Peter Fenton is a partner at Benchmark. He spent seven years as a partner with Accel before joining Benchmark. The list of businesses he has invested in and mentored is extensive. They include Twitter, Yelp, New Relic, Hortonworks, Quip, Zuora, Zendesk, and Polyvore – among others. He is so well spoken and careful about conveying his ideas that it is particularly hard to add my usual commentary to what he says below.
1. “The principal question that we focus on before an investment is the quality of the person we’re going to work with. There are three attributes that I try to be reductionist about that define the greatness that we see in our world. First, I think there’s just a profound, deep, innate motivation. Second, I think there’s a common trait that I would call ability to learn. [The] third thing, is perhaps the most obvious which is the ability to attract great people.”
Peter Fenton efficiently coveys three key themes within this series of blog posts when I am talking about successful venture capitalists: 1) motivated people are far more likely to persevere through inevitable adversity and do the necessary hard work; 2) the ability to be a learning machine means the business can adapt and grow in an uncertain world; and 3) the ability to recruit people to a mission or cause rather than just a business is essential. One commonality you see in whatever Peter says is a strong focus on building the business rather than finance or deal terms. His advice is so grounded in business fundamentals it is as applicable to a new bakery or grocery store as a startup. Without a sound underlying business all the finance in the world will deliver exactly nothing of value. When you are building a business you don’t want a cheerleader as your venture capitalist – you want someone who has extensive and relevant business skills.
2. “The great entrepreneurs have found they need to find complements. So, if you look at yourself and reflect on your skills and your talents and your unique abilities you’ll find that everybody has their gaps.”
Everyone has strengths and weaknesses. Having the right partners and colleagues is a way to create a force multiplier by filling in gaps in your skills and talents. As an example, Warren Buffet has said: “One plus one with Charlie Munger and me certainly adds up to more than two… CEOs get into trouble by surrounding themselves with sycophants. It’s beneficial to have a partner who will say, ‘You’re not thinking straight.’”
Richard Zeckhauser describes why 1+1 is more than two here: “Most big investment payouts come when money is combined with complementary skills, such as knowing how to develop new technologies.” If your strength is technical, find people who have other skills and vice versa. If you like uncertainty find someone with complementary skills and talents who knows how to manage its consequences. If you like novelty, find someone with complementary skills and talents who makes trains run on time. Michael Eisner has written a book on why partnerships succeed. Complementary skills and talents are a key to not only great partnerships, but better investing results..
3. “[Some venture capitalists aren’t ] in touch with the human realities of running a company and they had a false sense of the ability to predict things and be certain about the future. When you are running a company you don’t know much of anything about the next six, 12 months, you’re working through a lot of ambiguity.”
I’ve written about uncertainty, risk and ignorance before in my post on venture capitalists Vinod Khosla and Keith Rabois. Strong teams that can adapt as conditions and opportunities change create tremendous optionality for a business given the reality of an unknown business environment. Since venture capital is a search for rare but massive financial payoffs that can be harvested by finding mispriced optionality, it should surprise no one that Peter Fenton is focused on challenges associated with ambiguity and being humble about anyone’s ability to predict the future.
4. “The term we like to use is “shoulder to shoulder,” where there’s a real depth of engagement and we don’t know how to create more time in the day for that. So the business model we have doesn’t scale. And the core premise, I think, of the Benchmark model has always been optimize for the depth of the relationship with the specific companies we’re working with.”
Over the past few decades I’ve known many Benchmark partners past and present and in my view what Peter Fenton says about how they love to work alongside the team running the business is just part of who they are. Every Benchmark partner I have known loves to actively participate in the creation of a new and valuable business. This style makes what they do more fun and that makes them better at what they do. If you like novelty, uncertainty, making a positive difference and solving problems/puzzles, what could be more fun?
5. “There’s no substitute for creating the magic of the product in capturing our attention. And if that doesn’t occur, and it’s more about getting money from a venture firm to enable that, I challenge the assumption that you need us. We want to do company-building, and to do that we need to be committed exclusively in a matrimonial kind of way where we can give our heart, and our souls, and our energies to a company.”
Startup founders who just want to raise money are short changing themselves. Money is not scarce if you have the right opportunity and the right team. Peter is saying if all you want is money, Benchmark is not the right firm for you. What the best founders want is value-added capital. The best venture capitalists deliver the best financial results again and again for a reason. They add business value and not just capital to the startups in their portfolio.
