John and Mike Moritz did Google at a $100 million valuation in the Series A
Kleiner Perkins had adopted the idea of a modern keiretsu within a venture capital firm.
They would help facilitate and sometimes force partnerships and biz dev relationships upon their portfolio companies.
1990s tech ecosystem - AOL days leading into the Netscape days. Biz dev deals and distribution were a lot more important and different than it is now. It wasn’t like you could just have an idea for a company, spin something up on AWS, put it on the Internet, and get distribution for free on social. It didn’t work that way. You needed deals in place.
Kleiner Perkins was unquestioned the best venture firm at the time, but they weren’t the only top tier firm in the sort of bulge bracket of proto VC firms at that point in time.
Sequoia had done Cisco, about to do Yahoo.
Greylock based out of Boston.
Venrock: the venture arm of one of the Rockefeller family offices
Technology Venture Investors (TVI) and Meryl Pickard Anderson (MPA) shared the same office building on Sandhill Road.
TVI had the unique honor of being the only venture capital investor in Microsoft, investing one million dollars to own five percent of the company.
MPA had done well for itself, having done investments in Palm Pilot, semiconductor companies, and Rampus.
Conversations began within the two firms about restructuring the ownership structure of the firms, as the founders and senior partners had made their money and junior investors were doing all the deals.
A quick digression was made about the economics of a venture firm, which includes the fund and the carry within a fund, as well as the management company.
The management company is typically an LLC owned and controlled by the founding partners, and the fees flow into the management company.
The split of the carry in any individual fund tends to reflect ownership in the management company, but these are two wholly different entities.
The management company owners decide how the fees get paid out, and typically this would be high numbers.
Bob Kagle grew up in Flint, Michigan, and was the first member of his family to go to college. He attended General Motors University, a training school for members of General Motors employees’ families.
Bruce had gone on to work in the PC industry and then at Goldman Sachs before joining Meryl Pickard.
Bruce was a few years younger than Bob and did not have the same safety net as Bob.
Bob approached Bruce with the idea of leaving Meryl Pickard and starting a firm together, but Bruce was hesitant due to lack of investment capacity.
Bruce and his fellow young partner at Meryl Pickard, D. Racliff, discussed the idea of equal economics.
Bob’s offer to Bruce to be an equal partner showed an incredible vote of confidence and maturity.
Bruce and Andy within Meryl Pickard had conversations about what their next fund would look like, and the idea of equal partnership seemed to have made its way around the building.
Val Vaden was the fifth founder of Benchmark, coming from the buyout industry.
Val’s investment style did not fit with the rest of the firm, and he left the equal partnership at the end of 1996.
Benchmark had invested about 16 million in companies by the end of 1996.
Despite the partnership transition, Benchmark carried themselves with incredible decorum and discretion.
Val was still listed on the website in January 1997, with a bio that mentioned his focus on technology special situations.
Val went on to establish Vector Capital, and was part of a few other venture firms over the years.
Heading into 1997, the future of Benchmark was uncertain.
To get the swagger back, the four remaining partners decided to replace Val and recruited Dave Burn from Ramsey Burn and Associates, the most aggressive and hyper competitive executive recruiter in Silicon Valley.
Bruce Dunleavy from Maryll Picker Danderson and Air was an investor in the company Ink, a pen computing company.
After Ink, Pierre Omidyar went to General Magic, where he started tinkering around on the early internet and created a collection of internet services called eBay for Electronic Bay Area.
One of the five or so main things on the site was Auction Web, which became eBay.
Piers and Jeff asked users to pay a small listing fee to keep the lights on, and famously, users sent checks to Piers’ apartment.
Piers and Jeff went around Sandhill pitching the company to VCs, and Benchmark and Bruce Dunleavy were interested.
They gave Piers and Jeff a term sheet to invest 6.7 million total in the company in a series A financing at a 20 million dollar pre-money valuation.
