Scott cooper, what does a Venture Capitalist do . Basically what we do we provide money to companies that are trying to grow and hopefully become very Big Companies like a facebook or google or an apple someday and every doing our jobs correctly, were helping them grow the company so we dont obviously work in the businesses but we can provide and navigate new challenges as they go through the business, we like making ourselves as a money provider and a supporter as a business growth. Why can a company such as the one you described go to a bank and go through traditional avenues . A good question, the problem is most of the business we invest are very risky businesses that lose money for a long period of time as they invest in the business and banks unfortunately are not in the business of doing that or taking risk of losing the capital, we are willing to take that risk and about half of what we invested we will ultimately lose all her money and any bank to your promos will not be too excited back in adventure. Weight is the original money come from that you give to these companies. The way it works we go out and raise money from a couple different folks the University Endowments are big source of capitalist if you look at stanford or yield their large endowments and invest those turner return and that money goes to help subsidize the cost of supporting the University Large foundation so nonprofit organizations like a Florida Foundation for example in another example of an investor, what these companies are doing are trying to use venture as a way to drive a very high rate of return in the portfolio, they are looking for us to generate 25 or 30 returns annually for their business and as part of a broad portfolio they will have Venture Capital, stock, bonds and this is definitely high risk but the high reward portion of their portfolio. What is a normal pitch like . It is fun, its usually a few members of the Founding Team a common, often they have a Powerpoint Presentation so they generally havent built upon this time and its really an opportunity for the opportunity or to tell us about the expansive vision for the company, how big can the Market Opportunity become a workaday look like a skill for gets there and why is this team the right team to be able to go after that. Its a very fun intellectual process by which we get to learn all new interesting things and make a decision about whether this is a team for the particular opportunity. Is d. C. Unique to the tech world . It is deafly the case that not all Venture Backed Companies are Tech Companies but its also the case that many of the Companies Take Venture Capital are in fact Tech Companies, its not unique but it does require a type of financing like venture which is the willingness of somebody to take a chance on something where the odds of success are extremely low and hopefully that works the payoffs are very, very high. In our business, one or two companies in our portfolio will drive probably the line share of returns and we have in the rest of the portfolio probably does not confirm you that meaningfully, you have taught that level of Risk Appetite to be in the business. Your new book is secrets of sandhill road, where is the nletter road and wiser significant . It is in menlo park california which would not otherwise know except for the fact that a mile or two east sandhill road is more famous which is du Stanford University, you can think of sandhill road as a music row in nashville or wall street in new york, its a bit of a mythical place where happens to be a lot of Venture Capitals congregate but if not anything that exciting to write about, its a twostory, buildings but has to be lots of capital and lots of opportunity for entrepreneurs. It looks like a bit of an Old Industrial park, its liam thats been known from the very beginning from Stanford University and there arent any fancy highrises, its a lot of twostory building, i think maybe and partly there may have been zoning restrictions but also its upstage but a more famous neighbor which is Stanford University and the university always had intentions to make sure sandhill road was less than University Campus itself. He of the managing partner of Anderson Horowitz which is . Sorry yes, we are a Venture Capital firm, we do the things we talked about earlier in the interview and we invest in very early stage Startup Companies and hope that over time we can help them grow in a very large business, were about a ten billion dollar business we raised about 10 billion while hundred dollars over history from the limited partners we talked about and again, our job is to be on top of the most interesting things happening in tech and entrepreneurship in particular those businesses that have software as a foundational component to them. Whats a technical or legal explanation of what a limited partners . A limited partner is somebody whos an investor like ours and the Legal Definition means there truly limited in the sense they dont have control over the investments we make, they dont have control of whether we sell the investments, there essentially a passive investor, they give often money and we have an obligation to be a fiduciary of that money and earn a good return for them but the decision about what companies we invested and when we choose to sell, those things are 100 in our perfume. Whats a typical day for you . Usually we will be seeing a couple different pitches on a day and that means we might have hourlong meetings with entrepreneurs and for working on deals, we will often be doing diligence so somebody we met earlier and now are getting closer to think about a deal so will dig into their business in greater detail to understand the product in more detail, maybe the financials in more detail, then we also spent a lot of time building relationships, huge part of the business is being wellconnected into the entrepreneur ecosystem, understanding what professors are doing at different universities and irrelevant for some of our companies and we spent a lot of time on outbound relationship activities. What is your expertise that you bring to this position . I have been intact for 25 years, was a banker in my early days and then i was at a Startup Company for about nine years that got sold to hewlettpackard and now ive been in the business for ten years, i think what i bring is really an appreciation for the Capital Market in the financing side of businesses but also appreciation for what it means to be in a startup building process and i hope what that means, not only does it provide empathy and respect for the october neural process