#113 Sarah Tavel: The Value of Intellectual Rigor

Sarah Tavel has spent the past four years as a general partner at venture capital firm Benchmark, after previously serving in the same role with Greylock Partners and as the first-ever product manager at Pinterest. In this episode Shane and Sarah how studying philosophy helped in her career as a venture capitalist, the value of intellectual rigor, her concept of the net-present value of pain, why every strength has a corresponding weakness, where executive boards go wrong, assessing the performance of a CEO, lessons of rapidly scaling at Pinterest, and so much more. -- Want even more? Members get early access, hand-edited transcripts, member-only episodes, and so much more. Learn more here: https://fs.blog/membership/ Every Sunday our Brain Food newsletter shares timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ Follow Shane on Twitter at: https://twitter.com/ShaneAParrish Learn more about your ad choices. Visit megaphone.fm/adchoices

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

• 0:00Speaker 00

  I'll describe what you see for the people who do scale. The founders who are not afraid to be vulnerable. They understand that they are works in progress and then figure out the ways to constantly grow, evolve, and push their own abilities. And it's the people who aren't willing to admit to themselves or whomever they work that they don't know something, or they're not letting themselves have that learning moment of accepting that they don't know something, that they tend to just hold themselves back and not scale as a company scales.

• 0:51Shane Parrish?

  Welcome to The Knowledge Project. I'm your host, Shane Parrish. This podcast sharpens your mind by helping you master the best what other people have already figured out. If you're listening to this, you're not currently a supporting member. If you'd like special episodes, access before everyone else, transcripts, and other member-only content, you can join at fs.blog/podcast. Check out the show notes for a link. My guest on this episode is Sarah Tavel. Sarah's a general partner at Benchmark. This conversation is interesting because not only is Sarah an investor, but she has significant operating experience in scaling as an early employee at Pinterest. We talk about how studying philosophy helped her as a VC, her concept of the net present

• 1:36Shane Parrish?

  value of pain and how it applies, why every strength has a corresponding weakness, where boards go wrong, assessing the performance of a CEO, lessons from rapidly scaling Pinterest, and so much more. It's time to listen and learn.

• 1:59Shane Parrish?

  You studied philosophy, not computer science or business. How has that shaped the way that you approach your job as a VC?

• 2:06Speaker 00

  Yeah, you know, it's funny, like, I think most people misunderstand what philosophy is. I think that people probably, when you say that you studied philosophy, they imagine a bunch of, you know, guys in three-piece suits, sitting around a table, drinking cognac and pontificating on the meaning of life. But it is a little different. You know, of course, philosophy is this big umbrella. But the type of philosophy that I studied in college was a very analytical version of philosophy, where, you know, it's underpinned by logic. And you learn a level of intellectual rigor that you don't even realize.

• 2:49Speaker 00

  It's kind of like you think you can be rigorous in your thinking, and then you have to write a philosophy essay, or read a philosophy essay, where you have to, you know, you're breaking things down into premises, you have to think through thought experiments to imagine all the corner cases, and preempt, like, any objections that someone might have on your argument. And the level of rigor that you learn actually has made such a difference in my life. Like, when I was doing product at Pinterest, you know, a product document, where you're making a recommendation on a product, is actually very similar to a philosophy proof. Like, you have hypotheses, you know, about how users behave, how they'll accept a different,

• 3:30Speaker 00

  you know, a new feature, what their intent is on the product. And you underwrite that with, you know, user research, experiments, analyzing the data that you already have. And it's, you know, if all these hypotheses are true, then the conclusion is that you should ship the product. And that's, it's a philosophy proof, but for product. And I think investing is the same thing. Like, when you're writing an investment recommendation, or thinking about a potential investment, you also, you know, really what it comes down to is a proof, in the same way, where you have the premises, which may be a belief that you have about the future, the kind of product-market fit, the founder-market fit, all these things that you, once again,

• 4:15Speaker 00

  underwrite by... You know, understanding the competitive landscape, talking to customers, looking at the data, all those things and trends. And if you believe all those hypotheses to be true, all those premises, then it follows that you should make the investment. And so it was one of those things that I never would have anticipated. You know, when I studied philosophy, it wasn't with the intent to go into venture by any way, or to go into technology even. But it ended up being an incredible place to learn how to be good at this job.

• 4:46Shane Parrish?

  Speaking of Pinterest, you led some acquisitions while you were there. What was that process like? Can you walk me through sort of like the end to end, all the way from identifying the acquisitions to integrating the cultures?

