On this episode of Recode Decode, Haystack founder and Lightspeed Ventures venture partner Semil Shah talks with Recode’s Teddy Schleifer about breaking into venture capital and how the industry is changing.

Asked about VC’s reputation as a “clubby” industry where you have to know someone to get in, Shah agreed that you do have to build relationships — but there’s one way for a prospective investor to stand out from the pack of people applying every year to the biggest funds on Sand Hill Road.

“The No. 1 thing I tell people is, ‘Come bearing gifts’,” Shah said. “So you go meet a VC, don’t ask for a job. Tell him or her the companies you’re meeting that are interesting … Think of how many resumes Sequoia gets or a firm like that, right? A firm like Lightspeed, everyone will just say, ‘Great to meet you. Let’s start working on a deal together’. What that means is you have to bring something to the table.”

And it’s not good enough if you just think the companies are interesting, he said — your gift is existing knowledge of why they’re worth investing in.

“It’s like, ‘Well, I think this one’s interesting because I spent time with this family team and the two of them are just amazing to work with. You gotta come see it’,” Shah explained. “So not only does the knowledge matter, but the access and judgment around who those people are and what they’re doing matters.”

You can listen to Recode Decode wherever you get your podcasts, including Apple Podcasts, Spotify, Google Podcasts, Pocket Casts and Overcast. Below, we’ve shared a lightly edited transcript of Teddy’s full conversation with Semil.

Teddy Schleifer: I’m here today with Semil Shah, who’s the founder of Haystack, a venture capital firm. He’s also a venture partner at Lightspeed. We’ll get into what exactly a venture partner is in a bit. But Semil, welcome to Recode Decode.

Semil Shah: I’m excited to be in the red chair.

Here you are in the red chair. How’s your summer going?

Summer’s going great. I can’t complain. I just need an extra day a week.

An extra day, well, the land of innovation can invent an eighth day. You go on vacation anywhere or what’s … ?

No, we’ve got little kids so our vacations are like two hours when they nap.

Okay.

And we vowed not to go on a plane with them for awhile.

How old are they?

We have a daughter who is entering kindergarten next week, she’s 5 and a half.

Okay.

And we’ve got twin boys who will be 3 in October.

Okay, so you feel like that’s still not the age where they can survive a long plane ride?

I still have some travel PTSD from last summer, so I needed to get over that.

Okay, got it. Well, I assume that this will be … It’s a sleepy season here, I feel like people are still not totally around. A lot of out-of-office replies, I was out for two weeks. Which was like phenomenal. Did not have to do much of anything. But I was still kind of monitoring things but I was amazed at how little I missed.

Yeah, there’s not much going on. But there’s a lot of private deal activity going on and a lot of people doing rounds and taking rounds off the table when things are a little bit quieter. So there’s quite a lot of activity it’s just not …

It’s beneath the surface.

Yeah, beneath the surface.

Got it. So, we’re going to talk a little about kind of who you are and what you do and at the end we’ll talk more about where the industry is headed. I think you’re a real interesting person, as I’ve told you, because I feel like you almost approach venture capital as I do, as almost a reporter, a student. I don’t think I’ve ever seen anybody before … I remember I once saw one of your blog posts, or somewhere that you wrote that you were curious about some exit prices that have not yet been announced publicly. Which obviously is something I would do in my business. And I feel like you’re just very observant about various firms both at an inside baseball level but we can talk about this a little bit.

But you didn’t start here as an insider. You’re not the son of someone who was in the business. You didn’t grow up as an analyst, associate, which I think kind of gives you a bit more of an outsider eye on the way the industry is shaped. So let me just start with describing how you got involved in Silicon Valley. You moved here what? A decade ago?

Yeah, I lived in the Bay Area, in San Francisco, up until about 2006. Went to grad school on the east coast and thought I would move to Asia and then decided that was a whole different saga, that I didn’t want to move to Asia or settle on the east coast. I’d gotten married so my wife and I wanted to come back. She had a role at Stanford. We moved to Palo Alto. I knew a few people in the area but not really, and just tried to get involved in startups or on the investor side.

How old were you at this time?

How old was I? Probably 32, 33.

Okay.

Yeah.

So you were the age of a lot of VCs who were already at established firms.

Oh sure. Yeah, yeah. And I was actually more interested in working at startups but I was trying to just increase the surface area of what to do. And that was a pretty rough time. I was lucky that some of the folks — I was in Boston — that I was consulting kind of bridged me in to move here. And I was still working with them for income.

But I spent a good, I did a calendar audit, like 11 months just trying to crack in. Trying to work at any sort of startup. It could have been seed funded, could have been growth staged. And I think I brought good entrepreneurial energy, I just wasn’t, like, slotting into a role. And then I would in parallel also talk to all sorts of investors, like $40 million funds up to like billion dollar funds to just see if I could get a role. And that went nowhere, either.

So that was a pretty rough 11-month period and ultimately I ended up working at a friend’s company where I just said, “Hey, I’m going to show up and start working with you guys.” I was that frustrated.

