#113 Sarah Tavel: The Value of Intellectual Rigor

0:00 I'll I'll describe what you see for the people who do scale. The founders who are not afraid to be vulnerable. They understand that there are works in progress And then figure out the ways to constantly grow, evolve and And push their own abilities.

0:17 And and it's the people who aren't willing to admit to themselves or whomever they work. That they don't know something or They're not letting themselves have that learning moment of accepting that they don't know something. That they tend to just Hold themselves back?

0:34 And not scale as a company scales. Welcome to the Knowledge Project. I'm your host. Shane Parish. This podcast sharpens your mind by helping you master the best of what other people have already figured out.

1:01 If you're listening to this, you're not currently a supporting member. If you'd like special episodes, access before everyone else, transcripts, and other member only content, you can join at fs.blog slash podcast. Check out the show notes for a link. My guest on this episode is Sarah Tavill. Sarah's a general partner at Benchmark.

1:22 This conversation is interesting because not only is Sarah an investor, but she has significant operating experience in scaling as an early employee at Pinterest. We talk about how studying philosophy helped her as a VC. Her concept of the net present value of pain and how it applies Why every strength has a corresponding weakness. Where boards go wrong.

1:43 Assessing the performance of a CEO. lessons from rapidly scaling Pinterest, and so much more. It's time to listen. and learn. You studied philosophy, not computer science or business. How has that shaped the way that you approach your job as a V C?

2:06 Yeah, you know, it's funny, like I I think most people misunderstand what philosophy is. I I I think that people probably when you say that you studied philosophy they imagine A bunch of, you know, guys in three piece suits sitting around a table drinking cognac and pontificating on the meaning of life. But it it is a little different. Um

2:27 You know, this of course philosophy is this It's this big umbrella. But the type of philosophy that I studied in college was a very analytical version of philosophy where You know, it's it's underpinn by logic. Um And you learn a level of intellectual rigor.

2:46 That You don't even realize It's kind of like you think you can be rigorous in your thinking and then you have to write a philosophy essay or read a philosophy essay. Where you have to, you know

2:57 You're you're you're breaking things down into premises, you have to think through thought experiments to imagine all the corner cases and And preempt like any objections that someone might have on your argument. And and the level of rigor that you learn. actually has made such a difference in my life. Like When I was doing product at Pinterest, you know, a product document where you're making a recommendation on a product.

3:22 is actually very similar to a philosophy proof. Like you have hypotheses You know, about how users behave, how they'll accept a a different, you know, a new feature. what you know, what their what their intent is on the product. And you you underwrite that with, you know, user research, experiments, uh, analyzing the data that you already have. And and it and it's you know, if all these hypotheses are true, then the conclusion is

3:47 that you should ship the product um and that's it's it's it's a philosophy proof But for product? And and I think investing is the same thing. Like when you're writing an investment recommendation or thinking about A potential investment. You also, you know, really what it comes down to is is a proof in the same way where you have

4:05 The premises which may be a belief that you have about the future, the kind of product market fit, the founder market fit, all these all these things. That you once again underwrite by No, understand the competitive landscape, talking to customers, looking at the data, all those things. And and trends, and if you believe all those hypotheses to be true, all those premises

4:27 then it follows that you should make the investment. And so it was one of those things that I never would have anticipated, you know, from when I studied philosophy. It wasn't with the intent to go into venture by any way or to go into technology even. But it if it ended up being an incredible uh place to learn. How to be good at this job.

4:46 Speaking of pictures, you led some acquisitions while you were there. What was that process like? Can you walk me through sort of like the end to end, all the way from identifying the acquisitions to integrating the cultures? Yeah, you know, well the acquisitions that I worked on, it was was super early in Pinterest uh time. I can think I did th three kind of s of the first acquisitions that we made there. And so they were primarily with one exception more just the talent. I I have a hypothesis uh that I believe that founders are just a unique type of person. You know, they are Um, it's part of why I love to do what I do. It's it's um I I think that it's just such a different DNA of person.

5:26 And and what tends to happen in a company in a startup, uh or you know, a a company like Pinterest that's going through hypergrowth, is that you're constantly recruiting. And you have a recruiting team, and the recruiting team is doing everything they can to find the Google engineer, the Facebook engineer, the Twitter person, whoever it may be. And to have them come into the company. But it's all the same type of DNA. It's a type of person

5:50 who joins a company at a A stage where it's more secure, where you have a more specific role and You know, you're you're looking for a little bit more certainty and and structure. Versus the person who's a founder.

6:04 Like they you know, uh risk loving, responsibility seeking. It's not about what my job is, it's about what the company needs. you know, uh action oriented, high d high degree of urgency. And so I think it's so important to constantly inject that type of DNA into a company. Through the entire life cycle of a company, I'm I'm a huge believer actually in talent acquisitions for this reason, because it's just very, very difficult to recruit founders.

6:33 Because they're fa they're leading their companies. And so The idea with the talent acquisitions was let's find this type of DNA. Let's bring it into the company particularly In you know,

6:45 types of strengths that we we needed. For example, one of the acquisitions that I was most proud of was this um visual search company. They had developed some computer vision technology. And that was something that Pinterest needed we had no computer vision DNA. And bringing in that type of kind of founder orientation.

7:05 It was like incredibly impactful for the company. What are some of the lessons you learned about scaling Pinterest that apply outside of Pinterest after you left? Oh gosh, Shane, there's so many. No, th the first thing and this is one of the things that the founders with whom I work uh hear me talk about all the time is

7:25 that kind of what you measure matters. So No, I remember at Pinterest at one point our growth team decided that the metric that they were gonna base their success on, their their OKR on Well it's monthly active users, you know, so this lowest common denominator thing. If someone a user comes to your product once in the month

7:44 They count as an MAU and OKR is Objective and key results it's just a way for a company to have a team say this is our main objective for a quarter as an example. And the key result are the key projects.

