20 VC 055: David Pakman @ Venrock on The Future Of The Music Industry

Quote of the Day: 'A great entrepreneur has the ability to bend the world to their will'. David Pakman, 20VC David Pakman is a Partner at Venrock, having spent the past 12 years as an internet entrepreneur. This includes David's appointment as CEO of eMusic, the world’s leading digital retailer of independent music, second only to iTunes. Prior to joining eMusic, David co-founded Myplay in 1999, which he later sold, in 2001, to Bertelsmann’s ecommerce Group. Before Myplay, he was Vice President at N2K Entertainment, which created the first digital music download service. If that wasn't enough David is also the co-creator of Apple Computer’s Music Group. In Today's Episode You Will Learn: How David started his career as an entrepreneur and later made the move to VC? How David found the transition from entrepreneur and CEO to being a VC? What is the main value add that both Venrock and David provides to their investments? What makes a great entrepreneur for David? How long do VCs need to know entrepreneurs before making investments? What 3 tips would David give for best sourcing deals as a VC? What areas does David believe are soon to be disrupted? How does David predict the next big industries to be disrupted? What did David think of Jay Z's launch of Tidal? Who will dominate in the music streaming sector in the coming years? Items Mentioned in Today's Episode: David's Fave Book: Mindset by Carole Dweck David's Favourite Blog: Ben Thompson's: Stratechery Dollar Shave Club: Shave Time, Shave Money YouNow Tidal: High Fidelity Music Streaming As always you can follow Harry, David, The Twenty Minute VC and Venrock on Twitter here!

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  And we are back in the land of New York City for episode 54 of the 20 Minute VC with your host, Harry Stebbings, and I cannot tell you how excited I am to welcome today's guest. I've been a huge fan and admirer of his for a long time now. It is, of course, the legend, David Pakman, partner at Venrock. Prior to Venrock, David spent 12 years as an internet entrepreneur. He was the CEO of eMusic, the world's leading digital retailer of independent music, second only to iTunes. Prior to eMusic, David co-founded MyPlay in 1999, which he then sold to Bertelsmann E-Commerce Group. And if that wasn't enough,

• 0:40Harry Stebbings?

  the legend David was also co-creator of Apple Computers Music Group. But before we delve into today's amazing interview with David, are you looking at an inbox full of candidate applications and feeling a little overwhelmed? Well, head on over to HiringScreen. Their Blink algorithm allows you to build your job by selecting criteria such as work experience, qualifications, and many more. And then let Blink do the heavy lifting by scoring each candidate against your requirements and displaying every candidate in order of relevance for the job. But ladies and gentlemen, the time has come. Without further ado, it is the legend, David Pakman.

• 1:24Speaker 01

  You have now arrived at your destination.

• 1:26Harry Stebbings?

  David, welcome to the 20 Minute VC. It's a great pleasure to have you on the show. I'd love to start off by hearing a little bit about you and your start in the entertainment industry, and then how you made your move into the VC world.

• 1:41Speaker 02

  Well, okay, you want me to sort of go back to where it all started?

• 1:44Harry Stebbings?

  Let's go back to where it all started.

• 1:46Speaker 02

  Okay. I have a computer science engineering degree from Penn, and I went to work for Apple right outside of school. I was a product manager for a bunch of different OS releases. And then I started the music group at Apple, which was just a personal passion area of mine. After a couple of years of doing that, I moved into startup land and joined the first digital music startup that had been created in the sort of beginnings of the commercial internet. And then I started a company with a friend of mine. Called My Play and then I took over as CEO of E-Music after some friends of mine and I bought it from Vivendi Universal. After that, I joined Venrock and became a VC.

• 2:28Speaker 02

  I've been doing it for about seven years, focusing on early-stage startups and trying to apply some of the lessons I learned to help entrepreneurs build great and successful companies.

• 2:38Harry Stebbings?

  And how did you find the transition then from entrepreneur of a startup and CEO to being a VC? Was there anything that surprised you on entering the industry?

• 2:47Speaker 02

  I loved it because, you know, having done a few startups, the only challenge with startups is that you have to spend 150% of your time on essentially one market segment. And, you know, I'm intellectually curious and I saw so many different areas where there's explosion in innovation and disruption and I really wanted to be involved in more than one sector. And so, being a VC, you get to work with a bunch of superstar entrepreneurs, but each one is going after different markets and so you get to kind of spread your intellectual curiosity and learn a bunch in a bunch of different sectors. So I've really enjoyed that transition. The hardest part, though, is appreciating that you're not the one in charge anymore

• 3:32Speaker 02

  and that the CEOs that you're backing are the ones who are in charge and you can give them advice, but ultimately they have to make all of the final decisions. And that's just a transition I think that most people leaving CEO land and joining VC land have to make, but once I made that transition, it's been nothing but fun.

