Don’t Be Dogmatic
I have so many of these. What I’ve found interesting is that our biggest misses have been far misses, not near misses—companies that we didn’t pursue aggressively because we didn’t “get it,” or we believed the funding round was likely outside our typical parameters. Those include Stitch Fix, Cruise Automation, and Casper.
The lessons learned include (1) resist being too dogmatic about how you define your sweet spot as an investor; and (2) seek companies that seem extraordinary on some dimension, even if it is unusual or seems deficient in others.
Rob Go (MBA 2007)
For the Birds
Here’s what I wrote in my internal deal notes when I first met Jack Dorsey of Twitter:
February 8, 2007: Seems niche. How many people want to tell everyone randomly what they’re doing, and how many really want to look at it?
Of course, what I missed was that a brilliant entrepreneur can take a niche idea and build an iconic, anchor company. I also learned to spend more time thinking about what a venture could become if things go well as opposed to worrying too much about what could go wrong.
Jeff Bussgang (MBA 1995)
Flybridge Capital Partners
HBS Senior Lecturer
Missed Meal Ticket
When I was at Summit Partners in 2010 we looked closely at Just Eat, an online food delivery business based in Denmark. This was our conclusion:
“Just Eat seems to only work in Denmark, where business is profitable. Its other half-dozen markets are burning cash. It already has 10 percent of the Denmark population, so how big can this really get given that we’d be entering at a valuation of more than $100 million?”
Turns out, it can get very big. At the time, we completely misunderstood the unit economics and network effects of the business—in other words, the “winner-take-all” dynamics in a category as huge and frequent as food. Just Eat soon became the No. 1 food delivery business in a number of countries, including the UK, France, Italy, Brazil, and Canada. It went public in 2014, became a FTSE-100 company in 2017, and is currently worth $5 billion. That’s the price of an incorrect answer to perhaps the most common VC question: How big can this really get?
Rytis Vitkauskas (MBA 2008)
Leaving the Party Early
Over the course of 20 years in venture capital, there are many that got away (Twitter, Capital IQ, Adaptive Insights, and The RealReal, to name a few). However, one repeatedly bubbles up.
In 2002 we invested in Fieldglass, a human capital management company and the first software-as-a-service application for enterprises to manage contract workers. It had $2 million in revenues at the time of investment. After a few fits and starts with the business model, Fieldglass became the leader in its sector, was growing rapidly, employed an effective channel strategy, and produced high and increasing EBITDA margins.
After holding it for eight years we decided to sell to the private equity firm Madison Dearborn, after the firm’s cofounder, Paul Finnegan (MBA 1982), made the case that it would be a great home for the company’s employees. The price was five times our investment: It had been eight years, a little longer hold than we would have liked, but a very good outcome nonetheless. The CEO would continue to run the company and signed up for a whole new equity package; he asked if StarVest would like to roll a portion of our proceeds into the new deal, the only investors asked to do so. After considering the time we already had been in it, and that it would be a cross-fund investment (touting to one fund what a great exit it was while telling another that it was a great entry price), we decided to decline.
Four years later, Madison Dearborn sold Fieldglass to SAP for four times what they had paid us—$1 billion. What a miss! In retrospect, the company had just begun its growth trajectory and market dominance. Moral of the story: If you have the opportunity to invest behind a great CEO in the early stages of an emerging growth market with a sector leader and a smart, trustworthy, deep-pocketed partner, do it and figure out the fund issues later. Your investors will be happy you did!
Deborah Farrington (MBA 1976)
I was an idiot. I turned down Netflix. I don’t remember the exact date—maybe 2002? Before its first funding round, in any case. I told Reed Hastings that everyone would be streaming video in a year or two, so why set up this huge infrastructure around DVDs? He said, “They’re not ready for streaming yet. We will be ready when the technology gets there.”
Tim Draper (MBA 1984)
Draper Fisher Jurvetson
Driving against Type
I passed on CarGurus back when it was a young company. It is now public and trading at $4.7 billion. At the time, the company was raising money at a very high price relative to its progress and wasn’t selling more than a 10 percent stake, which would have been a much smaller ownership position than we usually get. So it was an “off-strategy” investment.
It was also in the highly competitive space of lead generation, where companies are paid a referral fee if they deliver a qualified customer lead to a business—in this case, car dealers. I think they also called on some other VCs and no one invested. But I was torn because I really like the CEO, Langley Steinert, and have known and respected him for a long time. What I learned is that great people (like Langley) are very rare and can beat the odds.
Jo Tango (MBA 1995)
Blinded by the Dot-Com Bust
I looked at Data Domain (Series B) in 2003 and at Splunk (Series A) in 2004. At the time, we had just come through the dot-com boom and bust, and my firm and I were sitting on a lot of challenged investments in the storage and networking markets. Both companies seemed really intriguing, but we had a hard time looking past the current portfolio of challenged companies to see that there might be some big winners in these particular sectors. Data Domain went on to an IPO and then an acquisition by EMC for $2.4 billion, and Splunk is the leading company in the network and security log management space, valued in the public markets at $13 billion. The lesson for me was to look for the best opportunities when the markets have become their worst—and to resist letting your recent experiences color your perspectives on new opportunities.
Fred Wang (MBA 1992)
Adams Street Partners
Paralysis by Analysis
The opportunity I most remember passing on was a seed round in Ola, the leading taxi/ride-sharing company in India. The mistake I made was that I sized the market statically and failed to appreciate how the market might expand with a radically improved experience. I’ve since learned to trust my instincts on founders and markets more and not overthink it, especially when it comes to those very early-stage investments.