7:59 that will move the metric on that objective. And and what happens is that if you choose the wrong metric So MAUs in this case, you actually end up optimizing for the wrong thing. Yeah, the product that you build. optim like that you end up deciding on different features that you're gonna build that optimize for something that's in top of the funnel based as in as an example here.

8:22 All startups are incredibly resource constrained, right? Like there's even Despite that there there being so much capital chasing startups, at the end of the day, you're still a capital constrained environment where As a founder, you have to make sure that your allocating your dollars in the way that will generate the most equity value for the company long term. And you just waste a lot of effort.

8:43 It's a shame, really, when you're focused on the wrong things. When when the growth team realized this and ended up changing their OKR to be what we called weekly active pinners, you know, actually making someone who signs up for Pinterest not just come to the site once in a month, but actually Pin something once in a week. Their entire roadmap changed.

9:04 And we were able to make the users that were signing up far more successful. And happier and better better long term engage users, so what you measure matters is is huge and I'm I have an allergy for van A metrics. I I can see a van A metric a mile away. And it's one of those things that I just think it's it's um

9:24 You know, it just it's back to that intellectual rigor of really being honest with yourself of what you're measuring and is it really the right Long term thing. Up. Org chart matters too, like I think people sometimes see org changes

9:38 As As a bug, you know, as a uh oh Something must not be r going right with my company. the company that I'm at because we had to change the org chart and now I'm reporting to someone else or, you know, they had to change these leadership teams.

9:54 But it's actually a a sign that the company's growing. And and it's sometimes I think of it as like setting a bone, like you have to constant like as you're growing you have to be able to set things in the right way so that the company's set up to be successful to grow quickly to be aligned have the chart the org chart actually be aligned with the strategy. Um And so it's just another one of those things where so many times

10:17 I would see situations where The way that the organization was structured actually created a tax. On our ability to execute. Wait, double click on that. So one example I'd give, the growth team wasn't reporting to the product team. To the product leader.

10:34 And so and there was a point in time when the growth team at Pinterest was actually reporting to the marketing team. And so you had a team that was separate from the product team. That was making changes to the product. And wasn't

10:49 actually aligned with what the product strategy was gonna be, what the h priority features were for the product team. And And it and it meant because they were we were all uh making changes to the same the same products

11:03 We had to have a lot of meetings to coordinate. No, there was no single leader. who was the one who was, you know, making sure that everybody's strategy and tactics were aligned. And so it it got pushed down to the rest of the team. A lot of overhead, a lot of meetings. A lot of people with different incentives pointing in different directions, and it slowed everything down.

11:25 And so when the org changed so that the the growth team reported to the head of product Everything just got streamlined. and more aligned and and we all executed a lot better. Talk to me a little bit about some of the considerations of integrating founders into an existing culture because uh that sounds like it's it's really good or really bad. Like can you have a team of founders? Can you? How does that work? It's it's a good question. I I think you'd be lucky to have a team of founders. All people that work in a company are on a spectrum where on on one side you have the founders

11:59 where their identity is the company, they No, they don't ask what their job is, they ask what the company needs. They work nights and weekends, it's like it's it's an all in pursuit. versus on the other side of the spectrum, you know, to be As ex you know.

12:15 Almost as hyperbolic as possible as like the the mercenary, the person who Well just go wherever they're paid the most. And when you when you Find those people who are super impactful. on on the founder side of the spectrum.

12:30 What is really important is that their identity They want their identity to be the company. And so you have to make sure that they're really, really aligned. with the mission of what you're doing. Because then they're gonna go all in on it.

12:44 But if it's just, you know, grafting someone on because they want a soft landing for their company, but they don't really care about what your company is doing. then that feels like it's not and not not a path for success. I'm curious from the outside looking in, a lot of these tech companies, especially ones that have gone public recently, don't seem to generate any cash for their shareholders. In fact they consume cash for their shareholders.

13:09 How do you think about this? H how do you feel this plays out? Like what are your thoughts on this? Cause you have a very different vantage point than I do from the outside looking And you're the inside looking out. There's kind of two things that I think about there, Shane. The first is that There's a cash flow.

13:26 It may be that Up front you have to invest money. in us you know, in marketing and sales, whatever it may be. In order to sign a customer

13:39 that will become very, very profitable for you over a longer period of time. And so even though There's burn up front that you have to accept. Over a longer period of time. It's a profit making machine. It's it's a machine that you can put a dollar in and get

13:54 five, ten dollars, whatever it may be back. And and when you have that type of machine, you want to be as aggressive as you can. A growing because it's gonna be A positive IR IR for you. And it leads to the second point, which is that No, something that I I think a lot about and in the companies that I look to invest in

14:14 is companies that can escape competition. You know, the companies The escape competition. ultimately are uh the ones that get to a place where they're incredibly profitable. They generate a lot of cash for their shareholders.

14:28 they are able to create great experiences for their for their customers And And but you're not gonna be able to escape competition overnight. There's gonna be a lot of investing that you have to do. in sales and product in you know the engineering side

14:43 And and and more and more you have competition. And they're gonna be doing the same thing. They're gonna be investing heavily And and and if you have a more efficient machine uh where you're able to again take that dollar and make, you know, five dollars, six dollars, whatever it may be out of it, if not more. Then you should be

15:00 burning as much money as you can do efficiently to keep getting further and further and further away. From the number two in the market. And so it's it's a very rational thing to do. Assuming that you have that machine that I described. There's a lot of people who

15:16 Think that they will have that machine. I know that there's a little bit of um uh you know, believe me, that can happen where you don't quite see the contribution margin and and someone might think, oh if we get to enough scale, then the the economics will start to work. Those tend to be trickier. Um, and there's a lot that you have to believe in terms of how the comp how the competition's gonna spend money.

