David's Notes
David's Notes
20 Minute VC: Bill Gurley on why the abundance of capital is today's biggest challenge in VC & the right way to think about market size when assessing opportunities
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20 Minute VC: Bill Gurley on why the abundance of capital is today's biggest challenge in VC & the right way to think about market size when assessing opportunities

How did you make your way into venture? It is actually an unusual story that exposes how much luck [and random opportunity] goes into these things. When I was in business school I was told you couldn’t just get into venture. I was told to go work for 20 years first.


My sister was an early employee at Compaq. I got exposed to what it meant to have options and for a company to explode. 


I ran into a dead end trying to get into VC. The 2nd best thing was to become a sell-side analyst. I begged my way into a job at Credit Suisse First Boston. This job allowed me to build a network with a bunch of different people. Frank Quattrone called me and recruited me. He said if I came to work for him he would move me to Silicon Valley and introduce me to every VC he knows. After that [31 months later] Benchmark approached me with an offer I couldn’t refuse. 


How has experiencing multiple booms and busts impacted your investing mentality? I have multiple views on this subject. I’ve read every book on the history of financial markets that I could. You can get tons of exposure to it if you just look for it. Silicon Valley is an interesting place because I have never been around a group of people where risk is forgotten so quickly


Each day as the market expands people take on more and more risk. But they lose their aversion to risk very slowly. It is like the boiled frog. Over a 5 year period your VC firm has taken on tremendous amount of risk. But every day you just moved a little bit so you never felt you were making this massive gap in risk exposure.


When markets bust risk aversion comes on immediately. Overnight. Boom! 


Here is why I said I have multiple views on this subject. I spent a ton of time the past couple years thinking about the cyclicality in venture markets. I was fortunate to spend time with the famous bond investor Howard Marks. He asked me to explain my business. After I explained it he said your business sucks. Your business can’t avoid cyclicality. 


He said you will have boom and busts cycles always. I think he is right


Venture is low barriers to entry high barriers to exit. As markets start to boom the amount of capital that comes into the category is immense. But when the market breaks the capital doesn’t have a mechanism to go away quickly because it is committed to these 10 year windows.


The other thing I realized is the vast majority of the average returns over a multi decade window are right at the end of the cycle. You can get conservative and pull back and miss [like venture firms pulling back in 1996 and missed the run of 97, 98, 99]. 


If you were to define risk - and it is arguable you could - as the burn rates these companies have ... the burn rates for some of these companies now are two orders of magnitude higher than they were in the 1999/2000 time frame. . .If capital gets hard that is going to be a really interesting issue. We haven’t seen capital get hard in a long time. 


I’ve come to believe that people get into more trouble by over focusing on TAM analysis - especially in these super early stage companies. Example: Saying Uber should only be valued at $5 billion based on the existing black car and taxi market. 


In 1980 AT&T hired McKinsey to predict the number of cell phones there will be in 2000. They were off by 100x.


All too often what I’ve seen is if technology brings about an easier, simpler, cheaper solution there is a good chance the thing could expand the market and blow things out of proportion


How to be a good board member: Be prepared. Show up having read everything. Be intimately aware of everything you are supposed to be aware of. Speak less. Younger people on boards usually speak too much. You learn to change that behavior over time. 


If you have an idea during a board meeting write it down. Ask yourself does this need to be discussed right now? Or is this something I can just put in a note to the CEO after the meeting?


In her recent book Thinking In Bets: Making Smarter Decisions When You Don't Have All the Facts, Annie Duke had an interesting section that said in a partnership or small group you come to know the weaknesses of everyone else. 


[If you want to work in VC] You need to be passionate about being a venture capitalist. I think 20 years ago there were more people that were passionate about it as a career choice. I think there are less today. 


What do you find the most challenging part of your role today? For the past 5 years the most challenging part for me has been the abundance of capital. It is equally mystifying to Howard Marks. And from reading the commentary, to Munger and Buffett. If interest rates are negative the model doesn’t work. There is so much peculiarity that is happening right now because of the massive amounts of capital. It raises strategic questions that have never been presented to boardrooms in the history of business.


My favorite book is Complexity: The Emerging Science At The Edge of Order and Chaos by Mitchel Waldrop. It is about multivariable nonlinear systems. I read it when I was 25 or 26. It had a profound impact on how I see models, systems, economies, opportunities, and investments. Because most things in life are multivariable nonlinear systems. I have a pile of that book in my office. I give it out all the time.


Full podcast here.


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