Aydin Senkut started at Google in 1999 when it was just another scrappy startup.
After watching the company grow from 30 to 3,000, he took off in 2006 and began investing some of his earnings under the name Felicis Ventures in 2006.
Since then, Senkut has sold 19 of his investments, many to big players like Groupon, Twitter, Microsoft, eBay, Intuit — and of course, Google. He was also an early investor in Angry Birds creator Rovio.
Last year, Senkut expanded Felicis beyond himself and raised a $40 million seed fund, which he continues to oversee.
We caught up with Senkut in his Palo Alto office recently. Here are some of the things we discussed.
- The race to payments. While companies like Google have made billions by tying online commerce to online activity, more than 95% of commerce is still done offline. Google Offers and Wallet will help Google link online activity with real world purchases. He also thinks other big online companies like Facebook will follow soon.
- Google wasn’t going to sell ads. Senkut spent part of his career trying to sell Google search to other portals before cofounders Larry Page and Sergey Brin decided that selling advertisements was the best way to monetise their technology.
- What he learned from Larry Page. He “had this uncanny ability to figure out what was important and challenge people beyond their limits. Being able to say no and focus on the things that really mattered, and on the other had being able to get you out of your comfort zone and always question the status quo, always thinking about a question that never existed before.”
- How Groupon is like Google. While the company may not be perfect, it and other daily deals sites fill a real gap — getting online customers into small merchants. Just like Google delivered demonstrable value with search ads. Senkut also notes that the model has been tremendously successful in every major country in the world.
- The recruiting crunch. Whether you call it a bubble or boom, the explosion of hiring in Silicon Valley is making it hard to find qualified high-tech workers. “Every single company we’re involved in has a recruiting issue.” He favours the proposed startup visa that would allow more workers in from overseas.
Here’s an edited transcript of the interview:
Business Insider: So you started Felicis in 2006.
Aydin Senkut: I made my first investment in January of 06. I always invested under the entity Felicis Ventures. Until last year, it was essentially just myself operating and my own personal capital. After doing that for four years, after a dozen or so exits it seemed to me that this could be my startup. As other startups are disrupting their own respective fields, I felt there was definitely an opening for a new breed of firms to come in with the approach of an angel but with the professionalism of a venture capitalist. Starting form last summer, we’re operating out of a $40 million seed fund.
BI: What characteristics do you look for in companies you invest in?
AS: We’re trying to pick fundamentally important areas.
For instance, we’ve been very vocal from two years back that mobile is underhyped, underrated, and it’s going to grow really fast. I was kind of a lone voice out there and now nobody can argue with the traction that mobile is getting. Out of the seed fund we closed last summer, half of the bets have been on mobile.
The second area is e-commerce. The beautiful thing about e-commerce is it’s applicable around the world. Three to five per cent of all commerce is online, we think that’s only going to go up. We also think as our world is getting increasingly more metropolitan, it’s also a matter of convenience. And unlike online search and media, it isn’t an area that gets censored. Trade is trade. We’re also very aware of big players like Amazon, so we’re trying to find niche players that are coming up with either new business models or targeting verticals that are meaningful. Women are a very important vertical we’ve been tracking for a while.
We rarely see Internet and mobile companies in areas like education, health care, and energy conservation. For instance, one per cent or less of health care spending is focused on IT. We think that number is also going to go up. That’s why we have bets like Practice Fusion. In terms of education, you’re witnessing the complete remaking of the printing press. The digital devices are here. We have a company called Inkling that’s completely redefining how books will be for the new era of smart mobile devices. In terms of energy savings we’re not investing in battery technology or new way of generating energy like solar panels, however we are really bullish on software and IT solutions to optimise energy consumption.
So we’re trying to do our homework and be smart about where we have conditional areas we believe in, then go and find category leaders and interesting companies wherever they are in the world. That’s how for instance we did the deal for Angry Birds [developer Rovio]. That deal took me nine months, the team was in Helsinki and it took multiple trips to several different countries, but I think it’s worth it because it’s an amazing brand and has amazing traction.
BI: How do you think the funding landscape has changed since 2006? It seems like there have been lots of changes even in the last year since you raised that fund — the IPO window’s open again, you’ve got huge valuations in late-stage funding.