15:39 whether the economies of scale or network effects that they describe will actually come true. And those are those are trickier. How how do you let's dive in there just a little bit because uh I'm curious how you determine the companies that are sort of using money to grow with this sort of like pain today again tomorrow versus companies that are using money to acquire customers, but don't actually have a viable product, they're giving it away for free, or they're the incentives are just so huge that customers are signing up for it, but they can't quite figure out

16:09 That it there is no runway there. How do you think about that? Or am I thinking about that wrong? So number one is that you're looking for early evidence. that what the founder believes will be true. Which is that the contribution margins will expand over time or that the unit you know, the cost to acquire a new user will go down or whatever it may be so that you can get to a place of profitability on a customer level.

16:35 You're looking for evidence that that actually is starting to happen, that it's getting better that you can you can see You you can extrapolate from the the Points that you do have. That there is a path there.

16:49 The second thing is is really just the founders understanding New Mercy. Uh Of their business. You know, there's um There's a very big difference.

17:00 Between a Founder uh who went You know, they're they wave a little bit that this is the way it's gonna be. And and then actually seeing the reality of the numbers and they're not being a great uh connection between

17:13 What the founder understands of their business and the and the facts the brutal facts on the ground. Um and by the way, that kind of really facing the brutal facts. I think that's a a Jim Collins com concept that I love. It's so so important. And then and then there's the the founder, um I remember this with uh

17:32 Francis is CEO of Sonder, a company I invested in. That he just knew every number in his business. Like cold. And he knew exactly how he was gonna make them better over time. And there was just a little bit of this feeling that here is a founder

17:47 Who is just a freaking animal? And they're gonna keep on going up this curve and you can You can extrapolate from where they are. That they're gonna make it happen. What are the things that you see yourself saying over and over again across the different boards that you're on?

18:05 So one of the thing uh one of the first things I I say is this kind of concept I call the net present value of pain, which is You know, when you're when you're running a company, there's so many decisions all the time. that you need to be making and so many optimizations And a lot of times

18:23 There there are some decisions that you kind of want to procrastinate on, you know. It may be a decision to cut a product that you had loved and you and you don't pursue. More often than not, it's it's people things, you know, someone who's not scaling in their role. Um and has to be leveled or let go. And

18:42 And what I always remind founders is that Pain today postponed until tomorrow. Is gonna be harder. It's it's like taking a loan out on the pain. And particularly in the early stages of a company.

18:56 If you have the wrong head of product. And you know it. But you're like, Hey, I'm just gonna wait. A few more months until I get this other roll. Right, before I

19:08 Address this thing. The compounding problems that happen. That you ship the wrong things. You hire the wrong people. Like the the problem you have to nip these things in the bud, otherwise there's these cascading effects that happen that make it a bigger and bigger deal when you actually get to that decision.

19:26 A another thing I I always remind people of is something I learned from my my partner at Greylock, Reed Hoffman. Which is that every strength has a corresponding weakness. You know, it's it's one of these things where I think a lot of times, you know, c people in a company One of the examples I always give is uh The difference in an org structure, as we talked about before, between

19:48 An org structure that's more centralized. You know, where there's More of a command and control. Everybody's moving. To the beat of the same drum.

19:57 versus a decentralized org. where you have more autonomy at the edges of an organization, they can move quickly. It works a lot for companies that have more local businesses like an Uber. But there's a corresponding weakness to both of those types of organizations. For the decentralized org

20:16 What tends to happen is people aren't coordinated and they end up building some of the same things or potentially have conflicting things. There's, you know, every team is building the same marketing acquisition engine. where like if you brought that centralized and maybe you'd have some economies of scale But you know, sometimes and on the centralized thing, it can feel like there's no redundancy in the things that people are working on

20:41 But it's slower. And what sometimes happens in a company is that They s you know, employees and I remember this at Pinterest Feel the weaknesses of the approach instead of the strengths.

20:54 You might not realize you take for granted that the decentralized org is helping the company move really quickly. And and and like have very times teams that are very focused on the local situation, but instead what you feel as an employee is the chaos. of oh my God, we're all building the same thing that's slightly different. Like isn't that A waste of resources

21:17 I and and so it's it's helping people take perspective. That the strength of an approach ca has a weakness that you can't Separate. I think it's also, you know, when we think about ourselves um as people, you know, I used to

21:33 always think, Oh God, I can't remember people's names, you know, I'm like really bad at Trivia and remembering facts. And then I realized that actually Meyer's Brick helped me realize this that It's you know, I'm not an S, I'm an N. You know, like the

21:49 And as the abstract thinker, like that's my strength. I'm an abstract thinker. And the strength of being an abstract thinker comes with the corresponding weakness that I'm terrible at people's names and you would never want me on their trivia team. And and and for founders they have these things all the time where the founder who is incredibly operational and like just you know A machine in terms of m executing

22:13 May not be the most strategic person. And the other way around. And so it's always, you know Accepting and realizing These two things come hand in hand. And then as a founder

22:24 Just surround yourself with people who have the strength that you don't and you're gonna have a great a great team. One of the things I want to come back to that you said was sort of identifying people that can't scale in their role. What are the early warning signs that people can't are aren't scaling in their role, that there's problems on the horizon, that action is necessary. I'll I'll describe what you see for the people who do scale.