For free. Yeah.

Yeah, I think they paid me in like Diet Cokes and sandwiches. But that was it.

Right. And this was like a pretty concerted effort to, like you said, “Hey, I’m here in Silicon Valley, I want to break in.” I mean, I pick a lot of origin stories here, like they just happen to meet someone at a party, so it’s almost like an accidental rise. But for you this was like, “Hey, I want to work at startups or in venture capital. I’m going to find opportunities actively and network actively.”

I was meeting a lot of people. I was definitely being called in for interviews and getting far in certain processes. Got to meet a lot of VCs through that process. I was also writing a lot online.

Right, you can actually write, unlike a lot of venture capitalists who have ghost writers or folks helping them.

Yeah, it just sort of happened naturally but I have always liked writing and did a lot of writing in roles before graduate school and during graduate school. I never thought of myself as a writer but it was just something I do to express myself and it’s sort of like a cathartic thing.

But what ended up happening was, I live like four blocks … My wife was working at Stanford so we lived in downtown Palo Alto, she could walk in to campus. And I ended up living like four blocks from Quora. And during that time Quora was in beta mode. It was a very hot venture capital deal. It was much talked-about, like you couldn’t be on the site, they were trying to get really big names on the site to contribute firsthand knowledge. And so I got an invite to join Quora.

From who? A neighbor or someone?

Yeah. And I just started writing on there and I just started noticing that people were picking it up. And then Erick Schonfeld, Arrington, M.G. at TechCrunch were like, “Hey, we like your writing, do you want to just guest post here a couple of times?” So I guest post a few times there. I did like this triple-part thing on Quora because I was like, “Hey, I think Quora’s an interesting thing.” I think my first post was about Twitter. And I just liked the products.

And so a couple of them just took off and they were like, “Hey, why don’t you just keep doing it?” So long story short, while I worked at, I ultimately started getting roles at startups and while I was doing that I was on the side, just for fun, ended up being the most frequent outside contributor to TechCrunch. And I think a lot of people probably read something I’ve written over the years. And I was just very consistent about it.

So during the first year when you were trying to get intros to the right firms, you’re pretty candid about the struggle you had to make that happen. Did you feel like, when you think back on that, that was like a fair struggle? Do you think it should be hard to break into this business, into venture capital? Or do you feel like it was, to what extent do you feel like it was meritocratic, got to make it work and if you can, you can and you’ve won?

I think venture — and we can touch more on this later too if you want — looking back on it, I don’t blame any of the VC firms for not hiring me. It’s really, you really have to have context about what you’re going to do before you come in. You have to have a point of view. Usually that point of view is shaped by participating in the ecosystem before. I mean there are other things you could do in academia and things.

And it is a trust and relationship game, just picking someone off the street and having them come into your investment partner meetings and stuff. So having worked with these firms in various capacities over the years and now knowing what I know, it was completely the right thing to do. What surprised me more was startups that would just not entertain me as a hire and then I kind of look at their trajectory …

Some schadenfreude, maybe?

Not really, but it was just sort of surprising to me.

Right. Yeah, I just feel like obviously the Silicon Valley is so connection-based and I just always wonder, I think the downside is, what if it’s not as meritocratic as it could be? And if you’re a great schmoozer but a terrible VC, you can still make it here.

I don’t know. I think there are two separate things. There’s kind of schmoozing and being known and being a gadfly. And like yeah, you can kind of get away with stuff and move around. But VC firms aren’t stupid, either. There not just going to go after some gadfly, there has to be a there there.

There has to be … for writing, for example, someone may say, “Well, how do you write … Oh, you’re just writing and getting into deals.” Well, the founders aren’t going to work with you unless you actually work with them, so it kind of works up until a point, but you have to deliver in real life.

Right. So at this point, so you’ve been looking around for a year. You’ve been keeping it pretty candid about kind of the failure to achieve. You don’t walk into Sequoia. Was there a big break you feel like you had and when you showed up here? You obviously had been putting in the spade work to try and find the right gig. Is there a moment that jumps out at you?

There was one moment. I think I had finished two funds. So we glossed over things. I had a couple … I was competing for this last role I was gunning for. I was a finalist, a very well-known firm. I have a lot of friends there. They were very gracious. They were like, “You lost out to someone with way more experience.” That was kind of a rock-bottom moment.

And so I had two friends kind of pick me up and they were like, “Hey look, just start this small fund. It’ll be your kind of ticket to go do your next thing.” Show me a deal flow.

This was Haystack.

Yeah. So I kind of just started that not knowing what I was getting into. And the first two funds just hit a number of companies like very, very lucky. And probably three years into that a bunch of people — because I knew a lot of VCs — I got a tremendous amount of offers.

And so I think that was the first time, this was like mid-2015, where I was like, “Oh, okay.” So I didn’t take it as like, “I’ve arrived.” I would never say that. But it did feel like a little bit of a turning point of like, “Okay.” There are a bunch of people who are like, “Okay, come over now.”

