In one of the earliest Startup Grind interviews, David Cowan from Bessemer Venture Partners joined us to discuss a variety of things going on in Silicon Valley. From what VCs are really looking for, seeing potential in the right entrepreneurs, and being on the board of one of the most successful app developer, Smule.
[02:34] DAVID: OK. I didn't mean to get involved in the technology industry, it was an accident. I loved computer science and studied it in college. I had some friends that worked with me in the Science Center and we were called Terminal Watchers. They told me when I graduated that I had to interview with a company called Oracle. I didn't know what it was or care, I was all set to get a job at some investment bank or management consulting firm; that was more glamorous back then. My friends urged me to go to the interview so I did. Back then, Oracle was hiring like crazy and didn't know who I was, just that I was a computer science major.
Larry Ellison had told his recruiter that he had to bring in a certain number of computer scientists every year. I didn't even know what Oracle did, but two minutes into the interview he said, "I really want you to come meet the team at Oracle and I really want you to come to California" and he puts this plane ticket down on the table and no one had ever given me a plane ticket before and I'd never been to California so I said, "OK I guess I'll go to California" so I came and saw how exciting Oracle was. Everyone was pretty smart and pumped up. They were building product. At night I sat in my friend's hot tub and we enjoyed California weather and it changed my plans. I decided that maybe I'd do the Oracle thing for a couple years because it’s fun and then go back to the real world. I think a lot of people think about that decision. They think there's the fun thing to do and then the real world thing that I'm supposed to do.
As I think back on all the steps that worked for me, it was always when I did the fun thing I wanted to do that it was the right decision. I came to Oracle and worked here for a couple years. I had once heard of the venture capitalists and thought that sounded really interesting. I had a little software company that wasn't that successful that got me through college, but the idea that I would be involved in starting new businesses really excited me. I didn't know much about venture capital, back then venture capital was a very small cottage industry I didn't know from Mayfield or Bessemer or Kleiner or anywhere else. I was told that venture capitalists all work at 3000 Sandhill Rd. so one day I found that address and parked my car and started walking around looking at the names on the doors trying to figure out who they are and what they do.
I walked in and asked if they hired summer people. By then I had applied and been accepted to business school so I knew I was going but thought I might come here for the summer. By the way, don't go to business school. That was a mistake and me doing the right thing; that was a waste of time. I should have stayed out here, there's a lot more business school in this building than in Cambridge, Massachusetts for an entrepreneur. So a very nice receptionist who I don't know said, "no we don't" and I asked who does. She took out a directory and circled 5 names and said, "I think these guys do." So I sent letters to those firms because that's what you did back then and one of them hired me for the summer, which was TA Associates and the other one interviewed me, but didn't hire me.
I went to business school and there was this partner there, Neil Brownstein. I really liked Bessemer because TA was a later stage investment and I really wanted to be in startups and Bessemer was a startup venture firm. When I was in business school I sent him a Hanukah card and a chain letter, I didn't have anything of value to send him, but I was trying to keep that connection.
[07:17] QUESTION: QUESTION: For those in the audience, this is a chain letter right?
[07:18] DAVID: It was a letter yeah.
[07:26] QUESTION: Not like the chain emails we send now, right?
[07:27] DAVID: Yes, this was the viral thing and the beginning. So I guess he remembered me and introduced me to his partners in Boston. I hung out with them and they took pity on me and hired me. I worked there for a little while in Boston and then I moved out here and have been here since. The VeriSign thing is something I started while I was Bessemer so even though I was working as a venture capital investor so I had to start this company had to be started to invest in it. There was a company called RSA, I don't know if anyone remembers it. It stands for Ramish Shamir Adelman, these are 3 mathematicians who invented public key cryptography and although there were two other mathematicians who say they invented it, RSA was a company out here licensing these public key cryptography toolkits. It was a rather esoteric thing and back then security was not something that venture capitalists invested in because security was only something you sold to the government so they could encrypt communications from one ship to another so venture capitalists just were not interested.