• 3:51Harry Stebbings?

  And how much of a role do you play in your investments and how do you hold back maybe if you're becoming too involved?

• 3:57Speaker 02

  Well, we try to be as involved as possible. We really try to be as helpful as we can be to CEOs. The Venrock goal usually is to be the CEO's first call when they need some advice or have some vexing... Challenge they'd like to try to resolve. And so we are very close with our CEOs and of course we're active board members. So I'd say we try to help a lot, but as I pointed out, we're not the ones who make the final decision. And so I think the best thing we can do is share our own experiences. And really what I try to do is help CEOs see around corners. You know, as a founder or CEO, you're massively absorbed in what's going on in the next thirty, sixty, ninety days at your company. But someone's got to be thinking about what's going to happen in the next six or twelve months.

• 4:40Speaker 02

  And that's something I try to help CEOs with.

• 4:43Harry Stebbings?

  And how many board, how many board seats do you hold then?

• 4:47Speaker 02

  I'm on about five or six right now.

• 4:50Harry Stebbings?

  And that allows you to be fully involved without being too overloaded?

• 4:54Speaker 02

  Yes, I'm also I'm looking at new deals every day, you know, trying to find more investments to make.

• 4:59Harry Stebbings?

  And being so involved in the music industry for a large part of your life. Did you, why, A, why did you decide two thousand eight was the right time to move away from music and into venture? And then second, is your investing strategy centered slightly towards the music industry because of your prior interest?

• 5:19Speaker 02

  Well, I, I thought, I think that I was, I had this luxury of having a front row seat of watching the first media industry get disrupted by the switch to digital distribution, you know, by the introduction of the commercial internet. And, you know, watching that up close, it became clear to me that the best way to participate in that disruption is as an entrepreneur, you know, being the disruptor as opposed to trying to survive the disruption. So it's much more fun to be the innovator than it is to be, you know, the company involved in a turnaround, struggling with change. And I've come to believe that fundamentally, I think, small companies are just much better at innovation than almost all large companies.

• 6:03Speaker 02

  And so if you're sort of pro innovation and pro disruption, the best place to be is in startup land. So I can't see myself ever working at a big company again.

• 6:12Harry Stebbings?

  And do you think that sector knowledge is very important then for you when investing?

• 6:18Speaker 02

  Well, I do think so. I mean, otherwise you're sort of investing blindly. We may never have as much knowledge of a sector as the entrepreneur who may have spent their whole career in a certain sector, but we do try to spend lots of time becoming expert on a number of sectors that we're focused on. And, you know, chance favors the prepared mind. We like to be really prepared so that if someone comes in in an emerging sector, we've got some understanding enough to be able to recognize that this could be a really exciting company.

• 6:50Harry Stebbings?

  And we always hear about, you know, the importance of great entrepreneurs and great teams, but what for you makes a great entrepreneur? What sets them apart from the rest?

• 7:02Speaker 02

  Really, the ability to bend the world to their will. We call them sort of force of nature CEOs. Look, it's it's super hard to to build a large and successful company from scratch. There's just too many things that can go wrong. And so I think the the most successful CEOs tend to be people who won't let won't let distractions and inevitable disappointments stand in their way. They're just relentlessly focused on finding their way to success. And that's a different type of person than someone who would give up more easily. And so I think the the best examples of entrepreneurs are people just

• 7:42Speaker 02

  who have a massive passion and a super strong belief that the world needs to be a certain way, and they go and try to build something to make the world that way.

• 7:52Harry Stebbings?

  And when you find those entrepreneurs, is it blatantly apparent, or does it come to you over a period of a few months of meetings?

• 8:01Speaker 02

  That's a good question. I think mostly it reveals itself in the early, you know, first and second meeting. But there are different ways to get to know someone, and it may take some time to truly understand someone's capabilities and outlook on life. But I think you learn about it pretty quickly, yes.

• 8:18Harry Stebbings?

  And what's the Venrock strategy in terms of timeline for investing? Do you invest kind of very quickly, or do you like to know the team for a year or two before making the investment?

• 8:27Speaker 02

  It's probably somewhere between the two. I don't think we need to know someone for a year before making an investment, and that would be a little bit unlikely, although it happens from time to time. But the ideal scenario is to have a few months of working relationship, either meeting the company before they're ready to raise money and helping them with introductions to key recruits, or potential strategic partners, or offering product advice, and being there to meet them when they're ready to raise money. That's the ideal scenario. They get a chance to get to know us, and we get a chance to get to know them.

• 8:59Harry Stebbings?

  And you said there about helping the team and the entrepreneurs. What would you say is your key value add to your portfolio companies?

• 9:06Speaker 02

  Me personally, or Venrock as a VC firm?