• 4:57Speaker 00

  Yeah, you know, well, the acquisitions that I worked on, it was was super early in Pinterest time. I think I did three kinds of the first acquisitions that we made there. And so they were primarily, with one exception, more just the talent. I have a hypothesis that I believe that founders are just a unique type of person, you know, they are, it's part of why I love to do what I do. It's, I think that it's just such a different DNA of person. And what tends to happen in a company, in a startup, or, you know, a company like Pinterest that's going through hypergrowth, is that you're constantly recruiting. And you have a recruiting team, and the recruiting team is doing everything they can to find

• 5:40Speaker 00

  the Google engineer, the Facebook engineer, the Twitter person, whoever it may be, and to have them come into the company. But it's all the same type of DNA. It's the type of person who joins a company at a stage where it's more secure, where you have a more specific role, you know, you're looking for a little bit more certainty and structure versus the person who's a founder. Like, they, you know, risk-loving, responsibility-seeking, it's not about what my job is, it's about what the company needs, you know, action-oriented, high degree of urgency. And so I think it's so important to constantly inject that type

• 6:21Speaker 00

  of DNA into a company through the entire life cycle of a company. I'm a huge believer, actually, in talent acquisitions for this reason, because it's just very, very difficult to recruit founders, because they're leading their companies. And so the idea with the talent acquisitions was let's find this type of DNA.

• 6:41Speaker 00

  Let's bring it into the company, particularly in, you know, types of strengths that we needed. For example, one of the acquisitions that I was most proud of was this visual search company. They had developed some computer vision technology. And that was something that Pinterest needed. We had no computer vision DNA. And bringing in that type of kind of founder orientation, it was like incredibly impactful for the company.

• 7:09Shane Parrish?

  What are some of the lessons you learned about scaling Pinterest that apply outside of Pinterest after you left?

• 7:15Speaker 00

  Oh, gosh, Shane, there's so many. You know, the first thing, and this is one of the things that the founders with whom I work hear me talk about all the time is that kind of what you measure matters. So, you know, I remember at Pinterest, at one point, our growth team decided that the metric that they were going to base their success on, their OKR on, was monthly active users, you know, so this lowest common denominator thing. If someone, a user comes to your product once in the month, they count as an MAU. And OKR is objective and key results. It's just a way for a company to have a team say, this is our main objective for a quarter, as an example.

• 7:56Speaker 00

  And the key results are the key projects that will move the metric on that objective. And, and what happens is that if you choose the wrong metric, so MAU is in this case, you actually end up optimizing for the wrong thing. You know, the product that you build, like you end up deciding on different features that you're going to build that optimize for something that's like top of the funnel base, as, as an example here. All startups are incredibly resource constrained, right? Like there's, even despite that there being so much capital of chasing startups, at the end of the day, you're still a capital constrained environment where, as a founder, you have to make sure that you're allocating your dollars in the way that will generate the most equity value for the company long term.

• 8:41Speaker 00

  And you just waste a lot of effort. It's a shame, really, when you're focused on the wrong things. When, when the growth team realized this and ended up changing their OKR to be what we called weekly active pingers, you know, actually making someone who signs up for Pinterest not just come to the site once in a month, but actually pin something once in a week. Their entire roadmap changed and we were able to make the users that were signing up far more successful and happier and better, better long-term engaged users. So what you measure matters is huge. And I'm, I have an allergy for vanity metrics. I, I can see a vanity metric a mile away and it's one of those things that I just think it's, it's, um, you know, it's just, it's back to that intellectual rigor of really

• 9:26Speaker 00

  being honest with yourself of what you're measuring and is it really the right long-term thing. Org chart matters too. Like, I think people sometimes see org changes as, as a bug, you know, as a, uh-oh, something must not be going right with my company, the company that I'm at, because we had to change the org chart and now I'm reporting to someone else or, you know, they had to change these leadership teams. But it's actually a, a sign that the company's growing. And, and it's sometimes I think of it as like setting a bone, like you have to constantly, as you're growing, you have to be able to set things in the right way so that the company's set up to be successful, to grow quickly, to be aligned, have the chart, the org chart

• 10:11Speaker 00

  actually be aligned with the strategy. And so it's just another one of those things where so many times I would see situations where the way that the organization was structured actually created a tax on our ability to execute.

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• 11:26Shane Parrish?

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• 11:27Speaker 00

  So, one example I'd give, the growth team wasn't reporting to the product team, to the product leader. And so, there was a point in time when the growth team at Pinterest was actually reporting to the marketing team. And so, you had a team that was separate from the product team that was making changes to the product and wasn't actually aligned with what the product strategy was going to be, what the priority features were for the product team. And it meant, because we were all making changes to the same products, we had to have a lot of meetings to coordinate. You know, there was no single leader who was the one who was, you know, making sure

• 12:10Speaker 00

  that everybody's strategy and tactics were aligned. And so, it got pushed down to the rest of the team. A lot of overhead, a lot of meetings, a lot of people with different incentives pointing in different directions, and it slowed everything down. And so, when the org changed so that the growth team reported to the head of product, everything just got streamlined and more aligned, and we all executed a lot better.

• 12:37Shane Parrish?

  Talk to me a little bit about some of the considerations of integrating founders into an existing culture, because that sounds like it's really good or really bad. Like, can you have a team of founders? Can you? How does that work?

