Chat Transcript: Author Randall Stross
July 13, 2000 -- The current high-tech boom owes much to venture capitalists, the people who put the money behind the ideas. Get an insider’s perspective on the workings of one of the most influential Silicon Valley firms, Benchmark Capital, the venture capitalists who backed such notable start-ups as eBay, Webvan and Ariba. Randall Stross, the author of eBoys, chronicled the two years he spent in the inner sanctum of Benchmark Capital, where he had unfettered access to the firm, sitting in on monumental decision-making sessions and gaining insight into the way venture capitalists work. Stross joined us today in an online chat.
Moderator at 2:59pm ET
Welcome to ABCNews.com's chat with Randall Stross. Let's begin.
Moderator at 3:00pm ET
How were you able to get such open access to Benchmark Capital? Did you encounter any resistance to your idea to cover the firm?
Randall Stross at 3:01pm ET
It took me a long time to persuade the partners to let me undertake the project -- 18 months from the time I first approached them to the time they consented. I think if I approached them today when they are much bigger and much better known, they would probably say no. By tradition the venture capital industry has been closed to outside observation and I happened to catch benchmark early in the firm's history when it wanted to shape itself and I think it viewed breaking the taboo of not permitting outsiders to observe was one way of shaking things up.
George at 3:02pm ET
What specifically does a VC look for in a new Internet startup before investing and what kind of investment pay off is expected?
Randall Stross at 3:02pm ET
Well the simplest way of answering is to say that the venture investor is looking for a very large opportunity.
Randall Stross at 3:02pm ET
And they will turn down good ideas that address small markets. They're looking for good ideas that address big markets.
Randall Stross at 3:03pm ET
But what makes it tricky is its the nature of this business to invest in new markets that don't yet exist, or there would already be incumbents and little opportunity for new entrants.
Randall Stross at 3:04pm ET
They're also looking for entrepreneurs who possess the right stuff, who will be able to reinvent the company three months after the initial investment when prior assumptions are proven wrong and the new company has to be conceived on the fly.
Randall Stross at 3:04pm ET
Oftentimes you hear venture capitalists refer to they're investing in the person.
Randall Stross at 3:05pm ET
The returns have until recently been expected to be at least a 5x return in three years. For a brief time in the heady days of 1998, the threshold climbed to something like a 10fold increase in three years and that was actually realistic, briefly.
Randall Stross at 3:06pm ET
But, as a general point, venture capitalists measure gains in terms of multiples, not in terms of mere percentages. And again, the only way you have a chance of attaining such rapid large gains is by entering businesses that do not yet exist.
Keith Holmes from proxy.aol.com at 3:06pm ET
Dear Randall, Given the recent tech shakeout in the NASDAQ market, what should a startup company know about the current state of VC money. Thanks
Randall Stross at 3:08pm ET
Since the down turn, there is now an understanding that there will be no easy exit for the investors and businesses that require an enormous capitalization combined with a dubious business model, will no longer get the benefit of the doubt. So there is a new cautiousness on the part of venture capitalists because they know that the capital needs of young companies will have to be met by private capital markets. The public markets will no longer be readily available for unproven businesses.
Ralph Freshour from toyota.com at 3:08pm ET
So your saying there isn't much room for companies who are "inventing a better mouse trap"?
Randall Stross at 3:09pm ET
A better mousetrap, sure. We know that there is demand for better mousetraps. Is there demand for a better widget trap that people have never been asked to pay for and that will cost $100 million in order to establish a brand? Perhaps not.
Adam from shci.com at 3:10pm ET
What was the atmosphere like in the office on a day to day basis? Intensely busy, organized busy, chaotic...