Right. So the move you guys essentially made was, “I’m going to do my own shop.” Right? That was the move that allowed you to say, “Hey, I don’t need to be hired by these firms.”

I don’t know if I would say that either. It was definitely something I entertained. We had one kid at the time. My wife was pregnant with twins at the time so it was like, “Ooh.” And we don’t have our own net worth or liquidity or stuff. So I did entertain one of those offers. And then I had three other firms, to their credit, kind of intercept those offers and offer me a hybrid role. They were like, “You keep doing what you’re doing. We’ll invest in your funds. Be a venture partner with us. Hang out and keep doing your own fund until you’ve taken off.” And you’ve got this like, even if it’s a 1 to 5 percent chance to have your own operation, you should do it even if you have to crash land. And if you crash land, you’ll have a role somewhere.

So, I ended up taking a role with GGV Capital. They were about four billion in assets, now about 20 years old, four billion under management across China and the U.S. And that was just an amazing experience. And I give them a lot of credit for creating that role. I don’t think anyone else in the Valley has that role. So I’m very fortunate.

Right, we’ll talk about that. Talk about what that means to be a venture partner just kind of more generally. There’s a lot of talking in Silicon Valley about failing up. You can fail and still be successful and you want to learn from failures. People are skittish, though, to kind of talk about applying for jobs and not getting them. From a brand perspective as a VC, do you understand why people just want to talk about the good stuff here?

Yeah. I mean, I think there are a lot of layers to unpack with that. But I think what it comes down to is people don’t want to hear it. They don’t want to hear it.

Listeners don’t want to hear it?

I think listeners do but let’s say the LPs and funds or the founders who are going to those funds, the employees are employed by the companies that are fueled by venture capitalists. They don’t want to hear necessarily how some of it works. And so there’s a little game to play around that.

I want to talk a little about, there’s a lot of misconceptions about what venture capital is. I feel like people watch movies or they read books and they watch “Shark Tank” and they think that this is how people just run around all day, barking orders, making money, seems to just be the good life.

But from getting to know people, there’s also a ton of grinding that goes into the business, and lots of days, it isn’t easy. And we were just talking about failure and there are tons of venture capitalists who never see any success or never see what’s called carry, or the profit, basically. And people don’t hear about them. So I want to talk a little bit about what it means, what you actually do all day on a day-to-day level.

So a lot of questions in there, and this is one of my favorite topics but I definitely don’t want to come off as someone like, “Here, let me tell you all about how VC works.” I’m five years in, very much a student of it, and I’ve been lucky to see a lot of it up front. And no one should be crying on the behalf of VCs because when they raise a fund they’re guaranteed contractual income.

Not paycheck to paycheck.

Yeah, it is hard, but for these larger funds I think what’s happening is that I think of things of, “Okay, let’s just put things into this cauldron.” And so what are we going to put? We’re going to put the culture around the social networking movie and Facebook rising, “Shark Tank” culture, hundreds of millions of people in the country watching “Shark Tank” and understanding what the role of the investor in that big seat is. And then things like HBO “Silicon Valley,” a proliferation of things like YC…

So people have this picture of what a VC is and does and I think what’s happening at the same time and the reason that the monolithic definition doesn’t apply is that VC is also growing and mutating as startup formation is growing and mutating. And so you have small funds, you have crypto funds, you have sector focus funds, you have geography focus funds, you have hundreds of funds under a hundred million bucks. You have now 10, 20, 30 funds over a billion dollars. So it’s just really different depending on where you sit.

So walk me through a typical day. What do you … I think there’s a conception out there that the venture capitalist is the captain of the ship and they’re running around and giving money and fulfilling dreams. But what’s the …

That is a big component of the job, is finding people that you’re attracted to, that you believe in.

But I think the image is that the VC holds all the cards and lots of times obviously on a hot deal…

Oh no, no. Yeah. So, let me answer this a couple ways and we can click on anything you like. So every Monday — I try to be really structured now — so every Monday I go down to Sand Hill Road, I spend the day at Lightspeed where I’m a venture partner. It’s an amazing experience after three years doing that with GGV and now getting to do that with Lightspeed, top-tier firms at the top of their game. Just an amazing experience, and I’m learning. Every Monday I go down there.

Tuesday, Wednesday, Thursday I’m in San Francisco, trying to meet the next great founder, trying to help a founder that I’ve already backed, helping people in the community. There’s a lot of that.

A lot of coffee meetings, that’s usually a 1:00 pm, a 2:00 pm, a 3:00 pm.

I don’t do it like that. I try to just do a few each day and make them longer. I did that for years but it just …

I’m always amazed when I talk to VCs just like if they ever show me what their Google Calendar looks like.

It’s kind of a mess, yeah.

How do you have time to deal with any crisis du jour?

On Fridays I just stay in my home office. I don’t make any meeting plans or call plans. And part of that is just to like build some quiet into my schedule. And I also feel like the job I have at hand is to actually … Because I think a lot of VCs over-weight and over-market how much they help. And so I tell people very openly, I’m trying to find people who don’t need a lot of help. And I’m trying to attract them to me, explain to them how I work with them, and then they can pull from me.