I was interested in security though because when I was in school I was using this network to send SMTP emails around and one of the first investments I made at Bessemer was the first venture backed ISP, a company called Performance Systems International. Back then the idea of an ISP was not about the web. I thought I was investing in an email company because this company was giving you a TCP IP router so you could send SMTP email from one company to another. I thought if companies are going to start opening up their networks then maybe security will be more important and someone will have to figure out what goes in and out. I thought it might make sense to make one or two security investments. Public key cryptography really seems like the right way to encrypted sessions so I called them up and said, "can I come talk to you, I'm a venture capital" but I didn't have a track record. These guys were desperate so they said OK. They met with me and said venture capitalists haven't been that interested but they were glad that I was except that they had this angel investor that owned 51% of the company and I had to talk to him.
It turns out their angel investor lives in the Everglades so I flew to Miami, Florida and drove hours through the Everglades into this building with this corrugated roof in the middle of swamp land. I met this guy who is by the way a terrific entrepreneur and philanthropist named Adleson Fisher, I don't know if anybody has heard of Fisher International but he's an accomplished entrepreneur who saw value in RSA and was buying it up. I said, "I want to invest in RSA because I think there's an opportunity to create transactions on the internet and to create a certificate authority" and he said, "OK, but you're going to have to invest at a valuation of $20 million. Back then that was not a normal valuation; that was like a Zynga valuation so I said I couldn't do that. I asked what else I could do.
He was really interested in the patents and thought they were really valuable. I thought enabling transactions on the internet was more valuable. That was a crazy idea that RSA wasn't doing so I said, what if I start up a company that does the transactions and then we do a deal where he could own part of this and I'll take that technology out of RSA. He said that was fine as long as he got to keep the patents. I incorporated VeriSign which I used to call Digital Certificates International from our offices in Boston and then I called Jim Bidsos who is the CEO of RSA to do a deal and for 2 or 3 months I was negotiating with him the detail of this technology deal. There were a couple times that Jim hung up the phone and said, "forget it this isn't going to work" and I'd have to call him up again and try to compromise to make it work.
I pretty much did what he wanted for the terms of the deal and it was kind of crazy idea. I don't know how familiar people are with public key cryptography and SSL and certificate authorities, but the idea of creating a company around a certificate authority -- and its not proprietary, anyone can do it -- but the idea of creating this company around certificate authority and we weren't selling hardware or software, but certificates. I remember my partners asking me what a certificate was. I said it’s an integer, but it’s a really big integer! Really big! They thought it was kind of crazy, but they said OK and got me feeling self-conscious that it might not work.
I remember on the eve of closing the big financing with the $1.5 million in, I remember pulling Ron Erevestor aside and saying, "Ron, is this really going to work?" he said, "yeah it’s going to work" and gave me that little extra boost of confidence. We closed and took some people out of RSA and started issuing certificates for anyone who wanted to do public key cryptography. We didn't really have a plan, but we were going to go after this idea and we were manually issuing certificates and the real important value creation at the company was when we hired a team to figure out what we were going to do starting out with the CEO, Stratton Stravos. We hired a recruiter named Steven Combs who is still out there. He helped us find Stratton Stravos who turned out to be a star. When we looked at his resume he didn't look like a star and I don't think he'd mind me saying this. His previous job was at Talogent which you've probably never heard of for a good reason, it was a joint venture of Apple and IBM. Before that he was the VP of sales at Go which was the startup that Randy Kaplan wrote about in Startup which made the famed tablet which was a big creator of venture capital.
This guy's track record did not speak success, but he himself is a go getting winner so when we couldn't hire the first three people we wanted, we hired this guy and he turned out to be the right guy. He hired in a team and they did something which I learned a lot from and that's Stratton really simplified the messaging and value proposition of the business. Up until then I was so excited about public key cryptography and whenever I was selling them on the keys and how you could do non-repudiation and how you could have these one-way functions that are asymmetric. No one really followed it or card and Stratton came and said, "We’re not talk about that, this is a driver's license for the internet." If you want to drive around the internet you need to have something that says you are who you say you are and that's what this is.
