by Isaac, Mike
Gurley quickly became a star of the Street. He moved up the chain rapidly as his older colleagues cycled out of the industry. They shared their financial models with the young Gurley, imparting years of valuable insights. One colleague, Charlie Wolf, helped Gurley get into Agenda, a famous annual conference of the tech elite in San Francisco. Gurley wandered the conference starstruck, the former benchwarmer trying to imagine himself belonging in a crowd that contained people like Bill Gates, Larry Ellison and Michael Dell—some of the biggest names in the history of computing.
His success wasn’t due only to helpful mentors. He quickly forged his reputation by making the right calls on technology stocks and market trends. So much so that he impressed one of Credit Suisse’s bigshots, Frank Quattrone, a legendary Silicon Valley investment banker involved in some of the highest profile technology company deals in history. The two men would grow close while at Credit Suisse, and eventually work together again at another firm, Deutsche Bank. Early on, Quattrone recognized that Gurley, an engineer by training and analyst by trade, possessed keen insight into the world he was covering.
The executives at the companies Gurley covered saw it too. As Amazon worked on its initial public offering to the stock markets in 1997, Jeff Bezos and his team of executives didn’t pick one of the two high-profile investment banking firms—Morgan Stanley and Goldman Sachs—to lead its IPO. Instead, Bezos’s firm picked Deutsche Bank, a less prominent but still excellent firm, to take Amazon public. It was the combo of Deutsche Bank’s star banker and his lead analyst that sealed the deal: Frank Quattrone and Bill Gurley. The duo wowed Bezos and his board with their knowledge of the online bookseller and its underlying business. Morgan Stanley and Goldman Sachs had the glitzy name, but Deutsche Bank had Quattrone and Gurley.
Gurley became the go-to analyst on what was then one of the world’s largest online booksellers. Gurley saw, very early on, the opportunity for Amazon to become much, much more than a bookstore.
Gurley’s biggest talent was his willingness to be a contrarian. In the heady days of the late nineties, when tech analysts like Gurley were often seen as glorified internet stock boosters, Gurley cut a path for himself by bucking against trends. His most notorious call at Deutsche Bank was his infamous report on Netscape, the first web browser and early internet pioneer. Most analysts rated Netscape positively, even as Microsoft readied its Internet Explorer browser for market—and promised to distribute it free of charge. Gurley saw this as a threat to Netscape’s browser dominance, and, unlike other analysts, worried about how Netscape would execute its business decisions under pressure from Microsoft. He thought Netscape’s shares were overvalued, and downgraded the stock. Netscape shares plunged nearly 20 percent the next day. Netscape never fully recovered.**
Despite his success, Gurley told Quattrone he wanted to stop being just an analyst and start making actual investments. Quattrone made it happen. He helped get Gurley a job with a respected venture firm, Hummer Winblad, but he was soon headed to the big leagues. After just eighteen months, he was recruited by a top-tier firm called Benchmark Capital.
The courtship between Gurley and the firm was long, but necessarily so. Benchmark operated as a small, tight-knit unit, with each partner involved in the decision-making and advising for all the companies in the portfolio. Any new partner would have to be in sync with the others.
Kevin Harvey, a founding partner at Benchmark, took Gurley hunting. While in the woods together, Harvey got to see Gurley’s analytical mind at work. But what stuck out most for Harvey was Gurley’s tenacity.
“He’s kind of an animal,” Harvey told his partners. As the two sat in the bush, Harvey watched Gurley spring to his feet, jump over a steep cliff, and scramble down a hill after a wild boar they were tracking, something that Harvey wasn’t willing to do. “He thought I was kind of lazy ’cause I didn’t want to.”
In 1999, Benchmark Capital had five venture partners. Gurley became the sixth. Each was exceptionally tall. They looked remarkably like the starting lineup of a college basketball team. Over time, partners would cycle in and out, but Gurley remained a constant.
Bill Gurley would always remain the tallest.
Even now, nearly twenty years into a phenomenal career in venture capital, the first thing anyone notices upon meeting Bill Gurley is that he is enormous.
Save for professional basketball players, the six-foot-nine Gurley towers above most everyone he meets. Men in Gurley’s position might have used such an outsized stature to their advantage, perhaps to intimidate competitors, a physical manifestation of VC swagger.
Not Bill Gurley. He is painfully aware of his size, and often goes to great lengths to avoid flaunting it. Gurley is more comfortable standing in the back of a room, trying to blend into the curtains at a dinner party. (It never works; friends, reporters, entrepreneurs all flock to Gurley as soon as they see him.) Gurley seems unused to inhabiting his body, visibly calculating how to maneuver his gangly legs and thick frame. One close friend said he wouldn’t be surprised if one day, like in a scene from Men in Black, Gurley’s head opened up to reveal a tiny intergalactic space traveler struggling with the controls of his Gurley-shaped spaceship.
When there is a lull in a conversation or an onstage presentation, Gurley won’t fill it with idle chatter. He’ll remain quiet. Sometimes after someone says something important, he’ll take a step backwards in the room as if physically absorbing the comment.
