Venture Capitalists at Work: How VCs Identify and Build Billion Dollar Successes

479 Pages·2011·10.32 MB·English

by  Tarang Shah

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Contents
Foreword by Gus Tai.......................................................................................................vii
Foreword by George Zachary....................................................................................ix
About the Authors...........................................................................................................xi
Acknowledgments...........................................................................................................xiii
Introduction.......................................................................................................................xvii
Chapter 1: Roelof Botha, Sequoia Capital: YouTube, Xoom, Green Dot,
Dropbox, AdMob.................................................................................................1
Chapter 2: Mike Maples, FLOODGATE Fund: Twitter, Chegg, Digg, Demandforce,
ngmoco:), SolarWinds, ModCloth.......................................................................11
Chapter 3: George Zachary, Charles River Ventures: Twitter, Yammer,
Millennial Media, Jambool, Scribd, Metaplace....................................................23
Chapter 4: Sean Dalton, Highland Capital Partners: Starent Networks,
Altiga Networks, Telica, PA Semi........................................................................39
Chapter 5: Alex Mehr, Zoosk......................................................................................55
Chapter 6: Howard Morgan, Idealab: Overture/GoTo, Citysearch, eToys, Snap;
First Round Capital: Mint, myYearbook..............................................................75
Chapter 7: Tim Draper, DFJ: Baidu, Skype, Overture, Hotmail, Parametric
Technologies, Focus Media, AdMob....................................................................91
Chapter 8: Osman Rashid, Chegg...........................................................................101
Chapter 9: Harry Weller, NEA: Groupon, Opower..................................................115
Chapter 10: David Cowan, Bessemer Venture Partners: LinkedIn, Smule, Zoosk........133
Chapter 11: Michael Birch, Bebo, Birthday Alarm.....................................................149
Chapter 12: Mitchell Kertzman, Hummer Winblad Venture Partners...................165
Chapter 13: Scott Sandell, NEA: Salesforce, WebEx, Bloom Energy..........................177
Chapter 14: Gus Tai, Trinity Ventures: Blue Nile, Photobucket, Modulus, zulily,
Trion Worlds...................................................................................................191
v
Chapter 15: Steven Dietz, GRP Partners: DealerTrack, TrueCar, Bill Me Later,
Koral, UGO Entertainment..............................................................................209
Chapter 16: Paul Scanlan, MobiTV...........................................................................219
Chapter 17: Ann Winblad, Hummer Winblad Venture Partners: Hyperion,
The Knot, Dean & Deluca, Net Perceptions....................................................237
Chapter 18: Jim Goetz, Sequoia Capital: AdMob........................................................253
Chapter 19: Roger Lee, Battery Ventures: Groupon, Angie’s List, TrialPay...................259
Chapter 20: Ken Howery, Founders Fund: PayPal, Facebook, SpaceX, ZocDoc.........275
Chapter 21: Alfred Lin, Sequoia Capital: Zappos........................................................289
Chapter 22: Kevin Hartz, Xoom, Eventbrite.............................................................301
Chapter 23: Eric Hippeau, Lerer Ventures; SoftBank Capital: The Huffington Post,
Yahoo!, Danger...............................................................................................315
Chapter 24: David Lee, SV Angel: Twitter, Foursquare, Flipboard, Dropbox, AirBnB.....327
Chapter 25: Ted Alexander, Mission Ventures: MaxLinear, RockeTalk, Enevate.....337
Chapter 26: Robert Kibble, Mission Ventures: Greenplum, Shopzilla,
Sandpiper Networks.......................................................................................353
Chapter 27: Rajiv Laroia, Flarion Technologies..........................................................365
Chapter 28: Jim Boettcher and Kevin McQuillan, Focus Ventures:
PCH International, Starent, Pure Digital, PA Semi, Aruba Networks,
Financial Engines, Centrality, DATAllegro.........................................................379
Chapter 29: Mike Hodges, ATA Ventures: Tellium, Zoosk, Biometric Imaging...........393
Chapter 30: Alan Patricof, Greycroft Partners: Apple, AOL, Office Depot,
Audible, The Huffington Post...........................................................................409
Chapter 31: Ben Elowitz, Blue Nile, Wetpaint..........................................................419
Chapter 32: Vish Mishra, Clearstone Venture Partners: PayPal, Overture, Cetas,
Mimosa, Ankeena, Kazeon.............................................................................429
Chapter 33: Rich Wong, Accel Partners: Angry Birds, Atlassian, AdMob, 3LM.............437
Chapter 34: Randy Komisar, Kleiner Perkins Caufield & Byers: LucasArts,
WebTV, TiVO, Pinger, Transphorm.................................................................443
Chapter 35: Peter Wagner, Accel Partners: Fusion-io, Opower, ArrowPoint
Communications, Riverbed Technology, Redback Networks.............................459
Index .......................................................................................................................471