Randall Stross at 3:12pm ET
It's actually highly structured because the partners' days consist of an almost unbroken string of meetings with prospective entrepreneurs. Interspersed with those appointments are phone calls from or to CEOs of portfolio companies and quick consultations with partners in neighboring offices. Sometimes there's a board meeting that pulls a partner out of the office. Sometimes breakfast or lunch meetings also require leaving the office. But for the most part, this or that partner will be found in his office, or a conference room during the day. So other than Mondays, when partner meetings bring all the partners together in one place, you often don't see all the partners in one place the rest of the week.
Randall Stross at 3:12pm ET
So it really isn't a dramatic setting.
Ram Anant from ti.com at 3:13pm ET
How does one go about approaching VCs? What are the steps one needs to take if one has an idea that he or she might think is worthwhile?
Randall Stross at 3:14pm ET
For the leading venture capital firms, who are overwhelmed by the number of submissions that they receive every day, there is an almost ironclad rule: only business plans that are accompanied by the recommendation of a person trusted by the firm have a decent chance of being considered.
Randall Stross at 3:15pm ET
That means a recommendation from an entrepreneur, who the partners have worked with before, or from an attorney, accountant, consultant or other person who is professionally known and trusted. Of course this makes it very difficult for a first-time entrepreneur who lacks the connections to these outside advisors. So somehow, someway, the aspiring entrepreneur needs to build a relationship with an intermediary who then in turn can later make the case for an investment to the firm.
Randall Stross at 3:17pm ET
There are many sources of capital however and the less structurally organized world of angel investors that is wealthy individuals who make investments in start-ups as individuals are probably a better place to look for initial investments. Their expectations of having an entrepreneur establish a reputation is more reasonable.
Charlotte Lafferty from rasserver.net at 3:17pm ET
at you average VC firm, what percentage of Business Plans submitted are actually read?
Randall Stross at 3:18pm ET
I can only speak about the practice at Benchmark Capital. There, the partners take pride in having at least one partner look at every single submission. However, in the course of the first four years of Benchmark's existence, the firm never made an investment in a submission from an unknown entrepreneur.
Randall Stross at 3:20pm ET
In some ways it's very similar to the workings of the book-publishing world. The odds of having a blind submission accepted for publication are almost non-existent there too. In a way, you could say that literary agents perform the same function of screening for the publishers that trusted entrepreneurs and attorneys do for venture capitalists. In both cases, an unknown person has no way of directly getting the attention of the ultimate decision-maker.
jack ross from bankofny.com at 3:20pm ET
Do you have any advice for someone in their mid 30's who wants to change their career to pursue a new and successful career as a Venture Capitalist?
Randall Stross at 3:22pm ET
The career opportunities for people who wish to become a venture capitalist are extremely limited. The billions of dollars of capital that are managed by venture capital firms requires a surprisingly small number of individuals. At this point, the only way for someone to be invited to join an established respected venture capital firm, is to have a proven track record as an extremely successful entrepreneur. There are very few exceptions to this unwritten rule.
Sharon from dialsprint.net at 3:23pm ET
Can you please explain what has happened to Webvan. The concept is brilliant, for old, young, injured, ill, as well as those who live in cold, snowy climates. Will buying Peapod speed up entering the market on a nationwide level?
Randall Stross at 3:23pm ET
First a minor correction, WebVan is merging with Home Grocer, not PeaPod.
Randall Stross at 3:23pm ET
And there are many questions that remain about the viability of the Webvan model.
Randall Stross at 3:24pm ET
HomeGrocer's approach is less capital intensive and for that reason would seem to offer a better chance for Webvan to enter more markets quickly. But the underlying question -- will many shoppers shift to ordering via the Web -- has not yet been answered.
Randall Stross at 3:25pm ET
Ultimately, I believe, it will happen. But, it's not clear to me that it will happen quickly enough.
James from dsl.snfc21.pacbell.net at 3:25pm ET
If you were to list the three most important things a venture capitalist looks for in a potential venture what would they be?
