Yesterday in Helsinki, this editor interviewed 4 of the six general partners at Benchmark, the nearly 30-year-old, Silicon Valley firm that’s known for some notable bets (Uber, Dropbox), paying each general partner the exact same way, and for continuing to lift similar-size funds over its a few years relatively than balloon in size. 

We were speaking at Slush, a significant yearly event for the European startup ecosystem, so I naturally asked why the firm was making such a giant showing, provided that it’s hard enough getting the Benchmark team to seem in Silicon Valley together.

Victor Lazarte, a gaming company entrepreneur who joined Benchmark five months ago as its newest GP, admitted that there was “no business reason” for Benchmark to return aside from its interest in understanding all things “exceptional.” (Helsinki is actually gorgeous.) 

Larzarte was equally candid when the conversation turned to soaring valuations lately, and I asked about his own gaming company, Wildlife Studios, which raised a Series A round from Benchmark in 2019 at a $1.3 billion valuation and, lower than a yr later, was assigned a valuation of $3 billion when Vulcan Capital led a subsequent round. Larzarte said the corporate had really made “like, no progress” in between rounds, but that because Benchmark had funded the corporate, “everyone” subsequently wanted to speculate in the corporate. (He said that, on reflection, taking up an excessive amount of money at too high a valuation so quickly was a “mistake.”)

Not last, we talked about how strange it’s to be living through a general downturn and a boom in AI investing at the identical time. On this front, the team was clear in its assessment that today’s high-flying but closed large language model firms aren’t going to be the breakaway winners that many expect them to be. (Price noting: it will not be an investor in such closed LLM firms, including OpenAI and Anthropic.) You may catch our conversation on this longer broadcast; meanwhile, you will discover some excerpts below, calmly edited for clarity.

Regarding Benchmark’s views on the sweeping trend of AI in all the things, partner Miles Grimshaw said we’ll be collectively astounded at how backwards our current use of software will look just a number of years from now.

I feel if we glance back at ourselves in a number of years – perhaps even a yr – it’ll feel like we were primates form of mashing rocks together to make fire. In two years, it’ll be weird that you simply needed to click all these buttons in Salesforce and navigate around and that it didn’t do more for you. User expectations of what’s possible are ratcheting up, and also you’ve got tectonic forces at play for imaginative, creative founders to benefit from. 

I feel the query [ties to] the startup opportunity versus an incumbent opportunity. You may never tell founders where they need to go – that’s not what we do. But considered one of the places to perhaps avoid – the traps – is: don’t be Microsoft. Don’t be [part of] the Copilot game [meaning Microsoft’s AI-productivity tool that’s powered by OpenAI’s ChatGPT]. That’s what they’re doing. It serves their business model. It serves their product environment thoroughly. But be more creative and impressive than simply Copilot. 

Peter Fenton, essentially the most senior member of Benchmark’s team, weighed in so as to add that:

We didn’t put money into a big language model. Perhaps this is exclusive to Benchmark, but our view is the capital intensive [companies are tricky]. We’ve been in some – all of us took Ubers here [to the event]  today [and that was a Benchmark portfolio company]. And capital-intensive businesses and enterprise backed firms have historically not been great partners. 

Our [belief] is that open source will find yourself having a profound effect on the ecosystem. We’re all, in a way, soldiers in the military of ‘tear down anything that’s getting capital intensive and overbuilt’ after which propagate a developer driven world. And these experiences in AI are going to be built by developers who’re imagining stuff that nobody can fathom at a big language model, because they’re serving a unique form of platform horizontal need. So yeah, we hope [the closed LLM companies] do well. We love the innovation. But I’ve been particularly drawn to the concept that there’s an open source founder who’s probably going to surpass almost all the things that you may do with capital.

Other outtakes from our conversation include Fenton discussing a giant miss by Benchmark that got here up in the course of the chat (by accident, candidly), which is Airbnb.

