Photo: b_d_solis via Flickr
Benchmark Capital led a $35 million investment Twitter back in 2009 before the company was fashionable, and has stakes in other hot young tech companies like OpenTable, Yelp, and Zillow.Partner Bill Gurley is a driving force at the firm.
He has almost two decades of experience in tech and finance: he worked as an analyst on the Amazon IPO in 1996, and has spent 12 years as a VC, first at Hummer Winblad, then at Benchmark since 1999.
Gurley also writes about the tech landscape at Above The Crowd, where recent essays discuss the ingenious business plan behind Android — it’s a way for Google to create an unassailable “moat” around its core search business — and why some startups’ revenue is worth more than others.
We caught up with Gurley yesterday to talk about mobile, Android, and the IPO market. Here are his comments on:
- Twitter: The ultimate replacement for the newspaper, with the potential to do incredibly accurate ad targeting. “If I can isolate the people who are into mountain biking in Marin, the ability to put ads against that is really high.”
- Android: Destroying competitors in the smartphone market by undercutting them on price. “I think Nokia and RIM’s stock prices since March tell the story.”
- Android tablets: They can’t take on the iPad in the consumer market yet, but have short-term potential in “industrial markets, like a replacement for embedded systems.”
- Groupon: Low barriers to entry make it unattractive. “Everybody and their brother has entered this space. There’s really not that much they do.”
- Cloud computing: A fundamental landscape change. “We’ve spent the past 40 years putting technology inside the enterprise and we’re going to spend the next 20 years ripping it out.”
- Angels vs VCs: They filled a gap when big VCs weren’t willing to invest in pre-launch Internet startups, but are now raising big funds and acting more like VCs. “We like to say instead of super angels, they’re micro-VCs”
- Secondary markets. Overheated, and collectively not as smart as the broader buy side market. “When something prices at an IPO that’s well below what some of those trades took at, that’ll be the day sanity comes to that market.”
Here’s a full transcript of the interview:
Business Insider: I liked the “Android is a Freight Train” post you did back in March. It’s obviously true that Android is dominating smartphones, but Android tablet sales have been pretty poor. Can Android do in the tablet market what it did with smartphones?
Bill Gurley: Did you see RIM what did after close? I think Nokia and RIM’s stock prices since March tell the story.
BI: But do you think that’s going to hold true for tablets as well?
BG: No, it’s not. But the smartphone market is pretty large all by itself. They haven’t nailed the tablet yet, but they’re hitting price points with these tablets, especially with oversupply, that are dramatically below the iPad. I expect Android tablets are going to do well first in industrial markets, like a replacement for embedded systems.
I know a lot of our startups are thinking about it as well — that’s a really cheap computer. Remember when we were all talking about the $99 computer? Android is getting really close to that. So think about filling up a classroom, or putting one at the counter of every small business. But they haven’t hit the magic formula to compete with the iPad yet.
BI: We saw what happened to RIM today, and Nokia a couple weeks ago. Does anybody else have a chance here?
BG: I haven’t seen any data points that would change my opinion. As I said in the post, imagine if Coke had to compete with Pepsi giving away their products. It’s really hard to run a business against somebody who is not acting as if it were in business. It may be unprecedented, other than maybe when Microsoft gave away IE against Netscape, with the same result.
BI: People were talking about free Linux displacing Windows on the desktop and that never happened.
BG: Every single startup in Silicon Valley quit developing on top of Windows 10 years ago. The Linux stack is all it’s designed on.
The thing to really watch if you’re focused on big companies is what ARM is doing. If Apple were to put a low-end product out on an ARM core, that would be a real shot across Intel’s bow. The ARM cores average 99 cents, Intel is still over $100. That’s two orders of magnitude difference….It’s been written about.
BI: I saw you tweeted about the Groupon S-1, and the removal of marketing costs from their expenses, and I liked how you linked back to a 1998 post about EBITDA earnings. Is this an indication that we’re in 1998 all over again? Or are investors smarter this time around?