22:49 Which is They're just learning machines. You know, it's such a growth mindset. thing where everybody has different ways of learning. Like I have I uh one of my

23:01 Founders uh is a f PhD and he's someone Who his way of learning and pushing his his horizons and what he's able to do is to is to read, is to study, is to kind of you know, he's a learning machine from Whatever he can consume in terms of content. Some people, you know, their way of learning and pushing their own envelope is to surround themselves with CEOs

23:25 That are a step ahead of them. and and find great mentors who who push them and hold them accountable. Some people might, you know, find coaches, you know, that actually help them through that. But The founders who I see. The founders and and And leaders

23:41 Are not afraid to be vulnerable? Like that they understand that there are works in progress. And and then figure out the ways to Constantly. constantly grow, evolve.

23:53 And push their own abilities. And and it's the people who I think Aren't willing to admit to themselves or whomever they work. That they don't know something or

24:05 They're not letting themselves have that learning moment of accepting that they don't know something. That they tend to just Hold themselves back? And and not scale as a company scales. Uh a couple of podcasts ago, I was talking with Chris Cordell, who is the chief of staff to steer at Butterfield uh Slack and she's she mentioned something and I'd love to hear your opinion on this, where

24:27 When you identified somebody who didn't fit the role, she said just let them go. Don't transfer them internally, don't give them another job. H w what do you what's your reaction to that? I would I would say that's right ninety five percent of the time. Like all all rules sometimes you should break it. Uh, particularly, you know, at the early, early stages of a company when you're going through hyper growth.

24:49 You're you're bringing in these these athletes and and the company gets more specialized over time. And and so roles have to evolve. But but I absolutely agree, you know, the ninety five percent scenario There is a non confrontational

25:06 weakness to this kind of transfer. Which is that you're telling someone, hey Not that I don't think that you're scaling with the company. But hey, let's find another role for you in the company and you can become someone else's problem or you know, it's uh one of my partners, Eric Vishrian

25:23 has told me this uh framework that he had At Loud Cloud when they were hiring. Which was that they would Interview people. And they would rate someone on a scale of one to ten.

25:36 And you had to be an eight, nine, or ten. Average in order to be hired. And and the thesis was is that seven skill companies. And what that means is that You know, when someone is a four

25:49 You just know they're not doing the job. They're not up for it and let's let's take them out of the system. But the problem with a seven Is that You don't get to that point because

26:00 That person will have glimmers of being able to do the job. They'll maybe they'll be super culturers. They'll they'll have these things that are redeeming. But because they have those things Two things happens. One There's an opportunity cost of that seat, of course. Like when someone that's a seven is holding the seat, it means that you don't have a nine having that seat.

26:21 And two is that And I see this all the time. Is that the execution of a team is often brought down by the weakest link. And so an entire team can be brought down.

26:33 By that seven. And so kind of back to that point of transferring someone If they were A seven. Or worse for that role.

26:42 the you know, the probability that they're gonna be a nine somewhere else, like you have to really be You have to have real conviction that that's gonna be true. Otherwise. The most likely thing that you're doing is trying to avoid a hard conversation that you just have to have. So you're avoiding the brutal fox. I like that that sevens sevens kill companies. And if you think of that, it's almost multiplicative, right? So the difference between a seven and a nine is huge. If you think of it uh instead of addition, you think of it as multiplying the people That they work with.

27:13 Yeah, absolutely. And especially when they're hiring people. Because, you know, it's it's kinda that classic A's higher A's, you know, B's higher Cs, like it's just the when you're a nine. You're gonna h people who are Eights, nines, and tens.

27:29 want to work with that person. But the seven is just not gonna bring that same level of team to the table. And so it does create this cascading. challenge in an organization that you just have to be hyper vigilant about. I wanna come back a little bit a at a higher level to the role of boards. Where do you think boards go wrong with Um

27:48 Startups with all companies. Ooh. How much time do we have? Um One of the things that I always tell founders Is you have to make sure That the board members that you bring on are as much on the same side of the table as you

28:04 about the future, w like where the company is headed and the future of the company. Because You know, people the whomever you have around the table in the boardroom Even an observer, you know, I think people kind of think of it as oh board of director like this person's on the board and this one's an observer, so the observer doesn't matter. That's

28:23 So, so wrong. Because things rarely come to a vote. It's always about what's that conversation around the table. And someone Who it has a seat at the table.

28:36 is participating in whatever strategic conversation you're having can really change The direction of a company. And and so you wanna make sure that the judgment of the people that you bring around the table is like super high.

28:50 And that they're gonna push you in the ways that you need to be pushed and want to be pushed. And that they're aligned on the vision and the mission of the company. Otherwise it just creates another tax on your execution where you end up having to spend time convincing someone who maybe was never on board with the direction of the company that you're going in.

29:10 And so so one is just like finding those people who aren't cheerleaders Like we'll help we'll show you the brutal facts. Ба ате сам там. Are all marching. In the same direction. That's number one.

29:23 Number two is, you know, and I've seen this is kind of the micromanagement that can sometimes happen. Um, and this is sometimes the weaknesses that X operators have when they transition into investing is thinking Oh, I can do this and I'm gonna dig in. on in the company and and get you know, help them with growth or help them with whatever it may be.

29:45 And and it ends up acting as a crutch. To the CEO. And so instead of the CEO hiring the person that they should hire, so they have that inside the company you know, all like working on a twenty four seven, you have this person who thinks that they're really good at whatever fun functional level. It whatever function it is.

