Building Enduring Value and Hitting Incremental Gains with Benchmark’s Sarah Tavel | E1983
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Sarah Tavel joins Jason.
- Sarah Tavel, a CEO, discusses the importance of having difficult conversations with executives who are not performing well. She emphasizes that CEOs need to develop a "learned ruthlessness" to make tough decisions for the benefit of the company.
- Tavel highlights the "five temptations of a CEO," a concept from a book she recommends, which includes the temptation to be liked. She acknowledges that this desire can hinder CEOs from having necessary difficult conversations.
- Tavel explains that allowing underperforming executives to remain in their positions can have negative ripple effects throughout the company. She emphasizes the importance of making decisions quickly and decisively to avoid long-term consequences.
Sarah Tavel, Benchmark Partner, on disciplined fund size and efficiency
- Sarah Tavel, a partner at Benchmark, discusses the firm's disciplined approach to fund size and efficiency. Benchmark has maintained a consistent fund size, with their latest fund being around $425 million, similar to their 2004 fund.
- Tavel explains that this disciplined approach is due to the firm's long-standing partners and their efficient fundraising process. The firm's reputation and track record make it easy to attract investors.
- Tavel acknowledges the challenge of being massively oversubscribed, but emphasizes that Benchmark's commitment to a specific fund size means that they have to be selective with their investments. This approach allows them to maintain a consistent strategy and focus on their existing Limited Partners (LPs).
Benchmark's commitment to founders and investment strategy
- Benchmark's investment strategy focuses on making a limited number of high-quality investments, typically in Series A rounds, aiming to be the first board member. Each partner manages approximately $80 million and makes 5-6 bets per fund, with an average of 1-2 investments per partner per year. This disciplined approach means they are highly selective, meeting with 5-10 new startups per week and ultimately investing in only one out of every 150 companies they meet.
- Benchmark emphasizes a deep commitment to founders, going beyond just financial investment. Sarah Tavel, a partner at Benchmark, describes how they actively engage with founders, often making 5 related calls per week for each company they invest in. This includes involvement in recruiting, providing judgment on potential hires, and frequent communication with the founder. This level of commitment is a core belief at Benchmark, as they believe that early-stage companies require a high level of personal involvement to make a significant impact.
- Benchmark's model prioritizes direct engagement with founders, avoiding outsourcing to internal consultants. This approach creates a scarcity of investment opportunities and a high bar for getting a "yes" from Benchmark. However, it also ensures a deep level of commitment and partnership with the founders they choose to invest in. This model reflects their belief that venture capital, particularly in the early stages, doesn't scale in the traditional sense, requiring a hands-on approach to truly support founders on their journey.
Strategies for competing in a changing venture landscape
- The venture landscape has changed significantly since the founding of Benchmark, with new players like Y Combinator making many small bets and other firms managing large sums of capital and employing specialized departments.
- Some venture firms are now taking on roles similar to AWS, providing infrastructure and support to startups.
- This shift in the venture landscape has led to increased competition and a need for venture firms to adapt their strategies to remain successful.
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- Benchmark's value proposition is about deep partnership. The speaker explains that Benchmark's approach to working with startups is based on a deep partnership, providing support in areas like hiring and team building. They believe that some founders prefer this hands-on approach, while others prefer more independent growth.
- Benchmark is navigating the changing landscape of venture capital. The speaker acknowledges the increased competition in the venture capital space, with higher valuations and lower ownership percentages for startups. They discuss the importance of entry price and the need for discipline in investment decisions, highlighting the potential for inflated valuations driven by competitive pressures.
Valuations, ownership, and building deep relationships with founders
- Benchmark prioritizes partnering with founders they believe in, even if it means deviating from their typical ownership range. They make investment decisions on a case-by-case basis, considering the unique founder and the specific market they are targeting.
- Benchmark emphasizes building deep relationships with founders, going beyond typical investor-founder interactions. This involves frequent communication, including daily or weekly texting, and a deep understanding of the founder's journey.