Today, with all the nuances of security and identity you could argue if that's the right metaphor, but it doesn't matter because it was back then. It worked and people understood what the value proposition was which was that now you could do commerce on it and you knew who you were dealing with so you could put your credit card into the browser because the lock goes on and that was what we needed to do.
[17:28] QUESTION: Do you feel that's a trait of ultimately successful entrepreneurs in that they are able to simplify the message? The example I'd give is we had Jeff Smith here a couple months ago and that is one of the key points he stresses and that you need to talk about your product in 3-4 words tops and allow people to understand. Is this a common theme now that you've seen hundreds of startups or is it unnecessary?
[17:58] DAVID: I think it’s absolutely critical. It’s a really bad sign when someone is pitching a company to me and 5 minutes into the pitch I still don't understand what they do or their product; that's just not right. It turns out Jeff's company can be explained in 3 words, "make social music" and he can say everyone should do three words, but not everyone can do that but they should be able to do three sentences. If you can't there may be value in what you're building, but there's so much friction explaining it to the world that it's going to be hard to make it work.
[18:47] QUESTION: It sounds like in your experience with Venture capital and how it was so different then, as you've seen it over the last 20 years, how have things changed and how do you see it today?
[19:04] DAVID: Well, boy it’s different in so many ways. I'm not sure if you're asking me about Venture capital or the startup world, there are two sides to it. I think what's changed about startups is more interesting and I think in the technology world the huge change which changes everything is that I think what has happened to technology because of the internet as what happened in the field of physics when people said that light is not particles, it’s a wave. Technology used to be particles and we used to ship boxes and software and you paid for it. You may be paid for support or maintenance, but most of the value was upfront and you got that technology with a license.
It doesn't make sense anymore for any technical product not to be connected, there are so many reasons to connect technology even in just updating it and making sure it works better than week. Today there is almost nothing that anyone buys that's not connected and as a result technology is not delivered as particles, it is delivered as a wave. You buy a service and access to a technology you expect to get better as you use it. The idea that you get it and the company goes away and the idea you'd use technology from a company that doesn't exist anymore seems crazy, but that's how it was back then. That then changes business models and what it means to sell and have a customer.
Another major driver that makes things different is the fact that we can now so quickly -- this is variation on the singularity -- we can create interesting technology so much faster and cheaper. Moore's law extends to the startup world and at Bessemer we have the Internet Law which says that to create a secure, scalable, e-commerce application takes half the time and half the money every 18-24 months. We look back from 1995 and we've mapped it and you can see the curve very clearly. In 95 and 96 I remember startups clearly paying $20 million to Pero systems and others to build them an e-commerce application and you can see because of Apache, Load Hosting, JavaScript, Active X, PHP, XML and Ruby you can see the curve coming down becoming faster and faster. That also changes a lot the way you think about startups.
Back when I joined Bessemer the business model for a tech company was that you have some idea and hire the engineers to build it for a while. Then you hire a couple sales people to get Beta sites. Enterprise was the only place to go. Then you'd hire some more sales people and raise more Venture capital and then you'd fire some sales people because you missed your number and then you'd raise some more Venture capital and hire some more sales people, and then after 3 rounds of Venture capital you find out there was something wrong with the product because it doesn't meet the needs of the customer. It met the needs of what you thought the market wanted and by then you've blown $30 million and lots of years of people's lives. That was what most investments were like back then.