30:04 Coming in. And and really caus more pain where then the CEO feels like they have to have this person who's not living and breathing the company every day you know, opining on on different product directions or you know what the compensation's gonna be for the sales team. Like that's that's not productive.

30:22 And then I'd say the third thing is just Uh when there's distrust. That happens. with the uh the board and and the founder. Then you can't have the conversations that are important.

30:36 Um you can't have Uh Yeah. You can't hold the mirror up to the founder? because they don't wanna hear it and you're not gonna be you're probably not having good intent if you're if you if there's a trust breakdown already that's happened. Sometimes founders describe a board that can get toxic

30:52 And it tends to be in that circumstance where There's just a trust breakdown and then the board isn't able to Perform. the duty that it has, which is to Th there's the kind of fiduciary duty, of course, you know.

31:05 But then there's I think the more important stuff which is Are we focusing on the right things? Are we pursuing a strategy that will lead to you know, tremendous equity value creation, all all those things. Talk to me a little bit about how that trust breaks down and what it looks like when it's happening. You know, one of the things that I I tell My company is

31:27 You can take as long to you can wait until the board meeting to give good you know, good news, but You give bad news as fast as possible. And It there's that is a a classic trust breakdown. from the founder to the board where the board feels like, Hey Why are we just finding out about this now?

31:45 What else don't I know? And so that's that's an easy way for things to break down. The other way that happens from where the board loses the CEO's trust. Is usually if the CEO doesn't feel

31:59 like the board member is acting in the best interest of the company. If an investor ends up investing in a competitive company If they recruit someone to a different company, if they end up just optimizing for their own their own equity in the company instead of like helping make a financing successful. All those things can break down because

32:20 Ultimately when you're the CEO, you want to bring on a board member. Who is going to be doing everything they can to make the company successful. Like that should be their optimization function. And when it's the when there's a breakdown there, that can that can really hurt trust. You strike me as a very structured thinker.

32:39 process oriented person when it comes to making decisions. Can you peel back the curtain there a little bit and walk us through maybe your personal process for making decisions, whether it's to invest in a company or even at a board level? How are you structuring those things in your mind? Yeah, you know I I think it's it's kind of the Where my brain is. And it's why, you know, one of the things that I I try to do a lot is is synthesize the world in a way and reduce it so that I can have a framework from which to reason.

33:08 You know, it is this kind of building patterns so that you can see the topology of the world In a way that is Higher resolution. then if you if you didn't have some of those mental models from which to to reason. And so for me, like, you know, I ask myself, like I meet with a lot of social products all the time

33:31 And you can see them growing really quickly. And one of the first frameworks that I actually wrote about to help me Figure out. What which are the ones we should invest in is this thing I wrote called the hierarchy of engagement, which is how do I know if something's growing really quickly if it's actually gonna be something that endures? for m marketplaces like I you know, I see a lot of companies, there's so many founders

33:54 who orient themselves towards hitting this one million dollars of annualized GM V. You know, there's kind of these ideas that go around, which is that To raise your series A you have to hit A certain metric. There are ways to mi hit milestones.

34:12 that are more vanity metric. Then the actual kind of authentic real intellectual rigor Around kind of am I Am I really doing the hard work to get to this milestone? And so it was a similar thing of like how do I

34:29 look at these companies and and understand Are they orienting in the right way to build enduring value? And and then as a board member, then how do I also help kind of pull the future into the present. And and help align the strategy with a way that I think will create maximum value. So I'm I'm always trying to

34:48 Put structure a decision help me think through something in a way that that I hope gives me an edge. In making the right decision at the time. Well, just like Michael Jordan, we can get some insight into that, but nobody nobody's gonna listen to this and become Michael Jordan. So maybe you can go into some more detail on sort of what are the mental models that what are some other mental models that you're thinking about or frameworks that you're using

35:13 when you're sort of uh internally structuring your decision. I imagine opportunity cost is one of them, but what what else keeps coming up over and over again? What are the timeless ones? Well, Opportunicos is such a huge one. Um You know at benchmark. Our model of investing is that we have decided that we're not gonna scale our business.

35:34 You know, we we haven't grown our fun size. And and it's just five general partners right now. And it it's a kind of this rare structure of an equal partnership. And and and we Don't delegate any part of our job. kind of our aspiration for any company that we

35:53 Or on the board of is that We are the hardest working, most impactful. board member that you have Around the table. And so there's no talent partner to whom I

36:03 can delegate a search for There's no associate who's gonna dig in on your model for me. There's no uh marketing person who's gonna help you think through PR. It's It's you got me and the rest of my my partnership. And so it means that when you take a board seat. The level of commitment

36:23 that that kind of promise you are making to the Founder Is I I really think at a a very different level. than other people.

36:33 No, I'm on you know Seven boards right now and And I am on these talent calls every week for some of my companies where we're We're doing a search for a CRO as an example. And it will always be me.

36:45 And then the talent partners. Of the other firms as opposed to the partner itself. And it's and it's just a very different level of service and I think When it's me on the call.

36:57 Helping kind of figure out the right profile person to go after Interviewing people, closing them. that we're gonna have a better outcome. But it it does mean that that

37:07 Opportunity cost. The commitment you're making is is a very big commitment, and so it's always When you make an investment. Not just are we gonna make money, but

37:18 Of all the places where I can spend my time. Is this the place I should spend it? This idea I described before of escaping competition. You know, that is something that is fundamental to all the companies that I invest in.

37:32 Is is this a company That is Oh, it's gonna be fighting tooth and nail with another, you know, collective of companies for an incremental point of market share.

37:44 Or is this a company that can really dominate a market? Just so much better than any substitute. That they become The de facto standard in the space.