Night Ritter, a large newspaper conglomerate, had a competing term sheet, which was an acquisition offer.
At this point, eBay was growing 10% a month and was profitable.
Benchmark structured equity back loans to Pierre and Jeff in the amount of 750,000 dollars each as a way to incentivize them not to take the acquisition offer from Night Ritter.
This was reported by the Washington Post after the IPO of eBay.
It was also reported by the SEC filings that in addition to the equity investment that Benchmark made, there was also some kind of equity back loans to give them the ability to whatever they made on the appreciation of the shares that they got as a part of the direct investment.
It has also been heard from a podcast that three of the six was used as a secondary, 50% of the investment round.
There has also been speculation that there was no secondary and that it doesn’t exist at all.
It is believed that there was at least something, and there is enough smoke around the equity back loans to suggest that there was a secondary transaction.
This allowed the entrepreneurs to take some money off the table, so they didn’t sell the company for 50 million dollars and instead let everybody make 50 billion dollars.
Benchmark was the only VC term sheet and the only ones willing to structure a deal like this.
Benchmark was willing to structure a deal that allowed the entrepreneurs to take some money off the table without selling the company.
This allowed Benchmark to retain some carry after the eBay investment.
It is believed that there was at least something, and there is enough smoke around the equity back loans to suggest that Benchmark was the only VC term sheet.
David Byrne, Bob K. Gold, Bruce Dunleby, Kevin Harvey, and Andy Radcliffe all made the same amount of money on eBay, demonstrating the economic incentive of the equal partnership model.
However, the most salient incentive on a day-to-day basis was the impact of the decisions on their own career trajectories.
Introducing a secondary incentive of becoming senior widened the gap between the older and current generations, and could lead to misalignment.
The only way this model works is if everyone brings the same amount of value to the partnership, otherwise the gap between those who are bringing it and those who are not will widen.
This model is delicate and requires an unbelievable support system for the partners to succeed.
It is critical for a board member to feel psychological safety in their partnership in order to do the things they think are right without conflicting incentives.
This is a rare quality to find in a board member, and it is essential for the success of the partnership.
Rich Barton, a former venture partner at Benchmark, noted that the culture of cooperation and trust at Benchmark is a model for entrepreneurs to bring into their company.
This culture spills over into the portfolio company relationship, with frequent communication between the board member and the entrepreneur.
This tight-knit relationship is essential for maintaining world-class performance, but it will not scale.
Rich Barton noted that the partners at Benchmark had a debate about whether to expand their operations.
Some partners argued that they should hire associates and junior partners, and scale up their capacity.
Others argued that they should focus on their existing model and not fix what wasn’t broken.
Rich Barton noted that other firms had been successful with different strategies, such as Sequoia’s expansion into multiple continents and Andreessen Horowitz’s focus on Web 3.
Benchmark tried a variety of strategies, including corporate partnerships, international expansion, and raising larger funds.
However, the one thing they stayed true to was not bringing on junior partners.
Rich Barton noted that the other firms that were successful with different strategies had someone who could make a call and take the time to travel and find the right partners.
Bill Gurley was identified as the perfect candidate for the sixth partner due to his experience in the industry.
He had been a venture capitalist long enough to have burned through all the capital being a bad VC, but still had 20 years of running room left in his career.
He was also fiercely competitive but also an unbelievable teammate.
His history was perfect for the role, having started his career as an engineer at Compaq, then going to Wall Street and writing Above the Crowd.
He originally started Above the Crowd by taking over the slot of someone who sent out a weekly fax, and then added to the contact list from the Pom Pilot with fax numbers.
Bill joined Hummer Windblad and spent 18 months there as a venture capitalist.
He was one of the rare female-led venture firms at the time.
People said having someone like Bill on your board was like bringing in a new co-founder, as he was always working on behalf of the company intellectually and executionally.
He was known for his Calvinist work ethic.