That’s Gurley thinking, analyzing what’s happening, what’s been said, what will be said. Or it’s him just being awkward, because he is awkward. In a habitat like Silicon Valley, awkwardness is ignored or encouraged, and the only thing that matters is whether you have the brains to back up your ideas.
Brains, and one other thing: zeal. Like so many of his peers in the Valley, Gurley truly believes in the transformative power of technology and innovation. He appreciates the positive impact that a young founder with a big idea and a few million dollars can make in the world. The tech press loves to fixate on his negative comments about Silicon Valley, but Gurley insists he is an optimist.
Even in some of the industry’s most dire moments, Gurley didn’t shy away from the venture business. He was there during the dot-com bust at the turn of the century, looking for promising founders. And when the financial crisis rocked the foundation of the global economy in 2008, he doubled down on startups.
“Environments like this tend to sort out the true entrepreneurs from the pretenders,” Gurley wrote during the height of the crisis. “When money is easy in Silicon Valley, it tends to attract short-term opportunists looking to make a fast-buck rather than build a lasting company. Only the best entrepreneurs set sail in rough seas like this.”
Chapter 7 notes
** That call also earned Gurley the ire of a young entrepreneur who would one day become another influential venture capitalist—Marc Andreessen. Andreessen was a co-founder of Netscape and is credited with helping to invent the consumer internet. Though Netscape eventually floundered and sold itself to AOL, Andreessen never forgot Gurley’s report. Years later, after both men had achieved personal success and enormous wealth, the two still carry a grudge. In an interview with the New Yorker years later, Andreessen remarked of Gurley: “I can’t stand him. If you’ve seen Seinfeld, Bill Gurley is my Newman.”
Chapter 8
PAS DE DEUX
Venture capital isn’t as much a profession as it is a brawl. If it were a sport, it would be like rugby without the mouthguards. There are no real rules, except that players should do whatever they need to do to seal a deal.
It doesn’t seem like a hard job. All you do is give away other people’s money. But it is. A VC’s calendar is packed with daily meetings—with founders, with their financial backers, with industry analysts, with journalists. VCs spend time talking to the CEOs of large, established companies about market trends and recruiting practices. They
talk to investment bankers about private companies and public markets. They have to fend off hordes of eager founders seeking their favor. Even while relaxing at the bar in the Rosewood—the luxury hotel that has long acted as the social hub of tech money in Palo Alto—they’re likely to be interrupted by an awkward elevator pitch.
A venture capitalist’s job is to cut through all the noise and find the startups that will deliver outsized returns for the pension funds, endowments, family offices, even other high-net-worth individuals who have invested their money as limited partners, or LPs, in the VC firm. The lifecycle of a VC fund is typically ten years, by the end of which these LPs expect returns of at least 20 to 30 percent on their initial investments.
Venture capital is risky. Roughly one-third of VC investments will fail. But a heightened “risk profile” comes with the territory. If institutional investors prefer lower-risk investments, they can stick to reliable municipal bonds or money market funds. With low risk comes low returns.
To compensate for such high failure rates, VCs tend to spread their investments across a number of different industries and sectors. One grand slam investment with a return of ten, twenty, even fifty times the amount of the investment can make up for an entire investment portfolio of losses or weakly performing startups. In venture capital, so-called “moonshot” companies—run by entrepreneurs who aim to remake and dominate entire industries—are the most sought after, the ones that bring the greatest glory.
The investment equation is simple: a venture capital firm provides money to a startup in exchange for an equity stake in the company. For founders who decide to take on venture capital,†† a company begins raising its first round of funding early in its life cycle. This “seed” round typically involves modest investments in the tens of thousands to hundreds of thousands of dollars. After that, venture rounds continue by letter: Series A round, Series B round, and so on. Those funding rounds continue until either the company:
Dies. This is the most likely scenario.
Is acquired by another larger company.
Holds an initial public offering of its shares, allowing outside investors to purchase shares in the company through a public stock exchange.
For venture capitalists and founders alike, the goal is to guide the company to either B or C rounds, or “liquidity events.” Those are when a VC can finally convert shares in a company into cash.
Each round has a certain kind of politics, and conveys a different kind of status. Typically, the earlier a venture firm invests in a hot company, the more prestigious it is for the firm. The firm benefits, retroactively, by being seen as having the foresight and skill to invest in a lucrative startup years before it grew into a powerhouse. David Sze, of Greylock Partners, will always be known for his early investments in both Facebook and LinkedIn, when their valuations were still in the millions, not billions. Besides his seed investment in Uber, Chris Sacca made early bets on Twitter and Instagram, each of which have since made him a billionaire.
The other reason a firm wants to invest early is simple: the earlier you invest in a company, the greater share of equity the firm gets for a smaller amount of money.
The hardest part of a VC’s job isn’t even necessarily about finding the right company, the right idea, or even the right industry to park their next investment. It is about finding the right person to run the company: the founder.