BG: I think there are lot of indications that we’re in more bubbly times than we’ve been in the past 8 years. The careless behaviour in the late-stage private markets is a big sign of that, that’s more endemic to Silicon Valley than anywhere. People are falling all over themselves to buy shares of a company where they’ve never seen the financials. There’s a lot of that going on. Probably some of those members who bought the Series E in Groupon.
BI: LinkedIn went crazy on the opening day of its IPO, but Pandora didn’t. Are investors a little more cautious this time around?
BG: So far they are. Believe it or not, I think what happened with Pandora is healthy for the market. First day pops — the press is ridiculous, they treat first-day pops as if they’re good. They’re really bad for the company because it means they gave away way more of the company than they should have and institutional investors were given a freebie by the investment bank.
If that happens again and again, you have manias. Sanity is fine. Even where Pandora is now, $12 or 1$3, it’s still a really strong valuation relative to their fundamentals.
LinkedIn is a very different company, I don’t know if it’s worth $75 or $50, but it’s worth a lot more than most companies. It’ll be interesting to see Groupon try to price because I don’t think it has the business characteristics of a LinkedIn.
BI: No network effects?
BG: I wrote a post a few weeks back called “All Revenue Is Not Created Equal” and talked about 10 things that differentiate high-quality revenue companies from low-quality. Network effect is a very strong barrier to entry, if you have that it’s the golden ticket. But there are valuable companies that don’t have that.
But the daily deals space, I don’t think there are any barriers to entry at all. If you had a continuum of barriers to entry between -10 to +10, you might put something with a network effect at 9 or 9 1/2. The daily deals space, with all the data we’ve seen, it would be a negative 9 1/2. It’s the opposite end of the continuum. Everybody and their brother has entered this space. There’s really not that much they do. They’re about coupons.
BI: Is there any benefit from them getting to huge scale fast? Like Amazon did?
BG: The Q1 financials put a knife in anyone who would argue that. If $2.4 billion in sales is not scale then there is no such thing. You should be at scale by then.
I think it’s going to be interesting for some of these companies to become public because this late-stage private market is really reckless, and they’re not nearly as smart as the buy side is as a whole. So they’re making valuation judgments but they haven’t been tested through a combination of a liquid marketplace that trades daily and an SEC requirement to share audited financials on a periodic basis. Until you have those things, you don’t have a scoreboard, you just have a bunch of speculation. We’ll learn a ton when they finally price.
The thing that will put an end to the highly speculative second market is when something prices at an IPO that’s well below what some of those trades took at. That’ll be the day sanity comes to that market.
BI: What areas do you think are undervalued or underappreciated?
BG: We’re in the positive part of the cycle now so almost everything has a positive spin, so I don’t know if I can point a finger at something that has no interest out there. There are some legitimate categories.
What’s going on with the cloud is completely and totally valid. We’ve spent the past 40 years putting technology inside the enterprise and we’re going to spend the next 20 years ripping it out. That is a fundamental shift. There is no reason whatsoever for any business with 100 employees or less to have any infrastructure on their premises other than end units. It doesn’t make sense. We’ve got a number of startups like Eucalyptus, Rightscale, and Engine Yard that are all focused on that space.
We’ve had a number of companies focused on the local market. Almost everybody who thinks about local thinks about daily deals, but companies like OpenTable and Zillow and Yelp are all getting their money from the local market. We’re in a company called GrubHub that’s kind of an OpenTable for takeout and delivery. Uber gets paid by connecting limo drivers onto a network.
Local is another area. In the past 18 months, small business finally gave up on the yellow pages. Which is something we’ve been waiting on for a long time. Small businesses have had too many customers come in and talk about their Yelp review and they’ve realised they have to be present. You had a reluctant buyer of Internet services until about 18 months ago and now you almost have an anxiety-ridden, “I have to spend” attitude.
BI: Didn’t a lot of that yellow pages spend already go to Google?
BG: I don’t think so. A lot of what went to Google search ads were vertical businesses, the guy selling archery hunting stuff over the Web. That’s not the local store or the local market. As an example, Zillow gets a large portion of its revenue from realtors. I don’t think that many realtors were buying Google ads.
