Recode.net

“What could go right?”

On a recent episode of Recode Decode, hosted by Kara Swisher, Benchmark general partner Bill Gurley said he’s still worried about a bubble.

You can read some of the highlights from their discussion at that link, or listen to it in the audio player above. Below, we’ve posted a lightly edited complete transcript of their conversation.

If you like this, be sure to subscribe to Recode Decode on iTunes, Google Play Music, TuneIn and Stitcher.

Transcript by Celia Fogel.

Kara Swisher: Today in the red chair is someone I've tried to get here for a long time, it's someone I've known for a very long time: Bill Gurley, general partner at the venture capital firm Benchmark. He's invested in companies ranging from GrubHub to Zillow to Uber and serves on several board[s] of directors. Before he joined Benchmark in 1999, Bill worked at Compaq and spent four years as a tech analyst on Wall Street. Bill, welcome to the show.

Bill Gurley: Thanks for having me.

We have known each other a long time.

Very long time.

I knew you as an analyst, I think.

Yes.

I don't know if I knew you at Compaq, because I didn't cover Compaq. But I did cover, I remember, the CEO at the time. There's so much to talk about; I think people know you really well here in Silicon Valley, but some of our listeners don't. So walk through how you got to Benchmark. I wrote the story when you went to Benchmark, if you recall, in 1999 for the Wall Street Journal. You had been at another venture capital firm.

How far back do you want me to go?

Well, how did you get into [being a] tech analyst? Let's start with tech analyst and Compaq.

I had a computer engineering degree in undergrad, and my sister was a double E [electrical engineering major] out of Rice and was employee 63 at Compaq, so I was exposed …

Wow. Where did you grow up?

In Houston.

So yeah, of course.

My father was in the space program, worked at Johnson Space Center.

And Compaq was there, right? In Texas.

Yeah, and her going through that obviously brought a lot of exposure into our family of being at a startup, and she was given options. And Kleiner was an investor.

Oh yeah.

I wouldn't have expected to have that exposure that early in my life. I also — like everyone you've probably had in this chair — had a Commodore VIC-20 and used to code out of magazines and stuff like that. I ended up at the University of Florida where I rode the end of the bench on the basketball team and got a comp sci degree. I went to Compaq, where I'd spent some summers, and worked there for a couple of years, and I found I was drawn to a broader calling. I started work on the third PC and it looked a lot like the second and the first.

What did you do?

I worked in a team that did problem solving. So when a new computer was coming to market, they'd put it into test and it would fail. And my team, we'd get thrown in a room with a logic analyzer —

Like, "why isn't this working?"

Yeah, yeah, yeah. So it was fun. It was fun.

This was the '80s, right?

Yeah, this was '89 to '91.

I remember AOL was on that one computer ... I can't remember. They were all small computers.

I had a Prodigy account when I was working there, and I used to trade stocks. I ended up going to business school and then I started trading stocks — Borland went public during that time. And so this combination of being fascinated with technology, looking for a broader thing to do, and then getting interested in investing and tech and disruption, that kind of thing. So I went to business school, I thought about trying to get into venture at business school. I went and met with some Austin Ventures people who said, "Kid, you're way too young, go get 20 years of work experience."

Right, because they had operators.

That's what they said, yeah. Which is ironic, and I can come back to that, based on how we choose people at Benchmark now. But anyway, while I was at business school, everybody cracks open every Fortune and Businessweek and they read everything because they want to think they are professional business people. And so I was reading about all these amazing analysts at Goldman Sachs at the time, Dan Benton and people like that. And Rick Sherlund. And they were always quoted, like, opining, and I just got interested in it.

You wanted to opine.

Yeah, I went to Wall Street and just knocked on doors. Like cold, like what you read about. And got very lucky that [Credit Suisse] First Boston gave me an opportunity.

Right, which was a big deal at the time.

And then two weeks after I joined, Charlie Wolf was there covering PCs, and he announced he wanted to resign and back off. So I went into my tiny little apartment with no air conditioner and wrote a 20-page assessment of the PC industry.

What did you tap away on?

I don't remember, probably some kind of luggable.

I'm thinking Kaypro, perhaps, around then. Trash-80.

And I went in and begged for Charlie's job, and was very fortunate. Not only did Charlie share with me all his models, but two of the other ranked analysts, David Course and Dan Benton, who still comes to your conference every year, they gave me all their models and they've all left the field.

Oh, where did they go?

Dan and David when to the buy side and Charlie went into academia. They just like got out.

"We're leaving." Wasn't that a signal to you? "Uh oh, I better get out of here?"

It couldn't have been more fortunate, right? Because I moved up through the ranks very quickly.

It's an opportunity. That's somewhat how I got my job at the Washington Post. People retired or left.

So that was a big event. And then the other big event was at Stewart Alsop's conference, which Charlie helped me get into.

Which was the big deal, Agenda.

Oh man, you're standing at that first dinner, and there's Bill Gates and Larry Ellison and all this stuff, and you're like, "I'm just a nobody, this is crazy." But anyway, one of those first few years, they were selling a Palm Pilot. And it had the attendees’ contact information in it.

Ahh, aren't you clever.

And I had just started this newsletter called "Above the Crowd," which was a fax at the time. And so I was just like, "Oh wait, this is too easy." So I paid like $200 for this Palm Pilot and I spammed everybody …

… with "Above the Crowd." It was a great newsletter.

The most important people in the technology industry.

Yeah, you've always been a writer. We'll talk about that soon.