but also allows us to be better investors are more patient and understand and recognize that these things dont go up into the right all the time and starting a company is a series of ups and downs and i think we bring a discipline and patience to that investing process. Scott cooper, often there is not a product associated with the pitch, is that correct . Right, there is a product idea usually but its often the case that at the early stages there is no product that has been built, what were trying to understand from the entrepreneur is not necessarily what is the final product but tell us what the ideal means, how did you think of the idea for the product, how do you believe the market needs are, we recognize that companies will pivot and they will change over time as they get products into market and we recognize as part of the process and we want somebody who is capable of the data points of the market and being responsive to what the needs are for the market as they build the product. When it you lost record. It is funny, we dont actually think of it that way, the honest answer is is pretty poor if you looked at it that way, we generally and on about 40 50 of the things we invest, we have a polite way of calling them in. Capital which means we lose all of our money and typically about 20 40 you make a little bit of money and the real difference between success or failure is what happens with the remaining ten or 20 of companies, do they become a facebook or google or something where you might make 25 50 100 times your money and thats the way the business works, the wizard measure recent success is total return but theyre driven by a small number of companies. If youre a 10 billiondollar company and you had successes, what is one you can tell us about. Sure, we had nice successes, ill give you a great example, Public Company to date that people may know about, this is Enterprise Security space, we invested in that company for the first time in 2009 it was our First Investments when we started the business and it was a seed investment, we put about half a Million Dollars and to get the two founders an opportunity to build out their idm product and over the years we invested more money as another Venture Capital but it went public about a year end half ago and if you look today is a 10 12 parking cap company, thats a great example of the success when you have something weve been working from inception and the Founding Team there has done an incredible job in building up what is a sustainable freestanding and valuable business. I apologize if i missed this, what is it that they do or make . , they are a software company, to way to think about what they do, if your business, you might have lots of cloudbased applications which means applications that you are not running on your premises but running in the cloud scene might have gmail for example for email, you might use salesforce. Com for your sales, you might have a software that manages your marketing, although software is, because they run in the cloud, every user has to be able to log into those and have security controls around their ability to access applications. What opted does is provide a single signon into those applications so instead of having to know your password for the applications, you log into optout and it directly manages your access into all those applications. It is a tool that the it department will used to manage security in their top, meaning user and when we hire somebody what applications we can give them access to somebody leaves the firm, how do we remove access its a tool to manage security and User Administration for a variety of applications. For those of us of a certain age, like General Electric and ibm, florida, those are names were familiar with, where did that name come from . Its a very good question, i dont know the origin story, i will look that up for you and drop you a note on it. I wish i had a better answer, unfortunately i think you stumped me. Is Silicon Valley successful because of Venture Capital . No, Silicon Valley is successful because of entrepreneurs who built the businesses and willing to take the risks that it entails, and building something as we talked about might have a ten or 20 chance of success, Venture Capital is an enabler of onto burnell activity, where financing source and hopefully we can add value to these companies but we should not get ourselves at the end of the day, the innovation of the development of these Companies Comes 99 from the hard work and efforts of the auto burners putting in. One thing that you talk about in the secrets of sandhill road is that products or ideas are often quote ten years ahead of their time, what do you mean by that . It is funny, you see this recurring theme that this is it did not work at some point in time and later it will work, let me give you an example, you might recall a company which was in the 98 99 timeframe and it was basically trying to do grocery delivery and the way they were doing at the time they were building massive warehouses in order to stock all the produce in the materials that they needed and they would use vans, literally as the name implies to deliver the two people and provide delivery, was a Wonderful Service for people but it was a small Market Opportunity because the number of people who thought about the idea of Home Delivery for groceries or willing to use their computers at the time because cell phones did not exist to do the ordering was not that big of a company and the company was not successful. If you fastforward to today, were an investor called insta cart which is doing the same idea but executing in a very different way, there executing it with a workforce that is in many cases part of the gig economy, people are independent contractors on their own doing this, theyre not stopping, the supermarkets himself but partnering to get access to the produce in the things they need and they have the benefit of the iphone revolution which means a lot of things people would not have done at the desktop and theyre willing to do on their mobile phone, its those examples of things were in new technology can create a market and expand the market in a way that cannot exist in a prior timeframe. When it comes to an insta cart or awk to, number one do they go to other Venture Capitalists as well besides yourself . Yeah they do, the way the business works, people raise money in different rounds and rounds correspond to the scale and development of a company, often people will raise our first round of financing and that will last them 18 20 per month on average and they will