And so because that, selection is such an important piece of what I try to do and it’s so noisy and you meet a lot of people, I find that I need to bake in parts of my schedule where my mind can actually rest and my subconscious can kick in and I can say, “Well hey, I’m still thinking about that person. I’m still thinking about that product and service.” And if I catch my brain at rest starting to think more about it, I start to get excited.

Most of this is your Friday time?

Yeah, Friday and weekend. It’s just kind of baking that into the schedule to just think about the commitment more. There’s also some times where I meet somebody and I commit within the day or hours.

Sure.

And so I try to be as instinctive as possible in those situations.

Right. So you’re pretty intentional about time management. You think to yourself like …

Yeah, when you …

I mean, lots of people when they want to be VCs it’s like, for instance my job is dealing with incoming, right?

It’s the No. 1 thing VCs privately, I feel, discuss is hacks around time management and how to better manage their time. It becomes tougher once you’re part of a larger partnership because you get pulled into other things, you get pulled into administrative things. When you have three little kids, you’re running these phones, I have this kind of dual role. I have to be completely vigilant over my time.

Right.

Yeah.

Right. So you’re a venture partner, Lightspeed, used to be venture partner, GGV. The titles always seem to me, it seems like a part-time gig, but I do think that obviously there’s a lot of confusion about what titles really mean in Silicon Valley.

Yeah. There’s a good Quora thread about, “What is a venture partner?” I think when that thread was written, there were kind of one or two things, it was like “somebody who’s trying out venture and it’s like an entry step in.” You’ll see a lot of GPs on Sand Hill Road, they would actually start as a venture partner and I actually think it’s pretty smart.

There are other people who are maybe coming in and they just want to do a couple deals in a couple areas but they don’t want to be fully baked into the partnership. I think for me, the way it started with GGV and now with Lightspeed is that what’s happened in the world of venture is like a lot of these larger funds have scaled. They’re now hitting global opportunities so they become multi-strategy.

And I’m, I guess, probably situated in a unique way where I’m a single GP that’s invested in a lot of companies that have scaled up and been followed by the big VCs and that I’ve gone on to do multiple hundred million dollar revenue businesses. I think because it was normalized while I was working at GGV, other firms are more open to those structures. So the venture partner is a way to recognize that.

Because you feel like this is a more common thing today than it was when you signed up with GGV?

I think more firms would do it now based on the fact that I have been able to do it. I think the question is, who do you do it with? So they’re supply constrained.

So what is someone who’s a general partner at Lightspeed do that you don’t? I mean, what’s the …

Oh, yeah. So I’m trying to invest in companies that are pre-series A. The round sizes are like $2 million, $2 1/2 million or less. That’s the stage I like. That’s the stage where I think I can add value, where I feel comfortable with selection. Some of my partners at Lightspeed, for example, they might write an $8 million dollar check into one company and make a reserve commitment, or might write a $25 million dollar check into the company and be the second board member. I think the level of commitment that that check brings versus what you do at seed is just completely different.

Yeah, but no, in terms of at Lightspeed, right? So obviously you’re there on Mondays. If there’s a decision on Wednesdays, is part of the challenge of being only a venture partner to make sure you have access?

Every firm has its own investment decision process. Some of the firms are advocacy models. Some of the firms are consensus. Some of them are voting.

Yep. This is how firms make decisions about which companies to fund.

The way I see Lightspeed going is, people form deal teams and if there’s a deal kind of moving, there’s a team kind of forming and then they bring it to the partnership on Monday. They’ll ask for a rating sometimes to get a calibration from the partnership. There’ll be an active discussion, really structured, active discussion both around the opportunity, the market and also testing the partner’s own personal willingness and resolve to commit to the opportunity. I find those really fascinating. And then there’s a vote.

Right. And is that different than the way that … So GGV, for folks that don’t know, is a firm, it’s well-known basically for being very active in China as well. I feel like they’re probably one of the two or three most prominent …

But also remember here they did series A or B in Opendoor, HashiCorp, Wish, some pretty major companies.

How is, I mean, so now you’ve seen two firms up close. How is GGV different in terms of …

I think every firm, and I’ve been inside other partner meetings, too, has their own flavor. GGV, they have a smaller partnership in terms of the MDs at the top. There are only five or six at a time and they tend to bring things to the partnership. And because the partners are distributed between U. S. and China, are kind of more having one-on-one conversations, then they have a group weekly meeting every Monday night. So they figure it out that way. But every firm’s different. If you had people from different firms, yeah.

Yeah, sure. No, it’s fascinating hearing, because it’s so …

So going back to your question, too, of what folks at Lightspeed do during the week, it’s very much an outbound field job. It goes back to almost journalism, right? You’re going out, hitting your beat, talking to people. There are a couple people who focus on fintech or real estate or infrastructure and they’re going and working with their companies, talking with sources.

