Trusted Insight founder Alex Bangash hosted an intimate breakfast on September 22 at Asellina in New York City’s Gramercy Park, featuring Silicon Valley entrepreneur Tikhon Bernstam. Twelve executives gathered around the table listening attentively as 35-year-old Bernstam, famous for co-founding Parse (now owned by Facebook) and Scribd (the world’s largest document sharing platform, with 80 million users), shared his insights on the esoteric world of venture capital investing.
And who better?
Not only has Bernstam, a Palo Alto native, been stunningly successful as a founder of venture-backed start-ups, he is also currently invested in some 50+ start-ups, which seem to be on track for their own outsized returns.
Tikhon takes a unique approach to angel investing, helping to grow the companies he’s invested in by hiring the best available talent (often luring people away from competitors), supported by wads of cash and even an 18-bedroom building he bought for those hires new to Silicon Valley who need a place to stay.
Topics of conversation at breakfast included market leaders, the biggest challenges to today’s venture capital-backed high-tech companies, differences between the dot-com bubble and today, alternatives to going public, managers’ fees and what would appear to be some really basic common sense practicalities about using data to inform investment decisions.
Here’s the short version.
On Differences Between The Dot-Com Bubble (1997-2000) And Today:
Bernstam pointed out that during the dot-com bubble the investment thesis was driven by the need for capital, while now it’s driven by the need for talent.
“Mark’s on the record as saying he could never have started Facebook today or last year because there is no talent,” Bernstam stated, referring to Mark Zuckerberg. “There’s tons of capital, but it offers no real advantage because everyone has the same hiring problem: they can’t hire. We’re trying to really actively invest in noncapital things that are holding companies back."
Another big difference: “I believe that half the companies were actually operating unprofitably. ...The difference is that today these are real businesses. What didn’t work in the nineties because you had three million internet users will work today because you have three billion.”
On Market Leaders And Identifying Market Leaders:
“In marketplaces, winners historically take 90% of market share. It’s great to be market leader because you can raise capital on much better terms. One percent of Uber is worth all of Lyft, which is an unfortunate place [for Lyft] to be in. Being second is being last. Marketplaces are owned by the people who have the largest supply.
“...Market leaders have always gotten a huge premium, but when the market is unclear it feels very cheap. With superior data sets and a little statistical analysis, I’m able to come up with very contrarian ideas that have proven right, like solo founders are not necessarily a bad thing, that they’re often a very good thing. ...Most of the valuation is in speculation that’s not backed up by any science or data and with a little data the results can actually be quite shocking."
“In the cloud storage space most VC firms passed on Dropbox arguing the market was too competitive, there were too many players, it was too confusing. That’s actually generally the hallmark of a great market, where there’s no clear leader. In the case of say a Dropbox, Drew [Houston] just came in a built a product that was 10X better than everything else and everyone was confused about what to use because everything else was so terrible. Now he has 40% of the market share with Dropbox.”
On What He’s Learned From VC Investing:
“My biggest mistake [in earlier investments] was thinking about price as an important variable; now I think about market size and killer founders, people who are maniacally obsessed with their companies. You can identify these people quite easily and if you throw them at a large market they typically have great success.
“I think the biggest mistake investors make is that they just don’t think about the size of the market. They invest in things they use, and things that have no market at all, or a very tiny one.”
On Going Public:
“Historically people have gone public to alleviate the pressure on payroll, or to return money to LPs. Now there are a lot of other ways to do that. Instead of going public you can just go to the secondary market and cash out your employees. [Once they go public] many folks just start living quarter by quarter and not thinking, ‘What’s our 10-year vision of what we want to do?’ Still, some companies want to go public because it’s a very powerful signal that, ‘Look I’ve done it!’ Many never will go public because they don’t need to."
“The ultimate problem with going public is you have a new set of bosses and competing quarterly numbers. That might not be the right move. Nobody would do anything that would cannibalize their existing high margin existence. I would stay private. I tell people to stay private."