He was known for being both analytical and willing to take risks.
He was known for investing in both consumer and enterprise companies, but became known for his investments in marketplaces.
Bill Gurley was known for his deep understanding of financial statements, pricing power, and take rates.
He was able to recognize the mispricing in the Series A market and took advantage of it.
Benchmark was not architected to build a company like Y Combinator, but they recognized the shift in the market and took advantage of it.
They raised a billion dollar fourth fund and before that the first fund was 85, the second was 150, and the third was 175.
They expanded internationally first to Europe and then to Israel, with Bruce spending a lot of his time in London for the first year.
They recruited seven partners to come in and run the international funds, but the separate Europe fund and a separate Israel fund both structured the same way but separate partnerships.
The upside benefit of the trade-off of running a partnership like Benchmark was that the partners were able to spend all their time on the field, making investment decisions and helping portfolio companies.
Bill talks about one of his biggest regrets being that Benchmark failed to pursue Google when they had the opportunity.
Benchmark also missed out on Skype, which was a much smaller miss but still a big miss for a different reason.
Benchmark also missed out on Facebook due to a conflict of interest with Franster. Mark Zuckerberg was reportedly fond of the Benchmark team, but they were unable to pursue the investment.
Peter Fenton joins Benchmark from Excel, which had just done Facebook.
Peter wasn’t directly involved in the Facebook investment, but it was part of that relationship in DNA.
The existing group of GPs at Benchmark, and in particular Bill, found that Peter had already been to all the companies they were interested in.
Peter’s dad is Knoll Fenton, who was an entrepreneur and then founded Trinity Ventures.
Peter, Bill, and the other GPs go on a spree of recruiting to inject a little giddy up back into Benchmark.
The most impressive lineup of venture capitalists join the same firm, which retrospectively feels like the Heat.
David Byrne, Eddie Rachliffe, and Alex Pulcansky step back and don’t take tail economics, meaning they’re out of the management company and no longer have formal decision making power in the firm.
The current ownership structure of the management company transfers to the current GPs and they don’t take carry in the new fund.
They keep working and having carry in the boards from the old funds and they’re big LPs in the future funds.
He had GP economics in the Facebook fund and was walking away from that to join Benchmark.
It was an emotional decision for Peter to join Benchmark as he had to decide if he really believed in the refounding of the firm and the refocusing on the model.
Peter went on to do investments in Twitter, Doctors, Hortonworks, New Relic, Elastic, Quip, and Friend Feed.
Matt Coler’s contributions to Benchmark included his understanding of mobile advertising, which he saw as a potential for a TV-like experience with the added benefit of data and location.
He also identified the dynamics behind Uber before Bill Gurley invested in it.
Matt’s quote, “Our job is venture capitalist is not to see the future but to see the present very clearly,” became a truism of venture at that moment in time.
He also identified the potential of Series A investing and the difference between formation stage and seed investing.
Matt’s investments in Instagram and Asana paid off hugely for the partnership, with Instagram returning the fund on the investment.
He also identified the potential of the smartphone becoming a remote control for the real world.
By the end of Fund Six, it was clear that there was something special going on.
This led to Fund Seven, which was a perfectly gelled group of GPs with expertise in all the things that were going to flourish in the next decade.
Everyone knew exactly what to look for and prices it appropriately.
They had the swagger. They knew they had a secret. They knew they had the right team. They knew they had gelled as a team.
They were willing to just go, run and not overthink things and play the game on the field. It was a perfect balance of gut and intellectualism.
This fund is ridiculous, with investments in Uber, Snap, Discord, Stitch Fix, Duo Security, Elastic, Next Door, and We Work.
A quote from talking to folks part of the firm and other enterprises was “swashbuckling insanity” in a good way in every dimension.
The Fab 4 era had the very best marketplace investor in history in Bill Gurley, Matt Cola who helped create the DNA of the modern social media company, one of the best games investors to ever live investing in games with Michalaski, and Peter Fenton as a utility player and total shark across all categories.
