Danny Rimer: The Biggest Lessons from Missing Snap, Airbnb, Spotify and Facebook | E1166

Intro (0s)

• Focus on the main thing and back the founder.
• Market size is not as important as the quality of the company.
• Look for the best company, not the best company in a sector.
• Great products create scarcity and brand recognition.

Background (1m7s)

• As a child, Danny Rimer was described as a mama's boy, interested in art, and a fan of James Bond movies.
• He didn't think about success in traditional terms but was comfortable being different.
• He cares about being transparent and staying true to himself.
• Success hasn't made him care less about what other people think, but he focuses on what is important to him and doesn't take things for granted.

Takeaways & Learnings from James Barksdale (3m31s)

• Danny Rimer learned two important lessons from James Barksdale:
  • Keep the main thing the main thing: Focus on the core business and avoid distractions.
  • The snake rules:
  • Make a decision and commit to it.
  • Don't revisit or debate decisions once made.
  • Understand that opportunities may look like snakes, but it's important to assess and make decisions.

Decision-Making Approaches in Investing Partnerships (7m17s)

• Each investor has a vote on investment decisions.
• Voting system ranges from 1 to 4 and 7 to 10, excluding 5 and 6.
• A certain threshold of positive votes (6.5 or higher) is required to pass an investment.
• Outliers (like Justin TV/Twitch) are welcome, but the sponsoring partner must demonstrate strong conviction.
• Index tries to avoid creating unnecessary friction in the deal-making process.
• Danny Rimer reflects on missed investment opportunities that still haunt him.
• Spotify, Snap, Airbnb, and LinkedIn are among the notable missed opportunities.
• Index failed to capitalize on chances to be part of these companies' funding rounds.
• Despite regrets, Danny Rimer finds solace in knowing that Index was highly sought after by these companies.

Thesis-Based Approach in Investing (11m42s)

• Index's investment thesis is a way to build conviction and support it.
• Everyone is encouraged to have a major and a minor investment thesis.
• Investment thesis helps sift through opportunities and identify those worth pursuing.
• Example: Exploring fashion as a potential social lubricant replacing music.
• Index team members can select their major and minor investment thesis.
• Thesis pursuit involves individual work, collaboration, and pitching to the partnership.
• Biggest challenge: Potentially missing out on exceptional founders who don't fit the thesis.
• Anomalies exist, like Spotify's Daniel Ek, whose exceptional qualities outweighed thesis concerns.
• Previous experiences with challenging music opportunities influenced Spotify decision.

Balancing Founder Enthusiasm with Market Concerns (16m25s)

• Index Ventures backs exceptional founders regardless of the market they're targeting.
• They suspend belief on the market itself and focus on the founder's vision and team.
• They do market sizing but don't rely on it heavily as they believe it can constrain thinking.
• They learned from Airbnb that it's better to think about creating new markets rather than cannibalizing existing ones.
• Index Ventures prefers category creation plays as a firm.
• They believe that category creators have the potential to create entirely new markets and disrupt existing industries.

Preventing Bias from Past Investment Outcomes (19m12s)

• Analyzing mistakes is more valuable than analyzing successes.
• Celebrating successes is important, especially for highly driven individuals.
• Index-backed companies should be the focus rather than specific companies.
• Common mistakes to avoid:
  • TAM (Total Addressable Market) overestimation.
  • Valuation based on current snapshots of comps rather than future growth potential.
• The number of highly valuable companies in the trillions and hundreds of billions will change.
• Languishing of traditional SAS and software providers is more likely due to execution and product-market fit issues rather than other reasons.
• It's difficult to predict which companies will be worth hundreds of billions in the future.
• Index-backed companies should be the focus rather than specific companies.
• Missed investment opportunities, such as Nvidia, can be learning experiences.
• Some companies that have not been public for long may reinvent themselves and become worth hundreds of billions in the future.