37:56 How do you think about that? Because y what you're really trying to do is like what we know from history is the only thing that gets us out of sort of trench warfare is asymmetry and weaponry, right? So how how are you dictat like how are you determining escaping this competition so that you have an asymmetric outcome where maybe there's one or two players and they play nicely, maybe there's Uh it's a winner take all market, or h how do you How do you work through that? Yeah, there are different flavors of working through it. So U the the strongest, strongest sign is a network effect. And that and that's why I spend

38:30 A huge amount of my time looking at social companies or our marketplaces because They both have network effects. And You just have a dynamic with those companies.

38:42 Where if they're able to get their flywheel fast enough They're able to tip a market. And and once you tip a market. the space between you and the competition just gets w w wider and wider. The other uh type of company

38:58 That doesn't necessarily have a network effect. But I I also love Are companies that Actually go after a space. That

39:08 is underestimated from the outside. And because it's underestimated. It actually doesn't invite competition. So or or the competition isn't strong competition. So, you know, I'm on the board of a company called Chinalysis.

39:23 And chain analysis is it's in the kind of blockchain crypto space. Where they have built built a a technology That lets Law enforcement agencies, government uh Agencies.

39:37 Mm. Investigate transactions on Any of the current blockchains, the cryp the Bitcoin blockchain, Ethereum, et cetera. And and make sure that there's no illicit activity. And then the companies that are regulated and want to participate.

39:52 In this cryptocurrency ecosystem But have to make sure that they're not In the middle of some money laundering. They need a tool and so they use chain analysis. And so chain analysis has become this de facto standard in the space. It just got into a space before other people saw the opportunity.

40:11 And Because they were the leader. They were able to build more and more technology, you know, they're able to go across any blockchain. Now where there as they got bigger they got amortized the cost of their engineering efforts

40:25 across a broader and broader revenue base, which let them reinvest in the business and pull further and further away from any competition. And so now, you know, it's kind of a w that's one of those winner take most dynamics without a explicit network effect. Because they were there first, they executed really, really well. And and just got

40:46 So much bigger than any of the competition. that they could could keep on making their advantage bigger and bigger. I like these smaller sort of niche ideas too where it's a smaller market and maybe you're an A player and you go into a B market and you can just dominate that B market. And then I I'm curious as to where these things start to go wrong. So V C is uh you know, the starting a business is necessarily valuable in and of itself.

41:14 And so there's an expected sort of failure rate and then there there's things that you do that maybe increase the odds of that failure rate. So across your aperture, all the companies you have exposure to, all the companies in the the benchmark portfolio, all the companies that you get pitched, what are the mistakes you see CEOs making over and over again that increase the odds that they're not going to be a success? The thing that Chinalysis got right. You know, call you called it a B market. I'll I I'll change that. Um Oh I I yeah, I wasn't trying to be derogatory or no, I but I I think there's a nuance here that's really important, which is that it actually is a B market in the beginning. It's really small. No one cared about it. That's why there is no competition.

41:55 The important thing is, you know, markets are like rivers, you know, where You you wanna be canoe you're like a canoe on the river. And if there's a great Current for you.

42:07 It's gonna keep pushing you. And so it might be that the market is small. But the current is increasing. And it's getting bigger and bigger and bigger. And that's gonna help you build something really, really valuable. We have another company called Benchling.

42:21 That has just done a phenomenal job executing in this kind of biologic space, which again, there was a a current that they saw that other people didn't see. that was gr creating this really, really big market, but in the beginning Someone else might have thought it was a B market. For the the s the failure scenarios If a founder's ambition

42:41 Blinds them. In not picking A small starting place. to really, really execute. And and get incredibly strong product market fit.

42:53 Their ambition blind them to wanting to take on a really big problem with a blunt product that doesn't You know, that tries to be a little bit everything for everyone. Versus Excepting

43:06 Something that might feel small in the beginning. But opens up into something much bigger. I love the way that we're talking about this because we're really at the the heart of it. I mean, we're using a little bit of different vocabulary, but we're really talking about mental models. When you're on the call doing this talent scouting. You're touching the territory when you're not delegating that work. Nobody's giving you a map on the other side of it. You're in the weeds. you you get to know what's going on when you're talking about sort of the B market for lack of a better term. It's really contrast, right? You want to be the best player

43:36 in a market with weaker competition. And so you're talking about how do we generate the most contrast because there's a lot of value to be created in that contrast. When whatever market you're in, whether you're in the A market and you can be the A plus person But you really want to be the A plus person in in sort of a market without a competition. You know, I I think about uh these two companies, DoorDash and Postmates, a lot. You know, it's such a beautiful case study in a way because Postmates was um recently acquired by Uber. Uh incredible team. And they were the first actually to realize

44:12 That there was an opportunity for them as this kind of on demand player to introduce delivery for any small business. So it had been that before you had uh Grubhub, which was you know, Grubhub and Seamless were the two you know, innovators, incumbents in the space.

44:30 That realize that They could create a marketplace where they would get restaurants That had their own delivery. to list on their marketplace. And then they would, you know, help those restaurants get more

44:43 demand side for their delivery. And what Postmates realized is that If you just limit the supply side to restaurants that have their own delivery. It's actually constraining the market beyond What is possible.

44:56 And so Postmates realize Hey, we'll provide we'll create a third side to this marketplace. Which is the delivery, uh on demand side. And we'll let any business

45:08 You know, restaurants, cafes, retailers will provide delivery for them so that we dramatically expand the supply side and that creates a much much stronger value proposition for the demand side. Which is true. Door Dash had the same uh insight but followed them kind of a year and a half later, so maybe inspired by Postmates.