Today we have a situation where you dream up a company and two people and some contractors from ODesk from whatever put up this site and get users. You then find out it didn't work and can move onto the next thing. You could spend $50-100,000 on that. The idea to zig and zag because you've already spent $20 million and now have to do something else -- that was another thing back then if you found something wrong with the product people had so much invested that they believed they could do something else to fix it and that was normally a recipe for losing more money and time. So today the way I like to think about it is that failure is an option you should expect and we expect; it’s a normal part of figuring out what does and doesn't work. That also changes how venture investors behave. It used to be that venture capitalists loved talking about themselves as supportive. That meant that we'd give you money even when your product fails and you're having problems, this sounds ridiculous. This is actually the way venture capital firms talked about themselves 10-15 years ago. They said, "We will support you and figure it Out" that seems stupid today. If something is not working, stop doing it and do something else.
Today a supportive Venture capital won't put money into something that's not working. A supportive venture capital says, "hey let's figure something else out together and do something else together." Jeff Smith and I worked on other ideas that didn't work and Jeff came to me to say it wasn't working; he didn't wait for the investors to say it wasn't working and we tried something else. I don't know if Jeff told you about the Genesis. I'll tell you the Genesis of Smule. Jeff back then was the CEO of a company called Tumbleweed which was a security company that sold to banks so this about as enterprise as you get. Jeff was very good at it and he grew the company and took it public. He then decided to go get a PhD in music at Stanford for a couple years. Then when he was itching to do something again he asked me for ideas so I told him to be an entrepreneur in residence at Bessemer and we'd find something to work on together.
We naturally assumed that because he knew everything about security for banks and was going to start a company with his experience in that we went to a lot of meetings with companies pitching things if they needed a CEO or money we had both. One day, some guy was coming in to pitch me on this plastic thing that shoots these laser lights he was selling in Sharper Image and when you block the light it makes a tone.
[27:42] DEREK: That sounds awesome.
[27:43] DAVID: Yeah it does so I said, "Jeff, you know something about music, why don't you come to this meeting with me." The guy pulls out this plastic thing with lights and when you put your hand in front it makes a music tone and you put your hand here it makes another tone and goes, "da da da" and he was selling these like the revolution of music. We said, "Well what happens when we play something and like it? Can I save it or send it to someone?" and he said, "no people don't want that; they want this." So Jeff put various body parts in front of the lights trying to have fun with it, but it was a piece of plastic people buy and put in their closet along with the other stuff they bought from Sharper Image. When he left Jeff and I started brainstorming about how we could help people unleash their creativity and we started riffing on different ideas of what you could. What if people could play music and do it together? What if we could take people not musically trained and help them jam and make music together? That would be awesome.
Jeff then said that maybe with the iPhone thing we could do something with that. We sat talking for about an hour and I said, "Jeff you seem pretty animated about this music stuff, you should do something in music" and it was like someone had lifted something off his shoulder because he was an enterprise guy and that's what he was going to do. That's what he was supposed to do because he knew that. After that I can tell you did not come to a single meeting with any other enterprise companies for the rest of the summer, he was just thinking about music.
Three days later he told me I had to go meet with this guy at Stanford, Ga Wang who is this professor. The two of them were just crazy with these crazy ideas and it didn't make any sense but they were so excited, brilliant, and creative that I said "this is a waste of money, but here's some money and figure it out" and I figured he'd build a real company after. They got in a room with all these grad students and they built the sonic lighter and build the oak arena and there was no doubt this was going to be an interesting venture. That brings me back to the lesson that you have to do what you love.
[31:15] QUESTION: It sounds like you hit those moments where you want to do anything else but be in that situation because it gets so tough and hard. If it’s not something you're not passionate about and love, chances are you're going to walk away and give up. Is that something you see that entrepreneurs with passion push harder and go longer? That they go long enough to see light at the end of the tunnel? What's the difference between those entrepreneurs that you see?