Evaluating Market Timing Risk in Investments (24m7s)

• Market timing risk varies among investors.
• Exceptional companies can succeed in any market, even during unfavorable conditions.
• Entrepreneurs should focus on building great companies rather than reinventing Wall Street mechanisms for going public.
• The best companies can go public in any market when they are ready.
• Figma took over three years to develop a significant enough product to dominate the market.
• The market was clearly there for Figma's product, but product development was the main concern.
• Snap faced challenges after its IPO but had a relatively straightforward trajectory leading up to it.
• Despite the long development time, the investment partnership had confidence in Evan Spiegel, Dylan Smith, and the team's ability to develop a great product.

Key Lessons on Managing Effective Reserves (27m36s)

• Index Ventures has a seed, venture, and growth fund with the same LPs across multiple funds.
• Index Ventures doubles down on investments as soon as they have a signal that validates their bets and can convince the team to take their money.
• Signaling risk used to be a concern, but with so much money in the market and entrepreneurial power increasing, it's less of a concern now.
• There's a lot of money in venture capital, which raises concerns about how thoughtful investors are being with their investments.
• Index Ventures is not a fan of sector funds, impact funds, or geographic funds because they believe these compromise the caliber of entrepreneurs and companies they back.
• Index Ventures chose not to raise more funds because they have enough resources, and they value their small, tight-knit team culture.
• Larger funds would require more hires, partners, and teams, which could change the firm's dynamics and motivation.
• Index Ventures focuses on getting to carry as soon as possible, and larger funds would make this take longer.

Massive Funds vs. Boutique Specialists (31m24s)

• Index Ventures is trying to position itself as "scaled Artisans", combining the strengths of large asset gatherers and boutique specialists.
• Index believes that the most successful luxury watch is the Apple watch, which has more skews than Rolex but generates less profit.
• Index aims to be like the scaled Artisans and Rolex, creating brands with scarcity and value.
• Index believes that most successful tech companies create brands as a byproduct of a great product or service, with Apple and Airbnb being exceptions.
• Index emphasizes the importance of branding and forces its entrepreneurs to think about it proactively.
• Index believes that scarcity and brand go hand in hand, and that it's difficult to build a brand when it's diluted or when it's considered too late in the process.
• Index argues that most brands are not real brands and that it takes a long time to build a brand that is truly relevant to people.

Sourcing, Selecting, Servicing: Strengths & Weaknesses (36m6s)

• Index Ventures focuses on generating maximum returns for its non-profit investors and excels in the exiting phase of venture capital.
• Danny Rimer believes sourcing is best suited for younger individuals, while Index Ventures' strength lies in exiting investments.
• Index Ventures strives to be disciplined and unemotional when exiting companies, prioritizing the interests of its investors.
• In cases of failure, Index Ventures aims for early recognition and encourages entrepreneurs to pivot or shut down.
• For successful companies, Index Ventures may opt for incremental sales over time, ensuring that decisions are made collectively rather than by a single partner.
• Danny Rimer regrets missing the opportunity to sell some of his Airbnb shares earlier.
• Selling a company in stages can be challenging, especially for public companies, requiring discipline and long-term value evaluation rather than short-term gains.

Reflecting on Missed Investment Opportunities (42m21s)

• Biggest mistakes as a firm:
  • Holding onto investments for too long rather than selling too early.
• Sold Etsy too early:
  • Didn't anticipate Josh Silverman's transformative impact on the organization.
  • Missed out on significant gains.
• Holding too long vs. selling too early:
  • Mixed results, but mostly held onto investments for too long.
• Biggest winner is tough to choose.
• Potential big winners:
  • Charmaine at Get Harley
  • Tom at Motorway

What is a Big Success (44m24s)

• Danny Rimer stresses the significance of learning from both successes and failures in business.
• King's journey exemplifies the value of perseverance and adaptability, having reinvented itself several times before achieving success with Facebook mobile games.
• Index's conviction in the King team led them to make concessions on price and ownership.
• When advising founders, Rimer considers the story and the team's ability to reinvent themselves before suggesting whether to continue or give up.
• New investors should take their time, make well-thought-out decisions, and meet many people to establish a benchmark of great entrepreneurs.
• Surround yourself with exceptional individuals and minimize time spent with those lacking a clear direction.