• 12:49Speaker 00

  It's a good question. I think you'd be lucky to have a team of founders. All people that work in a company are on a spectrum. Where on one side, you have the founders, where their identity is the company, they... You know, they don't ask what their job is. They ask what the company needs. They work nights and weekends. It's like it's it's an all in pursuit versus on the other side of the spectrum, you know, to be as, you know, almost as hyperbolic as possible. It's like the mercenary, the person who will just go wherever they're paid the most. And when you, when you find those people who are super impactful on, on the founder's side of the spectrum,

• 13:30Speaker 00

  what is really important is that their identity, they want their identity to be the company. And so you have to make sure that they're really, really aligned with the mission of what you're doing. Because then they're gonna go all in on it. But if it's just, you know, grafting someone on because they want a soft landing for their company, but they don't really care about what your company is doing, then that feels like it's not, not a path for success.

• 13:57Shane Parrish?

  I'm curious, from the outside looking in, a lot of these tech companies, especially ones that have gone public recently, don't seem to generate any cash for their shareholders. In fact, they consume cash for their shareholders. How do you think about this? How do you feel this plays out? Like, what are your thoughts on this? Because you have a very different vantage point than I do from the outside looking in. You're the inside looking out.

• 14:19Speaker 00

  There's kind of two things that I think about there, Shane. The first is that there's a cash flow thing that you have to look at, which is, it may be that upfront, you have to invest money in, you know, in marketing and sales, whatever it may be, in order to sign a customer that will become very, very profitable for you over a longer period of time. And so even though there's burn upfront that you have to accept, over a longer period of time, it's a profit making machine. It's, it's a machine that you can put a dollar in and get five, $10, whatever it may be back. And, and when you have that type of machine, you want to be as aggressive as you can at growing,

• 15:02Speaker 00

  because it's going to be a positive IRR for you. And it leads to the second point, which is that, you know, something that I, I think a lot about and in the companies that I look to invest in is companies that can escape competition. You know, the companies that escape competition ultimately are the ones that get to a place where they're incredibly profitable, they generate a lot of cash for their shareholders, they are able to create great experiences for their, for their customers and, and, but you're not going to be able to escape competition overnight. There's going to be a lot of investing that you have to do in sales and product and, you know, the engineering side and, and more and more you have competition and they're going to be doing the same thing.

• 15:47Speaker 00

  They're going to be investing heavily and, and if you have a more efficient machine where you're able to, again, take that dollar and make, you know, five dollars, six dollars, whatever it may be, out of it, if not more, then you should be burning as much money as you can do efficiently to keep getting further and further and further away from the number two in the market. And so it's, it's a very rational thing to do, assuming that you have that machine that I described. There's a lot of people who think that they will have that machine. You know, that there's a little bit of, you know, believe me, that can happen where you don't quite see the contribution margin and, and someone might think, oh, if we get to enough scale, then the, the economics will start to work.

• 16:32Speaker 00

  Those tend to be trickier and there's a lot that you have to believe in terms of how the, how the competition's going to spend money, whether the economies of scale or network effects that they describe will actually come true. And those are, those are trickier.

• 16:45Shane Parrish?

  How, how do you, let's dive in there just a little bit because I'm curious how you determine the companies that are sort of using money to grow with this sort of like pain today, gain tomorrow versus companies that are using money to acquire customers but don't actually have a viable product, they're giving it away for free, or they're, the incentives are just so huge that customers are signing up for it, but they can't quite figure out that there is no runway there. How do you think about that? Or am I thinking about that wrong?

• 17:14Speaker 00

  So number one is that you're looking for early evidence that what the founder believes will be true. Which is that the contribution margins will expand over time, or that the cost to acquire a new user will go down, or whatever it may be, so that you can get to a place of profitability on a customer level. You're looking for evidence that that actually is starting to happen, that it's getting better, that you can see, you can extrapolate from the points that you do have, that there is a path there. The second thing is really just the founder's understanding numeracy of their business.

• 17:56Speaker 00

  You know, there's a very big difference between a founder who may, you know, they wave a little bit that this is the way it's going to be, and then actually seeing the reality of the numbers, and there not being a great connection between what the founder understands of their business and the facts, the brutal facts on the ground. And by the way, that kind of really facing the brutal facts, I think that's a Jim Collins concept that I love, is so, so important. And then there's the founder, I remember this with Francis, the CEO of Sonder, a company I invested in, that he just knew every number in his business, like, cold,

• 18:40Speaker 00

  and he knew exactly how he was going to make them better over time. And there was just a little bit of this feeling that here is a founder who is just a freaking animal, and they're going to keep on going up this curve, and you can extrapolate from where they are, that they're going to make it happen.

• 18:57Shane Parrish?

  What are the things that you see yourself saying over and over again across the different boards that you're on?

• 19:04Speaker 00

  So, one of the first things I say is this kind of concept I call the net present value of pain, which is, you know, when you're running a company, there's so many decisions all the time. That you need to be making and so many optimizations. And a lot of times, there are some decisions that you kind of want to procrastinate on. It may be a decision to cut a product that you had loved and you don't pursue. More often than not, it's people things. Someone who's not scaling in their role and has to be leveled or let go.