It came from the analyst days, because I had to write big, long reports.

Absolutely. But they used to write reports a lot better then. There was a lot of people, you know, Mary, you, even Henry Blodget wrote some fantastic stuff, though it didn't end so well for him there.

So then — I should hurry this along — so after three years of doing that, I was getting burned out. It's a tough job being an analyst. And I was thinking about going to the buy side and, in fact, had been interviewing with Capital Group in LA ...

Right, that's Gordon Crawford.

... who I still have a ton of respect for. And Frank Quattrone called me ... out of the blue, and he had left Morgan Stanley on, I think, Good Friday in '96. We ended up sitting down and he said that he'd like me to join their new firm. And I said, "You know, I'm kind of burned out on this analyst thing." And he said, "Well, what do you want to do, long-term?" And I said, "I'd love to be a venture capitalist." And Frank said, "Why don't I move you to Silicon Valley? You can cover any sector you want, and I'll introduce you to every venture capitalist I know."

Well, that's an offer.

Yeah.

What did he do, take your soul? [BG laughs] Frank kind of looks satanic, so did he say, "You must ..."

You know, there are people that are super loyal to Frank and I'm one of them. And when someone makes a commitment like that and helps you get your dream job …

And you worked for them.

Yeah, I did. And we were very fortunate. We were lead-left on the Amazon IPO, which would be a famous trivia question one day. "Who took Amazon public?"

Frank was in the middle of all this. Or else buying and selling companies. He was involved in a lot of that during that time.

Yes, and [Jeff] Blackburn was the banker that worked alongside me who then went to Amazon.

Before we get ahead of ourselves, what was that period like? Because I was here too. I remember these things. And at the risk of sounding aged, it really was an exciting time.

Well, for me, it was my real first exposure to Silicon Valley. I'd been out here a couple times as a PC analyst, but the PC industry wasn't really centered in Silicon Valley.

No, it wasn't.

IBM and Compaq, and even AST was in Irvine. And Gateway was in Sioux Falls. So I didn't travel here all that much, and then I was just suddenly put here.

Because internet, that's why.

And by the way, that's the sector that I asked Frank that I wanted to cover, and of course I knew nothing about it, so I went and bought all those TCP/IP books and stuff, which I don't think helped me at all, but I read them anyway. And it was super exciting, you know? And I knew a few people. Like when Frank called me, I called [Roger] McNamee because he had been at T. Rowe, so he was someone I had known from the buy side. And there's a few others like Glen Kacher and some of the Tiger guys. So I called Roger and I said, "I don't know Frank." He's like, "Take his meeting immediately. You have to. This'll get you to Silicon Valley." So it's been great. Roger's always been someone that I've called along the years to help me think through decisions. Yeah, it was so exciting. Like I remember one of the first meetings was in a train caboose for CNET with Halsey [Minor] and Shelby [Bonnie]. And I knew nothing about media or advertising.

Right. That doesn't stop many people.

And Halsey was just remarkably upset that I wasn't getting it faster, and Shelby, God bless him, was just super calm and casual, bringing me along and teaching me.

That was interesting. He used to call me in the middle of the night because he was like, "Why is my story on [page] A22 of the Wall Street Journal and Yahoo's on the front?" Or whatever. And I said, "You're lucky you're on A22, because I got you on A22 or else you wouldn't be there at all." But that didn't end well for Halsey.

No. But I've stayed in touch with Shelby. I consider him a wonderful gentleman.

Yeah. So then you shifted over to venture capital.

I was with Hummer Winblad for 18 months and then came to Benchmark.

So that was a big deal, I remember. That was like, gaaah. Like, "You left there?" And they were shifting at Benchmark at the time.

Yeah, two weeks after I announced the Hummer Winblad position, Andy Rachleff cornered me at a conference and said, "Dude, why didn't you call me?" And quite frankly, I would have to say I was so fixated [on] being a venture capitalist [that] when someone started to ask me, I'd say, "Yes!"

Yeah, take the first date. And they were a well-known firm.

Yeah, yeah, yeah. And I'm still very close friends with John [Hummer]. I think the cultural fit with Benchmark is just [better].

Yeah. I remember tall, white guys, essentially.

Well ...

Come on. I sat across from them when they were talking about eBay.

When someone approaches you that works for an equal partnership … because everyone else that's working their way into venture starts at the bottom with only a piece of the action, you’ve got to work your way up. Someone else's name firm. It's a pretty compelling offer when someone comes and says, "We want you to be one of us."

Absolutely. And you were the tallest of all those tall men. But it did cause reverberations. Everyone was sort of talking, I remember, it was a big deal because you were sort of the bright young thing at the time.

Well I guess now that I've been here something like 16 or 17 years, it's probably the right place.

Yeah. And it was changing also. It was starting to shift.

To a certain extent, the beginning of my venture career was a little bit like being near the top of a roller coaster: Ch-ch-ch-ch-ch. And then it just slammed down before I ever had a chance to really establish myself and build a track record.

This was the end of the first internet bubble.

And when I first arrived at Benchmark, it was like, "Nothing can go wrong." There was an IPO every week.

And they had done eBay.

And then, wham! Man, the door came down hard.

So what was that like? Because you do write a lot about bubbles. You're like the worrywart of Silicon Valley. And we'll talk about that in the next section. But what was that like, as an early venture capitalist, when you have that happen to you?