Bejul Somaia (MBA 1998)
Lightspeed India Partners
Speak Up, Sonny
I met with the Visio team led by Jeremy Jaech who, along with others, had sold Aldus, the inventor of desktop publishing.
I was extremely impressed with the team and invited them on the spot to present at our next OVP partners meeting. I thought the presentation had gone well as they outlined how Visio [a diagramming and drafting application], their second startup, would also change the world. After the team left, my partners rained all over their parade, saying that they were an arrogant team with the gall to say “they knew what the customer needed.”
They went on: “Can you believe that they knew without a ton of market research what the customer wanted?” I sat and listened, knowing that this was spinning out of control. Of course they did know what the customer wanted! And we would have been the first dollars in.
At that time, I’d been in the business for six or so years. That experience taught me to stand up to older partners on the team and trust my intuition.
Chad Waite (MBA 1983)
OVP Venture Partners
In 2012, just one year into my VC career at Bessemer, I met a sharp and energetic founder named Nat Friedman. He told me about his company, Xamarin, which helped developers write apps where 99 percent of the code would be the same for iPhone and Android. The timing was great as mobile apps were starting to take off. However, my Bessemer team and I became fixated on the pricing model and passed on the Series-A round. Just a few years later, the company sold to Microsoft for something like $500 million; Nat is now CEO of GitHub. Major miss. From that experience I learned to trust my gut more on the role people play in the success of a startup.
Sunil Nagaraj (MBA 2009)
Lessons from the Fall
It was the summer after my HBS graduation when we first met. The company was tiny, and the prevailing wisdom on Sandhill Road was that there was no money in developer tools—but user growth was accelerating, and cloud computing seemed to be changing the world. The founders were friendly and willing to meet occasionally, but they were also staunch believers in bootstrapping without outside funding. By 2012 our friendly meetings had become more serious, culminating in the dreamed-of investment opportunity. Unfortunately, things got highly competitive, stretching my conviction and the support from my partners into uncomfortable territory for an early-stage investment with unproven founders. Four weeks of intensive negotiations later, Andreessen Horowitz won the deal, offering to invest $100 million at a much higher valuation. Six years later, Microsoft acquired GitHub for $7.5 billion.
I learned a lot from that opportunity and the people around me:
- Having a thesis and picking a winner is only a fraction of the job.
- Often claimed, seldom true, “platform” companies are extremely rare.
- Move faster when you have conviction—other investors are right behind you.
- The best investors “pay up” and invest at the next opportunity.
- Valuation matters, but other factors are just as important.
- The best investors in the world take big risks but also work harder than anyone else.
Luis Robles (MBA 2010)
A Dream Redefined
We first met Peter Szulczewski when he was working on a neat concept called ContextLogic. He had built contextual targeting technology that would help make websites (primarily in the media vertical) more profitable. A May 2011 investment memo [cowritten with former colleagues Sunil Nagaraj (MBA 2009) and David Cowan (MBA 1992)] had this to say: Peter and his team were “pioneering the use of machine learning and natural language processing algorithms to improve the relevance of online advertising.” The company’s technology led to more than a 100 percent lift in the performance of ads on the page, something that could benefit a lot of destination sites on the internet. We even had come to an agreement on investment terms at a reasonable valuation. What’s not to like? Well, media sites just weren’t buying it, unfortunately—they weren’t set up to integrate the technology quickly and take full advantage of its benefits.
We parted ways as friends and agreed to keep in touch. Peter and his team were busy after that, pivoting the company to become Wish, a mobile shopping app with a cheap, cheerful, low-friction ethos. The items in the app’s feed are customized based on your online habits, no doubt leveraging the company’s strong technology around contextual ad targeting. The concept took off: Wish is now one of the top-ranked shopping sites in the world and on track to break $2 billion in revenue in 2018 with 300 million active users and a reported $8.5 billion valuation. Not bad for a failed ad-tech experiment.
Here’s what we wrote about Peter and his team at the time we were considering the investment: “We think the team is incredibly strong and is one of the main reasons for our enthusiasm about backing the business at this early stage. They have absolutely the right DNA to tackle some of the most difficult and intractable computer science problems around automatically understanding the context where ads are served.” In other words, teams and leaders of this caliber and level of ambition are rare. Even when their first ideas don’t pan out perfectly, they figure out a way to survive and thrive. I should have listened to our own assessment of Peter and his ability to solve problems previously thought to be unsolvable. In the end, he achieved his dreams—just not in the way that any of us expected.
Ethan Kurzweil (MBA 2008)
Bessemer Venture Partners
Power of the Pivot
In 2008, a few members of the New York Angels met with a founder of a company called Tote, which was developing an app for the iPhone to be used for shopping. If you typed in “red skirt,” red skirts from various retailers would appear. None of the founders had any experience in retail, the app was slow, and almost all of us passed. When it did launch, the app was a disappointment. But the founders learned and pivoted into a web-based platform called Pinterest. A $25,000 investment grew to north of $25 million. Yup.
Lesson learned: A truly talented entrepreneur can move an idea into great success. We were New York–based and didn’t know the San Francisco cofounder, Ben Silbermann. The one member of our group who did invest had a pal in San Francisco who had met Silbermann, so he was more aware of his abilities. This leads to the ultimate VC question: Do you bet on the jockey, or do you bet on the horse?
Elaine Gilde (MBA 1978)
New York Angels