- This level of engagement allows Benchmark to be a more strategic partner, helping founders achieve their full potential. They believe this approach is more valuable than simply making a large number of investments, as it allows for a deeper level of support and understanding.
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- In today's venture market, every hire must be perfect to ensure a long runway for experimentation and growth.
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The critical role of governance and accountability in startups
- Governance is crucial for accountability and trust in startups. The speaker argues that governance, including board meetings, is essential for creating a healthy environment of accountability within a startup. This accountability benefits both the CEO and the executive team, leading to better performance and decision-making.
- The importance of strong relationships with board members. The speaker acknowledges that the impersonal nature of virtual interactions during the pandemic led to a decline in trust between founders and board members. However, as founders have spent more time with their board members, the focus has shifted from governance as a formality to a genuine partnership.
- The dangers of using governance, valuation, and secondary offerings as weapons. The speaker criticizes the practice of some investors using these tools to gain an advantage over other investors, often at the expense of the startup's long-term success. This approach can lead to short-term gains but ultimately harms the company's ability to build a sustainable future. The speaker highlights the example of Tiger Global, which may have seen limited returns on its investments due to this strategy.
- The importance of selecting board members who are committed to the company's success. The speaker emphasizes that founders who prioritize short-term gains over long-term partnerships may end up with board members who are not invested in the company's success. This can lead to problems when the company faces challenges, as these board members may not be willing to support the founder.
- The role of the board in supporting the founder and executive team. The speaker highlights the value of a board that actively supports the founder and executive team by providing guidance, mentorship, and connections. This can help the company make better decisions, avoid potential pitfalls, and ultimately achieve greater success.
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The power of incremental improvements and executive limitations
- The power of incremental improvements: The speaker emphasizes the importance of small, consistent improvements over time, comparing it to compound interest. They argue that even small gains, even if they seem insignificant at first, can lead to significant results in the long run.
- Executive limitations and the Peter Principle: The speaker discusses the challenges of identifying and addressing executive limitations, particularly when they reach their "Peter Principle" – a point where they are no longer capable of performing at the required level. They highlight the importance of having a leadership team that pulls the company up, rather than being pushed up by it.
- The importance of hard conversations and avoiding vanity metrics: The speaker stresses the need for CEOs to have difficult conversations with their executives, even if it means potentially upsetting them. They also warn against focusing on vanity metrics that feel good but don't actually reflect the company's true progress.
Vanity metrics vs. building enduring value in startups
- Vanity metrics can be misleading and distract from building enduring value. Sarah Tavel emphasizes that focusing on metrics that simply go up and to the right, like app downloads or gross merchandise value (GMV), can be deceptive. These metrics might make a company look successful, but they don't necessarily reflect true progress or customer value. Instead, she encourages founders to focus on metrics that directly relate to building a strong product-market fit and creating a sustainable business.
- Chasing vanity metrics can lead to shortcuts and a lack of intellectual rigor. Tavel points out that companies often fall into the trap of chasing metrics that they believe investors want to see, rather than focusing on the fundamental principles of their business. This can lead to superficial growth and a lack of genuine progress. She uses the example of a food delivery company that might prioritize achieving a high GMV by expanding into multiple cities, rather than focusing on building a strong presence in a single market.
- Founders should embrace the uncertainty of early-stage companies and focus on learning and experimentation. Tavel encourages founders to be transparent about their progress and to acknowledge that they are still figuring things out. She emphasizes that investors understand the iterative nature of early-stage companies and are more interested in seeing evidence of learning and experimentation than in seeing perfect metrics. She also warns against the temptation to manipulate metrics or engage in "gamemanship" to impress investors.
The consequences of choosing status over results in startup success
- The most dangerous consequence of prioritizing status over results is the vulnerability to vanity metrics. Founders who are focused on status are more likely to be swayed by metrics that make them look good externally, rather than metrics that actually contribute to the company's long-term success. This can lead to a focus on superficial achievements and a neglect of the core fundamentals of building a strong business.