It's intimidating. I mean, I think for anyone that breaks into venture, years two, three and four, unless you're as lucky as, say, [Matt] Cohler with Instagram or Roelof [Botha] with YouTube, are just anxiety-ridden. People use the metaphor of children: You basically have a bunch of middle-aged teenagers with acne that are awkward and clumsy. And you haven't proven anything. That's if you do early-stage. And so it's a gut check. And it's really helpful — at least it was helpful for me at Benchmark with the equal partnership — there's just this kind of team orientation where, if you feel like you're struggling, people are getting beside you.

Yeah, because they all have a stake in it.

Yeah, they have a stake in you doing well.

It's not an eat-what-you-kill kind of situation.

Not at all.

So what was your investment?

My first investment at Hummer Winblad was a company called Employees, which was SaaS HR.

Ah, early.

Way before its time. It was like Workday, 10 years early.

Or Zenefits. I was just visiting their offices.

Very similar. Because we didn't charge the same way, but the same customer set.

But it was the beginning of that idea.

And ADP ended up buying it for 150 [million]. But we didn't make nearly as much money. And we made a huge mistake by choosing HR instead of sales, because HR is a corporate purchase by someone who doesn't have any authority. And sales is a credit card purchase by someone who has all the authority. So, hard lesson.

So you did that. And what was your first at Benchmark? What were you involved in?

It was Epinions.

Epinions, oh my god. Was that a success or a failure for you?

We ended up merging it with Dealtime, it went public, and eBay bought it for $600, $700 million.

Yeah, so you feel good about that. But that was a hit company, and then sort of not.

It was. It was covered in the New York Times Magazine, and then the bubble burst and then there was a founder split and …

Explain Epinions for people who don't know. I remember you on the covers. It was always on the covers, that guy.

Epinions was a big UGC idea at the beginning of the internet, which was basically to allow UGC reviews of anything and everything. And they started in the categories more like products. They did experiment with services.

And the CEO was?

The CEO was Naval Ravikant.

Naval, yeah. That's right.

An interesting story about him: We ended up splitting from him and there ended up being a lawsuit. And this was, I don't know, 16, 17 years ago. I'd always thought of Naval as one of the smartest people I'd ever met, but when someone sues you, you tend to get on the other side of things. And just this past winter, I was at a ski event that Chris Sacca put together, and he was invited and we sat down and talked for the first time in [ages].

Oh wow. And?

It was great.

Hugged it out?

Yeah, it was awesome. It reminded me of why we worked together in the first place. But I regret that we spent 16 years not chatting. And he's obviously gone on to do some spectacular things.

In the next section, we're going to talk a little bit about your philosophies, what you write about, because you write about bubbles and things like that. But what was your philosophy on investing then? What were you doing in the early days? And we'll talk later about how it changed.

I think when I was on Wall Street. just devouring any book I could in investing philosophy — I think I bring a structured approach.

You're almost academic in the way you think about it.

And the way I think about it, which will sound trite, but I'm always looking for some kind of competitive advantage, like some type of unfair ability to compete in the marketplace. I don't get drawn to the kind of enterprise deals that are just, "Who has the better Salesforce, knock them down," kind of thing. People make money doing that. It's a valid approach. I remember the OpenTable scenario. We're meeting with Chuck [Templeton], and he's in, like, three restaurants, and we're like, "How could this ever work?" And you're like, "Well, it can work if we tip it into a network effect and then everyone has to buy it." And that's what played out. It's that kind of thing.

So is that what convinced you? Like, what advantage do you mean?

In that case, we were betting on the existence of a network effect. And people talk about network effects all the time, but you come up with ways to try and analyze whether it's possible or not. Will more diners lead to more restaurants, and will more restaurants lead to more diners? Are there ways to measure and study that? Or to implement the go-to-market strategy such that it exploits it as much as possible?

So does your analytical approach hurt you sometimes? You're not the gut investor that some people are.

It can. I think venture's really hard. And there's a lot of luck involved. And mistakes that you make — especially missing ideas — are ... it's called asymmetric returns. But if you invest in something that doesn't work, you lose one times your money. If you miss Google, you lose 10,000 times your money. You have to orient yourself toward — Bruce [Dunlevie] uses the phrase, "What could go right?" And you have to kind of think that way all the time.

Oh, that's interesting.

And you're more likely, being overly analytical, to talk yourself out of things.

Right, right, that's what I mean.

And so you have to twist your brain in the right way.

Yeah, because you can think of all the wrong things, "What could go wrong?"

Yeah. And by the way, the Google example is one that kind of fit that at the time.

That was 1998, yeah.

Excite was going bankrupt.

Yup, they were.

And Yahoo's stock had fallen from like 82 to 10. So search didn't look that interesting. And you had two academics and ... There's a venture rule book: "Don't back academics who insist on being CEO." [laughs] So there was a number of things that said, "Don't do it." But two of the smartest investors ever —

… Sequoia and Mike Barnes ...

— stepped up and did it. They also wanted a price that was seemingly ridiculous, obviously a very good investment.

Did you pass on that one?

We failed to pursue it. It's always important to state it that way. Because to say "pass" made it sound like we had a chance. I don't know if we had a chance. They presented to us and we failed to pursue it. And if we had, we would have had to compete with two of the best.

Right. Absolutely, I remember visiting that garage, Susan Wojcicki's garage at the time.

There were 25 employees when I met with them.

And they were crazy, let's be clear. They were. And there were a lot of search things that had gone wrong. And Yahoo still was very strong. And, in fact, their big break was when they put Google on the Yahoo platform as the search engine.

I remember.

And it was a fatal error for Yahoo at the time, even though they got a big stake in it.