BI: So cloud and local. Any other areas you think are legitimate?
Photo: Matt Rosoff
BG: This is certainly totally appreciated by the market, but every day that goes by I get more and more excited about our Twitter investment. Maybe that’s one that’s been misunderstood, people compare it with Facebook and people talk about “why would I tweet?” But it’s a one to many broadcast mechanism, it’s a newspaper replacement. It’s not for everybody to tweet, it’s for everybody to follow. The more people figure that out, they see it’s RSS-plus. It’s literally the place you check for information.BI: I noticed that with Bin Laden’s death — it was revealed on Twitter before traditional news outlets.
BG: I was talking to a hedge fund guy who said it’s more valuable than Bloomberg, “I have instant information across the globe about what’s happening.”
BI: You obviously have faith they’ll find the key to make money off all those users. Is there an ad delivery model that makes sense when you’re in these specialised clients with micromessages? Or maybe Sponsored Tweets are going to take off?
BG: Watch that space. Max Levchin and I were talking about the notion of the interest graph, we argued that Twitter is a much better position to become the interest graph than Facebook. If they are able to do that, advertising will be unbelievable.
Facebook has stitched together your social graph. The idea of an interest graph is to bring together everyone that has shared interests. If I can isolate the people who are into mountain biking in Marin, in one place, the ability to put ads against that is really high.
It’s two derivatives from where they are today. They have to improve the discovery mechanism for who you follow with a taxonomic list of choices, but as you do that, and as you start to identify what people’s interests are, then you have an ability to launch very targeted advertising.
BI: Shifting gears a little, are angels upending the way VCs do business? Or are angels just looking to raise funds like everybody else?
BG: A lot of angels have raised funds where the dollars per partner is not much different than ours. We like to say instead of super angels they’re micro-VCs. That was all the talk about a year ago, and it’s kind of subsided. There was one legitimate role that was filled: for the most part, the brand name VCs over the past four years had decided from a returns standpoint that betting on Internet companies made the most sense after you saw some momentum rather than just doing it out of the gate.
If you look at the huge successes on the Internet, Google, Facebook, Amazon, they were all done after they were working. No venture person funded any of those pre-launch. As the brand name venture firms moved away from being willing to bet on two people and a PowerPoint, you created an umbrella for angels to come in underneath.
We have remained pretty true to what we do — we like to own a large position in a company, take a board seat, and provide a quite a bit of of assistance to the entrepreneur building the company. A lot of the angels have so much activity spread so far across they can’t provide that role. So we’ve developed a symbiotic relationship with a lot of them, they show us all their companies, they’re eager to have us come in and help build the company when it’s a little further down the road.
The other crazy thing in the landscape, a lot of guys we used to think of as our competitors have moved up to that shootout in the late-stage private market, throwing around $50 and $100 million at a time. That’s very different from what we do.
BI: Why do you think that’s happening?
BG: Two reasons. A lot of companies were postponing IPOs because they thought the window was closed, and that’s becoming less true now as everyone knows it’s open.
And Yuri Milner made a lot of money on a really smart trade when we were at the bottom of the cycle and he got rewarded handsomely for it. I think there were a lot of people mimicking Yuri. The only problem is, he did it when he was the only one doing it and the market wasn’t bubbly. His mimickers are doing it at a very different time.
BI: We’ve talked about the IPO window, but what about M&A? I look at the Skype deal and wonder if we’re going to see a big wave of buyouts.
BG: I think for the first time since 99, the IPO market is paying better prices than the M&A market. That’s a big deal. These acquirers don’t want to compete with the prices that the buy side wants to pay.
The other thing, the top 10 tech companies have $350 billion in cash. They ought to be going crazy. But for various reasons each of them independently aren’t. Apple and Amazon have always been kind of reluctant buyers. Google has gotten worn out by the EU and antitrust commission so it feels impossible for them to do anything. Microsoft just did the big Skype deal so they’re probably not going to do much more.
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