Right. Sure. I think a lot of the best VCs have a journalistic mindset. Another misconception that I think is definitely not talked about sufficiently at VC is the role of luck. You always see a Medium post that eloquently describes how the company was just acquired, it had total forethought into how everything was going to unfold. Obviously there are other examples of companies that have failed, that maybe the decision process was perfectly good and based on a rational, they should have been rewarded for it rationally based on …

Do you agree that a lot of this is luck? I know the follow-up obviously is: If a lot of it is luck, should VCs be as venerated as they are? I think it’s going to make people uncomfortable. I think that’s why lots of VCs don’t talk about luck.

I think to answer this requires some nuance and digging a little bit. I believe absolutely that luck is a major component of these things, because all you need in your career is one investment to just pop. And I think if you talk to people in private it’s very had to know in the moments of early investment like how that could even be possible.

Sure, especially if you’re doing seed, there’s a huge variance in what can happen.

Now where I would downplay luck is when you see people get lucky a lot, because they have a lot of choices. So they’re selecting out of those choices. And to select well out of those choices is pretty remarkable. If you look at, just to pick on a few people, but like Matt Cohler has now been at Benchmark for 10 years. If you look at the companies he’s associated with at dollars and valuation outcome, just on an Excel sheet, it’s pretty remarkable. Is that luck? I don’t know.

Each individual decision might be luck, right? But your argument is if you’re hitting enough home runs then …

Yeah, because you would imagine everyone would want to work with Matt in some way on the consumer side and so he’s got all these choices. If you think about one of the co-founders of Lightspeed, Ravi Mhatre, and I think in the last six quarters he’s had a billion dollar-plus platform enterprise outcome. Is that luck? I don’t know. I don’t think so.

I think there are people who graduate into this level where they’re both attracting more and more people, more and more quality opportunities and they’re selecting very precisely amongst those opportunities.

Are there investments you’ve made where you think back about a great investment that you made that should have been successful and then it’s like, “I’m lucky,” and it doesn’t pan out? I’m sure you think about, you do some self-reflection all the time, right? I know you have charts where you look at … I mean, sometimes it’s not your fault, right?

Yeah, and the way I shortcut that at seed — which is very different than what Ravi or Matt would do at a series A commitment — is I try to focus on partnering with a person or a set of people in a market knowing that things may change and would I make the same decision to invest in this type of person again? And generally I feel like I get that right, that I’m comfortable with that. Again, the dollars aren’t as big.

So I’ll you give you two examples. So one example where things didn’t work out was a company called Luxe Valet. So Luxe had amazing cohort retention numbers. They were making quite a bit of money.

Describe — what does the company do?

Oh, sorry, Luxe Valet started in San Francisco, moved out to eight cities pretty quickly. You would tap in your location in the city. A valet would come and take your car and park it and then do other stuff to it, like fill it with gas, do a car wash, change the tires, fill up the tires and give it back to you at the end of the day at a different location. So you didn’t have to deal with garages. You could use Uber.

Plus you got a clean car, yeah, right.

Yeah. A lot of people used it, not just in San Francisco. What ended up happening is that the company wasn’t able to, as hard as they tried, wasn’t able to manage losing money on an economic basis with going deeper inside the wallet.

Now the interesting thing about them is anyone who ever used Luxe Valet or if you search it on YouTube, all the valets arrive by scooter or skateboard.

Okay, ahead of its time.

And so it was like a year before people doing scooters. But what if at Luxe, I mean, you could do just what ifs everywhere, right?

Right.

What if two months before they decided to sell the company they were like, “Let’s just turn it into a scooter share,” or something like that, who knows?

I went into that investment having made a number of on-demand investments that had worked. I saw a lot of people using it. I thought parking was … You know, people spend in the U.S. like $40 to $50 billion dollars a year. So I did all that analytical work. I knew the founders. But that didn’t work out.

Versus like, I was the only seed fund outside of True Ventures to invest in the seed round of HashiCorp. And I’ll probably never make an investment like that again in my life. And I just met the kid through a friend who he worked with, thought he was brilliant. I spent weeks getting to know him.

So that’s an example of luck working.

Absolutely. There’s no way you could see a multi-billion dollar company potential just by meeting some 21-year-old kid.

Right. So that gets me to another misconception or something that really irks me about the way a VC works, which is like — and we’ve talked about this as you tried to break into VC — but it’s still pretty clubby overall. I think the industry, there’s an in-group and you’ve got to break in and it’s not totally easy. If you know the right investor, you meet the right company. It’s hard for a reason but there is a club and there is an in-group. And we can talk about this a little bit later when we get into stuff like diversity. Obviously the in-group isn’t helpful to that.

Do you feel like, in your experience, that running your own fund but kind of being attached to some existing big heavyweight funds, are there advantages to being not part of the in-group and not being one of the 10 partners at one of the five biggest funds? What are the advantages of a lone wolf?

