Sunday Conversation #1: Peter Fenton, Benchmark Capital

[Update: I’m beginning to get the Sunday Conversations transcribed and add them to the posts. A lot of people have asked for it, and I’m happy to provide where appropriate. So now, on this conversation, you can read it, watch on YouTube, listen via iTunes, SoundCloud, and of course, on Swell Radio.]

I’m excited to unveil the first “Sunday Conversation” with Benchmark Capital’s Peter Fenton.  For those interested in venture capital, Peter is a well-known figure and one of the most successful venture capital investors in the world. Peter was kind enough to put aside some time to chat with me over the past few months, and we finally taped the following conversations at Benchmark’s new offices in Mid-Market back on May 31, 2013. As you’ll see in Peter’s answers, he offers precise commentary on a range of issues that are critical both to investors and founders alike. In a time when venture capital firms are getting bigger and engaging in marketing, Benchmark takes a unique, highly differentiated approach, which you can see from the videos here. Below are the seven (7) short video segments separated by topic, and at the bottom of this page are SoundCloud files if you’d prefer simply to listen to the audio. These questions were designed so that the audience interested in this topic can quickly learn from the guest. This series will run twice per month and feature guests in a long-form discussion. ♦

Part I, Attributes Of Great Entrepreneurs (4:37) – Fenton discusses what he believes are the attributes that make up great founders, what he describes as possessing a deep, innate motivation, being continuous learner, and having ability to hire diverse team born from the self-awareness of realizing what one’s strengths and weaknesses are ♦

Semil Shah: I’m Semil Shah and I’m here at Benchmark Capital in San Francisco to have a discussion with one of the general partners here, Peter Fenton. So, I’d like to have a wide-ranging discussion with you today and learn sort of how you do your work. The first kind of general question is you’ve worked with entrepreneurs now for over a decade and seen some companies grow both on the consumer and enterprise side. What is it about working… What are the attributes that make working with a great entrepreneur great? How do you identify that, and then how do you build that relationship leading up to investment and then once you’ve invested?

Peter Fenton: Yeah. Well, it’s the principal question that we focus on before an investment, which is the quality of the person we’re going to work with. The saying that we like to have at Benchmark is that good judgment comes from experience, which comes from bad judgment. So, we get it wrong a lot, but what’s interesting is when you get it right.

I think there are three attributes that I try to be reductionist about that define the greatness that we see in our world. It’s, I think, universal. This is perhaps too precise, but I think you’ll see these characteristics in a Jack Dorsey, a Liu Sarnia, a Dick Costolo, a Steve Jobs, a Jeff Bezos and the list goes on.

First, I think there’s just a profound, deep, innate motivation. A lot of what happens after the fanfare of starting a company and hiring people is, “Why are we here, what’s the purpose, and why are we doing this?” Great entrepreneurs have a motivation that runs so deep that it feels insatiable, and that is infectious. It lets other people around them have that motivation. I often ask the question of a company, what’s the purpose, why are you doing this. You’d be amazed at how few entrepreneurs can really answer that question. The great ones can. They have a real sense of the purpose, and it’s usually not about them.

Second, I think there’s a common trait that I would call ability to learn. My partner, Bob, likes to say, “Be a learn-it-all, not a know-it-all.” The problem of being a founder, entrepreneur, CEO, your business is changing on you radically every year. So, as you scale from zero to 30 it’s very different at 30 than it is at zero, and then to 300 all over again, and then to 3,000 all over again. So, if you don’t have that curiosity and ability to learn, you can get left behind. The company will grow past your ability to grow with it.

Being a learn-it-all means you have to be very self-effacing around what you do and don’t know, apply critical thinking, and don’t assume that what you’ve been told is right. That trait is a muscle, I think, that you have to continually work on. Sometimes people lose that as they achieve success, and they become know-it-alls and they’re full of advice. One of the things we aspire to do in our business is to accept humbly that we don’t know a whole lot. But, we do have an ability to learn quickly which is why I’ve tried to invest in things like consumer, Internet, and enterprise. Because I think that’s one of the great assets that we can bring is that curiosity to a company.