[31:52] DAVID: Usually what gives someone passion is when the entrepreneur is the customer of the technology. The pattern I see most frequently that leads to success is that someone sees an opportunity to create technology that can be used and valuable and they think they can do it right. It could be something that's fun like making social music or something like how complete a financial transfer payment from this company to that kind of company. It might sound boring, but for this person it’s really exciting. This person sees a vision for how to do it better and wants to show it can be done. I'll contrast that with the other entrepreneur who I think is less successful. They are the person who wants to start a company and that's what's driving them; that doesn't work so well.
[33:16] QUESTION: Does it ever work?
[33:17] DAVID: Yeah but less often.
[33:24] QUESTION: It’s interesting that you say that, we have guys working on specific things in startups. Eric is working on Startup List which is targeted at startups which he's passionate about and Spencer is working on his game which he quit Apple to do. What would you say in terms of how many ideas you get pitched, how often are you guys meeting with new entrepreneurs?
[34:03] DAVID: I used to be able to answer that question and what I was able to do that it was about 100 to 1 in terms of meetings to investments and that was when the world was simpler and a meeting was a meeting that led to an investment or not. Today, what is a meeting or pitch? I get pitched 5 times when I open up the Tech Crunch page. I get pitched on Twitter or every time I get an email from Naval Ravikant on AngelList. I get pitched so many times a day and we all see pitches from startups; do you count those? Do you count only the ones in the same room with someone? What if I'm in WebEx? What if I try the Product? What if someone else at Bessemer is looking at it? It's hard to say now what that ratio is and there's a huge funnel that comes down to 15-25 a year.
The process for getting funded by Bessemer or any large venture firm is that you start off usually by pitching someone who is more junior at the firm because if someone comes to me I'm going to send them to someone else to get the first pitch. Some people get offended by that and say they want a partner, OK so go somewhere else. That doesn't work for us if you can't tell your story three times. What are you, bored? If someone is willing to listen, tell them the story and tell it again to all the partners. Don't take it personally if someone says you have to go through a process first. It wouldn't make any sense for me sitting on 12 boards for me to say oh yeah I'll give every startup an hour without knowing; it would be impossible so don't be offended if you get that.
[36:35] QUESTION: In terms of these guys that get through are there any other clear things that you see within these guys where you sit down with them and in the first five minutes you say, "He's got these things." Are there any indicators you see?
[36:54] DAVID: First I'll answer what are the most common characteristics of a successful entrepreneur and the answer is simple; it is luck. Any other characteristic you tell me about all these successful people, sorry, there is no common characteristics. There are characteristics I look for in the first 5-15 minutes. I'm looking for a scientific mindset and someone who is really interested in hard questions; someone who has no problem talking about mistakes that have been made. I'm interested in someone talking about what they learned from a mistake rather than being defensive about it, that mindset is critical to be able to be a data-driven, smart company that knows how to navigate. Also being able to work with a team and attract smart people that want to work for you.
There are things I look for. For example, here's one interview question I have. First I start with a little background about them. When they tell me where they worked and it’s usually somewhere I heard of and every company you've heard of has gone through some tough times. If you worked at Apple it might be, "oh, did you know about those location files on the iPhone? What was that about?" Apple might not be a great example because they are sort of an authoritarian run organization, but if I'm interviewing someone who was an executive of a company, I ask them about something that went wrong at the company. One of two things happens; the first is they explain that it was bad and hard to get out of. The other people say, "oh yeah, those guys really screwed up, I told them this was going to happen!" It obviously wasn't very compelling if they didn't listen to this person and this person had absolutely nothing to do with it! To me, that's when I start looking at my watch.
There are other signs of this mindset. Sometimes I ask a question and someone says, "I don't know, that's a good question" that's a really good answer. Not everyone knows all the answers. If someone asks a tough question like, "how are you going to monetize your service? Your service will include people in Egypt or China, but your advertisers aren't going to monetize them. How are you going to make money?" that's a good question is a good answer. "I don't know that's going to be hard, I don't know the answer yet. Right now we're just focus on the product and are going to have to figure that out."