Yup.

So all right, when we get back we're going to talk about how you've developed as a venture capitalist and also some of your writings. Because you always create sort of a big old mess. Like, people start talking about the things you write, especially around bubbles. Recently you've been writing about bubbles, and you've written about them several times. You're sort of the voice of warning in the industry. When we get back with Bill Gurley of Benchmark.

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We're here with Bill Gurley of Benchmark, who I've known a long time. We're talking about investing, philosophy and writing about it. Now, you've been very public about your opinions. A lot of venture capitalists are super secretive. You haven't been. You were an analyst before, so you're used to writing and putting your opinions out there, and at various times you've caused sort of a kerfuffle talking about the bubble, right? At the top, where everyone's feeling good, you're like, "Just a second." Sort of like the aunt at a garden party sometimes, talking about how you had written about the trouble a-comin’. This was about six months ago?

Yup. I would tell you — as a backdrop, and then I'll dive into it — that I have a philosophy that the very best entrepreneurs are disserved by bubbles. In other words, they would raise money at any time. When bubbles come along, almost anyone can raise money. And so it creates excessive competition, you get companies that are misbehaving and doing things that can disrupt markets. And so I've found, and maybe I'm just a contrarian, but I've found that like 1999 and 2015 were two of my least favorite times in Silicon Valley. Some of it I would tie back to just the behavior you see. You once said — I read something you wrote — you said, "Too much arrogance, too much bullshit will be the downfall of Silicon Valley." And it's interesting because that reminds me of a conversation I was having with Rachel Whetstone, who now runs comms at Uber. Shortly after we met, she said, "Do you watch HBO's ‘Silicon Valley?’" And I said, "No, I don't, I tried to watch the first episode and I didn't like it." And she said, "You have to watch it." And I said, "Why do I have to watch it?" She said, "The rest of the world is laughing at us." And I still to this day think half of the people in Silicon Valley don’t know that it's a parody.

Ah, it's true. They like it. They like being paid attention to at all, I think.

I'll give you another example of the kind of stuff that just makes me cringe. I was at an investor conference last year in Vegas, a private investor conference.

That one, I know which one. Where everything leaks out. That private one.

So unicorns are presenting, right? One after another. And I probably sit in on eight unicorn presentations, and five of them use the world "trillion." Now I don't think I had heard the word trillion in an investor presentation before that day.

That's a big dream.

But we had done something in the ecosystem to encourage this type of outlandish promotion —

Going to the moon.

— where you feel like you need to use words like trillion. And I think it's dangerous when we act like we have the right to disrupt everything or eat every industry, but we're not willing to play by the rules of profitability or GAAP accounting or being public. We look like entitled brats. And I think the end state, the really bad end state of that type of behavior, is we invite regulation from Washington that I prefer we not have. But I think that's possible if we play it too loose.

If we play it too loose, if we talk about all these numbers ... Every three or four years, the [Wall Street] Journal has a story about the parties. I think they just recycle the same story, I don't know if it's so much the party ... What I was talking about in that quote was, I was interviewing an author who was writing about how innovation dies and how it's created. And someone asked me, and I said, "Well, it's going to be that. It's the same thing every time."

And people discount risk slowly. Like they forget about pain and they forget about layoffs and they forget about that this is supposed to be hard, you need to profitable. And the younger generation, they're taught in very short time windows. So most of the entrepreneurs today weren't around in '99.

So they've forgotten.

They have no muscle memory of it whatsoever.

There is also a mentality, though. If you have a depression-era mentality, you don't do anything, too.

That's true, that's true. Absolutes on either end aren't going to get you anywhere. And, in fact, I would suggest that there are two types of entrepreneurs. There's the incredible operator who might be a COO, they hate these times. Because they can't promote. And then there's this hyper-promotional person that only comes to Silicon Valley when the time is right, and then they go away. And boy, those drive me crazy.

You start to see the scammers.

And you see it in the deal flow, so it goes from being 10 percent hyper promotional to 90. And I've even heard stories that I find hard to believe, but I've heard stories of reputable people in Silicon Valley, "You should overstate your numbers in your fundraising because everyone's doing it and everyone's just going to discount them anyway." If people are really doing that, it's distasteful, you know?

Let's talk about what you wrote about the bubble. What were your main worries, and how do you look at them now? There was just an article in the Journal talking about how people are fixing themselves. Do you think that's the case?

Somewhat, yeah. I mean look, the piece that Sequoia did, the deck that Sequoia did in ‘09 was extremely helpful to the Benchmark portfolio. Because you went into that next board meeting and everyone had kind of reevaluated where they were. And Katie Benner — who wrote that story that you're talking about — called me and said she started researching this topic and she started calling entrepreneurs, and some of the stuff I had written had inspired them to change their behavior. So that actually means a lot to me if that was a result. If we play these bubbles out, if we just get extremely promotion-to-the-end-state, then you have the type of crash you had in '01, which is complete wipeout. Like, 50 percent of people get laid off. And it'd certainly be better if we can avoid that kind of thing.

Are you, as venture capitalists, sort of responsible and indulgent of these entrepreneurs? Because you have Mark — and you were talking about it, but Mark's knocked up the prices. You all knock up the prices quite high.