45:29 And and they both use incredibly similar techniques in the beginning. To get the demand side flywheel. But the difference was is that Postmates went after San Francisco. There was already competition there.

45:43 You know, I always think that you have to be just so much better. Then the competition That it's obvious that you're the way to go. But that wasn't as obvious for postmates when they were going into this big city and Because the incumbents weren't necessarily

46:00 Like doing the same playbook. But they had a pretty good product that they were offering. Door Dash on the other side went after The suburbs.

46:10 You know, they went after a market where Everybody else thought it was terrible and not, you know, economic. To provide delivery in the suburbs. And so They went to this desert.

46:23 For food delivery. Yes, yes, yeah. And so they went after this market where everybody else had a you know, it was a desert. People were like, Oh my God, you're providing delivery? Like that's This new thing. And and it also was a lot easier for DoorDash to get to a very, very big percentage of the market in the suburbs because again The restaurants weren't being attacked by

46:48 fifty different vendors trying to get their attention. DoorDash was probably the only one knocking on their door. And there aren't that many restaurants in the suburbs. Relative to a city. Yeah. You know, I I say postmates could be executing a ten X Door Dash's execution.

47:05 But because DoorDash had A strategy that let them just be, you know, so much better than any substitute,'cause it's a lot better to be better it's a lot easier to be better than the competition when you have no competition, your competition's really crappy. And so it it just got them. to be able to be in the zone where they could tip a market.

47:26 before Postmates didn't I I kinda describe it as like postmates I think optimized for GMV, for maximizing GMV, and they try to boil an ocean. Whereas DoorDash really optimized for tipping this market. What I think of as like happiness. And they boiled a thimble.

47:45 And you can see I mean, I don't know, I haven't checked DoorDash's market cap recently, but it is An astoundingly successful company. With a very, very different strategy than the incumbents. Do you think that there's something to the notion there that if you can figure out your business in the hardest conditions. Then the e the easier conditions, which would be the city, are gonna be much easier if you can make it work in the suburbs where there's

48:11 You know, deliveries are more complicated, uh signing up people might be easier, but the whole network and the operations are gonna be a lot more complicated. Then that translates into it working in the city, whereas In this case, working in the city might not translate to working into the suburbs, or am I thinking about this wrong? No, that that's absolutely true. I mean you see that in so many different industries. I remember I was uh uh lucky to observe the board of diapers dot com.

48:38 And those guys started by selling diapers wife and formula. It was like a two percent gross margin business. But if you can get really good At making the economics work for A business that has that level of gross margin

48:53 And then you start to add more, you know, higher gross margin products to the basket. The DNA of the company The habits of the company Get forged.

49:05 in this really, really resource constrained environment. that only creates benefits from there. That said, I wouldn't say that you should choose a market necessarily to pick the hard thing. I actually think that you wanna pick

49:19 Something that is easy To win, to to tip the market. You know, and And and it you know, there was ways in which Going after the suburbs was harder

49:30 than going like operationally harder, harder probably from a unit economic perspective, although I'm not positive. Then like going after the city But it was ultimately easier to get to that tipping point. And that's what I think you really want to maximize for. Do you think that the there is an interesting notion, we just talked about sort of margin and increasing margin over time. Do you think there's an interesting way that

49:51 Are there businesses that go after, you know, Amazon would be an example, I think, where they They have a low margin and then they they lower it over time and that's how they get bigger and bigger and bigger and bigger. uh and then you can't really compete with them if they're constantly lowering margin, at least playing that game. How do you think about that? Back to the the concept I articulate before of of tipping a market.

50:15 One of the wonderful things that happens when you tip a market. is that your organic growth starts to explode. You know, because your value proposition relative to any other substitute becomes just so much better.

50:31 That you would be stupid as a buyer not to go. You know, it's almost a an IQ test. Are you gonna where are you gonna buy from? And so What the beauty is of, you know, a company like Amazon that's able to articulate a flywheel very clearly is that they don't have to spend money on the acquisition side.

50:48 And they have, of course, and because they have so much more inventory that they can They can make their margin. Off of a very, very every skew that you could possibly want. versus any individual Uh product.

51:01 And and it's just I mean, how do you compete with that A flywheel that's spinning at that magnitude. It's it's uh You end up ha you know, it's just a very, very diff difficult thing as we as as we've seen over the last ten years. So so where does this go wrong? How does this like i the these business model I mean, ideally I'm probably uh it Amazon's not gonna be the champion in a century from now.

51:25 uh but they have a really good model and the model has this runway that's incredibly long. Does that go wrong through complacency? Does it go wrong through greed? Does it go wrong through bringing the the future into the present and sort of like increasing the margins? How do you think about that? Well I I think the number one thing that I see is is complacency, although From what I can tell, Amazon is not a complacent company by any means, but certainly There are plenty of

51:54 Examples of companies that um that got leapfrogged, that got disrupted in some way. by a new company. Um, I I'll give eBay as an example. I mean ebay Which you know, benchmark was lucky to be

52:10 the early investor and so it's been, you know, just a phenomenal company. And yet the same time you can't help but see that That Company. is being unbundled.

52:22 by new startups that you know there are vulnerabilities. The hard thing about being A horizontal platform like an eBay. Is that you're you have to try to be everything for everyone. You know, and what what that forces is this kind of lowest common denominator product.

52:40 Whereas, you know, I I take goat as an example here. Or Goat was a company. I don't know if you're a sneakerhead. Um Yeah. It's a it's a it's a it's a marketplace for sneakers. Uh secondhand sneakers and and and now new sneakers. Uh if there's that pair of Yeezys you've been eyeing, you can go there, Shane, and get them. Definitely.