raise another round of financing and if theyre doing well, the valuation will be higher on the second round of financing, in general for each round of financing, the early stage there tends to be one major investor and if youre lucky enough to have the opportunity will be the major investor but when they raise subsidence rounds of financing if the case that additional will be part of the company. We have an interesting relationship with our Venture Capital firms in the industry, we are partly competitors and that there are deals and rounds that we will directly compete against but many times reporting with other Venture Capital firms because were investing alongside an earlier round or later round with the same company. Do you have a cease on how the business operates during the first round of financing . Yeah, the way our business works, we have a set of governance rights that are attached to the financial interest that we invest in the company, often we will sit on the board of the company and will have the right to duties that a board member might have to obviously make decisions about whether the ceo is appropriate for the business or strategies the company may be doing and we also tend to have a stock that allows us to vote for things like will the company raise more money or is a Company Going to sell themselves, those types of things we have a say in that we dont govern them completely, obviously the founder of the company and the shareholders have votes of his well but theres a balance of power that comes from the governance structure. Do you have a say so in a company like auctor or insta cart today now that their freestanding company . Or have they pay back their money and youre gone . Yeah, they dont pay back their money, the way they work, we own equity in stock in the company, in the case of auctor when they go public, we have the option if we choose to sell the stock and thats how we would make a return on our investment. And knocked his case, we have one member of the board, our founder is on the board and are typical and low that we will stay on the board for some period of time after these companies go public but over time look to exit the boards of these companies and become more mature, today are only say, one of many Board Members and we own stock like any other stockholder we can vote through proxy for other Corporate Activities that require a type of vote. Mr. Cooper, then horowitz and mark injuries and are legends in Silicon Valley, arent they, who are they . Mark andreasen, people might remember was originally made his fame as a founder of netscape back in 1983 which was the First Company to commercialize the web browser and it went public in august of 1995, heralded what many people had the tech moderate the start in the early 90s. He has gone on to be involved mark has gone on to be involved with other important companies. He was on the board of ebay and hewlettpackard. An important inventor and lucky to have him as a partner of ours. He ran a number of products on behalf of mark, had Close Friends and colleagues, they started a company in 1999 called loud cloud which many had not heard of but we were trying to build something akin to what Amazon Web Services does today so think of it as computer on demand. It is a good example of a company that was probably a few years too early but now seems like a very successful idea so that was cofounder of that business which was a very successful business and he and mark in 2009 took entrepreneurial steps and turned themselves in to Venture Capitalists and helped grow the opportunity for other entrepreneurs seeking to build new businesses. Host does netscape exist today . Netscape does not. It was sold to aol in 1998 and the netscape browser doesnt exist today. Kind of the main browser mostly by using todays Google Chrome or the apple Safari Browser but most of those browsers and their progeny to the early netscape days. Host one of the realities and criticisms of Silicon Valley entrepreneursshould today is inventors or entrepreneurs who come in with a product that they are hoping will be sold to a Larger Company or a Larger Company will buy that product so theres less competition. Guest we are not interested in backing companies where their goal is to try to sell the company. The reality is that does happen many times, probably 80 of the excess in our business when a company is exiting happened through acquisitions but when Companies Start we want to believe that they are going after an opportunity that is big enough in a product expensive enough that they can support a Standalone Company and go public, you are right which is acquisitions do happen. I dont think about the the anticompetitive we are happy to see new innovation, it is certainly the case that Larger Companies will acquire younger businesses but often another Company Behind them is going after another segment. The fact that acquisitions exist has had an impact on the rate of company formation. We are privileged to see new opportunities still happening. Host is the culture of Silicon Valley, the work culture there, something you have to get used to . It is a hardcharging culture no doubt, people working hard, have high dreams and aspirations for what they are trying to build and it does mean people probably spend more hours at the office than they otherwise would like to but it is also a very Competitive Labor market in a positive way which is there are kinds of different opportunities and job mobility is extremely high, puts a premium on culture within the company which is its the ceos and Management Team doesnt do a good job of helping people who want to achieve a Work Life Balance do so, there are so many opportunities that keeps the market in check. Host can you pitch an idea to the Venture Capitalist on sand hill road if you live in fort wayne, indiana or louisville, kentucky . One of the things weve seen in the us is it is very geographically concentrated so new york, california and boston make up 70 of the total Venture Capital dollars invested every year. The answer is you can and we are very interested in talking to those entrepreneurs. Often what happens in those local markets, the very early Stage Capital will come from those local markets and if they dont have larger firms you will see those Companies Come out to new york, boston, la or other places where there is more concentration of larger funds that can do the next financing rounds for those businesses. Host in your book you talk about the fact that microsoft and facebook were dc funded companies and the difference in return for those two companies. This is a real interesting phenomenon which is the average time it takes the company from founding to go public has doubled over the last 15 years. It used to be the case the companies would go public 6. 