I think everybody, to a certain extent, has to play the game on the field. I like to use the example of Hortonworks and Cloudera. So we're in this company Hortonworks, it's a Hadoop company. Cloudera raises $950 million from Intel. What do you do? You could sit around and say, "We're going to get to profitability," but you're not going to matter. You might as well lock the door and leave the building. So you're forced into a game of capital warfare that you may have not been ready to play. And so I don't know that any one person is responsible. Silicon Valley and venture capital have always been cyclical. And so there's something about human nature that causes us to be increasingly risk-seeking until someone comes along and really punishes everybody.

There was that study in Iceland where the banks started taking risks — it's often men, I'm sorry to say, but women don't take the same risks. [Men] underestimate risk rather severely.

Right, and there's tons of books that have been written on different types of asset bubbles. There's another contributing factor, I think, right now, which is [that] we've had low global interest rates for the past seven years. And I was fortunate enough this summer to meet Warren Buffett — Chamath [Palihapitiya] was the one that made that happen. But we only had one question each, and I said, "You know, in our industry we're seeing that low interest rates are leading to overt competition that's irrational." And he says, "You bet it is." And he's seeing it in his business as well, and I think it's played out in natural gas and all these other pockets. Real estate in Silicon Valley, right? All these asset prices, because with interest rates so low you just have people looking for yield, so money sloshes around.

I always say there's not enough rat holes to shove it all down in Silicon Valley.

It's true. I would have never imagined in my life as a venture capitalist that the biggest problem would be too much capital everywhere.

So what do you do? Here you are, trying to compete with your Hadoop company and others, what do you do? Do you discipline yourself or do you just go along for the crazy ride?

I write about what could go wrong in the hope that it might correct something, but I may not have been very successful at that. You play the game on the field, and the game on the field may be particularly sloppy. You're trying to outraise one another, which perpetuates the problem.

You out-hype each other.

Yeah. You try and spend more efficiently, even though everyone's losing way more money. And one of my biggest things that I've said about this current time is the risk we're taking because of the size of the losses. If you go back to ‘99, there were a whole bunch of companies going public and everything, but people were still moving towards profitability at $30 or $40 million in revenue. And this is way different. There's way fewer companies, whatever the number of unicorns is, but they're being given piles of money. Hundreds of millions. And burn rates are areas we've never seen before. And steering those back towards profitability, if capital ever becomes scarce, is going to be a really difficult exercise.

So how are you going to do that?

I don't know.

"Put down that free kombucha shake right now!"

And look, there's been some things that I think have been super helpful. Tomas speaking out on Kind bars and brick walls, and then you know, this summer over at Dropbox, Drew Houston went out, it looks like he did a press tour about cutting $35 million of perks out of Dropbox and did it in a way that he was proud of. And you've had the Evernote thing as well, where they've corrected some of that stuff. And seeing him as a leader talk about that as a smart exercise is awesome. And a sign, like some of the stuff that Katie wrote about, that we're moving back in the right direction.

Do you ever feel you can do anything else to impact entrepreneurs besides writing? What would you write right now, if you were doing that essay?

I've got an unwritten blog post about unit economics. One of the things that Silicon Valley does when it gets risk-seeking, which it did in '99 and now, is they invest in businesses with lower and lower gross margins. And that's riskier. And a lot of times those involve consumer products. And then what they do is they start selling them heavily discounted. And there's this old saying about selling dollars for 85 cents. But there's a truism to it. You can create infinite revenue if you sell dollars for 85 cents. And if you give consumers more value than you charge them for, they will love you. And I remind entrepreneurs all the time that Webvan had the highest NPS scores of any company I've ever known. It wasn't that the consumer proposition didn't work, it was that the economics didn't work. They weren't charging enough for the service level.

What's interesting about that is that conceptually, it was the right idea. A lot of things are directionally correct, but it wasn't working out on an economic basis.

They should have been charging more money, basically. Anyway, we're in one of those time frames. Some of that's starting to get cleaned up. There's probably been more shutdowns this year than in the previous three.

Or sales.

Or sales. And layoffs. You're starting to smell for the first time. I've heard signs of some real estate correcting. I'm hopeful that it can be a soft landing. Historically, it hasn't been.

Right. What could happen?

Oh, what could happen? I mean, macro is really hard to get right. And Buffet and those guys don't even try.

We've got an election, we've got so much going on.

I think the European situation is probably a bigger hotbed. If Italy or something defects from the EU, and the kind of thing that could cause. China's GDP, a lot of people are worried about. I don't have enough knowledge to know whether that could be the catalyst, but it could be.

We're talking to Bill Gurley about investing and the bubble and some of the things he's written about it. When we get back, we're going to talk about his current investments and some other thoughts that he has going forward.

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We're here with Bill Gurley, the well-known venture capitalist in Silicon Valley who works at Benchmark. He's been involved in lots and lots of companies. He was an analyst before that, but he's one of the most high-profile venture capitalists, VCs, in the Valley. Today, the Journal had a piece about how you guys are doing pretty well. Little bit of smack-around of Andreessen Horowitz. How do you judge yourselves?

It's difficult. The venture industry, as I mentioned earlier, you have to be very fortunate to fall on what people sometimes refer to as positive black swans, these break-out plays. And I think you could spend your whole career and do extremely well and never get behind one of the ones: A Facebook, a Google, that kind of thing. And it's almost impossible to predict ahead of time what's going to turn into something like that. And so it just creates a ton of anxiety. I would also say that it's an extremely cyclical business and so you might be doing well in '99 and really eating crow in '01 or '02. And so it goes up and down and it's hard. What we try and do internally is we keep track of what we're doing, what our competitors are doing and what are the deals or investments that we regret not doing. And we just constantly talk about it.