“Public companies don’t value innovation. Steve Jobs was fired from a public company.”
Trusted Insight also hosted a breakfast featuring Mr. Bernstam in San Francisco on October 6.
And who better?
Not only has Bernstam, a Palo Alto native, been stunningly successful as a founder of venture-backed start-ups, he is also currently invested in some 50+ start-ups, which seem to be on track for their own outsized returns.
Tikhon takes a unique approach to angel investing, helping to grow the companies he’s invested in by hiring the best available talent (often luring people away from competitors), supported by wads of cash and even an 18-bedroom building he bought for those hires new to Silicon Valley who need a place to stay.
Topics of conversation at breakfast included market leaders, the biggest challenges to today’s venture capital-backed high-tech companies, differences between the dot-com bubble and today, alternatives to going public, managers’ fees and what would appear to be some really basic common sense practicalities about using data to inform investment decisions.
Here’s the short version.
On Differences Between The Dot-Com Bubble (1997-2000) And Today:
Bernstam pointed out that during the dot-com bubble the investment thesis was driven by the need for capital, while now it’s driven by the need for talent.
“Mark’s on the record as saying he could never have started Facebook today or last year because there is no talent,” Bernstam stated, referring to Mark Zuckerberg. “There’s tons of capital, but it offers no real advantage because everyone has the same hiring problem: they can’t hire. We’re trying to really actively invest in noncapital things that are holding companies back."
Another big difference: “I believe that half the companies were actually operating unprofitably. ...The difference is that today these are real businesses. What didn’t work in the nineties because you had three million internet users will work today because you have three billion.”
On Market Leaders And Identifying Market Leaders:
“In marketplaces, winners historically take 90% of market share. It’s great to be market leader because you can raise capital on much better terms. One percent of Uber is worth all of Lyft, which is an unfortunate place [for Lyft] to be in. Being second is being last. Marketplaces are owned by the people who have the largest supply.
“...Market leaders have always gotten a huge premium, but when the market is unclear it feels very cheap. With superior data sets and a little statistical analysis, I’m able to come up with very contrarian ideas that have proven right, like solo founders are not necessarily a bad thing, that they’re often a very good thing. ...Most of the valuation is in speculation that’s not backed up by any science or data and with a little data the results can actually be quite shocking."
“In the cloud storage space most VC firms passed on Dropbox arguing the market was too competitive, there were too many players, it was too confusing. That’s actually generally the hallmark of a great market, where there’s no clear leader. In the case of say a Dropbox, Drew [Houston] just came in a built a product that was 10X better than everything else and everyone was confused about what to use because everything else was so terrible. Now he has 40% of the market share with Dropbox.”
On What He’s Learned From VC Investing:
“My biggest mistake [in earlier investments] was thinking about price as an important variable; now I think about market size and killer founders, people who are maniacally obsessed with their companies. You can identify these people quite easily and if you throw them at a large market they typically have great success.
“I think the biggest mistake investors make is that they just don’t think about the size of the market. They invest in things they use, and things that have no market at all, or a very tiny one.”
On Going Public:
“Historically people have gone public to alleviate the pressure on payroll, or to return money to LPs. Now there are a lot of other ways to do that. Instead of going public you can just go to the secondary market and cash out your employees. [Once they go public] many folks just start living quarter by quarter and not thinking, ‘What’s our 10-year vision of what we want to do?’ Still, some companies want to go public because it’s a very powerful signal that, ‘Look I’ve done it!’ Many never will go public because they don’t need to."
“The ultimate problem with going public is you have a new set of bosses and competing quarterly numbers. That might not be the right move. Nobody would do anything that would cannibalize their existing high margin existence. I would stay private. I tell people to stay private."
“Public companies don’t value innovation. Steve Jobs was fired from a public company.”
Trusted Insight also hosted a breakfast featuring Mr. Bernstam in San Francisco on October 6.