5 years after founding, now those numbers are roughly 10 or 12 years. The reasons are probably beyond the scope of our conversation today. Microsoft went public at a 350 million valuation, today microsoft is over 1 trillion valuation and all that growth for 350 million 1 trillion happen in the Public Market and include the benefits of all Public Market investors. The mental exercise i talk about in the book is if facebook were to grow at the same level of appreciation, it would be worth more than the entire global gdp, we are probably not going to see 3000 times growth in facebook over history and obviously those are extreme examples but they point out in important thing about the industry which is a lot of money that used to be happening is a lot of growth happening in the Public Markets are now shifting to private markets. As a policy matter that is the problem, less growth means normal investors to invest in retail accounts or their 401 k accounts are missing out on appreciation opportunities and i would like to see us have more back roads happening more evenly between public and private markets. Why are they staying private longer . Guest there a lot of things, the most significant is the fcc many years ago if you look at the data started to introduce a lot of efficiency markets in Public Markets do exactly that, make the markets more efficient and this is not at all a problem with the sec. If you look at the amount of money it cost to trade stocks today, the expenses Retail Investors bear, all of those have been going in the right direction the last 20 years so it is a wonderful thing. The challenge is that works well with very large and highly liquid stocks but when you have smaller stocks that arent as liquid that market has become more challenging so if you are a sub milliondollar market Capitalization Company in the Public Markets you dont have Research Analysts covering your company, you probably dont have sales and trading at banks talking to the Institutional Community about buying your stocks and as a result therefore the stock doesnt trade very well, what we call not very liquid. That is an unattractive place for people to be and therefore companies are staying private longer in order to get a larger scale in larger market and in the last 50 years the money has followed that so the Public Market investors have recognized that and that is why you see mutual funds like fidelity, investing in private companies as they recognize growth they have to go into private markets because of the cycle to get into the Public Market. Host are you still the wild west in the sense that you are outside a lot of the regulations banks etc. Have to face. Depends on the type of Venture Capital firms so we are called registered inventor advisor, it is the way hedge fund would be regulated or another private equity firm and we are subject to sec coming and visiting us, a number of compliance rules, number of Venture Capital firms have lesser regulatory scrutiny, really a function in our case of the types of investments we are doing, we need to subscribe to a higher regulatory, not that they are regulated that way. They ultimately, our responsibility at the sec, fraud or other bad behavior, they have majority was very scrutiny than a bank or other institution. Host what products are catching your eye . What are you looking for . Guest it is very interesting. We have lots of ideas where the most exciting things will be, one great area we are spending a lot of time is the intersection of Computer Science and life science. Theres a whole new set of companies trying to generate new drugs or create new diagnostic tests for disease were they are using components of Computer Science for that process. Things like Machine Learning that can improve the learning ability of computers to detect cancerous cells in a blood sample for example. That to me is one of the most interesting areas, the other part of our business is we need to be just open to meeting with different entrepreneurs and understanding the ideas that because we dont believe we are smart enough to know all the greatest trends will be important for the next 10 or 20 years so a lot of our business is just getting ourselves in front of really smart individuals doing the cutting edge work in software and for us to do the diligence to determine do we think that business has a chance to grow into a large and selfsustaining company. What are the Lessons Learned from the 1990s . Good things to talk about. The lessons of the 1990s mostly a lesson of i would call market size and the ability of businesses to sustain themselves profitably. I always like to talk about we talked about netscape really. When netscapes old self to aol in 1998 the entire size of the internet population globally was less than 150 million people. People were using these horrible screeching dialup modems to get Internet Access so if you think about that, a company like pets. Com which is been in the news of late because we had a recent ipo of another Company Called chewy. Com. No matter how great an idea it was to have dog food online could never be big enough to acquire enough customers and sustain the individual economics for the business and ultimately that business failed but the big luck of the 90s is the size of the market really matters because it drives how costly it is to acquire customers, how many you can get to and ultimately how much profit you can derive from those companies. A different example, we often live in a world where sometimes we willfully suspend disbelief to go along for dreams a defendants have, theres a difference in my mind between what appears to be in we will see as the sec does their work, between fraud and misleading people versus having big dreams and ultimately failing be able to accomplish those dreams so the lesson for all of us is just making sure we fit those dreams appropriately and understand the difference between an ambitious plan that might be feasible and one that might have bad behavior associated with it. Host scott cooper is the managing partner of Anderson Horowitz and is the author of secrets of sandhill road Venture Capital and how to get it. Thank you for being on the communicators. All the communicators are available. 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I hope this gives us an opportunity to go back and reassess in a way
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