What are the regrets? What are the investments? We'll talk about the ones you've done.

Right now? It's the obvious ones. It's Airbnb, Pinterest, Slack, GitHub is one that we're fascinated with. I think the Collison brothers at Stripe are …

Which you didn't do?

Which we didn't do. I like them more than their business, but I really like them.

Pinterest?

On them, it's just like the thing I said about growth mindset. Like, learn-it-alls. They're nuts. They're just begging for information, which I love. I think with Pinterest it's just the size and scope. It got way bigger than we would have predicted.

And the others?

Slack, I think it's fairly obvious. It's a viral enterprise tool.

And you didn't think that would be. Well, there had been Yammer.

It was a pivot, it was a game company.

Yeah it was, I remember.

You can't kiss them all. And Airbnb, you know, Matt brought it in like his first week he had joined us. And we got caught up on one of our rules about ownership and redid it for a lower ownership.

One of your rules. Do you think you should have rules? What are your biggest rules?

You try to maximize ownership, take a board seat. There aren't that many [rules].

No academics in garages.

You can get into trouble. And one of the games you play in venture is to know which rules to break at the right time. And so we constantly challenge ourselves. Like, "Should we maybe be dropping this rule at this moment in time because things are changing?"

Does that make you the most insecure people on the planet?

It might.

It feels like it sometimes.

Chasing the breakout. And when the close happens on one of those, it's actually a really perverse element of the venture industry. Like the moment that John Doerr and Mike Moritz closed the Google investment, which was probably all of a week and half, it was the biggest event in both those firms for over a decade.

Yeah, without even knowing it at the time.

And something had happened in a week and a half. And for a lot of those companies, and I'll include the ones we're in, if you worked there it probably would have come out that way anyway. So the seminal event was that closing event that was very quick.

Right, and decisions were made quickly. Often on a instinct, actually.

And in that case, like we talked about previously, most people's instincts would say, "Don't do it."

So talk about what you did do. Obviously your biggest — there's a couple at Benchmark, but Uber is one of your big ones. I've talked to all of you about how that happened and various people, of course, take credit all the time and this and that. But it really was Matt and then you others there. And it went back and forth actually, initially.

Having come out of OpenTable being successful, I was trying to think of other industries where, if you put a network on top of [it, that] would absorb waste and make it more efficient and more usable. And the thesis of cars had come up, and we had met with several taxi [startups] — there were actually taxi startups before Uber. And we had quickly come to the conclusion that doing it on top of taxi wasn't the right way to do it because prices were fixed, they’re oligopolies, there's regulation, and if anyone did it on town cars, we would pay attention. So that was a thesis we had internally when they popped up.

Which was a town car kind of offering. Ride in style, whatever it was.

Yeah, so we immediately cold-called them, and I remember meeting with Ryan and Travis at a restaurant and then I brought them [in]. This was before their seed round, and this is the part you're talking about about going back and forth. And they presented the company to us for the seed round and we chose not to do it at that point in time. And then for the next three or four months …

What that like, Calacanis and Sacca were in that one, right?

That's right. And then over the next three or four months Matt became, I think, the No. 1 rider on Uber. And as he's done many times in our partnership —

… This is Matt Cohler ...

— he came into the room screaming, "We have to do it! We have to do it! We have to do it!" And so we got aggressively in front of the series A.

And what did you think at the time? What would happen here? Of the entrepreneur, Travis, and obviously Garrett Camp was involved and others.

Between the time we looked at the seed and when we did the A, Travis had moved into the CEO position. At the beginning we were just studying him as an angel investor in the thing, and probably by the time the A came around he was the CEO. It was hard. Like I said, we had a theory that it could be like OpenTable. So you know, OpenTable was sold for like $3 billion or something. So I'd be inaccurate if I suggested we had a vision that it could one day cause people to question car ownership. I never had considered that.

And what do you think of the person? He's quite aggressive.

He is, he is. So Matt had known him for a while. I actually called Mark Cuban, because Cuban had been an investor in Red Swoosh, and they had ended up in a disagreement, yet Mark had walked away thinking Travis was remarkably professional even though they had different points of opinion, which I took as a positive. I like to think I knew how passionate he was. But I didn't. We were taking a chance. I'm remarkably thrilled, now that we're involved, to see a guy who's just so committed to what he does.

Right, but some say too committed, too aggressive. Do you provide, "Slow this the hell down, stop arguing with people."

You know, it's funny, in the book I mentioned earlier, "Grit," this woman Angela Duckworth had studied all these people that have been successful. And she claims, and there's a big TED video that's only six minutes which is quicker to watch than reading the book, but she says the key characteristic that differentiates successful people from unsuccessful isn't IQ, it's grit. And she describes grit as passionate perseverance. And on those two dimensions, I think Travis may be completely on the far rail. One of the board members described him as "remarkably all-in." You know?

Yeah. But that can become abrasive and irritating, which to many it has.

Completely understand. I do think that most VCs would probably yearn for most of their founders and CEOs to have some of this grit.

Does that have to change, and do you have an impact on that?

I think every one of the entrepreneurs that gets thrown into the limelight in the way that he has —

And with failures before. He really did have a lot of trouble.

By the way, I think those contribute to the grit.

Oh absolutely, I think it's right at the heart of it.

He spent so much time on these startups and one of them went bankrupt and one he sold for $20 million.

And in the first one he sort of got screwed by his investors.

Absolutely. And just years and years of trying. I often think that the grit is driven by some kind of obligation to the Entrepreneur Society of America. Because he knows how hard it is to be on one of the ones that's not working.