AS: First of all, there’s a lot more capital available. Especially in the earlier stage deals. Definitely there were a number of angels when I started, that number has grown at least by an order of magnitude if not two orders of magnitude. You also have the emergence of great incubators starting with Y Combinator, Seedcamp in Europe, TechStars. I think it’s really good for the startup ecosystem.
The IPO window has been mostly closed, now it’s coming back. I think it’s a really important development for the venture ecosystem, that’s one of the major ways people can get liquidity. In general, IPOs have been a better way to capitalise compared with an M&A type of exit.
There’s kind of an interesting dichotomy going on. There are some companies doing extremely well, coming up with new innovative business models or technologies and they’re getting traction much faster than before, and they’re getting a premium for being a category leader or a thought leader. However, I think that premium is being more generously and more generally applied to the whole startup ecosystem. It’s not a bad thing — it’s a good thing for entrepreneurs, but that value has to be justified by the fundamentals of the company as well
BI: As you’re looking around, do you think a lot of those valuations are justified? Or are people investing more crazily?
AS: We don’t really care about a bubble or not because our investment philosophy doesn’t hinge on the bubble. That’s why we picked fundamental areas like mobile, health care, e-commerce. We know the numbers will get better. It might take a year, it might take three years, but we know they’ll get there.
The related trend that concerns me a lot more than the bubble is the dilution of talent. I was at Google in ’99, I’ve seen the company go from zero to a $100 billion valuation. One of the things that allowed us to do that is amazing talent. Out of the first 100 or 200 people at Google, quite a lot of these people could have been founders themselves. But they decided to work for Google.
Now when I look at companies today, there is this weird situation — in the rest of the country, people are hurting for jobs, and here we have all these companies looking for talent. You can’t just take a random person and make them the VP of marketing or make them an engineer. Companies like Google, Facebook, Amazon, and Microsoft are throwing big packages at this talent. Everybody’s competing for this same great talent and there’s only a limited number of them. So every single company we’re involved in has a recruiting issue. That’s one reason why people like myself and others in the ecosystem are so passionate about the startup visa.
BI: Another CEO told me he wasn’t having so much problem with the Googles and Facebooks as losing engineers who want to do a startup. It’s easier to get funding now, and you’ve got things like Amazon Web Services so you don’t need as much up-front capital. Are you seeing that as a problem?
AS: That’s how the ecosystem has developed. It’s really positive, it’s really attractive to start a company — there’s an abundance of capital, there are great mentors, there are incubators if you want, and we have this concept of a lean startup, this idea of launch fast, iterate, and pivot if need be, which is great and can be effective.
However, some of the ideas take time to work them out. Maybe it’s not that difficult to get the first few employees, but when you get to employee 15 what do you tell them? It is important to capture people’s imagination and inspire them, and that can only be done by going after really tough challenges or going after something really meaningful. That might not be so easy to do in three months on Amazon Web Services.
BI: How is Google doing with recruiting? And what do you think of Larry Page’s efforts to reorganize the company?
AS: It is almost inconceivable for me to look at a company like Google. When I started there were 30 people, now there are close to 30,000. So it’s growth of 1000x. When I left there were 3,000 people and it already felt big. There are advantages, you can see great stories like Android where literally you take a company out of virtual obscurity and put it in the Google ecosystem and at Google scale and look at what happened. It’s one of the best stories that Google has. So one way to get talent is through acquisition and give them a lot of leeway.
One of the things Larry is trying to do is to get more accountability for product, to give more flexibility in terms of people running their own businesses, and hopefully scale the company and bring this energy back. Making his executives available to employees and making employees feel like “let’s rally everyone, we have a big goal.” It’s a very exciting company, they’ve always been a standout in terms of how they take care of their employees. I was there for six years and certainly it was hard to leave.
BI: How did being at Google prepare you to be in the startup world?
AS: We built that business from scratch. I remember days when Larry and Sergey said “we’ll never have ads” and we were wondering “well how are we actually going to monetise the site?” I traveled around the world trying to sell Google search to portals, this is even before we had ads. So I remember the tough days. But we also knew we had a greater calling, we knew we had a really important product. I think it’s amazing how much search has changed in terms of empowering people and giving them information.
The most valuable thing I got from Google: I worked for a year and a half for Larry Page and he had this uncanny ability to figure out what was important and challenge people beyond their limits. Being able to say no and focus on the things that really mattered, and on the other had being able to get you out of your comfort zone and always question the status quo, always thinking about a question that never existed before. I take that mentality and pragmatism and try to apply it to our own approach to the companies, hopefully translating some of those lessons to the companies we support and back.