• 9:09Harry Stebbings?

  Let's go for you personally first, and then Venrock as a whole.

• 9:12Speaker 02

  Well, I don't know, this is a unique attribute, but I was a founder and a CEO, and I had to hire people, and I had to deal with the challenges of growing a company, and raising a lot of capital, and managing investor expectations, and dealing with competition, and dealing with inevitable team challenges, and having positive momentum turn into negative momentum. A lot of different things to manage. So, having gone through that, I feel like I'm well-equipped to empathize with these same challenges that an entrepreneur that I partner with goes through, and to help get through them, and say, here's some things that I did that were helpful to me, or here's some mistakes I made, let's avoid

• 9:57Speaker 02

  these. You might package all this up into something like wisdom or advice, but also, I think I try to be a real, strong friend, a partner, somebody who, where the boundaries of investor and CEOs start to melt away a little bit, and we can have a strong and productive relationship that is based on trust and mutual respect.

• 10:24Harry Stebbings?

  And I think it's fair to say that you've become a master of deal sourcing and finding those great entrepreneurs. What three tips would you give, then, on how to best source deals as a VC?

• 10:35Speaker 02

  I'd give none of those tips.

• 10:37Harry Stebbings?

  You'd give none of them?

• 10:38Speaker 02

  Because, you know, finding obviously great deals is a requirement for success. And I wouldn't want all my competitors to know what I do, but I'll I'll offer a strong point of view I have is that right now venture capital is super competitive. And it's a very efficient market at funding things that are working right now. So if you're a VC and your goal is to look for things that are exploding at this moment, that's a very competitive space and it's going to be really hard to find any value there and hard to win as a VC. So my goal is to find things that aren't happening yet, you know, really I would call them non-consensus investments.

• 11:19Speaker 02

  Investments where people, if you asked most VCs, they would probably feel like, no, that doesn't feel like that will work. And to have some unique point of view about why I think it will and make that bet. You know, I did that with Dollar Shave Club where very few people believed that that company could become as large as they have and could disrupt, you know, a traditional legacy shaving market, men's grooming market.

• 11:41Harry Stebbings?

  Sure.

• 11:42Speaker 02

  I did it with live streaming with YouNow where very few people believe that a bunch of kids talking to each other on through mobile live video was going to be big and, you know, a year later, everyone believes that.

• 11:54Harry Stebbings?

  And how does that inspiration come to you? Is that foresight just inbuilt within you, do you think? Or do you actively seek it out?

• 12:02Speaker 02

  You know, as you get older, I think you start to realize some things that you are good at. At least there's enough data points to say you seem to be consistently good at it. One thing I've been consistently good at is predicting things that I think are likely to happen based on technology trends. And it doesn't mean I've got some wisdom that other people don't. It probably means that I've just been around and been observing technology for a long time. But I do think certain things are predictable and it's clear that it will happen to us, but not everyone believes it yet. And so I try to use that skill.

• 12:31Harry Stebbings?

  And you mentioned there the explosion of VCs themselves and the funding. How do you feel then about the future of venture?

• 12:40Speaker 02

  I think like all industries, venture will be disrupted. It's being disrupted today. It's being practiced actually today differently than it was 15 or 20 years ago. And it'll probably be practiced five or seven years from now differently than it is today. So I do believe that venture is not unique and it will experience disruption through things like angel list syndicates and crowdfunding and even just the different data sources that many of us use to track the progress of startups. So it's likely to continue to change and VCs have to adapt, just like the companies that we expect to invest in.

• 13:20Harry Stebbings?

  And we talked a little on disruption. What do you think is the next big area to be disrupted?

• 13:28Speaker 02

  Well, I think there are quite a few, actually. You know, one area that we're really only seeing start to be disrupted in the last few years is just traditional brands that who sold to their customers through indirect sales channels like retailers. I'm confident that the only model that will really work in the future or the model that will work best in the future are brands that have direct relationship with customers. So I think we're seeing plenty of legacy consumer brands struggling to move from offline to online and at least from indirect to direct. I think media is in a complete fundamental platform shift from an age of scarcity to

• 14:10Speaker 02

  an age of abundance where you can't depend on exclusive content as a way for you to build your media brand. You have to build platforms on which other people create and share content. So those are two extraordinarily large industries that are in the early and mid phases of their disruption.

• 14:28Harry Stebbings?

  And thinking of disruption, I think Jay-Z would like to think that Tidal's disruptive. What did you think of their launch and their product as a whole?

• 14:37Speaker 02

  Well, I think the concept was flawed from the beginning and I think the launch was a disaster. But I'm certainly not alone in thinking those two things.

• 14:45Harry Stebbings?

  So why was the product flawed?