And the last thing, third thing, is perhaps the most obvious which is the ability to attract great people. It’s not as simple as build a great team. The great entrepreneurs have found they need to find complements. So, if you look at yourself and reflect on your skills and your talents and your unique abilities you’ll find that everybody has their gaps. I learned this really from, say, Jack or Liu, who are very different, but each of them found a complement in other people that allowed them to be more of who they are.

Put a different way, it’s acute self-awareness reveals what you need as your partner. I think that self-awareness is humbling, because you have to admit what you’re not great at, and then you have to play your game. I think sometimes people think they need to be visionaries, but they’re really great at execution. Other times people are great at relationships, but they’re not as good at execution. Well, you have to find your complement.

I think there’s different dimensions of entrepreneurial leadership that vary by the character of the people that inhabit those folds. The great entrepreneurs figure that out. They find their complements. This is, of course, if you look at what Steve did at Apple with Tim Cook. People really balanced to stuff he wasn’t great at, so he could be obsessive about the stuff he was.


Part II, Boardroom Lessons (2:52) – Fenton discusses lessons from the boardroom, explaining how investors and founders approach managing the board ♦

Semil: So, a derivative of that, a more tactical question would be, you’ve sat in on over a thousand board meetings, right. So, once you’ve identified these attributes in entrepreneurs, what is it that you try to do, as a board member, and what is it you think the founders, in general, whether you back them or not, are looking for in board members?

Peter: Board meetings, having sat through way too many as you say, 14 years, we try to calculate the exact number, but it’s well over a thousand total. They vary from watching-paint-dry boring to sublime critical thinking, where you’re really at the heart of the business.

The first question in any board dynamic is, is there trust? If there’s a healthy degree of trust, where everyone has an agenda to advance the business, versus their own personal agenda, you set the groundwork for doing great work at the board level.

The attributes of the great board meetings that I can point to are really focused on asking tough questions and applying critical thinking, as opposed to just updates. A lot of the entrepreneurs I work with, I encourage to get rid of the PowerPoint. A typical board meeting will have 30 to 60 PowerPoint slides. So, I ask entrepreneurs I work with to think about that as a Word document, and can you reduce it down to something we can read before the board meeting, so we don’t sit there looking at slides for three hours.

If you think about it structurally, I think there’s something ideal in a board meeting where about a third of it is update. “Here’s how we’re doing, here are the financials, here’s the progress against commitments we’ve made.” The second third should be some meaty topic, you know, competitive landscape, potential product road map, any number of things, but a really meaty discussion which is bringing out the best of the board members. The last third should be an open dialog where the group thinks about the problems of the business and there can be an open dialog about it. But, you can’t do any of that without trust.

A lot of entrepreneurs, I think, would benefit from studying someone like Jeff Bezos, who’s taken the mindset that everything needs to be written down into a Word document, six pages or less. It needs to be read. He actually has his board sit there quietly at the beginning of the board meetings and read it. He doesn’t know if they’ve read it in advance. Hopefully, there’s enough trust that you can actually get the materials out in advance and they can read it.

It’s amazing what happens when you change the dynamic from being one of reporting to a bureaucratic structure to engaging with minds. It’s profoundly different. I think the trap most people fall into, and I certainly have played my part in this in asking for the updates, is that it can just reduce itself to pure updates, which is not really what a board should be about.


Part III, Fenton’s Path Into Venture Capital (4:42) – Peter chronicles his path into venture capital, which will catch the attention of folks out there who are interested in becoming a venture capitalist at some point in their career ♦

Semil: So, peeling back the layer a little bit, just on you as an investor, can you share a little bit about in how you got interested in venture capital, how you kind of cut into the industry and then maybe the one or two events that set you on a path where you felt like, “Hey, I can do this”?