- The "unicorn status" phenomenon exemplifies this dangerous trend. The pursuit of a high valuation and a "unicorn" label can lead founders to prioritize short-term gains and superficial metrics over building a truly valuable product and company. This can result in a focus on "hacking" the system to achieve the desired status, rather than focusing on the fundamentals of building a successful business.
- The analogy of a basketball player with impressive stats on a losing team highlights the importance of accountability over popularity. Just like a player can have impressive individual statistics without contributing to a winning team, a company can have impressive metrics without actually building a sustainable and valuable business. This emphasizes the importance of holding teams accountable for results, even if it means having difficult conversations and potentially sacrificing popularity.
Building trust in leadership and the pressures of maintaining success
- CEOs often avoid showing vulnerability, which hinders the development of genuine trust within their leadership teams. Sarah Tavel emphasizes the importance of acknowledging that past successes do not guarantee future success, and that constant effort is required to maintain a successful firm.
- The pressure to consistently deliver successful investments can be immense, especially after achieving significant wins. Tavel highlights the anxiety that comes with knowing that every deal matters and that missing out on a great opportunity can be incredibly painful.
- The fear of being outdone by others and missing out on the "one or two companies every year that really matter" is a common paranoia among venture capitalists. Tavel uses the example of Pinterest, a non-consensus bet that was considered a foolish investment at the time, to illustrate the importance of identifying and backing companies that defy conventional wisdom.
The importance of non-consensus bets and independent thinking
- The importance of non-consensus bets: Sarah Tavel emphasizes the value of making bets that go against the prevailing consensus. She highlights her investment in Pinterest as an example, where she saw potential in a product that was dismissed by many as a niche site. Her outsider perspective, free from the influence of industry gossip, allowed her to recognize the unique value proposition of Pinterest.
- The risk of consensus thinking: Tavel argues that the greatest risk for investors is falling into consensus thinking, where everyone discusses the same ideas and develops similar viewpoints. This can lead to missing out on disruptive companies that challenge the status quo.
- The power of outlier ideas and founders: Tavel describes how she created tags in her investment database for "outlier founders" and "outlier ideas." These tags represent investments that don't fit traditional categories and require a leap of faith. She believes that these outlier bets can lead to significant returns, citing her investments in a meditation company, a stock trading app, and Chainalysis as examples.
- The reward of non-consensus belief: Tavel emphasizes the personal satisfaction that comes from making non-consensus bets and being right. She describes the feeling of being "lucky" when you identify a unique opportunity and invest in a company that others overlook. This feeling of being a "non-consensus believer" is a source of pleasure and validation for investors.
The relationship between hype, investment decisions, and startup promotion
- Hype can be detrimental to startups, especially in the consumer space. Sarah Tavel, an investor at Benchmark, believes that hype creates unrealistic expectations for customers, alerts competitors to your product, and encourages other founders to enter the market.
- Announcing a startup too early can be an ego-driven decision rather than a strategic one. While there are exceptions, such as the need for legitimacy in B2B or for recruiting, Tavel argues that the benefits of early announcements are often outweighed by the potential downsides.
- There is a time and place for promotion, but it's important to avoid unnecessary hype. Tavel emphasizes the importance of strategic timing and avoiding actions that could attract unwanted attention from larger competitors. She uses the example of Meta's Threads launch, which was likely spurred by the success of a similar product.
In-person work vs. remote work: Impact on startup productivity
- In-person work is seen as advantageous for startups, especially early-stage ones. Sarah Tavel believes that remote work hinders productivity and slows down communication, making it difficult for startups to achieve the necessary velocity and momentum. She compares remote work to running a race with a parachute tied to your back.
- Being in the office fosters a stronger company culture and facilitates knowledge transfer. Tavel emphasizes the importance of in-person interaction for building a strong company culture, allowing for spontaneous collaboration and mentorship. She argues that it's difficult to replicate this dynamic in a remote setting.