Randall Stross at 3:26pm ET
One would be size of market, potential market. Two, degree of uniqueness. And three the entrepreneur's smarts and heart.
vd at 3:26pm ET
There are stories about these large VCs who sit through your tech. presentations (sometimes more than 1) and then magically the same ideas appear in some other known "friends" of these VCs. How much of this is true? How does one protect oneself?
Randall Stross at 3:27pm ET
One of the stories that I write about in the book is of an entrepreneur, Eric Greenberg, who was extremely concerned about precisely this potential problem. He had felt burned when an idea he had pitched to one firm was rejected but within a matter of several months if I recall correctly that same firm had funded an idea very similar to his original one.
Randall Stross at 3:29pm ET
As a matter of tradition, venture capital firms will not sign nondisclosure statements. However, the problem I believe is much smaller than you might think. Because good ideas tend to come in waves where ten different entrepreneurs will present the same basic idea literally within the span of one week. The best firms have far too many good ideas to check out to really have the time and bandwidth to go recruit a team for an idea they ripped off from an entrepreneur they turned away.
Randall Stross at 3:30pm ET
And in Eric Greenberg's case he was able to put aside his fear and was willing to accept an offer to be an entrepreneur in residence at Benchmark. His story has a rather happy ending. Despite the very high degree of distrust of venture capitalists in general that he had begun with, he worked with Benchmark and founded a company that swiftly went public and which is doing quite well -- Scient.
Keith from proxy.aol.com at 3:31pm ET
Are the VC guys that smart or just good at knowing what will be accepted by the public markets?
Randall Stross at 3:31pm ET
In times of a frothy stock market, every venture capitalist looks smart and the better ones will laugh at themselves knowing it will be proven fleeting.
Randall Stross at 3:33pm ET
The track records of a venture capital firm, I believe, can't be judged unless an extended time period such as ten years is unit of measurement. That way the exceptionally good times are blended with the dog days and the full cycle is captured. Venture capital returns have always behaved in a cyclical fashion.
Bob from citinv.com at 3:33pm ET
How did Benchmark increase deal flow and obtain their original deal flow?
Randall Stross at 3:34pm ET
They started out with five partners. Three of whom were coming directly from established venture capital firms and the prior experience as venture capitalists gave them instant deal flow. The hardest challenge to overcome initially for benchmark was not getting deal flow...
Randall Stross at 3:35pm ET
but raising their first fund because institutional investors have always been very wary of first-time funds. And they barely succeeded in raising the very modest $85 million that they had set as their goal for the first fund.
Randall Stross at 3:37pm ET
From their experience one can see that it's not easy to launch a new venture capital firm. Even with prior industry experience.
Moderator at 3:38pm ET
What do you think has been Benchmark's most successful investment to date?
Randall Stross at 3:38pm ET
Easily the best would be eBay, which is perhaps the single best venture capital investment of all times...
Randall Stross at 3:39pm ET
When Benchmark invested $6.5 million in 1997 eBay's valuation was put at about $20 million. Not long after eBay's IPO in September 1998, the company's market cap briefly touched $30 billion, which was a pay-off that requires a lot of zeros to calculate.
Lynn at 3:39pm ET
You mentioned "entrepreneur in residence" earlier, could you please expand on it. How does the relationship work from the entrepreneur & Benchmark standpoint?
Randall Stross at 3:40pm ET
Many of the leading venture capital firms have EIR programs where at any given time, one or two individuals who have a prior history of success in their fields are invited to use an office and come up with an idea for a new venture...
Randall Stross at 3:42pm ET
The venture capitalists provide a stipend, in Benchmark's case it was $10,000 a month, and the ears of the partners for informal consultations. The entrepreneur is not legally bound to have the host firm fund the new venture. All they are promised is a first look. But in practice, the human relationships that are built during the course of the residency tend to bind the entrepreneur to the host firm. And many successful businesses have come out of Benchmark's EIR program, one of which was Scient, mentioned earlier. Another was Ariba, the B2B giant that was born in very modest circumstances -- a borrowed office in a corner of Benchmark's office.