vi
Introduction
For years, this question has played in our minds: why do some start-ups defy
all odds and become multibillion-dollar successes while many others fail? Is
this purely a stroke of luck or is there a science behind the success? If so,
what are the common characteristics among successful start-ups and entre-
preneurs? To find answers to these questions, we went straight to the source
and asked the venture capital investors who were part of some of the most
notable successes of our time.
In this book, you will hear leading start-up investment practitioners discuss,
in their own words, how they identify promising ideas, markets, products
and entrepreneurs, and how they helped build game-changing companies.
We explored with them the lessons learned from not only the successes, but
also their failures, to identify the factors that separate the two groups and
also to draw the common patterns. Finally, we asked them what advice they
would give to entrepreneurs aspiring to build the next Google, Facebook,
Groupon, or Twitter.
To provide you with a 360-degree view of how to build successful start-ups,
we have included interviews with several phenomenal entrepreneurs and ex-
ceptional start-up operators. We explored with them the end-to-end journey
from formation to exit and discussed the most common operating challenges
along the way, and how they tackled them.
As you’ll read in the pages to come, many interesting revelations and pat-
terns emerged.
One of the most surprising revelations was that many successful companies
arose out of non-consensus, unconventional, and in fact contrarian ideas.
Most people didn’t think those ideas would succeed at all, let alone become
multibillion-dollar companies. In each of these cases, the entrepreneurs had
a very strong intuition and access to asymmetric information based on their
predisposition toward, and early exposure to, a potentially huge untapped
or emerging market opportunity. Groupon, Twitter, and Facebook are great
examples of that. Given the general market disbelief, these companies en-
joyed very little competition until they broke off the chart. On the other
xvii
hand, the riskiest start-up ideas tend to be those most people can see are
great ideas. Hence, there is so much competition that it negatively impacts
everything from gross margin to valuation.
Surprisingly, most successful start-ups were not started with a goal to build
a billion-dollar company. They rather started with a desire to solve a mean-
ingful “pain point”—a VC term for a problem that causes people a lot of
frustration. This is usually something that affects the entrepreneur person-
ally and directly. Then the entrepreneur does a wonderful job of solving the
problem for a small group of customers. Eventually the entrepreneur, with
the help of venture investors, finds a way to expand the solution to a very
large group of customers. This doesn’t necessarily put management before
market, but rather it emphasizes the fact that the best companies are cre-
ated when great teams intersect with large market opportunities.
Whereas entrepreneurs focus on identifying and solving these burning pain
points, venture investors try to find those extraordinary entrepreneurs who
are trying to solve potentially huge problems in a meaningful way. Venture
investors tap into their tremendous network of contacts and “pattern rec-
ognition”—the art of leveraging lessons drawn from past successes and fail-
ures to identify a combination of factors and behaviors that may point to
promising markets, entrepreneurs, products, business models, and so forth.
Together, these build a “prepared mind” or “gut feel” about the emerging
market opportunities created by the tectonic shifts in customer behavior
and the enabling technologies that can be successfully applied to those shifts.
Entrepreneurs are true visionaries, and venture investors are great pattern
recognizers with an experienced toolkit of how to build companies—and
how not to build them. Successful start-ups are created when a trusted rela-
tionship and line of communication is established between the visionary (en-
trepreneur) and the pattern recognizer (investor) for two-way knowledge
transfer.
In discussing the characteristics of the successful founders, the words re-
peated most often are extraordinary passion, intelligence, authenticity, intel-
lectual honesty, dogged persistence, risk-taking, and integrity. Many of these
entrepreneurs were scarred by past failures, were hungry to win big, or
came from humble backgrounds. They also had this fact in common: they
were hardly known to the world before starting companies that made them
successful and famous. Most of these successful founders also paired with
one or more co-founders rather than going solo. The co-founders they
partnered with had not only complementary skills, but more importantly, a
long history of working together. They had built a great chemistry with each
other well before they became co-founders.
xvii i
It’s also clear from the interviews that most successful start-ups have an “A”
team of 30 to 40 people stroking together in harmony towards a common
mission. This gives them ten times the productivity advantage over their
competitors. These teams come together when the passion, intelligence, and
charisma of the founders serve as a talent-magnet to attract some of the best
people in the industry to solve the toughest and most challenging problems
for their customers. The first 10 to 12 hires in the start-up team are ex-
tremely important, as they determine the DNA and culture of the company
and, in turn, its success trajectory.
It’s quite interesting to notice that successful start-ups are extremely adept
at “rapid iteration and fast fail.” This technique of quickly trying things out is
one of the most important characteristics of the “A” team and it becomes a
core part of the start-up DNA. Successful start-ups use it to figure out a
product/market fit and optimize everything from product features to pricing.
Successful start-ups also end up making drastic changes to their original plans
in what’s called a “pivot.” Only a small percentage of such pivots—one in
ten—are successful, though. The successful pivot is a function of the “authen-
ticity” and “intellectual honesty” of the entrepreneurs, where a deep knowl-
edge of the market space and its fine nuances, combined with their ability to
quickly adapt to new market realities, plays a key role in determining the ef-
fective degree and direction of the pivot. The journey to a successful pivot
has a logical progression without any leaps from one strategy to the next, and
the domain knowledge of the founders remains relevant in the new plan.
The interviews also reveal how important market timing is in determining
start-up success. It’s probably the most overlooked concept by the entre-
preneurs, and they usually end up being too early or too late to the market.
Many companies fail not because they are too early or too late, but because
they don’t recognize or admit that, and change their plans and cash burn
accordingly.
Equally revealing is the fact that the so-called “first mover” advantage is not
that important for start-up success, unless you can turn that early position
into a sustainable competitive lead. An example might be a consumer inter-
net company that would leverage the network effect to build a massive and
sticky user base—like Groupon. But usually a successful start-up might be
coming to the party late, yet with a better solution and better execution of
its strategy. Remember, Google was the 99th search engine to launch and
Facebook launched a couple years after Friendster and LinkedIn.
These findings are just the tip of the “knowledge iceberg” hidden in this
book. We are confident that quite a lot of actionable insights will be revealed
xix
to you as you read through various chapters. We have spent enough years in
the venture industry to know some of the most pressing challenges faced by
the budding entrepreneurs. We also know that there is an ocean of un-
tapped knowledge hidden within the leading practitioners in this industry.
This is our humble attempt to bring a few buckets of that knowledge to
much-deserving entrepreneurs who can learn and apply these findings to
their specific situations and improve their chances of building successful
companies. Nothing will be more satisfying than seeing this book positively
influence and lift the success trajectory of the entrepreneurs whose relent-
less passion, dedication, and dogged pursuit brings great products and serv-
ices to us against all odds. They are a true blessing to the world economy
and mankind.
For the love of entrepreneurship!