In March of 2015, Forbes came out with an article called “The Benchmark Way” chronicling the Fab 4 era and all the companies they had invested in.
Benchmark knows how and when to sell in addition to how to identify these phenomenal companies.
The Benchmark philosophy is that they don’t want to hamstring the next generation with any of their decisions.
In 2018, when a Wall Street Journal piece came out, their holding in Uber was worth 8 billion dollars, which alone would have 16x the fund.
Benchmark sold almost half of its stake in Snap and realized a billion dollars in gains.
They also sold $900 million worth of Uber shares to Soft Bank and at that point still owned 7 billion as of 2018.
Benchmark was instrumental in encouraging and pushing Snap to go public as soon as they did.
Bill Maris started sounding the alarm in Silicon Valley about valuations being out of control and not being in the best interest of the company or founders to raise money at these valuations.
Uber hit an unprecedented valuation of at least $60 billion on the private markets, which had never happened before by an order of magnitude.
This created a lot of pressure on Benchmark, the board, and the LP’s of Benchmark.
The amount of capital involved impacted thousands of people, including employees, customers, and drivers on the platform.
The pressure to land the plane and stay on the same order of magnitude of the current valuation was greater than any single relationship with a founder.
In 2018, Benchmark brought on Chathan Kudaguta as a spec hire.
Chathan had already done investments in Elastic, MuleSoft, and MongoDB, and had achieved success with all three investments.
Chathan is known for his involvement in the only episode of Acquired not related to tech or business, where he and Eric analyzed the last Star Wars movie together.
Chathan is a perfect example of the idea that if you are in venture for 7ish years, you can have 20 amazing years ahead of you.
In 2019, Benchmark brought on Miles Grimshaw as a General Partner.
Miles had previously been at Thrive Capital and was involved in helping build that firm.
Miles was involved with Eric’s Table and Benchling, and was very early to Benchling before Benchmark and Eric.
Miles’ greatest success is joining Benchmark, and he is now part of the current Benchmark partnership, which includes Peter Fenton, Eric Vessria, Sarah Tavel, Chathan Kudaguta, and Miles Grimshaw.
Many people know that Benchmark has a website that just says Benchmark, which has contact information linked to their Twitter feed and lists their announced portfolio companies in a Twitter list.
Benchmark was the first venture capital firm to have a website in the mid-90s, and they evolved it a few times to become more modern.
Matt Cohler joined the firm and worked on the website, making it more web 2.0 and interactive.
The website was ultimately seen as taking credit for the entrepreneurs’ success, which is antithetical to Benchmark’s mission.
Matt Cohler showed the website to the rest of the partnership and got a lot of feedback and opinions, ultimately leading to the decision to not have a website at all.
This decision added to the mystique of Benchmark, especially in the Fab 4 era.
Benchmark has a different model than other firms, where they do not lead rounds and instead focus on helping to bring the best round together without the conflict of having to force more of their own money down the company’s throat.
This is beneficial for founders, as they can have a more real relationship with their board members, who are not pitching for the next round of capital.
Benchmark has experimented with different types of investing, such as mezzanine investing and growth investing.
They also host dinners with CEOs of companies they have missed, in order to learn why and adjust accordingly.
Ben Miller, CEO and co-founder of Fund Rise, discussed the Fund Rise Innovation Fund, which enables customers to invest in late-stage growth tech companies that are still private.
Miller explained that these companies have a valuation of more than a billion dollars, and have raised money from growth funds.
Miller discussed the divide between public and private markets, and how Fund Rise is working to tear down this divide by giving retail investors access to these great companies.
Miller noted that two-thirds of all venture capital is Series C and later, and that retail investors are the long-term investors for these companies.
Miller invited founders to email
notvc@fundrise.com to get in touch about having the Innovation Fund participate in their next funding round.