[40:52] QUESTION: You have to balance that with some answers, right? The alternative is, "gee I don't know that's a great question and that one too" so I mean, where is that balance of being humble and being honest and easy to work with by saying, "hey we screwed up" vs. "hey this guy is not a complete idiot and knows some of the answers."
[41:20] DAVID: That's the thing; I don't think there's a balance there. Go for the idiot over the arrogance anytime. I may be particularly sensitive to this issue, but I think most investors respond in a similar way.
[41:39] DEREK: That's really good advice. I'm going to ask a couple rapid fire questions and if anyone here has questions we'll take those in a minute. These will go along the lines of if you were a first time entrepreneur in Silicon Valley now.
[42:56] DAVID: I just realized an answer to this thing of; "am I an idiot?" the answer is I'm going to hire the most brilliant user-monetization person to work on that problem. They say to me, "can you help me find that person?" that tells me they don't know something and they're going to do something about it and not start a company because this person was my friend at school, I'm going to find the best person for that. When an entrepreneur asks me for help, that's someone who is an entrepreneur and makes something with very few resources. When they come to a meeting and say, "what can I get out of David Cowen and this meeting?" that's good.
[42:53] DEREK: For the entrepreneur.
[42:54] DAVID: And their shareholders too. When that person is going to go to the next meeting and do the same thing and the next one.
[43:05] DEREK: Continually add value along the way.
[43:13] DAVID: Yeah and instead of trying to prove how smart he or she is, they are trying to get the job done.
[43:17] QUESTION: If you were a first time entrepreneur, would you apply for Y Combinator or the other incubators?
[43:31] DAVID: Yeah absolutely. I think people are laughing because they think somehow venture capitalists are scared of incubators, combinators, or angels. I think Tech Crunch got a lot of views by saying angels and venture capitalists are competing against each other. I love the angel eco-system; it’s the greatest thing for my business. I think it’s a little crazy and I think sometimes they are investing based upon anecdotal evidence of success rather than a real understanding. Those doing well will inspire others to keep doing it and I hope they do because they are just funding all kinds of great startups out there that Bessemer gets to pick from because the angels can't do the series B. They are running these tests and turning over a card and we get to look at them. I think it's great.
[45:00] QUESTION: I apologize these are not supposed to be gotcha questions. As a founder yourself would you do these things? As entrepreneurs we get conflicting advice on these things. It's interesting to get your perspective on what you would do in our situation.
[45:27] DAVID: I'm not an expert on the nuances of one such school or another so I don't know the answer to which is the right one. I think you do whichever one you can because it’s not easy to get into any of these things and get money. I kind of laugh when people ask what to look for in a Venture capital and angel. You look for the money and someone willing to give it to you! That is really important, you just make it happen.
When I went to business school and another reason you shouldn't go to business school, I was taking a class on Venture capital and the professor said, "When you go graduate, don't go work for a Venture capital firm because they're all a bunch of snot-nosed MBA kids who don't know anything. No one wants your business advice or hear if their company is good. Go do something else and if you really like Venture capital down the line then go and do it." That kind of makes a lot of sense, right? I decided to do it anyway. If someone is foolish enough to offer me a job, I'll take it and they'll have to put up with my snot-nosed ignorance.
If you want to start a company and Y Combinator invites you, go there. If someone else invites you, go there.
[47:25] QUESTION: If you were a first time entrepreneur and your startup was not getting any traction despite all efforts, what would you do next?
[47:31] DAVID: Traction with users? Then I would stop and do something else and that's OK.
[47:44] QUESTION: If you were a first time entrepreneur, which would you worry about (at the early stages of your startup) nailing first, your team or your product?
[48:00] DAVID: That's a good question. We all know the reality is that there are two teams in any company; there's the team of 2-3 people who are a team because they are a team. Whatever they'd be doing, that would be the team and those people are going to try to make a product. Then when you have some success you build the team. When you build the team you're hiring people with functional experience with expertise around engineering management, use acquisition, design and whatever you need to build to functional experience around. Don't try to hire that before you have a successful product because you won't get the best people at that point.