Yeah, I felt it was rage. It was just like, "This one's going to work."

And so you get on one that has the wind at your back instead of your face and you're like, "I'm going to play it for all it's worth." And I do feel like that's part of the motivation.

So, just finishing up on Uber, obviously you're on the board, correct?

Correct.

When is it going public?

You know, I don't think that we're going to be going public anytime in the near future because of all the issues that we just talked about. We have a large number of competitors, even with the deal done.

Well done, by the way.

Thank you. [Competitors] who are very deep pocketed, who have decided that their primary form of competition is not going to be like building a different app or a differentiated service or a different level, it's just price. And so there are intense subsidy battles going on.

All over the world.

All over the world. And those companies, when they approach investors, tell them, "Uber is going to go public, and then they're going to have to be profitable, and then we're really going to sneak up on them with these discounts." While that's the game on the field, and it's one that I find to be remarkably messy and ugly, I don't think it would be in our best interest.

So raising more money is the way to go.

I don't know if we need to. We have $9 billion in the bank and $2 billion of debt, which is the most any private company has ever raised.

Does that frighten you?

Yeah, but two things. One, I do think that it is one of the best product market fits that has ever come along. And as I've come to realize what's possible here, there is a real opportunity to literally change the face of America.

You talked about that early on, I remember.

Like car ownership has gotten way too far in our country. 2.3 per household.

I agree.

And parking lots. Houston has like 4.5 parking spots per car. And there's an opportunity to change it. You can actually lower housing pricing if you remove parking requirements. So we're doing deals now with developers and getting cities to approve them to have parking-free housing.

It's definitely hit into a bigger trend. A bigger, more important trend.

And if you survey people, Recode had an article about a survey, and even though the Recode article was a little dismissive, it said 8 percent of the people in the survey said that ride-sharing had a strong likelihood to impact car buying decisions. That's 8 percent. This stuff only existed five years ago.

Yup, it's like smartphones, early on.

Yeah, what will that number be five years from now?

Absolutely, I don't drive my car anymore.

I think it's a leading edge. I know a ton of people who have gotten rid of their cars.

Does that ruin the idea of public [transportation]? I was at a meeting the other day talking about how private transportation companies do not take the place of public transportation.

I think most of the ride-sharing companies, if you look at heat maps, and they've published some of these, have huge red areas around public transportation. So most of the effective public transportation, which isn't buses, it's the subways and rails, they can't get to that last mile. And there have been studies done that suggest they're symbiotic. That they actually drive more usage of each.

So let's talk about — we're going to finish up in just a minute — what else are you in now that you think is very exciting? What makes you excited?

A couple. I'd probably mention three. So, Nextdoor, which is a social network for the local neighborhood that's really starting to grow.

Which also has issues around racism ...

They've done a really good job of addressing those in the past couple of weeks.

They're trying. It's like Twitter, it's humanity, right?

Absolutely.

Although mine is just horrible. Is there any black person who can walk down the street that's not suspect? I'm like, "Can you stop?"

Yeah, they've just come out with a whole bunch of new programs on this front. I think some of the initial people that were upset have come around and sanctioned what they're doing. So I feel good about how they've done that.

Tools are important. Why do you like that one?

If you go back to like 2006, the local advertising market was like 110 billion. And many of the avenues people would use to microcast advertising were radio, newspapers, magazines. They've come under threat from digital disruption, and there's not a place for people to bring that out. I also think by having a social network in the neighborhood, there's lots of features that you can implement over time. We're starting to do some of those now. And also because we're not dependent on anyone. We're not an SEO company, we didn't build on the back of Facebook Connect, we built this out ourselves.

Right. It's a bulletin board. It didn't work with AOL, with Patch, which was interesting. Well, Patch is more heavily content-oriented.

They did a bunch of anti-intuitive things to make the liquidity come alive. Intuitive funds were from Epinions that had built the UGC network before. I'll mention two others. Stitch Fix is just an incredible company.

She's amazing.

Katrina Lake's one of the best I've ever worked with. It's right here in the city, most people don't know about it.

Explain it.

They've built personalized women's fashion. Although they're moving into beta on men's now. And I like to think about it — no woman that's buying fashion wants to think about it this way — but I like to think about it as Moneyball for women's retail. And for every woman that comes in, they fill out a 15-page questionnaire to suss out size, fit, style, whether it's for work or social, and then for every item, we measure 66 characteristics. And then there's a data science team that's over 70 people now. In fact, Stitch Fix is the No. 1 competitor of Uber for data science talent in Silicon Valley. Eric Colson, who runs that group came from Netflix and did all the recommendation stuff there. And so when a customer comes in to ask for a new Fix, which is an interesting drug metaphor, and this package comes to them, we have a predicted keep score for every item in our inventory. Which is a level of analytics brought to this industry that's maybe one or two orders of magnitude above what everybody else is [doing].

Did you know I covered retail for seven years? And one of the companies was hot, and then it wasn't, and I went to the CEO after — it was a teen company, these things go up and down — I said, "What happened?" He goes, "Pedal pushers. I picked pedal pushers and not culottes. And that was the end of me." [laughs] I'm like, "Why?" He's like, "I just guessed." It was really funny, I'll never forget that, "pedal pushers."

And that's what retail's been. We're now working with merchandisers who have ideas. And they test the ideas against the algorithm instead of ever shipping them. And so it's really cool. There's an article written on her recently called "Moneyball Fashionista" that has the whole [thing].