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C H A P T E R
1
Roelof Botha
Sequoia Capital: YouTube, Xoom, Green Dot,
Dropbox, AdMob
Roelof Botha is a partner at Sequoia Capital, where he works with financial
services, cloud computing, bioinformatics, consumer internet, and consumer mo-
bile companies. Before joining Sequoia in 2003, he served as PayPal’s CFO and as
a consultant for McKinsey & Company.
In discussing Sequoia Capital’s partnerships with YouTube, AdMob, Green Dot,
and Dropbox, Roelof offers insight into the characteristics of special entrepreneurs
and their start-ups. I love how Roelof translates successful operating and venture
experience into identifying promising ideas.

Tarang Shah: What are the key ingredients in building a billion-dollar
start-up?
Roelof Botha: To achieve a big success, many things have to come together.
In some cases, what looked like smooth sailing from the outside was more
like a near-death experience; a few small changes, and the outcome could
have been dramatically different. There is always a healthy mixture of skill and
luck involved.
The key to start-up success is purity of motivation. The most successful
entrepreneurs tend to start with a desire to solve an interesting problem—
one that’s often driven by a personal frustration. The best companies are
2 Chapter 1 | Roelof Botha: Sequoia Capital
started by people who are motivated beyond money. They’re not initially
trying to build a billion-dollar company.
If you think about the sort of sacrifice and endurance an entrepreneur needs
to succeed, I just do not see how money is a sufficient motivator. If I were
an entrepreneur, I wouldn’t do it just for money. I would do it because I
really care about something.
Omar Hamoui, who started AdMob—which Google acquired and where my
partner Jim Goetz sat on the board—is a great example. Omar was a mobile
application developer who was frustrated because he couldn’t sell advertising
to support his business. So he tried to solve the problem by building a mobile
ad exchange, starting with emerging mobile developers. When we first part-
nered with AdMob, it was just him, running the company while finishing his
degree at Wharton. He did this not because he thought he could sell the
company for $1 billion—he was just trying to solve a problem for himself.
Now, to build a successful business, he had to recruit the right people early
on. The first ten to fifteen people you recruit have a huge impact on the
DNA of your business.
Another example is Dropbox, which my partner Bryan Schreier works with.
The spark that led to its formation came from personal frustration. The foun-
ders, Drew Houston and Arash Ferdowsi, were CS students at MIT. They got
tired of having to walk from their dorm rooms to the computer labs, carrying
flash drives back and forth. Sometimes copied files would be inconsistent or
they’d forget a flash drive, keeping them from accessing a document they
needed. That led them to ask, in a world where more and more people have
multiple devices, why isn’t there a common file system so you don’t have to
think, “What documents are on this machine?” I don’t think they had any idea
that the company would reach tens of millions of consumers and grow to the
scale it has. Now they’re focused on making it a successful big business.
Shah: What attracts you to start-ups and individuals to back?
Botha: We listen intently to founders who can clearly articulate an ailment
and artfully describe an elegant solution to relieve that pain. If they can weave
a believable story with a compelling value proposition, they’ll have us hooked.
We then focus on the size of the market opportunity. This isn’t an easy exer-
cise. Part of it is having a prepared mind. We go to great lengths to be very
tuned in to market trends. Say someone came to us and said, “We’ve just
met the guys who started EC2, and they’re building a cloud infrastructure
company that’s providing private clouds to enterprises. Do you want to join
us in funding it?” If I’d said I didn’t know anything about the subject and