Learning from the best VC: Benchmark

eBoys by Randall Stross is a classic. It chronicles the early days of one of the finest venture funds ever: Benchmark. Below are some of the excerpts I found most valuable.

“When Benchmark invested $6.7mm in eBay in 1997, the auction company’s valuation was put at $20 million. By the next spring, the company was valued at more than $21 billion; the value of Benchmark’s stake had grown 100,000 percent in less than two years’ time, making it the Valley’s best performing venture investment ever.” Page xv

“John Doerr for example excelled at promoting the visibility of John Doerr, but he evinced no ability or wish to raise up his partners to the same prominence he enjoyed, (and after hearing so much about Doerr, what entrepreneur who approached his firm, Kleiner Perkins, wanted to be deflected to one of the other partners, an unknown not-Doerr?). Benchmark partners had selected one another on the basis of perceived ability to subordinate individual ego to the larger interests of the collective.” Page xviii

“Two met with the entrepreneur that night; the others met with him the next day. At the end of day two Benchmark and Mohr Davidow made an offer.” Page xxi

“Obtaining the opportunity to invest in a cash burning company that had only just launched its service and had yet to sign a single significant customer was not an instant win at Benchmark. One partner summed up the situation: ‘the good news is we won. The bad news is we won.’” Page xxi

“Eighteen months after Benchmark invested and seven months after Critical Path’s IPO, its trading price gave it a market capitalization of $2.9 billion. Benchmark’s investment was now worth 87 times the original sum.” Page xxii

On cold calling: “We have no fear. If we could find God’s phone number, we’d call him.” Page 6

“He also left out the way he and his colleagues had to project an aura of success for years before it actually existed, the way credit card debt and second mortgages had to tide the business over in the interim.” Page 6

“In year two, Beirne convinced Ramsey and their first associate, Alan Seiler, to abandon the low rent contingency fee model and instead adopt a high rent retainer fee model, the one that the elite search firms used. To be a success, one must act the part, and a retainer fee was the way to communicate that one’s services were in demand. That was the theory. It was not easy however to remain confident when Ramsey Beirne’s revenue dropped to zero — and remained there. Beirne was barely able to keep his colleagues from abandoning the experiment as the months went by and their personal savings evaporated. Finally, six months later they got their first retainer.” Page 7

“The founders held off installing voicemail. The phone was to be answered, promptly, by a human — even in the after hours.” Page 8

“’Hi we’re Ramsey Beirne, the leading retained executive search firm in high technology.’ If said with sufficient force, it would not be questioned. And if a client laughed at the audacity, Beirne and his colleagues would reply ‘we brought in the COO of Central Point. We built the whole management team.’ The prospect probably never heard of Central Point, but it must have been an important client for Ramsey to lay claim to it the way that it did.” Page 8

“a client would be willing to hear a pitch from Ramsey Beirne the next morning at 8:30, then Beirne would call back and ask that it be moved to 7:30, just to show that his blood was Type A.” Page 8

“’I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.’ He had removed anything uncouth in his appearance that would provide an excuse to be turned away. He didn’t display the know it all arrogance seen in many who have coasted through the most selective colleges, nor was he handicapped by a parvenu’s tendency to try to bluster his way to status parity by talking incessantly.” Page 9

On collecting receivables: “Office lore had Beirne leaving a voicemail and saying ‘Joe. David Beirne here. Here’s the deal. I want my fucking money Federal Expressed over fucking night right now. This is the most unprofessional bullshit I’ve ever heard goddamn it. You’re better than that, and you know you’re better than that. So stop playing this fucking game and get it done.’ After he hung up the story went, he looked over at colleagues whose mouths were agape and said ‘that was the right thing to do, right, guys? I mean, this guy owes us money.’ The others reassured him but steeled themselves for the repercussions when Beirne’s message was picked up. The CEO called back. ‘David I wanted to turn that into a tape. That’s an unbelievable message.’ He said he had transferred Beirne’s message to his own collections department saying ‘this guy is how we should be collecting our friggin money.’ The check arrived as promised via FedEx the next day.” Page 10