There's a team of people who trust each other, work together, respect each other, and value the soul of the company. You're going to show that users care, obviously you have different models, but you're going to show that people care about it and get traction, then you'll recreate the best people to fill those functional positions.
[49:52] QUESTION: If you were a first time entrepreneur with an idea that kept you up at night would you bootstrap the company and build you people company as fast as possible or go try to raise money.
[50:07] DAVID: The former. You just try to build it and do it. We're supposed to do due diligence and check to see if an idea makes sense. In the old way that meant we called these companies and asked if the product existed if they'd buy it. That was kind of worthless because it was anecdotal evidence of a product that didn't exist and maybe they'd change their minds or maybe they were being polite, who knows? It turns out that today the best due diligence to do on any internet company is just build the damn thing and see what happens. You could build it cheaper than paying the consultants for 3 months to do a market study and then let the users tell you what to do. Always build it.
[51:08] DEREK: Great, can we give David a round of applause? Does anyone have any questions?
[51:18] QUESTION: How much more important is an idea than a team?
[51:26] DAVID: A company needs both; it needs a good idea and a good team. It needs a great market. I'll tell you what can be missing. The product can be missing if it’s a great team and we know it’s a great market to be in. What's a great market to be in? Let's say you were talking about mobile games with virtual currency; we all know there's money to be made in social gaming and if you had a great team that was going to do something there that's a backable venture even if they can't show you the games they are building. If you have a great product that's working and you don't have a team, but you have evidence that this is a venture that's going to hire great people -- I mean that maybe the founder has hire one or two really great people -- it gives me confidence the founder has a high bar to find people to fill other positions. I'd much rather have positions not filled than filled with B players on the team. I just want to see that the ones that are filled are A's.
[53:15] QUESTION: Do you have non-technical people pitching technical ideas? What are the odds of them succeeding?
[53:42] DAVID: Yeah I get that. I've had Rod come to me with some great ideas, seriously and I think he got them from his son. The good news is that today if you're someone that can just start coding that's great, if you're not it turns out that you can find those people today on ODesk. You can contract someone to build what you want to build. I have a friend, Dave Vinetti who is not a coder but he had an idea of building a social network around politics and civic interests to bring people together who share political views. You could go to your congress and get them to do things. He's not a coder, but he hired people on ODesk to build this really interesting thing. He then got some angels after he had it and they invested. I think his last round was from Founder's Fund or something. I think that's totally doable. You don't have to be a coder to be an entrepreneur.
[55:22] QUESTION: In the old days companies chased venture capitalists. Do you feel like the tables have trend and venture capitalists are chasing companies?
[55:47] DAVID: You would know better than I would. I do that sometimes, but when I'm doing it I'm doing it because there's a company that is doing something interesting where I've seen they are already pretty successful; then I'll go chase them.
[56:12] QUESTION: Do you analyze all these deals out there and wonder how some of them are making any sense?
[56:26] DAVID: I would short startups if I could if there were such a market for derivatives. Sometimes I'm wrong and laugh at it and the venture capitalists that funded it and it turns out they were right.
[56:54] QUESTION: In internet and mobile technologies they are getting cheaper and cheaper; 50-60% of data is stored in some form of that. What would be the future of more people's lives having digitized and how do you see that progressing?
[57:46] DAVID: So you're asking whether there are startups thinking about thinking about all the data around people's experiences or data experienced by an individual and spreading it out for security reasons?
[58:00] QUESTION: [inaudible] how can people live and what will be the style of living in the future?