I can only answer that for me, which is I’ve only been doing this five years and I’ve been lucky to have been around even before that and mentored and continually mentored by a number of VCs, very actively mentored. So I view it as a way to get smarter. I don’t think I was selected for that because I’m cool. I don’t think I’m an insider and a … like, I have inside knowledge, but I don’t have all the inside knowledge.

I fundamentally believe, anyone can still come here. There are now all these programs, like AngelList has Angel Track. YC has an investor’s school. First Round Capital has all these things that bring people into investing. There’s AngelList out there. So there are ways for someone who wants to get into venture to show that they’re passionate about it, to show that they can structure their thoughts and share judgment. And people will listen to them. I still fundamentally believe that.

You still think there are models of ways to break in.

Absolutely.

That are not … I mean, some of it’s obviously connection-based.

It is a relationship thing. No one is going to just hire somebody off the street. What I tell people …

There’s no SAT for VC.

I have people come in to me every week saying, “How do I get into venture?” What’s really ironic about this is I’ve helped a number of people get their venture capital roles even before I had anything going for myself. So I saw a lot of this up front. The No. 1 thing I tell people is, “Come bearing gifts.” So you go meet a VC, don’t ask for a job. Tell him or her the companies you’re meeting that are interesting, right?

Right. Give rather than ask, yeah.

Yeah. Or anyone that’s gone and talked to … Think of how many resumes Sequoia gets or a firm like that, right? A firm like Lightspeed. Everyone will just say, “Great to meet you. Let’s start working on a deal together.” What that means is you have to bring something to the table. That’s just … it is what it is.

Sure. Okay.

And the connection to the founder matters. You can’t just say, “Well, these are five companies I think are interesting” and then we gotta wait five years to see how they are. It has to go deeper. It’s like, “Well, I think this one’s interesting because I spent time with this family team and the two of them are just amazing to work with. You gotta come see it.” So not only does the knowledge matter but the access and judgment around who those people are and what they’re doing matters. Yeah.

There you go. I want to talk a little bit at the end here about kind of the future of the business. You recently announced a deal with Seattle, is that what it was?

Yes.

Okay. I know you’ve done some thinking about … not that Seattle is the hinterlands, but deals outside of the fifty-mile radius of where we’re sitting. Lots of people here feel like some, or I think there’s an increased conversation about what are the moral obligations of VCs to do things outside of town? What are the economics of doing deals outside of town? There obviously are some real challenges to a startup in Wisconsin succeeding. Are you bullish or bearish on deals outside of here?

Yeah. You asked a couple questions there. Just in general I feel like people expect a lot of VCs and VCs should be more interactive and sharing their knowledge and giving back to the extent that they can. I definitely agree with that, but where I probably draw the line is I don’t think they can just solve all those problems, right? There’s a limit to what they can do. They’re really bound with constraint.

I looked in my own data over the last two years. Intentionally, I’ve been trying to invest outside the Bay Area, mainly because I’ll meet somebody here in the Bay Area at seed and think, “Wow, they’re great, but I don’t know how they’re going to build a team here and keep that team loyal.” So the bar for that is really high right now. I still invest in the Bay Area quite aggressively, but I go into that trying to mitigate that risk.

Whereas when I meet teams outside the Bay Area, I found that they’ve already kind of spun out. Like this team in Seattle, Downstream, they all came from Amazon. They’re all really committed to this very narrow thing, specialty, that they’re working on in ads and product search for Amazon. And I think they’re going to stick together. So I was very happy to make that investment.

Now, depending on who you are and how much money you manage, you can have a very different view of what I’m saying. When I looked at my own data, what I concluded looking at … Brad Feld recently wrote something about Founder Group Investments. Fred Wilson has been writing about where their geographies are, and you could argue at the $200 million per vehicle range, Brad’s group and Fred’s group have just been lights out, right? They will go down as some of the best venture capital firms in history. They’ve done about a quarter to a third in their home market, about half in the Bay Area and then the rest is kind of sprinkled in different geographies.

What I’ve concluded in looking at their data, my data and talking to other firms where I can’t share the data, what I would tell a founder right now if he were sitting here, I’d say, if you’re going to start in the Bay Area, great. You need to raise quite a bit of money and you need to know who you’re going to hire and why and understanding how much you’re going to pay those people to stay, and how much equity you’re going to share.

Now if you say, “Hey, I don’t want to play that game, where do I go?” I would say, “You go to Seattle, LA, depending on what kind of company you want to build, Denver, potentially Austin, New York and Boston.

Right.

And I think after that, and this is the tough part, I think it’s really hard. Right? So there are a ton of consumer series As happening in LA, a ton of consumer and enterprise As happening in New York, no problem. But if you wanna go elsewhere and start the company, yes, there are gonna be companies in Utah. There’re gonna be companies in Toronto. I’ve invested in all those areas. It’s just harder and the data shows that.

Yeah, I view it as, I’m trying to invest into one of two outcomes. I’m trying to find a group, whether they’re here or in Seattle, that with a little bit of seed funding, they’re gonna get on venture capital railroad tracks, and I’m gonna help them do that. Or, they’re not going to raise sort of the fuel of venture capital and they might raise some strategic capital or follow-on or local capital, and they might have a more modest but very healthy outcome.