• 19:41Speaker 00

  And what I always remind founders is that pain today postponed until tomorrow is going to be harder. It's like taking a loan out on the pain. And particularly in the early stages of a company, if you have the wrong head of product and you know it, but you're like, hey, I'm just going to wait a few more months until I get this other role right before I address this thing. The compounding problems that happen, that you ship the wrong things, you hire the wrong people. Like the problem, you have to nip these things in the bud. Otherwise, there's these cascading effects that happen that make it a bigger and bigger deal when you actually get to that decision.

• 20:26Speaker 00

  Another thing I always remind people of is something I learned from my partner at Greylock, Reid Hoffman, which is that every strength has a corresponding weakness. You know, it's one of these things where I think a lot of times, you know, people in a company, one of the examples I always give is the difference in an org structure, as we talked about before, between an org structure that's more centralized, you know, where there's more of a command and control. Everybody's moving to the beat of the same drum versus a decentralized org, where you have more autonomy at the edges of an organization. They can move quickly. It works a lot for companies that have more local businesses like an Uber.

• 21:09Speaker 00

  But there's a corresponding weakness to both of those types of organizations. For the decentralized org, what tends to happen is people aren't coordinated and they end up building some of the same things or potentially have conflicting things. There's, you know, every team is building the same marketing acquisition engine, where like if you brought that centralized and maybe you'd have some economies of scale. But you know, sometime, and on the centralized thing, it can feel like there's no redundancy in the things that people are working on, but it's slower. And what sometimes happens in a company is that they, you know, employees, and I remember this at Pinterest, feel the weaknesses of the approach instead of the strengths.

• 21:54Speaker 00

  You might not realize, you take for granted that the decentralized org is helping the company move really quickly and like have very autonomous teams that are very focused on the local situation, but instead what you feel as an employee is the chaos of, oh my God, we're all building the same thing that's slightly different, like, isn't that a waste of resources? And so it's helping people take perspective that the strength of an approach has a weakness that you can't separate. I think it's also, you know, when we think about ourselves as people, you know, I used to always think, oh God, I can't remember people's names, you know, I'm like really

• 22:37Speaker 00

  bad at trivia and remembering facts. And then I realized that actually Myers-Briggs helped me realize this, that it's, you know, I'm not an S, I'm an N, you know, like the N is the abstract thinker, like that's my strength, I'm an abstract thinker. And the strength of being an abstract thinker comes with the corresponding weakness that I'm terrible at people's names and you would never want me on their trivia team. And for founders, they have these things all the time where the founder who is incredibly operational and like just, you know, a machine in terms of executing may not be the most strategic person and the other way around. And so it's always, you know, accepting and realizing these two things come hand in

• 23:22Speaker 00

  hand. And then as a founder, just surround yourself with people who have the strength that you don't and you're going to have a great, a great team.

• 23:30Shane Parrish?

  One of the things I want to come back to that you said was sort of identifying people that can't scale in their role. What are the early warning signs that people can't, aren't scaling in their role, that there's problems on the horizon, that action is necessary?

• 23:44Speaker 00

  I'll, I'll describe what you see for the people who do scale. Which is, they're just learning machines. You know, it's such a growth mindset thing where everybody has different ways of learning. Like I have, one of my founders is a PhD and he's someone who, his way of learning and pushing his, his horizons and what he's able to do is to, is to read, is to study, is to kind of, you know, he's a learning machine from whatever he can consume in terms of content. Some people, you know, their way of learning and pushing their own envelope is to surround themselves with CEOs that are a step ahead of them and, and find great mentors who, who

• 24:28Speaker 00

  push them and hold them accountable. Some people might, you know, find coaches, you know, that actually help them through that, but the founders who I see, the founders and, and leaders are not afraid to be vulnerable, like that they understand that they are works in progress and, and then figure out the ways to constantly, constantly grow, evolve and push their own abilities. And, and it's the people who I think aren't willing to admit to themselves or whomever they work, that they don't know something or they're not letting themselves have that learning moment of accepting that they don't know something, that they tend to just hold

• 25:12Speaker 00

  themselves back and, and not scale as a company scales.

• 25:16Shane Parrish?

  A couple of podcasts ago, I was talking with Chris Cordell, who is the Chief of Staff to Stuart Butterfield at Slack, and she's, she mentioned something, and I'd love to hear your opinion on this, where when you identified somebody who didn't fit the role, she said, just let them go. Don't transfer them internally, don't give them another job. How, what do you, what's your reaction to that?