- Senior leadership plays a crucial role in setting the tone for in-office work. Tavel highlights that senior executives need to lead by example and be present in the office to encourage others to do the same. She cites examples of CEOs like Michael Dell and Travis Kalanick who have mandated in-office work for their companies.
SaaS market challenges: Pricing, AI impact, and future models
- SaaS pricing headwinds are significant. The SaaS market is facing challenges, including declining multiples, overfunding, and customer consolidation. Companies are cutting back on SaaS vendors, leading to revenue loss for SaaS companies. Additionally, companies are increasingly building their own internal solutions, further impacting SaaS sales.
- AI is disrupting traditional SaaS models. The rise of AI is forcing SaaS companies to adapt their pricing models. As AI automates tasks, the need for traditional software licenses and seats decreases. This shift is leading to a move towards consumption-based pricing models.
- The future of AI-powered B2B products is consumption-based. The speaker believes that AI companies should focus on selling "work" rather than software. This means offering services that automate tasks and deliver finished products, rather than simply providing tools for employees to use. This shift would allow companies to charge based on the value delivered, rather than the number of licenses or seats.
Exciting AI investments and the transformative potential of new technologies
- Sarah Tavel highlights the exciting potential of AI investments in removing friction from human tasks, unlocking new market opportunities. She uses the example of DeepL, an AI translation company, which has significantly improved the efficiency and accessibility of translation compared to traditional methods.
- Tavel emphasizes the transformative power of AI in automating tasks that were previously time-consuming and expensive. She cites the example of Podcast AI, which automates podcast transcription, summarization, and even creates clips for social media platforms, saving countless hours of manual work.
- Tavel points out that the initial market opportunity for AI-powered solutions may seem small, but the compelling value proposition can lead to unexpected growth and innovation. She uses the example of HeyGen, a company that creates AI-powered avatars for videos, which initially seemed niche but has the potential to revolutionize online communication and training.
AI advancements, new use cases, and the competitive landscape
- The speaker is incredibly enthusiastic about the potential of AI, comparing it to the early days of the internet and the App Store. They believe that the rapid advancements in AI are creating a constant stream of new opportunities, and that those who don't get involved early will miss out on significant gains.
- The speaker highlights the ongoing development of foundational AI models, emphasizing that the field is still wide open and that new use cases are constantly emerging. They believe that the rapid pace of innovation means that even companies with seemingly orthogonal approaches to AI have the potential to disrupt the market.
- The speaker draws a parallel between the current AI landscape and the early days of the personal computer industry. They recall the abundance of different PC manufacturers in the 1980s, each vying for market share, and believe that the current AI landscape is similarly competitive and dynamic. They are optimistic that this intense competition will lead to significant innovation and long-term growth, just as it did in the PC industry.
How incumbents and consumers are benefiting from AI advancements
- The rapid pace of advancements in AI means that opinions on the field quickly become outdated, as new models and capabilities emerge constantly. This is exemplified by the resurgence of Anthropic after the release of its model, Claude 3, and the subsequent release of Google's Gemini model with its large token context window.
- The intense competition and investment in AI development, particularly in companies like Nvidia, is leading to significant benefits for consumers. This is similar to the early days of food delivery services, where companies fought for market share by offering incentives like full refunds for late orders.
- Consumers are currently in a "golden age" of AI, as they have access to powerful and sophisticated AI products at a relatively low cost, despite the high development and running costs. This creates a unique opportunity for consumers to benefit from these advancements.
Embracing AI in daily tasks and business operations
- Sarah Tavel advocates for becoming "AI native," meaning using AI tools like ChatGPT multiple times a day for various tasks.
- She uses ChatGPT to generate notes, summarize information, and even write scripts, demonstrating its versatility in daily work.
- Tavel emphasizes the time-saving and efficiency benefits of integrating AI into daily routines, highlighting how it can streamline tasks that would otherwise take hours.