Moderator at 3:43pm ET
As Benchmark's investments made the partners more and more money, did you see any change in the dynamic of the firm? Did making money change the partners in any way?
Randall Stross at 3:44pm ET
The partners work very hard at showing themselves and showing the world that "it's not about the money." Did they go on wild shopping sprees? No. Did they cut back their hours? No. In fact, if anything changed it's that they worked even harder than they had as if to fend off charges that success was going to make them soft.
Randall Stross at 3:44pm ET
For an entrepreneur who approached Benchmark after the early successes it was a good time because the Benchmark partners, personally coming from modest circumstances, were very concerned that their success would dull their work ethic.
Perry from 69.155.223.on.wave.home.com at 3:45pm ET
Given the fact that interest rates have risen steadily since the middle of last year, do you see this "liquidity" drawdown trickling down through the venture capital market(s)?
Randall Stross at 3:46pm ET
The pool of money available for investors is at an all-time high. The institutional investors who supply the capital that venture capitalists manage have seen the outrageous returns of recent years and have reapportioned asset allocation ratios to favor venture capital. The industry is literally awash in capital. In the past 12 months, one firm after another has raised billion dollar kitties.
Randall Stross at 3:46pm ET
Interest rate fluctuations do not impact these commitments directly.
Art A. at 3:47pm ET
I saw your comments about how to join a VC firm - be a successful entrepreneur! - but I presume that applies to joining as a partner. Don't VC firms hire "associates", perhaps recent MBA with technical background who can help review potential business plans and do the legwork?
Randall Stross at 3:47pm ET
That is true. I am not familiar with the process by which associates are hired because Benchmark has never used associates.
Randall Stross at 3:48pm ET
When Benchmark was founded the partners resolved to only have full partners so that they could say to entrepreneurs, when you deal with someone at our firm, you deal directly with a decision maker.
Moderator at 3:48pm ET
Did writing this book change the way you look at venture capitalists? How?
Randall Stross at 3:49pm ET
To be honest, I didn't have a very clear picture of any kind of what venture capitalists were like and how they went about their work. I did go through several phases in my thinking about how easy it would be to become an entrepreneur myself. I began with the assumption that it would be hard. Then ...
Randall Stross at 3:51pm ET
Simply because I was around so many new ideas and became infected with the notion that most anyone could start their own dotcom, I thought this is something that I could do too. But then with the passage of time, and a deeper understanding of the difficulties making a company successful in a ferociously competitive ecosystem -- it seemed as if every company that Benchmark funded faced five equally well-financed competitors helped purge me of my unrealistic picture of entrepreneurialism. I think it's very easy to start companies. And I think it's very very hard to make them successful.
todd from erie-tnt-1.pa.erie.net at 3:52pm ET
What is the average age of the partners? And at what age did they begin?
Randall Stross at 3:53pm ET
When Benchmark was founded, the partners were all in their 30s, which was unusual. The typical pattern is for someone in the computer industry to become a venture capitalist late in one's career or at least in the middle portion of one's career. The Benchmark partners were conspicuously young by industry standards.
Randall Stross at 3:53pm ET
And it reflects a trend toward younger rather than older partners.
Moderator at 3:53pm ET
Since we only have a few minutes left, do you have any closing comments or thoughts that you'd like to share with the audience?
Randall Stross at 3:55pm ET
I hope that the downturn in the NASDAQ since March is not deterring aspiring entrepreneurs from giving start-ups a shot. I still see the world of start-ups as the most interesting place to be. No other part of the economy offers the unfettered opportunity to do new things without organizational drag. And I will continue to look to the world of start-ups for the stories that I want to read about tomorrow.
Moderator at 3:55pm ET
I'm sorry, but we're out of time. Thank you to Randall Stross for joining us today to discuss his book, eBoys, and thanks to all of our audience members for your great questions and comments.