Peter: It goes way back to my childhood, as pathetic as that may sound. My dad was a founder/CEO and so for the better part of my formative adolescent and pre-adolescent years, I heard about these monsters that sat in his board, venture capitalists. As an adolescent you think, “Well, okay anyone who’s terrorizing my dad must be good.” So what he didn’t like about them was they were abstract, they weren’t in touch with the human realities of running a company and they had a false sense of the ability to predict things and be certain about the future. When you are running a company you don’t know much of anything about the next six, 12 months, you’re working through a lot of ambiguity. He then became a venture capitalist when I was a Stanford undergrad, and in that process revealed to me that there’s a different way of doing business of really partnering with entrepreneurs.

This is back in the late 80s early 90s and I saw how much joy it brought to him. What stood out to me, even then when I was an undergrad, was if you can be in service to extraordinary people who are changing the world for the better, that’s a noble calling. I think also maybe I just had enough self awareness to say, “I don’t really want to run a company.” I think there are other assets or attributes that I am more motivated by. I’m inherently very curious. I like to learn about new areas, and I think some of the things that I have I think as personal attributes are better for doing this job. Ultimately, these are leaps of faith, you don’t really know.

So irrationally, rationally I said this is a job that, seeing it practiced with a different attitude, a service attitude, is inspiring to me. I thought at age 21, 22 “This is what I want to do.” The advice I got was, “Good luck,” because it’s a career where you’re told people need to find you versus you find them. I put my head down and went to Bain to learn the language of business for a couple years and then went into a startup company because I thought it was critical that I work as a product manager getting a 1-0 product out the door to feel the risk, to get a sense of grounding around what the company building really was about from the bottom up.

That company, Verage, I worked at for a couple years, went public in 2000 and then somewhat embarrassing, I decided to get an MBA. At that point, you could get into the venture business if you could fog a mirror. So, not to make fun of the people that chose to hire me, but I did get in to Excel because one of my former Bain colleagues. Theresa had gone to the firm and knew that I was interested in venture and I thought it was too early. I really thought at age 25, 26 that I needed to spend another three to five years working in a company. And the advice I got which really stuck with me is don’t delay your passion. If you can pull it forward to today, I believe very strongly that this is a ten-year plus learning curve for being any good at the venture business. Start as soon as possible, make it what defines you. It’s your plan and it’s the thing you’re most motivated by.

So I took the leap and somehow managed to not get fired after the first three years because if you joined the venture business in 1999 it was a killing field. I think there were 14 people in my class that went into venture from the 2000 class at Stanford and maybe two remained. So what catapulted me forward, I don’t know, endurance. I wouldn’t even say that I catapulted forward, I survived through a tough period and never lost sight of why I was passionate about it. The idea of serving entrepreneurs and I formed some relationships with, like… Liu was one of my first investments, New Relic. I’ve been working with Liu since he started a company as an entrepreneur residence. But really, my legitimate first investment back in 2000 at Excel. People like that are what catapulted me, not any great thing I did.


Part IV, Investing In Open-Source Networks (4:49) – We discuss the environment and history around investing in open source networks, a sector which Peter has been investing in for a long time. ♦

Semil: So on that note of how you met, you know, Liu and New Relic, I think one of the most interesting things, just looking back at your career, obviously you’ve done consumer, you’ve done enterprise, but you’re one of the first people to see a wave coming and, you know, investing around an open source networks. And there’s still a lot of debate around that, people are wondering, you know, how big of a business that could be sometimes, so maybe if you can unpack that a little bit, how you got interested in that area, how you identified and got conviction around, “Hey, that’s actually a venture investable area,” and then what does the next, let’s say three to five years look like for open source projects, and founders who are out there who maybe want to reach you, right, who are working on these things, and are a little unsure about converting their hobby into a business?