• 25:37Speaker 00

  I would, I would say that's right 95% of the time. Like all, all rules, sometimes you should break it. Particularly, you know, at the early, early stages of a company, when you're going through hypergrowth, you're, you're bringing in these, these athletes and, and the company gets more specialized over time and, and so roles have to evolve. But, but I absolutely agree, you know, the 95% scenario. There is a non-confrontational weakness to this kind of transfer, which is that you're telling someone, hey, not that I don't think that you're scaling with the company, but hey, let's find another role for you in the company and you can become

• 26:18Speaker 00

  someone else's problem. Or, you know, it's, one of my partners, Eric Vishria, has told me this framework that he had at LoudCloud when they were hiring, which was that they would interview people and they would rate someone on a scale of one to 10. And you had to be an eight, nine, or 10, average, in order to be hired. And, and the thesis was, is that sevens kill companies. And what that means is that, you know, when someone is a four, you just know they're not doing the job, they're not up for it, and let's, let's take them out of the system. But the problem with a seven is that you don't get

• 26:58Speaker 00

  to that point, because that person will have glimmers of being able to do the job, they'll, maybe they'll be super cultural carriers, they'll have these things that are redeeming. But because they have those things, two things happens. One, there's an opportunity cost of that seat, of course. Like, when someone that's a seven is holding the seat, it means that you don't have a nine having that seat. And two is that, and I see this all the time, is that the execution of a team is often brought down by the weakest link. And so an entire team can be brought down by that seven. And so, kind of back to that point of transferring someone, if they were a seven, or worse for that role, the, you

• 27:42Speaker 00

  know, the probability that they're going to be a nine somewhere else, like, you have to really be, you have to have real conviction that that's going to be true. Otherwise, the most likely thing that you're doing is trying to avoid a hard conversation that you just have to have.

• 27:57Shane Parrish?

  So you're avoiding the brutal fox. I like that, that sevens, sevens kill companies. And if you think of that, it's almost multiplicative, right? So the difference between a seven and a nine is huge. If you think of it, instead of addition, you think of it as multiplying the people that they work with.

• 28:13Speaker 00

  Yeah, absolutely. And especially when they're hiring people. Because, you know, it's, it's kind of that classic A's hire A's, you know, B's hire C's. Like, it's just the, when you're a nine, you're gonna hire, people who are eights, nines and tens want to work with that person. But the seven is just not going to bring that same level of team to the table. And so it does create this cascading challenge in an organization that you just have to be hyper vigilant about.

• 28:42Shane Parrish?

  I want to come back a little bit at a higher level to the role of boards. Where do you think boards go wrong with startups with all companies?

• 28:50Speaker 00

  Oof, how much time do we have? Um, one of the things that I always tell founders is you have to make sure that the board members that you bring on are as much on the same side of the table as you about the future, like where the company is headed and the future of the company. Because, you know, people, whomever you have around the table in the boardroom, even an observer, you know, I think people kind of think of it as, oh, board of director, like this person's on the board and this one's an observer, so the observer doesn't matter. That's so, so wrong, because things rarely come to a vote. It's always about what's that conversation around the table?

• 29:32Speaker 00

  And someone who has a seat at the table, is participating in whatever strategic conversation you're having, can really change the direction of a company. And, and so you want to make sure that the judgment of the people that you bring around the table is like super high and that they're going to push you in the ways that you need to be pushed and want to be pushed, and that they're aligned on the vision and the mission of the company. Otherwise, it just creates another tax on your execution where you end up having to spend time convincing someone who maybe was never on board with the direction of the company that you're going in. And so, so one is just like finding those people who aren't cheerleaders, like will

• 30:15Speaker 00

  help, will show you the brutal facts, but at the same time are all marching in the same direction. That's number one. Number two is, you know, and I've seen this, is kind of the micromanagement that can sometimes happen. And this is sometimes the weaknesses that ex-operators have when they transition into investing is thinking, oh, I can do this and I'm going to dig in in the company and get, you know, help them with growth or help them whatever it may be. And it ends up acting as a crutch to the CEO. And so instead of the CEO hiring the person that they should hire, so they have that inside the company, you know, like working on it 24/7, you have this person who thinks that

• 30:59Speaker 00

  they're really good at whatever functional level, whatever function it is, coming in and really causing more pain where then the CEO feels like they have to have this person who's not living and breathing the company every day, you know, opining on different product directions or, you know, what the compensation's going to be for the sales team. Like, that's not productive. And then I'd say the third thing is just when there's distrust that happens with the board and the founder, then you can't have the conversations that are important. You can't have the, you can't hold the mirror up to the founder because they don't want

• 31:42Speaker 00

  to hear it and you're not going to be, you're probably not having good intent if you're, if there's a trust breakdown already that's happened. Sometimes founders describe a board that can get toxic and it tends to be in that circumstance where there's just a trust breakdown and then the board isn't able to perform the duty that it has, which is to, there's the kind of fiduciary duty, of course, you know, but then there's, I think, the more important stuff, which is, are we focusing on the right things? Are we pursuing a strategy that will lead to, you know, tremendous equity value creation? All those things.

• 32:16Shane Parrish?

  Talk to me a little bit about how that trust breaks down and what it looks like when it's happening.