[58:20] DAVID: I think there is an obviously ongoing challenge for all of us to figure out how to get access to data about ourselves that we want access to and not share it with people we don't want to share it with. It's a higher level security concern the way we use encryption and that kind of thing. I think that's an interesting set of problems to try to solve. I invest in reputation.com and our value proposition is that we help people control what search engines say about them; so what people see about you when they search you. There are a lot of other aspects of the problem that need to be solved in an interesting way. Some of it probably has to be solved with legislation about what people can and can't do with data. Most of it can be solved with technology where we have more access to our cookies and profiles.
[59:55] QUESTION: What has changed in the last 5-6 years in the ways people pitch to venture capitalists? What kind of new stuff is covered now?
[1:00:25] DAVID: There are a lot of things, but I'll share one that I think is most important as you think about a business plan. If I think about all the companies we're invested in like Yelp, LinkedIn, reputation.com, Zoosk, and Playdom, regardless of what they're doing and what their business model is, the whole business boils down to certain key metrics which I'm not sure everyone is quite attuned to, but should be. Every internet business has to get some value out of its use be that through ads, subscription, legion, currency, or e-commerce transactions -- those are the 5 I know of. You somehow have to get that value and every user has some lifetime value from some combination of those things. You can acquire the user through PR, word of mouth, or maybe you're one of the lucky few with a completely viral application where someone tells their friend and that's how the users come in.
I don't care if it’s a dating site, a business networking site, or an identity theft service it comes down to the ins and in outs. The ins are what it costs to bring in the users. I have a cost of acquisition and a lifetime value. Then I've got some time on how long it takes me to achieve lifetime value. The time to get it defines the business. I look at that and see which is better based on those three. There is another metric I use which is, when you acquire users, how deep the marketing channel for bringing them in. For example, if you're bringing in users cheaply through PR, that's not a deep channel. You can't just say I'm going to do 3 times as much PR this month; it just doesn't work that way and you can't do it. You might be able to buy more Google keywords, but maybe you bought all the words that you can and the only way to buy more is if you pay 5 times as much and the your cost of acquisition goes up.
The next thing I'll look at is the depth of the channel available to you which tells me how big this business can get. One is the capital that goes in and the next is how big it can get. If you focus in on those simple metrics, the rest of what you're talking about is just the supporting cast; those are the stars of the story.
[1:03:53] QUESTION: Do you think investors and entrepreneurs are getting more impatient for things to happen?
[1:04:26] DAVID: The question is, are we too impatient building businesses with LinkedIn as an example of a patient company? I would argue that facebook and Zynga followed a very patient strategy (well not Zynga), but Mark Zuckerberg said, "I want to bring value to my users and we're going to make money, but I want to focus on making this a good product" and I can tell you as someone with portfolio companies that try to advertise on facebook that facebook makes it hard to give them money sometimes. It's as if they don't care, they're more focused on getting more people engaged. I think that's a good patience. It just so happens that they are so good at it that they can back you up the track and do really well.
There are two kinds of virility and I think it’s interesting to understand them both and know which business you're in. Everyone wants a viral business because they are the best and the cost of acquisition and zero. One kind of viral business is where users actively tell their friends to get on the service because; "I want to do something with you" those are great because there aren't many of those. If you have one, see me because I'm interested. There's another viral where you don't actively say, "I'm going to get another user," but you create some kind of content that gets crawled on search engines and because that content is quality or interesting people see it, click through, and come to the site. That's a different kind of virility, but it works. LinkedIn has both because we have people inviting other people to be members, but more than that, we get users because our profiles are very highly indexed on Google. You put in someone's name and you're likely to see their LinkedIn profile in the top 3 results so that brings traffic.
Yelp is another one where someone writes a review and someone types in a restaurant or kind of food they want and they see Yelp reviews. That's viral also, it's just a slow viral. With the slow ones you have to be patient and not measure it on revenue or users, for companies like that I'm looking at if we're getting users to create content that's getting highly indexed in Google? You can show me flat numbers, when we looked at Yelp the numbers were not impressive. What was impressive was Google ranking those view highly and that would work in our favor.
[1:07:39] DEREK: Thank you let's give Dave one more round of applause.