Lessons & Takeaways from Snap (49m58s)

• Index Ventures had the opportunity to invest in Snap but didn't because it would have represented more than 10% of their growth fund.
• They didn't think a social media platform could be worth more than a billion dollars, as that was the price Facebook paid for Instagram.
• Index Ventures passed on investing in Airbnb because they didn't understand the business model and thought it was too risky.
• They didn't think people would be comfortable staying in strangers' homes.
• They also thought the company was overvalued.
• Index Ventures passed on investing in Spotify because they didn't think the music streaming business was sustainable.
• They thought people would continue to pirate music or buy CDs.
• They also thought the company was overvalued.

The Facebook Calls Discussion (52m48s)

• Index offered Facebook a term sheet of $50 million at a $5 billion valuation.
• Facebook received an offer from Microsoft for a $10 billion valuation.
• Index passed on the investment at $10 billion valuation.
• Index later purchased significant secondary shares from Facebook.
• Venture capital is about the one or two decisions you make per year, not the hundreds of decisions you make per day.
• Our path is based on the decisions we make at different forks in the road.
• Luck and decision-making are aligned with those forks in the road.

Unlikely Founders Who Became Incredible (56m24s)

• Index Ventures' Danny Rimer believes founders' strengths manifest differently in the US and Europe.
• In the US, founders are often overconfident, while in Europe, they may underestimate their abilities.
• Rimer learned from a failed investment to let go of failures and move on.
• To detach emotions from investing, Rimer reflects on past mistakes.
• The best companies don't require agreement, but contributions can create a multiplier effect.
• It's worthwhile to invest time in companies with the potential for significant success.

Giving an Effective Feedback (1h2m19s)

• Danny Rimer, a partner at Index Ventures, prefers the term "compassionate ass kicker" when giving feedback, emphasizing the importance of both understanding and driving results.
• Index Ventures is the only European venture capital firm that has successfully expanded into the US, which Rimer attributes to the partnership's ability to make tough decisions and stay true to their outsider perspective.
• One of the challenges in establishing Index Ventures' San Francisco office was avoiding the herd mentality and maintaining their differentiated approach.
• Index Ventures made the decision not to invest in cryptocurrency when it was a more contrarian move because none of the partners were genuinely excited about its potential.
• The baton of leadership has been passed to Me Maybe on the consumer side and potentially on the gaming side as well.

Assessing Europe's Startup Landscape (1h7m48s)

• Despite Brexit, Danny Rimer sees Europe as an attractive investment market.
• Rimer believes European entrepreneurs are improving and have increasing support.
• When meeting with American founders, Rimer and his firm tend to be skeptical due to their polish and sophistication, while they are more trusting of European entrepreneurs.
• Rimer values founders with genuine passion, regardless of their insider or outsider status.
• Rimer's wife supports his demanding work schedule and frequent travel.
• Rimer prioritizes his life into three categories: family, work, and interests, and regrets prioritizing work over family in the past.
• Rimer acknowledges the role of luck in success and that some missed opportunities were due to circumstances beyond his control.

Quick-Fire Round (1h14m20s)

• Danny Rimer stresses the significance of trusting one's instincts in investment decisions, even when it conflicts with prevailing opinions.
• A notable founder meeting for Rimer was with Jason Citron from Discord, where Citron's grilling of Rimer about the Nasty Gal bankruptcy situation impressed him despite resistance from other investors.
• Discord has transitioned from a mainstream platform during the pandemic back to its roots as a communications platform and vertical social media solution for gamers.
• Rimer acknowledges Sequoia, Andreessen Horowitz, and Benchmark as formidable competitors in the consumer space, with Benchmark being less frequently encountered.
• Rimer learned valuable lessons from Kevin Harvey, a former Benchmark partner, emphasizing generosity and collaboration even in competitive situations.
• Rimer joined Index Ventures as an observer and later increased his stake to 10% through secondary offerings.
• Rimer highlights the importance of focusing on the partnership and hiring peers to build a successful firm.
• He emphasizes the significance of humility and learning from past and present mistakes.
• Rimer envisions Index Ventures in 10 years with a slightly larger partnership, similar fund sizes, but improved returns due to better partners, hires, and investment decisions.
• He aims to open one more office in the next decade and stresses the importance of passing the baton to maintain the firm's values and culture.