Yeah.

Those are the only two things I’m looking for. So I don’t enter into those decisions thinking like, “Oh, it’s the right thing to do.” Or I have some guilt that I’m bringing to it.

Sure.

I’m really trying to give the people I think are deserving of the edge and that have differentiated themselves. Like it’s just not, this isn’t a grant business.

Right, yeah, it’s not.

Who have differentiated themselves through their experience and their insight, a chance.

Right.

Yeah.

Another obvious topic that is super important here, and every firm has sort of reckoned with it over the last years, is just diversity initiatives. We were talking a second go about the club. It’s mostly a white club. It’s a male club.

Yeah, Richard Kirby has been writing a lot about it, a friend of mine.

There you go. Do you feel like, how bullish are you that that’s changing? There’s obviously a debate about what motives are behind folks changing. Is it just for PR? Is it just for …

I would make two comments. One is that I think the larger firms that are investing on a national scale or global scale probably need, from a business point of view, need to have diverse points of view in their partnership discussions and investment discussions to make better decisions over the long arc of the next 10, 20, 30 years. I think there’s just a business case for that. So it’s just very easy to make that case. If it’s two people doing a micro-fund in Seattle, I don’t know how critical that is, right?

The second thing I would say, which I would love to see more of and have helped people do it, is the ability for people to start their new funds is amazing. I think there’s this whole bunch of people that want certain names to tilt over or change, but I almost say back, that’s great, and they should and they have their business reason to, but let’s say Benchmark formed in what, 1996, 1997?

Yeah, I think 20 years.

Six guys started it. They’ve been insanely successful. I don’t see any reason why five or six women or five or six teams of diverse people even if there’s a guy in there, a white guy in there, can’t go form the next Benchmark and make a statement. I think the money is there. I think the appetite’s there. I think the deal flow’s there. I’m looking forward to those types of things starting.

Do you worry when you look at a lot of white male … When you look at the Silicon Valley investor base in general … This is something I’ve been thinking about a bit, just to what extent they’re plugged into the country overall? I think this is a way that’s bridging the two things we just talked about, which are A) a lot of folks in Silicon Valley just invest in Silicon Valley; B) a lot of firms, a lot of white men. Those two things together I think can create a scenario in which it’s a perfectly legitimate question to pose: To what extent are investors in touch with reality?

Yeah, so there’s a couple questions there and I would say things are probably changing faster than you’ve seen. I think if somebody’s bread and butter is to invest in the enterprise or infrastructure or tech IT, a lot of that’s going to happen in New York. Bay Area is going to be the lion’s share of that. I think consumer, especially on a national or global level, people are on a plane from here every week.

One of my partners at Lightspeed, Nicki Quinn, she’s on a plane every week. She’s been doing some deals on the consumer side in LA and New York that aren’t announced yet, but when they’re announced they’re going to be really interesting to watch. She’s just on a plane.

What I have been thinking, putting that aside, what I have been thinking about is San Francisco to me feels like, it’s almost like a Hong Kong to China. It feels likes a completely different country. I think there’s some good from that where people here are pushing the envelope.

I was looking … I’m kind of a transit junkie, so I was noticing in the time that it was announced that the old bus depot was going to be decimated and then torn down and before ground was broken on the new Transbay Terminal, Benchmark did the series A in Uber, right? You can argue that was a very global net-positive event.

I think there are some dangers of getting out of touch but I do think at least on the consumer side I’m seeing a lot of people, whether it’s Nicki or Hans from GGV, they’re on a plane every week. They’re not investing a lot of consumer here, they’re going all over the place. They’re going to where those companies are being built.

I also think that when I moved here, and maybe up until that point, and this is one of my big concerns for the region, it was possible to move here. Now I just kind of think about what would it take to move here if I was 33 again? It was like, ooohh.

Economically, you mean?

Yeah. So will those next great people move here? There’s writing of macro-political reasons. There’s cost reasons here. So I do worry about that. To answer your question, in a way I think it’s important that the innovative, the creators who come here from all over the world are divorced from reality a little bit because that gives them that creative license to go do that. Then we’re also seeing some of the effects of losing touch with that.

What I would say in response to that is it’s not a monolithic thing. There are plenty of people at all the major firms, especially on the consumer side, who mostly have portfolio companies outside the Bay Area.

Two last things. Another obvious thing in the news is still a lot of conversation about SoftBank. I think the interest has waned a little bit.

Are you a baseball fan?

I am a baseball fan.

It reminds me of that Reggie Jackson quote, they’re the straw that stirs the drink now in VC.

The straw, I don’t know if they’d see that as flattering, but maybe not.

I think it’s flattering.

Yeah. I think there was a lot of interest in them last year. I’m still, we still write about them all the time.

It’s a topic of discussion amongst VCs weekly, yeah.

Sure. Do you still see them as, I mean, how would you rate them as the role they’re playing here? Generally positive, generally negative?