Peter: Absolutely, yeah, and I think it’s… open source has a lot of similarity, as strange as it may sound, with consumer internet. And let me go back to my first investment of open source, which is JBoss. So in 2003, the world had been so burned by the middlemen of the software industry, the people that were selling, and pushing, and product managing products into a company that weren’t being used. So you really couldn’t go and start a new sale cycle as a enterprise software company in 2003 and have much reception, because the people who had bought it last time got fired. So the shelfware, the false promises of the enterprise sales model, and Liu and I had a discussion about, why was it that Wiley had 300 employees and only 20 of them are writing software? It didn’t seem right.

And about that time I met Mark Fleury, and Mark conveyed a connection between the author and the consumer. And this idea that the middleman would potentially be irrelevant, in an era where you could have transparency, where if I want applications over my desktop, I can go grab it and download it, I don’t have to talk to 50 people in the bureaucracy, and they don’t know what they are talking about. So that idea of disintermediation, of empowering the author to connect to the consumer, is very similar to what powers Yelp, it’s very similar to what I think powers Twitter, where you have an author who’s now touching very directly, without all the stuff in the middle, the human being on the other side, and the internet opened that up.

So I think what… you then ask the question, any company which has achieved great products success, if you have an author who created an organization that’s creating a great product, how do you monetize it? And I think that has been the question from open source standpoint from the beginning of time. You know, Red Hat in 2003 was still not a particularly exciting company. Now it’s a multi-billions of dollar type cap company, and been proving that if you sell things that go around the product, the piece of mind, the packaging of subscriptions, so you do the work of configuring it, ensuring that it’s going to work as advertised, has value there. But what you hope for is that the product model and the business model play off with one another, and so that’s what we look for, which is can you get resonance where if I used the product in a certain way, it’ll open up the economic opportunity. Google is the best example of that, of course, where the product model is the business model, and I think Twitter is very similar to that, where the Ad is the same content.

I mean, so in a similar way, if you look at open source, you know companies today we’re invested in, Elasticsearch, Hortonworks, just a couple examples, post adoption, once you downloaded something you’re getting from the creators in the community, there are things that you can add to it, make it, enhance it and where it’s a very natural extension to pay for it, where the advertising, the pre-sales, the stuff that otherwise would have been done by armies of enterprise sales people going and doing proofs of concept, is done by the product. And so along those lines I looked at Zendesk, which is right across the street here, as being very similar, where, you know, we didn’t, for the first 10,000 customers, the company had sales people. You think about that, you know, achieving that mobile scale with product first, and the product model and the business model fed one another.

So because people do a trial of a Zendesk, they would then say, “Okay, well, I’m willing to pay,” but they didn’t do that by talking to a sales rep who visited them, and tried to, you know, show them PowerPoints on how this is a great product, they knew, they were using it. So it’s a very natural combination, so I think the world right now is allowed for this elimination of the middleman, and more transparency and an empowerment of the author, which cuts across almost everything Benchmark does.


Part V, How Benchmark Works (3:32) – Fenton describes how he and his partners generally like to find new potential investments, as well as sharing criticisms of the trend of venture capital firms investing in seed rounds ♦

Peter: I didn’t answer your question on how do… how do people find us?

Semil: Oh. Well let’s say there’s an entrepreneur out there. I’m thinking of one that I’m working with who’s building, you know, products and services around open source network. And you know, how does he reach out to you? How, you know, how does he get over the hump from turning it into something he’s been kind of fiddling on to a business, right? Make that turn.

Peter: So I’ll give you a great example of how people find us. Elasticsearch is a company that has been around for a little over a year. The project started with Shai Barone who’s from Israel, and it’s a reinvention, really, of the whole idea of search. If you think of big data, the problem with big data is it’s just a big conceptual term. It’s not concrete. What’s the application? What specifically can I do with it? And Shai conceptualized a rethinking of Lucene Solr solar into what I would describe as a killer application for big data, indexing at scale, large fonts of information, allowing for analytics for search. It was a very concrete product, Elasticsearch. And he went from nothing to 200,000 downloads a month in about six months.