• 14:47Speaker 02

  Well, it just is not, it's undifferentiated. You know, this is a space that already has plenty of players. The basic service of providing streaming music on to mobile devices is a commodity today.

• 15:01Speaker 02

  And the notion of differentiating it by saying you should patronize us because the owners are, you know, thirteen or fifteen aging superstars is just not a consumer value proposition that anyone cares about. Now, I think they tried to say what that really means is we'll have some exclusive content. But artists really aren't interested in providing a lot of exclusive content to platforms that are small because they ultimately want to reach really large audiences. So I think Tidal's notion of exclusive content was somewhat doomed from the beginning. And I think the numbers show the product has failed. The social receptivity was really negative. And I think it will ultimately completely fail.

• 15:44Harry Stebbings?

  So will the exit be an acquisition, in small term acquisition, or will it just be a fail?

• 15:50Speaker 02

  Hard to say. I mean, I don't concentrate on how bad companies exit, but I just, this is not going to be a big success.

• 15:57Harry Stebbings?

  And I'd love to hear your thoughts then on the future of the music industry as a whole. With iTunes moving into iTunes Music and then Spotify, who do you think is going to win this battle?

• 16:07Speaker 02

  Yeah, I think as a consumer, the last five years have been the best time to be involved in music because there's an infinite number of ways to hear and discover new music. And now we can connect socially, online and discuss it. So it's a great time to have all these different choices of platforms. I think unfortunately, it's not a good time to be an independent provider of digital music, you know, to be a music service. Because as I said, they're largely commoditized. Almost no one can make money in them, none of them are profitable. So the, you know, the business models are sort of cursed from the beginning. And the only companies that are likely to succeed are the ones who really don't care whether they make any money from music, like Apple and Google and Amazon.

• 16:50Speaker 02

  So I think iTunes is likely to be successful. What does that mean? I think they'll have, I think there'll be a sustainable, long-term digital music streaming service. But I don't think they'll get much more than. You know, I'm thinking sort of thirty to fifty million paying subscribers over the next two years. So I think my prediction is that they'll fall short of their goal of a hundred million paid users. But it'll be a service that exists.

• 17:17Harry Stebbings?

  And then I'd love to finish the episode with a quickfire round where I say a short statement and you give me your immediate thoughts.

• 17:23Speaker 02

  Okay.

• 17:24Harry Stebbings?

  So my favorite question, your favorite book and why?

• 17:27Speaker 02

  Currently, it's Mindset, which is a book by Carol Dweck about the psychology of success. I spent a lot of time thinking about what does our mindset need to be in order to be successful and overcome odds stacked against you. And this is a great book that talks about the growth mindset. So I love that one.

• 17:45Harry Stebbings?

  The highlight of your career?

• 17:50Speaker 02

  You know, the favorite moment of my career was when I was with, when I was at Apple and I was pitching artists to work with us on our new streaming music network. And I spent the morning playing tennis with Roland Orzabal from Tears for Fears and I spent the lunchtime having soup in Peter Gabriel's kitchen at his studio. And those were two idols of mine. And that's a pretty good day.

• 18:18Harry Stebbings?

  That's a pretty great day. Yeah, no, I can see why you chose that one. And then favorite newsletter or blog?

• 18:25Speaker 02

  I like, I'm probably gonna pronounce it wrong, but Ben Thompson's a stretch, stratechery or stratechery, I'm not sure how he says it. I think he's an insightful observer of business models.

• 18:36Harry Stebbings?

  And then what advice would you give to yourself ten to twenty years ago?

• 18:41Speaker 02

  Find ways to be different from others. You know, really have an angle, think differently than others. Don't depend on or be influenced by what the popular thoughts at the moment are. They tend to be wrong.

• 18:57Harry Stebbings?

  And then finally, your most recent investment that you can say and why you said yes.

• 19:02Speaker 02

  That was You Now, and I've talked a little bit about it. I said yes because it's led by an extraordinary leader who's, I think, the one of the most thoughtful people about community live video. It's focused on teens, which I think is the demographic group that tends to catalyse the success of all social platforms, and it's grown like a weed.

• 19:27Harry Stebbings?

  Well, David, thank you so much for coming on the show. I can't tell you how grateful I am for you giving up the time today.

• 19:32Speaker 02

  It's super an honour to be a part of it, and thank you, Harry, for having me on.

• 19:36Harry Stebbings?

  For all the items and resources mentioned in today's incredible episode with David, head on over to the blog at www.the20minetc.com. And I'd like to say a special thank you to HiringScreen, whose Blink algorithm means I spent a huge amount less time sorting through irrelevant CVs when it came to hiring my assistant, Jackie. This allowed me to make what hopefully you all think is a good show in the 20 Minute VC. I'm so grateful, HiringScreen, and thank you so much for listening, and we look forward to seeing you all in the next episode.