• 32:22Speaker 00

  You know, one of the things that I tell my companies is, You can take as long to, you can wait until the board meeting to give good, you know, good news, but you give bad news as fast as possible. And there's, that is a classic trust breakdown from the founder to the board where the board feels like, hey, why are we just finding out about this now? What else don't I know? And so that's, that's an easy way for things to break down. The other way that happens from where the board loses the CEO's trust is usually if the CEO doesn't feel like the board member is acting in the best interest of the company.

• 33:03Speaker 00

  If an investor ends up investing in a competitive company, if they recruit someone to a different company, if they end up just optimizing for their own, their own equity in the company instead of like helping make a financing successful. All those things can break down because ultimately when you're the CEO, you want to bring on a board member who is going to be doing everything they can to make the company successful. Like that should be their optimization function. And when it's, when there's a breakdown there, that can, that can really hurt trust.

• 33:35Shane Parrish?

  You strike me as a very structured thinker, process oriented person when it comes to making decisions. Can you peel back the curtain there a little bit and walk us through maybe your personal process for making decisions, whether it's to invest in a company or even at a board level? How are you structuring those things in your mind?

• 33:53Speaker 00

  Yeah, you know, I think it's, it's kind of the way my brain is. And it's why, you know, one of the things that I, I try to do a lot is, is synthesize the world in a way and reduce it so that I can have a framework from which to reason. You know, it is this kind of building patterns so that you can see the topology of the world in a way that is higher resolution than if you, if you didn't have some of those mental models from which to, to reason. And so for me, like, you know, I ask myself, like, I meet with a lot of social products all the time, and you can see them growing really quickly. And one of the first frameworks that

• 34:36Speaker 00

  I actually wrote about to help me figure out which are the ones we should invest in is this thing I wrote called the Hierarchic Engagement, which is, how do I know if something's growing really quickly if it's actually going to be something that endures? For marketplaces, like, you know, I see a lot of companies, there's so many founders who orient themselves towards hitting this $1 million of annualized GMV. You know, there's kind of these ideas that go around, which is that to raise your Series A, you have to hit a certain metric. There are ways to hit milestones that are more vanity metric than the actual kind

• 35:16Speaker 00

  of authentic, real intellectual rigor around kind of, am I really doing the hard work to get to this milestone? And so it was a similar thing of like, how do I look at these companies and understand, are they orienting in the right way to build enduring value? And then as a board member, then how do I also help kind of pull the future into the present and help align the strategy with a way that I think will create maximum value? So I'm always trying to put structure around decision, help me think through something in a way that I hope gives me an edge in making the right decision at the time.

• 35:58Shane Parrish?

  Well, just like Michael Jordan, we can get some insight into that, but nobody's going to listen to this and become Michael Jordan. So maybe you can go into some more detail on sort of what are the mental models, what are some other mental models that you're thinking about or frameworks that you're using when you're sort of internally structuring your decision? I imagine opportunity cost is one of them, but what else keeps coming up over and over again? What are the timeless ones?

• 36:22Speaker 00

  Well, opportunity cost is such a huge one. You know, at Benchmark, our model of investing is that we have decided that we're not going to scale our business. You know, we haven't grown our fund size, and it's just five general partners right now. And it's a kind of this rare structure of an equal partnership. And we don't delegate any part of our job. Kind of our aspiration for any company that we are on the board of is that we are the hardest working, most impactful board member that you have around the table. And so there's no talent partner to whom I can delegate a search for.

• 37:05Speaker 00

  There's no associate who's going to dig in on your model for me. There's no marketing person who's going to help you think through PR. It's you got me and the rest of my partnership. And so it means that when you take a board seat, the level of commitment, that kind of promise you are making to the founder is, I really think, at a very different level than other people. You know, I'm on, you know, seven boards right now, and I am on these talent calls every week for some of my companies where we're doing a search for a CRO, as an example. And it will always be me and then the talent partners of the other firms, as opposed to the partner itself.

• 37:50Speaker 00

  And it's just a very different level of service. And I think when it's me on the call, helping kind of figure out the right profile person to go after, interviewing people, closing them, that we're going to have a better outcome. But it does mean that that opportunity cost, the commitment you're making, is a very big commitment. And so it's always, when you make an investment, not just are we going to make money, but of all the places where I can spend my time, is this the place I should spend it? This idea I described before of escaping competition, you know, that is something that is fundamental to all the companies that I invest in, is this a company that

• 38:35Speaker 00

  is always going to be fighting tooth and nail with another, you know, collective of companies for an incremental point of market share? Or is this a company that can really dominate a market, become just so much better than any substitute, that they become the de facto standard in the space?

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• 40:11Shane Parrish?

  How do you think about that? Because what you're really trying to do is like what we know from history is the only thing that gets us out of sort of trench warfare is asymmetry in weaponry, right? So how are you dicta... like how are you determining escaping this competition so that you have an asymmetric outcome where maybe there's one or two players and they play nicely, maybe there's it's a winner-take-all market or how do you how do you work through that?

• 40:35Speaker 00

  Yeah, there are different flavors of working through it. So the strongest, strongest sign is a network effect. And that's why I spend a huge amount of my time looking at social companies or marketplaces because they both have network effects. And you just have a dynamic with those companies where if they're able to get their flywheel spinning fast enough.