The most vaunted title in Silicon Valley is, has been, and ever will be “founder.”
It’s less of a title than a statement. “I made this,” the founder proclaims. “I invented it out of nothing. I conjured it into being.” Travis Kalanick frequently compared building a startup to parenting a young child.
A good founder lives and breathes the startup. As Mark Zuckerberg said, a founder moves fast and breaks things. The founder embraces the spirit of “the hacker way”; he is captain of the pirate ship. A good founder will work harder tomorrow than he did today. A good founder will sleep when he is dead (or after returning from a week at Burning Man). Like Kalanick at Red Swoosh, a good founder shepherds his company through difficult funding environments, but chooses his benefactors wisely. A good founder takes credit for his company’s successes, and faces the blame for its shortcomings. A good idea for a company, even if it lands at the right time and in the right place, is still only as good as the founder who runs it. Most important of all, there can only ever be one real founder.
If this sounds messianic, that’s because it is. Founder culture—or more accurately, founder worship—emerged as bedrock faith in Silicon Valley from several strains of quasi-religious philosophy. Sixties-era San Francisco embraced a sexual, chemical, hippie-led revolution inspired by dreams of liberated consciousness and utopian social structures. This antiestablishment counterculture mixed well with emerging ideas about the efficiency of individual greed and the gospel of creative destruction.
Out of those two strands, technologists began building a different kind of counterculture, one that would uproot entrenched power structures and create innovative new ways for society to function. Founders saw inefficiencies in city infrastructure, payment systems, and living quarters. Using the tools of modern capitalism, they created software companies to improve our lives, while simultaneously wresting power away from lazy elites. The founders became the philosopher kings, the rugged individuals who would save society from bureaucratic, unfair, and outmoded systems.
Marc Andreessen famously said, “Software is eating the world.” Back then, technologists thought this was a good thing. Until recently, most of the rest of the world agreed. Venture deals increased by 73 percent from the early 2000s into the 2010s. The amount of global venture capital invested soared from tens of billions in 2005 into the hundreds of billions invested post-2010. San Francisco emerged as the world’s epicenter of such deals.
But then the balance of power began to shift. As startups upended global infrastructure at an unprecedented pace, entrepreneurs found that old power centers had eroded and been replaced in some cases by the upstarts that sprung up around them. Clayton Christensen’s “Innovator’s Dilemma” articulated the perils that awaited any company that grew so large that it no longer saw threats coming from more nimble competitors. The venture-backed startups became the new establishment.
Something else happened: Founders realized they liked being in control. They wanted freedom from meddling by outsiders like shareholders, investors, or the general public. Over time, founders discovered ways to protect their power. They used their visionary status to convince investors to cede control to the founders themselves.
Larry Page and Sergey Brin, the co-founders of Google, cemented and institutionalized this practice. In a cramped garage in 1998, Page and Brin founded a search engine to perform a task that sounded bonkers; “to organize the world’s information and make it universally accessible and useful.” It was the exact type of moonshot thinking venture capitalists encouraged.
But while the Google founders were excited to change the world, they didn’t want to make decisions based on what the money men wanted. The motto “Don’t be evil”‡‡ became synonymous with Google’s founders and their approach, the message being “even though we’re growing into a mature company, we won’t be doing terrible things for money.”
In 2004, when Google undertook its IPO, it used a controversial financial instrument called a “dual-class stock structure.” Google sold “Class A” shares to the public, while its founders held onto “Class B” shares. The two classes held the same monetary value, but Class B shares came with special privileges; every Class B share represented ten “votes,” or ten individual chances to yea or nay company leadership decisions. Class A shares, on the other hand, held only one vote per share. Page and Brin made sure that over the years, they had held onto enough stock in their company—and more importantly, were issued enough Class B shares at the time of the IPO—to maint
ain majority control.
Page and Brin didn’t actually want to go public. For the founders, listing their stock on the Nasdaq meant opening Google up to oversight from annoying people who knew nothing about tech. Investors would want to skim cash from Google. And when those investors felt revenue growth wasn’t strong enough, they’d try to change the company by imposing their collective will upon the two co-founders.
As one investor told it, Brin and Page agreed to go public only after meeting Warren Buffett, the legendary American business mogul, who introduced the two young founders to the dual-class stock structure.
“We are creating a corporate structure that is designed for stability over long time horizons,” Page wrote in a letter cheekily titled “An Owner’s Manual For Google Investors.” “By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach. . . . New investors will fully share in Google’s long term economic future but will have little ability to influence its strategic decisions through their voting rights.”
Many founders followed this same playbook. “Larry and Sergey did it, why shouldn’t we?” young entrepreneurs asked themselves. Mark Zuckerberg was considered crazy when he spurned a $1-billion acquisition offer from Microsoft. After Facebook went public in 2012, Zuckerberg maintained outsized influence due to a dual-class share structure and faced no board resistance when he pivoted the entire company to focus on building for mobile devices, an enormous gamble that paid off handsomely.§§