I view it as it’s an open market and there are no rules. Masa Son and his team have figured out a product to create for these multinational corporations and sovereign wealth funds in countries where the economies are shifting and giving them a way to diversify. How accretive that will be to those people is an unknown.

I also do see them investing in two kinds of companies. It’s kind of an 80/20. 80 percent is around where does the consumer live? How do they live? Where do they go work? How do they work and how do they get around? If you look at a lot of those investments like … I’m actually, I probably can’t share which ones, but SoftBank has actually followed into a number of the companies I’ve seeded so I’ve watched this develop over time.

If you look at, they’ve done Wag. They’ve done WeWork. They’ve done Uber. They’ve done DoorDash, right? This is getting into the consumer wallet.

Yeah, they like a lot of marketplace companies.

Yeah, and consumer focused, right? And so they’re probably looking around the world and just saying, look at what’s happening in Indonesia, Vietnam, Southeast Asia, Asia. You’re going to have this massive consumption upgrade. These networks are once in a lifetime networks to own a piece of.

I think you see 20 percent around AI. You could argue that even with our 2016 election the ability to use technologies like machine learning and AI are instruments of warfare, right? They’re the arms that people deal in. So SoftBank went to Carnegie Mellon and put almost $100 million in this company Petuum. I don’t know how much they paid for that English company, ARM, right? So 20 percent of what I observe is they’re playing that game.

It’s unclear whether the LPs expect a return. It’s a place to park their money. It’s unclear what kind of return you can generate from that fund. What is clear is that if you do have a jewel in your portfolio and that’s going to drive your RoR as a VC and you’re about to go public or thinking about going public and that founder or founding team gets intercepted by SoftBank and they can maybe raise triple the amount of money for a fraction of the cost and stay private and not go through that process, what does it do to your own RoR?

Right.

Yeah. I think that’s the issue.

Last thing. We talked about firms getting more diverse. We talked about late-stage money. We’ve talked about whether or not we’ve seen firms become more meritocratic. Is there one change you think for the VC — will look different, maybe in 20 years, we haven’t talked about? Is there a change you may hope to see in 20 years in the industry?

Yeah. I think you’ll see the early-stage specialization is what will stay. So people who have built up networks in these industries …

Very in-niche topics.

In very niche topics will stay. There’s the orthogonal attack by crypto. We don’t know what that’s going to turn into. I generally think the best-in-breed firms, the firms that will have been around for a few decades and will continue to be around for a few decades are going to be — this is a word you hear all the time — they’re like platforms, but they kind of have a global nature. They’re able to invest globally. They’re probably managing in their vehicles a billion dollars or more and they’re multi-strategy, meaning like the way I call it is they have multiple bites at the apple.

What they have to do first is pick the right company to invest in and the price and the ownership doesn’t really matter. Once they start working with them and identifying that this is the right one, you really go in hard, right? Then it becomes a way. You have to fight to get in. Then you have to fight to build up your position. Then you have to fight against someone else coming and taking it. That’s why I think a lot of the funds that will be around in 20, 30 years that are most durable will be multi-strategy.

Do you think that’s …

Even including fund-of-funds. They’ll have fund-to-fund practices.

These are funds that invest in other funds.

Yes, so you’ll have the banner name of the fund. You’ll have the fund-of-funds practice to funnel deal flow, find new GPs. You’ll have your actual GPs running from seed to growth and then you’ll have a way to invest in growth, global opportunities.

So you predict fewer firms, maybe that are fewer, bigger, bigger monsters? Or is it like in addition to niche small guys who only invest in Lacroix bottles or markers?

It’s hard to know, but I think you’ll have the same number or potentially more of larger mega funds. Like you can imagine a firm like BlackRock having a shingle and investing across states, just given how fundamental technology is, too. You see Coatue doing this now, right? Coatue started as a public hedge fund. They built up a huge research arm. Then about seven years ago they hired a buddy of mine, Kyle Doherty, built out their U.S. office, started doing growth investing. Now they hired another buddy of mine, Matt Mazzeo, and now they’re doing early. So they’re multi-strategy and really good at what they do. They invested at Snap at two billion. Didi.

Right, no, they’ve done pretty well. They’ve shown how you can do everything from investing in public stocks to …

The interesting academic question is, is it better to start off as VC early then grow into growth and then have a crossover capability? Or is it better to start over in public and work down? If you look at Coatue, it worked pretty well for them. We’ll have to wait and see if the venture firms that are growing can sustain it to that level.

So basically you’re saying that you’re going to watch the public hedge funds eventually and in 10 years that’ll be …

That is way above my decision grade. No.

You’ll gradually move from seed to hedge fund.

No. I try to keep things simple. My main thing, I end up getting attracted to the entrepreneur and their story. It’s kind of like mushy. Then I just can’t stop thinking about it. Then I’m just, okay, they’re off. They raise like a big round maybe a year or two later and then they’ve got bigger problems than dealing with me.

Right. There you go. Okay. Semil, it was great having you.

Yeah, this was great. Thank you.