• 41:02Speaker 00

  They're able to tip a market. And, and once you tip a market, the space between you and the competition just gets wider and wider. The other type of company that doesn't necessarily have a network effect, but I also love are companies that actually go after a space that is underestimated from the outside. And because it's underestimated, it actually doesn't invite competition. So, or, or the competition isn't strong competition. So, you know, I'm on the board of a company called Chainalysis. And Chainalysis is, is in the kind of blockchain crypto space where they have built, built

• 41:46Speaker 00

  a, a technology that lets law enforcement agencies, government agencies investigate transactions on any of the current blockchains, the Bitcoin blockchain, Ethereum, et cetera, and, and make sure that there's no illicit activity. And then the companies that are regulated and want to participate in this cryptocurrency ecosystem, but have to make sure that they're not in the middle of some money laundering, they need a tool and so they use Chainalysis. And so Chainalysis has become this de facto standard in the space. It just got into a space before other people saw the opportunity.

• 42:26Speaker 00

  And because they were the leader, they were able to build more and more technology, you know, they're able to go across any blockchain now where they're, as they got bigger, they could amortize the cost of their engineering efforts across a broader and broader revenue base, which let them reinvest in the business and pull further and further away from any competition. And so now, you know, it's kind of a, that's one of those winner take most dynamics without a explicit network effect because they were there first, they executed really, really well, and, and just got so much bigger than any of the competition that they could, could keep on making their advantage bigger and bigger.

• 43:09Shane Parrish?

  I like these smaller sort of niche ideas too, where it's a smaller market and maybe you're an A player and you go into a B market and you can just dominate that B market. And then I'm curious as to where these things start to go wrong. So VC is, you know, the, starting a business is necessarily valuable in and of itself. And so there's an expected sort of failure rate. And then there, there's things that you do that maybe increase the odds of that failure rate. So across your aperture, all the companies you have exposure to, all the companies in the benchmark portfolio, all the companies that you get pitched, what are the mistakes you see CEOs making over and over again that increase the odds that they're not going to be a success?

• 43:52Speaker 00

  The thing that Chainalysis got right, you know, you called it a B market. I'll, I'll change that.

• 43:58Shane Parrish?

  Oh, yeah, I wasn't trying to be derogatory or anything.

• 44:01Speaker 00

  But I think there's a nuance here that's really important, which is that it actually is a B market in the beginning. It's really small. No one cared about it. That's why there was no competition. The important thing is, you know, markets are like rivers, you know, where you, you want to be canoe, you're like a canoe on the river. And if there's a great current for you, it's gonna keep pushing you. And so it might be that the market is small, but the current is increasing and it's getting bigger and bigger and bigger. And that's going to help you build something really, really valuable. We have another company called Benchling that has just done a phenomenal job executing this kind of biologic space, which again, there was a current that they saw that other

• 44:43Speaker 00

  people didn't see that was creating this really, really big market. But in the beginning, someone else might've thought it was a B market for the, the, the failure scenarios. If a founder's ambition blinds them in not picking a small starting place to really, really execute and, and get incredibly strong product market fit. Their ambition blinds them to wanting to take on a really big problem with a blunt product that doesn't, you know, that tries to be a little bit everything for everyone versus accepting. Something that might feel small in the beginning, but opens up into something much bigger.

• 45:27Shane Parrish?

  I love the way that we're talking about this because we're really at the heart of it. I mean, we're using a little bit of different vocabulary, but we're really talking about mental models. When you're on the call doing this talent scouting, you're touching the territory. When you're not delegating that work, nobody's giving you a map on the other side of it. You're in the weeds. You get to know what's going on. When you're talking about sort of the B market, for lack of a better term, it's really contrast, right? You want to be the best player in a market with weaker competition. And so you're talking about how do we generate the most contrast? Because there's a lot of value to be created in that contrast. Whatever market you're in, whether you're in the A market, you can be the A plus person, but you really want to be the A plus person in sort of a market without A competition.

• 46:09Speaker 00

  You know, I think about these two companies, DoorDash and Postmates a lot. You know, it's such a beautiful case study in a way because Postmates was recently acquired by Uber, incredible team. And they were the first actually to realize that there was an opportunity for them as this kind of on-demand player to introduce delivery for any small business. So it had been that before you had Grubhub, which was, you know, Grubhub and Seamless were the two, you know, innovators, incumbents in the space that realized that they could create a marketplace where they would get restaurants that had their own delivery to list on their marketplace.

• 46:55Speaker 00

  And then they would, you know, help those restaurants get more demand side for their delivery. And what Postmates realized is that if you just limit the supply side to restaurants that have their own delivery, that's actually constraining the market beyond what is possible. And so Postmates realized, hey, we'll provide, we'll create a third side to this marketplace, which is the delivery on-demand side. And we'll let any business, you know, restaurants, cafes, retailers, we'll provide delivery for them so that we dramatically expand the supply side. And that creates a much, much stronger value proposition for the demand side, which is true.