Huh, interesting. There's all kind of interesting experiments going on in retail.

Yeah, it's really cool.

All right, you get one more. What else?

I'd probably talk about HackerOne.

Oh, I don't know that one.

So Sheryl once said that the smartest thing Facebook ever did on the security front was start a bug bounty program. And bug bounty means you basically pay the hackers to find the holes before the bad guys do.

Yeah there's all kinds of crowd-sourcing on this.

Yeah. Microsoft, Facebook, Mozilla, there've been people who have done this before, but they all did it kind of holistically within their own firm. Alex Rice, who worked on these programs at Facebook, created a startup that will allow anyone to have a bug bounty program. So in like 18 months, we've got over 500 customers including Priceline, Salesforce, Uber, GM, Home Depot, the Pentagon. And they're all now running bug bounty programs. And then we have a marketplace of all the hackers and all the reputations and skill sets. And it's really cool. And I think you look at the problem, huge problem, most of the solutions are defensive where you're just throwing hardware and software. And this one's offensive, right? Because you're fighting the battle in front of them.

I see, interesting.

It's elegant. And Mårten Mickos, who ran MySQL, is the CEO over there now.

Oh, that's a really interesting company.

And he's awesome.

So what is overhyped?

What would I say is overhyped ...

You can name names.

Well, some of the categories that become difficult, I would say, in this type of world, are ones where capital can create this messy playing field that I'm talking about. And one of those where I think that's happened is in the online lending space.

Aha, there's a lot of those. SoFi, others.

SoFi and Avant have raised a billion dollars and Lending Co. went public, and there's OnDeck and Square, and it's like, if everyone just starts aggressively giving away money, it's hard to build a business, you know? And so those are the things that get dangerous. I would say that some of the ones where we over-choreograph are difficult. Like VR, because the big guys all pull out their R&D teams and their guns, so Samsung and HTC and Facebook, they're all at the table. Most big startup breakouts are where people aren't paying attention. As opposed to where everybody's got their guns lined up.

Do you like VR?

I think that the screen resolution is not there yet. And a lot of the demos to get people excited are on $30, $40,000 equipment.

Right, exactly. And it's hard to use.

And you put on the stuff that you can buy today and it's pixelated.

I had a big argument with someone about this.

And so I do think there's a risk that we run into what's known as a trough of disillusionment before you get a breakout because of that.

What about current companies, I'll finish up with this. Twitter. I ask everyone.

You know, I'm one of the biggest optimists about what's possible out of Twitter.

Most people feel that way.

Primarily because the most important people in the world are curating their persona there. And you can get them to do more work than they're already doing today.

Yeah, it was interesting, because Mike McCue is a former board member who is running for the board. He said it's a bigger phenomenon than it is a company.

Look, it may be. I think running businesses at scale is probably the most underrated activity in Silicon Valley relative to how hard it is, you know.

How hard it is? I know you guys are all like, "It's so hard." I'm like, "I thought you're the smartest people on earth."

Fair enough.

I don't really care because you're all rich and smart.

Fair enough, but what [John] Donahoe did at eBay is really really hard. And most entrepreneurs like to take potshots at big companies in a way that I think is disrespectful.

What do you imagine will happen to it, then?

There's always a chance that there's a sale process. I guess Ev [Williams] was rumored in the press yesterday talking about that. I think there's a lot of opportunity to kind of micro-segment around interest groups, because today the way the feed's oriented. If I love all country music, which I do —

Me too.

— if Ryan Adams happens to say something at the right time, I find it. I thought you could mine the feed and build a Techmeme for everything. And so there could be an alt-country newspaper that it’s pulling from, and you have a ranking table. I've talked to Jack [Dorsey] and the team about it. I hope one day they do it. I think it could lead to something.

What happens to these companies? I think the problem is a smallish company gets a lot of attention because of journalists, and then it's sort of a narrative, the way Yahoo became.

Yup. It's possible.

And it gets sucked up into that.

Yeah. It's possible, you know. There's a lot of heat, pressure.

What is a mistake that you've made and learned from, as a venture capitalist or investor, anything. You talked about being too analytical and missing some of the instinctual stuff. Is there anything you did that you're like, "Oh I shoulda done it this way?" Or what do you tell entrepreneurs?

The immediate thing that comes to my mind was the Google investment, because you can't make a bigger mistake. I was trying to think of another one since we already talked about that.

That's a big one. But what went on there as an investor?

As I mentioned, some of the external data points lead you to have some amount of skepticism. The product usage was already starting to happen. We were all using it in our office. It was a better product, so we can't blame that. And we were already talking about, "Oh you just do what GoTo did." So the business motto really wasn't a question either. Everyone was already saying that. I think it came down to the price at the time was remarkably high, and the team was remarkably self-confident in a way that would cause you to question whether they could pull it off. But they did. And I go back, I think the learning is that if you have remarkably asymmetric returns, you have to ask yourself, "How high could up be?" And then that "what could go right?" question. Because it's not a 50/50 thing on the judgment call. Like, if you thought it was a 20 percent chance at doing it, you should still do it, because the upside is so high.

Right. What do you want to invest in? What interests you a great deal now? Like AI, everyone's either terrified with it or thrilled with it.

I've been spending a lot of time looking at the health care space.

Ah, you're going to wade in there.

Well, I look at the technologies, I look at the smartphone, I look at what we've done with UGC plays, I look at what we've done even with Zillow and real estate. And I say, "Boy, this thing's really messed up, we ought to be able to fix it." Now, my first