And it electrified me when I saw that. I didn’t know about it until, you know, he and others came and told us of it. So that first sort of question of how do you get our attention? You know, by creating something amazing. We’ll find you or you’ll find us. More likely we’ll find you. And there’s not much substitute for actually creating an amazing thing. And I’ve been of the belief for a long time that venture money too soon can kill that. So, the fact that Elasticsearch got to the 200,000 downloads a month without us spoke to the authenticity of the mission.

He did it in spite of the fact that he had no money, in spite of the fact that no one said, “The world needs another search product,” which it’s not, but that’s a component of it. And we respond to that, because it speaks to the motivation of the entrepreneur, his ability to learn, his ability to figure out okay, well how do I create an adoption dynamic where the product is going to show up everywhere? And the third thing I was going to point to a great entrepreneur is he found a great partner in Steven Sherman, who is the CEO. The two of them founded the company together.

So, there’s no substitute for creating the magic of the product in capturing our attention. And if that doesn’t occur, and it’s more about getting money from a venture firm to enable that, I challenge the assumption that you need us. And I’ve been a bit of a critic of seed financing, because I think it’s, you know, not at all clear to me that that’s something that venture business needs to be doing.

Really, in a relationship, we want to do company-building, and to do that we need to be committed exclusively in a matrimonial kind of way where we can give our heart, and our souls, and our energies to a company. And it’s very difficult when you’re spreading seeds in the market to do that in a reliable, consistent way. So, Shai didn’t take a seed investment. He got the company off the ground. I think SV Angel should be doing seed investments and Ron Conway should be doing seed investments. But the model is to have 1,000 flowers and to see which ones really grow to the sky. But in our model of work, it’s quite different. We like to form deep commitment and make it a seven to ten year kind of partnership with someone.


Part VI, The Future of Benchmark (4:03) – Peter discusses the future of Benchmark Capital in an increasingly competitive venture capital environment ♦

Semil: So the final question along those lines is, just tell us a little bit about how you and your partners envision the future of Benchmark. So you guys have earned, you know, a great reputation up to date. There’s a lot of investment dollars, a lot of marketing dollars, going into the asset category. You guys moved to San Francisco. You’re a little bit quieter than most of the other firms. How do you think about maintaining your edge over the next three, five, so on, years?

Peter: I think it starts with why we do it? Why does Benchmark exist? And the principal motivation that you’ll see across the six of us that are actively investing is a real passion to do company building and be a partner with an entrepreneur through thick and thin. And the term we like to use is “shoulder to shoulder,” where there’s a real depth of engagement and we don’t know how to create more time in the day for that. So the business model we have doesn’t scale. And the core premise, I think, of the Benchmark model has always been optimize for the depth of the relationship with the specific companies we’re working with. We describe it best as a guild of artisans practicing a craft than a company or corporation pursuing scale.

So, what we’ve learned about Benchmark from the beginning until now is that we flourish at six partners. There is an equal Benchmark compensation scheme which is unique, I think, to us in the industry, which encourages a degree of teamwork that I think is palpably different in the feelings of the people we invest in. Giving an example of that goes back to open table where a number of the VPs that Bill recruited into open table were coming from other partners. And there’s not an incentive in the firm to keep resources to yourself when the other partners are no different than you. It’s all for one, one for all. I think that that simplicity of saying that we want to optimize around the depth of the relationships that we can build with entrepreneurs allows us to not complicate the business with things we don’t really understand how to scale.

If I took an example of, you know, PR. We don’t have a PR part of Benchmark. We do know a bunch of great PR firms. One of things we like to do is to be able to call them up and ask them to work with the companies. But we think the companies benefit from having that direct relationship where we’re not an intermediary. You know, recruiting great VPs. There are a number of really talented recruiters in Silicon Valley and we pride ourselves on having a relationship with people like Paul Daversa or Ali Behnam at Riviera Partners, to do VP engineering searches and really being their trusted partners and helping them work with our companies. But, you know, the model is different and distinct I guess today, because if you go back to the beginning of Benchmark, it’s like it is today, which is that the industry has changed.