“The Benchmark boys would make his career transition instantaneous. They believe in equal partnerships and were not going to ask him to go through a let’s get to better acquainted probationary trial. He would be a fully enfranchised partner, with an equal share, on his first day.” Page 14

“Of the fifteen hundred proposals that came in, about five hundred of those seemed interesting enough to warrant a meeting with one partner. Two hundred one second meetings, and half of those received additional review.” Page 25

“Arthur Rock, the senior dean of American venture capitalists and an early investor in Intel, always insisted whenever his venture firm put money into a startup that the entrepreneur co-invest one third of his total net worth, whether it be large or small.” Page 34

“Kagle was a little worried that eBay had offered her only 6 percent equity, lower than the 10 percent that had come to be the Valley standard in recruiting a seasoned CEO.” Page 58

“The collective value of a typical venture capital portfolio will go down before it goes up — the pattern is called the J curve — because the companies that are not going to survive die before the best performers begin to shine and pull the value of the portfolio up with them.” Page 75

“In eBay’s case, at the time it was still sitting in the nest and Benchmark had invested in it, The Economist estimated that there were more than 150 online auction sites on the Web. One of those was far ahead of the rest, backed by Kleiner Perkins, and was already a public company with a market capitalization of about $175 million.” Page 76

“after two years in the saddle, he’d expect to be a director at 8 companies. That would be what his Benchmark partners considered the maximum number of directorships he could hold without diluting the quality of service to the entrepreneurs.” Page 144

“The company’s dire financial situation, with sizable liabilities, meant that Benchmark’s capital would be financing an existing balance sheet, rather than financing growth. That was not the case with the other first round investments. ‘If you put in half of what we’re on the hook for, it goes to do these two acquisitions and Yahoo and he’s out of money again. I think it’s either walk away or do a the big financing at lower cost. I don’t think the turn-over-a-few-more –cards-on-the-cheap works.’” Page 163

“The art framing business was ripe for consolidation because competitors were not solely interested in making the greatest amount of money, as he was.” Page 170

“’I’d love to kill it and I’d hate to kill it.’ And Rachleff then said “you know that emotion is exactly the emotion you feel when it’s time to shut it down.’” Page 191

“Webvan faced a choice: owning fewer customers, who shopped more frequently, or more customers, who shopped less frequently, and the strongest base of customers to have would be the former group.” Page 198

“we’ve been on the boards of hundreds of small companies, and the ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” Page 201

“He showed sides that illustrated the volatility of Yahoo’s and Amazon’s stock. In the month of June, Yahoo’s market cap had jumped by $4 billion. Do you think Yahoo was actually a really different company on Jun 30 than it was on Jun 1? Probably not. The few number of shares circulating intensified the trading activity. Only 3.5 million shares, or 10 percent, were in the hands of the public.” Page 208

“Three weeks ago the stock was at $18. Now we’re at $82.50. It’s just like what we said: it’s real volatile. Don’t get crazed. Don’t go buying Porsches or your resort home. We’ve got to focus on the long term.” Page 210

“What’s it like recruiting when the stock price is so high? Really hard. The options offered to new employees were certain to be valueless, as they would depend on the stock ascending still higher. I mean, it’s at such a ridiculous level, there’s going to be a big fall here. The question is sort of when and how.” Page 215

“Very few of benchmark’s startup investments had gone bust. Of 73 investments made by July 1999, only three had gone out of business. It seemed that venture investing was less exposed to the risk of failure, fundamentally different. Or had the ready supply of follow on capital — in private and public markets — merely prolonged artificially the lives of companies that would have soon perished were it not for the extraordinary infusions of capital?” Page 293

“One of the best ways to have a nice Silicon Valley company is to keep your headcount as low as possible as long as possible.” Page 301