BI: Why do you think big companies like Google and Microsoft and Apple have so much cash sitting around now? Are we going to see a wave of M&A this year?
AS: To set things straight, these are really sound companies with really great profit margins, and because they’re well run the cash is kind of piling up. Companies approach it in different ways. Apple is very conservative, they’re not an M&A culture, they keep the cash, and they can use it for really interesting things like the new campus they’re building or really being able to go very deep on a new product idea.
Google has been certainly a lot more aggressive and staying aggressive on the M&A front. Larry and the executive team have correctly identified they have a lot of opportunity to give companies scale so they’re going to continue doing that.
Microsoft until a few years back had been active, I’ve not seen them as active with the exception of Skype. Their business is even a little bit bigger, even a business at a scale of a billion dollars is kind of a rounding error for Microsoft, OK, I can see where the discrepancy comes from. However, I think they will have to make some big investments and big bets to fill some holes in their product portfolio.
We’ve had 19 M&A events. We literally had companies bought by every large company we mentioned plus eBay, Intuit, Disney, and so on. One of the great things for the health of the venture capital startup ecosystem is you’re not only counting on these few big guys to use this money, but you have this spectrum of buyers.
BI: When I saw you talk at a recent event, you mentioned you had a small stake in Groupon from one of those sales.
AS: Correct. We had a company called Mob.ly which Groupon bought essentially to build out their mobile services.
BI: And you seemed more bullish on Groupon than some other people on the panel.
AS: All I was trying to say is “look, they are addressing a problem that hasn’t really been solved well before.” How do you generate business for small businesses? How do you generate business for merchants?
One of the reasons Google was really successful — Google delivered results. The ad system really worked. We not only ranked the ads by how much the click was costing, but also by the clickthrough. In the same way, Groupon simply delivers actual customers to businesses. Now one can argue about how many of those customers come back, how many don’t, and about how sound that business actually is, and gross revenues versus net revenues. The matter of fact is they’re filing an important void for the merchants, and that’s one of the reasons their revenues have grown so fast.
The other thing that was really eye-opening for me, the model has been replicated in almost every major country in the world. It definitely works, which means it definitely is an important area where a good solution was missing before.
[But] I’m just an indirect shareholder. We were fortunate enough that they bought one of our companies. I have no insights into the company now or how things are running there.
BI: What do you think about Google getting into that space with Offers and Wallet and so on?
AS: One of our earlier and more successful bets was Mint, and one of the things I learned from Mint is if you have access to transaction data, I don’t think you can do any better than that in terms of getting true intent.
Companies like Google have become extremely valuable, $100 billion companies, basically by tying online activities or online searches to online commerce. But online commerce is only 3 to 5 per cent of all commerce, depending on how you slice and dice the market. So my belief is that not just Google but Facebook is going to have to do this as well, they’re going to have to find ways to approach offline commerce. And one of the best ways to do that is through payments. Payments is really important because it will allow a company like Google to tie any type of advertising activity to actual transactions that are occurring.
BI: Since mobile is a big focus for you, what do you think of the platform battle? Have Android and Apple sewn it up? Or does Microsoft have a chance?
AS: Watching how fast RIM is going down, that will make that opening even bigger for Microsoft. The Nokia move was a good one. It[‘s going to take a lot of money, a lot of work, but they do have a decent shot.
BI: What platforms do your mobile startups bet on?
AS: Obviously Android and iOS are no-brainers. Very few have come out and made a definite choice on the third platform. If you look at how meaningful that third platform is to their business — right now you have higher profits on iOS and faster growth on Android. And even that is splitting yourself in two. It’s not that easy to find good iOS developers, then you sometimes have to get different developers for Android.
That was one of the interesting things about Rovio, they didn’t just stick to these two platforms — they did it for Nokia, they did it for Microsoft, they did it for Chrome, they did it for every imaginable platform. They make it look so easy that people don’t think about it, but it’s actually one of their big core assets. You have these two leading platforms, but there’s still some other stuff going on in the fringes with remaining platforms, and they still have huge numbers of users. So I definitely think a successful mobile strategy at scale is a multiplatform strategy, going beyond the two. Likely to include in the future the Microsoft platform, assuming they do a good job with developers and create a strong brand.