And we don’t know that that’s good or bad. I think it’s, you know, very coherent to me that there can be multiple models of success in the venture business. We have to play our game, and that game is, again, a guild of artisans as opposed to a corporation. And ultimately, you know, we have to have an unbounded ambition and passion and motivation to do this job and understand where that comes from. It doesn’t come from being about us, so we don’t have a website. We have a webpage. And we think it’s best to reflect back to the companies we work with than onto ourselves. And I think a lot of what we do is consistent with the value system that starts with that basic premise of why we do it.

And you know, our partners all share that belief and they have a variety of backgrounds from former CEOs to people like me that have been doing this job for, you know, ten plus years, to Bill, who was an analyst on Wall Street, and the mixture really creates the whole, which is what I think makes it an interesting group to work with.


Part VII, A Move to San Francisco (3:48) – After making two-thirds of its investments in San Francisco itself, Peter discusses how the firm operates out of the city now and why that’s important to their business ♦

Semil: So, I want to give you a chance to just talk, final question about being here mid-market in San Francisco, you know, leaving Sandhill Road and having your headquarters here, what motivated that and how are you enjoying it?

Peter: Yeah. It’s an interesting back to the future because the beginning of the Venture business, a lot of people were based in San Francisco. They weren’t in mid-market. They were in a big glass tower, cement and glass tower. The first thing is, we really don’t have a headquarters, and I think it’s interesting when you think about our business. It’s field-based. So, we spend four days a week out and about.

One day, Monday, we come together as a partnership and that’s where companies come and present and it’s this sort of the theater of a Monday and a partnership, is shared through the industry. We came to realize, years ago, that the center gravity in our portfolio had become split, so bimodal. Two-thirds of our investments in the last five years have been in San Francisco, so we felt it was imperative we stayed close to the customer and get up here. Half the partners live in San Francisco, but we come together Monday. We do it here and we do it down in Menlo Park, so we switch every other Monday, because it’s you know, for the people that are down south, for the companies that’s down south, it’s easier for them.

I think the long term belief is that San Francisco’s going to only increase in relevance in the industry. There are a number of reasons for that I think which are structural, not just cycle-based, which is to say out of what you would have seen in 99, 2000 is very much cyclical, a sign of the bubble. The structural changes I think are, you know, we’ve talked about the pool of great engineering talent in San Francisco, and that’s a byproduct of the Google bus, the Facebook bus, the eBay buses, has allowed for engineers to come here out of undergrad and really lay roots down in San Francisco.

Secondly, I think there’s a much more consumer design, interactive design focus in our companies and urban centers are a better environment I think to do that than suburban settings. Then lastly, I think the deep coupling of software into open source is allowed for the ability for the companies in San Francisco to get away with a few developers that can go pull down a Hadoop distribution or whatever it might be, a logging software without having to build up all internally. So, there’s a de-layering, if you will, of the software value chain where it allows for smaller teams to move more quickly. I think a city environment is conducive to that.

So, I think in the next five to ten years the trend will amplify, not abate, and so we’re here. One last thing about our offices is that there are no offices. You might have noticed if you walked, you know, throughout Benchmark today, the partners got rid of their offices. It’s really a reflection of the type of companies that we work with and want to work with, is transparency and being open and collaborative. And the image of venture offices on Sandhill Road with large enclosed areas to have private discussions doesn’t fit with our culture, and so we have instead a very open, organic feel in the building. We hope that that shows a reflection of who we are and how we practice the business.

Audio Recording, Full Conversation via SoundCloud

A special thanks to the team at Scaffold Labs for sponsoring the Sunday Conversation series on Haywire. Scaffold Labs is a boutique technology advisory firm based in Silicon Valley which designs and builds scientific and predictable talent acquisition programs that helps technology startups hire great people. Scaffold Labs has previously partnered with companies such as Cloudera, Appirio, and Nimble Storage, among others. For more information, please visit