the first to write about network effects, you know, back in the early 90’s, and that had a big impact. So anyway, that’s my favorite book, “Complexity,” Mitchell Waldrop.
Right now, believe it or not, I finally during COVID decided to attempt the Caro books on Lyndon Johnson. I am — I am three-quarters through the first one. But if you know — if you know the book, they’re like 4,000-page books.
RITHOLTZ: Right, a giant. And there’s a dozen of them it seems.
GURLEY: And — and — and all the journalists I’ve met in my entire life, you know, so you have to read this, you have to read this, you have to read this. So, I finally — I finally took it on.
RITHOLTZ: So, if I haven’t read complexity, but if that floats your boat, I thought James Gleick’s “Chaos” did a really nice job explaining what’s behind Chaos theory.
GURLEY: They came out in about the same time. They were …
RITHOLTZ: Oh, really?
GURLEY: … (inaudible) books. Yeah, those two books are — are almost like years of one another.
I found the applicability of what was discussed in complexity, you know, more realistic for me as an investor.
GURLEY: And by the way, that book, you know, was something that Mauboussin read at the time, and — and — and Bill Miller read at the time. Bill Miller is like the chair emeritus there now, and Mike is the chair at Santa Fe. And so, it’s been fun to get to know them and discuss those topics and then getting deeper to program.
RITHOLTZ: Quite interesting. What sort of advice would you give to a recent graduate who is interested in a career in either entrepreneurship or technology or venture capital investment?
GURLEY: Yes. So — so it turns out from my point of view that venture capital is achievable for young people even though most people would tell you it’s impossible. I think the odds are low of breaking in because the supply and demand just doesn’t really yield itself. There’s not — there’s not spaces relative to (inaudible) people who want in.
But I think it’s an area that bends to youth and bends to hustle. And so, my — my advice would be take a bet on a very narrow sector. Hope you’re right, but then immerse yourself in it. And there’s no way the generalist venture capitalist is going to be able to compete with you because you’re going to know more about said subject matter, you know, something popular today like the NFTs or –or, you know, V.R., like you could easily be the smartest — you can be smarter than every venture capitalist on V.R. if you immerse yourself for six months. You just would.
Now, you got to get it right? I mean, like I said the downside. But — but it yields to hustle and it yields to focus, and so those would be the two things I would — I would recommend.
RITHOLTZ: Really interesting. And our final question, what do you know about the world of venture capital and technology today that you wish you knew when you were starting out at Benchmark back in 1999?
GURLEY: This is a really hard question, and the reason it’s really hard is because that all of my initial answers that I want to give you, Barry, really violates the premise of the question because I could say, well, I should’ve invested in Google, right, or, you know, hold Amazon forever, but — but those things are just hindsight (inaudible) …
RITHOLTZ: Right, right.
GURLEY: They’re not — they’re not (inaudible).
RITHOLTZ: I was going to say, no, don’t make me call Mike Mauboussin on you.
GURLEY: Exactly, right, like — so I — my answer, which — which I guess will be confirming of — of probably every guest you had on and — and makes it not that original because I’ve heard many other great investors say that it’s just — the power of compounding for some of these platforms is so, so huge that, you know, if you invest in an Amazon or whatever, like the hardest thing to possibly do is just close your eyes and forget it.
And the only thing analysis that’s going to cause you to do is sell the stock. You know, you — you’re not going to run analysis, you know, for the fourteenth time and go, hmmm, I should keep holding like that. And that is so hard, so, so hard to implement — easy to say, very hard to implement.
RITHOLTZ: Yeah, that’s a fascinating answer. You know, the — the problem with conceptualizing compound is that it takes place over years and decades, and — and humans live in seconds and minutes, and it’s so challenging to conceptualize that exponential leap. There’s no doubt.
Bill, thank you for being so generous with your time. I really appreciate this.
We have been speaking with Bill Gurley. He is a venture capitalist at Benchmark.
If you enjoy this conversation, well, be sure and check out any of our previous 400 or so we’ve done over the past seven plus years. You can find those at iTunes, Spotify, wherever you feed your podcast fix.
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I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.