You mentioned Airbnb. That’s considered one of those on our long list of deep regrets. Once I joined the industry, you possibly can buy 20% to 25% of an organization in a Series A investment for a number today that seems like a seed round – $7 million to $10 million. Because we had an ownership threshold that was not possible to realize [when Airbnb was first fundraising], we missed the chance. And we’ve type of relaxed that as a constraint since it’s not a matter of what can Benchmark own. It’s: what’s the corporate’s potential?

We also talked about what makes a Benchmark company in 2023, with GP Sarah Tavel saying the main focus very much stays on nascent teams:

Of the investments that we’ve made to date this yr, some large percentage of those [were] actually at incorporation of the corporate. So most of the time, it is definitely two individuals who see a possibility, and we’re getting there before they even left their last job to begin that company.

We actually deal with, ideally, being that first board member, the primary partner to a founder after they’re embarking on this journey, and a big percentage of time, being the primary money [that] two people raise for his or her idea.

Speaking of board seats, we asked in regards to the latest trend in Silicon Valley, that of VCs who say board seats don’t matter because the actual information between founders and investors is transferred between board meetings. Here, Fenton suggested that as a fiduciary, it might almost be negligent for a VC to not take a board seat where possible.

It’s an interesting hack, the enterprise business, where we codify a relationship typically with money. But then we join the board governance structure, and the one who takes our money, we now have power over, in theory. With governance structures and boards, you possibly can hire and fire the CEO. That’s the largest job of the board. 

In my opinion, the really great businesses are built with boards which have a partnership with the CEO, which have a gaze to the horizon of what’s possible that’s larger than anyone person. And I feel that the integrity of that structure has been tested throughout everything of our C Corp business model. [When the industry] moved into crypto, we removed boards; we said, ‘Who needs boards? Who needs company constructing and all that stuff?’ And it created interesting token value, but I don’t think it built equity value . . .

My sense is we’re moving through a time period where the concept of governance –  we just went through it at OpenAI – percolates as much as the highest of individuals’s consciousness. And we will see what happens when the governance structures are misaligned. And I actually have a private view that my partnership with an incredible CEO is deeply enhanced by knowing that I’m carrying the fiduciary responsibilities that they carry with them near their heart, and that if I’m not serving on the board, I could be effective, nevertheless it’s not the identical. 

Finally, getting back to that valuation discussion with Lazarte, we wondered how Benchmark counsels its startups on valuations, provided that the larger their follow-on valuation, the higher in some ways for earlier investors but, sometimes, the more severe for the founders, who can have fewer options when their firms change into overvalued. Here’s what he needed to say:

Once I partnered with Benchmark [as a founder in 2019], I actually desired to work with Peter because I felt that he was someone who could help me transform the corporate, and I used to be lucky that he desired to work with me, right? After which, just being transparent, we were in a period where there was lots of capital chasing deals, and there’s the proven fact that after Benchmark invests in an organization, everyone wants to speculate in the corporate. So this second round that we raised, we actually made, like, no progress. But there have been so many individuals who were interested and I [was thinking that] we’re an organization from Brazil and we’re attempting to move to Silicon Valley. And we were at all times very low profile. But like all of the sudden, it was, ‘Oh, Benchmark invested,’ and there have been these people coming in. After which I made the choice of, okay there are these funds that [are being] invested [at] twice the valuation when really not much progress was made. And I made the choice of, okay, with extra money, perhaps we will do more. 

But on reflection, I feel that myself and lots of the founders . . .made the error of raising an excessive amount of capital.The issue is once you raise an excessive amount of capital, you begin moving into unnatural directions, you begin deploying more capital than what’s natural to that business. And then you definately grow your team, but larger teams, a lot of times they don’t produce more. In reality, they produce less. And when you try this, you will have to undergo the painful means of reducing the team. So the perfect founders should not trying to maximise for unnatural valuations, because that does distract from the core purpose of constructing the corporate.