53:00 And and the experience and the company started, uh what I you know, the the forklius is that The company started because the founder had been working on another startup. It was you know Running on fumes, looking for A new idea.

53:15 And he had ordered a pair of sneakers on on eBay. Uh you know. Jordan's or something. Open the box. And it was a pair of counterfeit sneakers. It was you know, they were not authentic sneakers.

53:28 And that was the light bulb for him that There was this vulnerability to this huge, huge marketplace that had hundreds of thousands of SKUs for, you know, Nike sneakers. But it was that people didn't know had to do a lot of work.

53:45 In order to make sure they weren't gonna get counterfeits. And that and and they didn't always trust that if they were gonna buy something That it would be authentic. And so GOAT went after that vulnerability first by creating like, you know, a policy that it was always good that they were gonna vet all the inventory to make sure it was authentic. And then they also created

54:05 A product that was focused on this white hot center of the sneaker vertical that was mobile first and had features that an eBay just couldn't. Build? Because the eBay wasn't For just sneakers. That let them.

54:20 Disrupt eBay and and leapfrog. what they were doing and and so There's there's there's kind of this um What's that uh saying that there's only two ways to make money, bundling and unbundling? The creative destruction that is, you know, part of what we love about startups and

54:36 And certainly I think that any big horizontal platform. While they have this incredible strength which is their scale There's also a vulnerability there that we might, you know, see evolve. W what's the most interesting thing that you've seen

54:51 Uh or a most surprising thing that you've seen recently in terms of Uh startups. Well you know the

55:02 so fascinating over this past year. Is You know, is is kind of the effect of shelter in place. It is uh transformative. And

55:13 So many different ways. You know, there's a class of companies Where the future has been pulled forward. You know? Or things that

55:23 Would have been on that three to five year roadmap. become on the like, we need to do it now roadmap, you know, that kind of like and there's you see that in the in the success of a lot of these software businesses right now. And it's you know, we've seen the benefit of that and it's and it's it's just transformative. And then of course there's this change to the way we work where We had always you know, the default answer had always been

55:48 We're gonna have an office and we're all gonna be co located. And we're gonna go into a room together and we're gonna, you know, get through that, you know, roadmap planning together. And like that's the way we're gonna work. That was the default. And And now of course everything's changed, you know? We are

56:05 We are in a place where The default has been completely changed to the mirror image. And we're having to make decisions now. All these companies Uh Well the new default

56:17 That we have now. Persist. Post shelter in place. Or does it revert back? Right. And and what and like you kinda feel that It's not it's not gonna go to the way things were.

56:29 Like there are you know we've seen an acceleration. In the technologies that we have now To to make it so that when you're working remotely it can actually be Better, more productive.

56:42 Than it used to be when we were in the same place. And and in a way, like you had technologies like Slack And and Zoom that I think facilitated a new way of working, which was the ability for us to be Remote.

56:56 But But aren't actually native. to the way we are working when you're working remote. And so you're seeing a new generation of companies that are native to this either fully remote Or you know, future hybrid

57:10 work spaces. that I think are gonna be transformative for the way that we work um with each other and collaborate across functions. So that I think is incredibly exciting. And then there's also the consumer world, which is You know, it it right now you're just seeing In exp you know.

57:28 If it had been for The last three єurs. This you know, it always felt rather not the last three years. The you know Pre Covid. that consumer was just

57:40 It was owned. It was owned by Facebook and Amazon and Google and Apple and You know, and and if you wanted to build a consumer company you were pushing against a rope Right now because of shelter in place. People can't spend time In the real world.

57:57 All these ways that we used to spend our time Are no longer available to us. And and so because of that It has created this new gold rush. Or a land grab, really. For all these minutes that used to belong.

58:12 Two. Offline minutes? are now suddenly fair game for all these digital products, mobile products, and it's created this, you know Wonderful new uh renaissance for these consumer social companies.

58:26 And so that has been really interesting to see. And then of course the question is what what persists, what thrives. Once, you know, you and I are able to be in a conference room together or give a friend a hug. Yeah, that's a really interesting question'cause it's like the longer it goes, the more your habits will probably change. They're probably not gonna change fully to where they are now, but You're probably gonna get more takeout than sitting at a restaurant. You you're just used to

58:51 I mean that you develop that pattern of behavior and It it it really is huge. And it it's um You know, I like the longer That we are in this A suspended state.

59:04 the stronger these new habits will be. And you know, you of course there's the the good and the bad. There's the The good, which is how people are collaborating with each other and connecting in this kind of m uh global maxima states Where the

59:21 Geography becomes, you know, not as important. than you know, just being able to connect somehow Uh and then there's the bad, which is that You know, I do think I I'm I I didn't I never knew if I was an extrover an introvert.

59:35 And now I know I'm an extrovert, like I think people, you know, f miss each other. And should spend time together and like, you know, how can you not like the the physical presence And there's you know, there's there's a there's a lot of people who that habit, especially when you're younger and you get, you know more and more engaged with, you know, games and other things.

59:56 Changing back to Oh the world, uh the way things were. I know it's gonna be some give and take and it'll just be really interesting to see how that evolves. Thank you so much for your time today, Sarah. That's a great place to end this conversation. Thanks so much for having me.

1:00:18 Hey, one more thing before we say goodbye. The Knowledge Project is produced by the team at Furnham Street. I wanna make this the best podcast you listen to, and I'd love to get your feedback. If you have comments, ideas for future shows or topics Or just feedback in general, you can email me at shane at fs.blog or follow me on Twitter at ShaneA Parish.

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