6. “We love the day-to-day work with the entrepreneurs, which prevents us from scaling. We don’t have an ability to offload any part of our relationship in the way we practice it, to anyone other than ourselves. So, there’s no associates, no principals, there is really nothing beyond the group of people here and our assistants who keep our lives sane. That’s a strategy. Another perfectly cogent strategy is to try and build a certain set of services that you use to differentiate.”
There are several different ways to be successful in the venture capital business. Benchmark’s approach works very well for them. It suits the personalities of the partners and makes them happier. Being happy and having fun are highly underrated.
7. “The attributes of the great board meetings that I can point to are really focused on asking tough questions and applying critical thinking, as opposed to just updates. A lot of the entrepreneurs I work with, I encourage to get rid of the PowerPoint. A typical board meeting will have 30 to 60 PowerPoint slides. So, I ask entrepreneurs I work with to think about that as a Word document, and can you reduce it down to something we can read before the board meeting, so we don’t sit there looking at slides for three hours.”
If you can’t describe what you want to do in simple declarative sentences in a written document you have not thought it through. I am a fan of the Amazon “write a Word document describing the purpose of the meeting if you are the one who called it” approach. While many broken underlying assumptions can be easily hidden in a PowerPoint slide deck, the same is not the case for a Word document.
8. “[There is] a ten-year plus learning curve for being any good at the venture business.”
No one is born to be an investor. It is a skill that must be learned on the job over a period of years. We all have a set of biases and dysfunctional heuristics that cause us to make emotional and psychological mistakes. The best way to learn how to invest is to invest. “You can’t simulate investing” writes Keith Rabois and I agree. In that sense, the human process of learning to learn to invest is like machine learning. If you have the right process in place, making mistakes can make you smarter. Or not, if you are not paying attention or willing to change.
9. “Be a learn-it-all, not a know-it-all.”
This is a version of a simple Charlie Munger philosophy: be a learning machine. Be humble and hungry to learn. A “know-it all” approach to investing and life is a great way to experience a big fall resulting from hubris. If you never are encountering situations in which you make decisions where you are wrong it is strong evidence that you are not learning. If you have not destroyed a cherished idea at least once a year (Charlie Munger’s standard), you probably have a broken learning process. A major problem with not discovering small mistakes is often that you are setting yourself up to make a big painful mistake.
10. “The saying that we like to have at Benchmark is that good judgment comes from experience, which comes from bad judgment. So, we get it wrong a lot, but what’s interesting is when you get it right.”
Charlie Munger’s approach to investing is again applicable: pay attention to your mistakes and the mistakes of others. Learn and adapt. Make new mistakes. All these approaches will help you deal with the fact that life and the investing environment requires people to make decisions in an environment typified by risk, uncertainty and ignorance. People who do best with uncertainty are those who know how to adapt to change. If you think you can stop learning and that you “know it all,” you are in big trouble.
11. “What we discovered is you can take product-driven entrepreneurs and back them in the enterprise market and achieve orders of magnitude more scale than you could with a sales-driven model.”
When the dogs love eating the dog food and are telling other dogs how good the dog food tastes, any business scales better. As a bonus, a business that is product-driven involves more creativity and is more fun. Founders who are driven by products and services instead of sales make better products and services. In an age when it is so easy to get information on which products and services work well and don’t, better products and services mean the business scales better since their adoption can become viral. The Matthew effects kick in when a product or service is viral, but with a really attractive customer acquisition cost (CAC) and low churn. Like happiness, low CAC is highly underrated. High CAC is a stone cold killer since it is one of the Five Horsemen of the Service Provider Apocalypse.
12. “What you hope for is that the product model and the business model play off with one another, and so that’s what we look for… can you get resonance where if I use the product in a certain way, it’ll open up the economic opportunity. Google is the best example of that, of course, where the product model is the business model.”
The biggest successes in the venture business all involve feedback/reflectivity. You can’t deliver the scaling qualities that can generate grand slam tape measure financial returns without creating at least one nonlinear phenomenon that comes from positive feedback. What is most desired in a startup is a lollapalooza phenomenon of several types of mutually reinforcing positive feedback loops. Creating and sustaining virtuous cycles is powerful and rare which is why unicorns are rare and several distributions of success in the venture business reflect a power law. But when a positive feedback loop happens, it can be magical. Alignment of the product model and the business model is particularly magical. Peter Fenton has generated far more than his share of magic. When someone is successful repeatedly in the venture business that is something truly special.