• 47:37Speaker 00

  DoorDash had the same insight, but followed them kind of a year and a half later. So maybe inspired by Postmates. And they both used incredibly similar techniques in the beginning to get the demand side flywheel spinning. But the difference was is that Postmates went after San Francisco. There was already competition there. You know, I always think that you have to be just so much better than the competition, that it's obvious that you're the way to go. But that wasn't as obvious for Postmates when they were going into this big city, because the incumbents weren't necessarily like doing the same playbook, but they had a pretty good product that they were offering.

• 48:22Speaker 00

  DoorDash, on the other side, went after the suburbs. You know, they went after a market where everybody else thought it was terrible and not, you know, economic to provide delivery in the suburbs. And so they went to this desert for food delivery.

• 48:39Shane Parrish?

  That almost sounds like Walmart-esque, right?

• 48:42Speaker 00

  Yes, yes, yeah. And so they went after this market where everybody else had, you know, it was a desert. People were like, oh, my God, you're providing delivery? Like, that's this new thing. And it also was a lot easier for DoorDash to get to a very, very big percentage of the market in the suburbs, because, again, the restaurants weren't being attacked by 50 different vendors trying to get their attention. DoorDash was probably the only one knocking on their door. And there aren't that many restaurants in the suburbs relative to a city.

• 49:14Shane Parrish?

  Yeah.

• 49:15Speaker 00

  You know, I would say Postmates could be executing a 10x DoorDash's execution, but because DoorDash had a strategy that let them just be, you know, so much better than any substitute, because it's a lot better to be better, it's a lot easier to be better than the competition when you have no competition, your competition's really crappy. And so it just got them to be able to be in the zone where they could tip a market. Before Postmates, and I kind of describe it as like, Postmates, I think, optimized for GMV, for maximizing GMV, and they tried to boil an ocean. Whereas DoorDash really optimized for tipping this market, what I think of as like happiness.

• 49:58Speaker 00

  And they boiled a thimble, and you can see, I mean, I don't know, I haven't checked DoorDash's market cap recently, but it is an astounding successful company with a very, very different strategy than the incumbents.

• 50:12Shane Parrish?

  Do you think that there's something to the notion there that if you can figure out your business in the hardest conditions, then the easier conditions, which would be the city, are going to be much easier? If you can make it work in the suburbs where there's, you know, deliveries are more complicated, signing up people might be easier, but the whole network and the operations are going to be a lot more complicated, then that translates into it working in the city. Whereas, in this case, working in the city might not translate to working into the suburbs? Or am I thinking about this wrong?

• 50:43Speaker 00

  No, that's absolutely true. I mean, you see that in so many different industries. I remember I was lucky to observe the board of diapers.com. And those guys started by selling diapers, wipes, and formula. It was like a 2% gross margin business. But if you can get really good at making the economics work for a business that has that level of gross margin, and then you start to add more, you know, higher gross margin products to the basket, the DNA of the company, the habits of the company, get forged in this really, really resource constrained environment that only creates benefits from there.

• 51:27Speaker 00

  That said, I wouldn't say that you should choose a market necessarily to pick the hard thing. I actually think that you want to pick something that is easy to win, to tip the market, you know? And, and it, you know, there was ways in which going after the suburbs was harder than going, like operationally harder, harder probably from a unit economic perspective, although I'm not positive, than like going after the city. But it was ultimately easier to get to that tipping point, and that's what I think you really want to maximize for.

• 52:00Shane Parrish?

  Do you think that there is an interesting notion, we just talked about sort of margin and increasing margin over time, do you think there's an interesting way that are there businesses that go after, you know, Amazon would be an example, I think, where they they have a low margin and then they they lower it over time and that's how they get bigger and bigger and bigger and bigger. And then you can't really compete with them if they're constantly lowering margin, at least playing that game. How do you think about that?

• 52:26Speaker 00

  Back to the the concept I articulated before of tipping a market. One of the wonderful things that happens when you tip a market is that your organic growth starts to explode, you know, because your value proposition relative to any other substitute becomes just so much better that you would be stupid as a buyer not to go, you know, it's almost an IQ test, are you gonna, where are you gonna buy from? And so what the beauty is of, you know, a company like Amazon that's able to articulate a flywheel very clearly is that they don't have to spend money on the acquisition side. And they have, of course, because they have so much more inventory that they can, they can make their margin

• 53:10Speaker 00

  off of a very, very, every SKU that you could possibly want versus any individual product. And and it's just, I mean, how do you compete with that, a flywheel that's spinning at that magnitude? It's, it's, you end up, you know, it's just a very, very difficult thing as we, as we've seen over the last 10 years.

• 53:31Shane Parrish?

  So where does this go wrong? How does this, like, these business model, I mean, ideally, I'm probably, Amazon's not going to be the champion in a century from now. But they have a really good model and the model has this runway that's incredibly long. Does that go wrong through complacency? Does it go wrong through greed? Does it go wrong through bringing the future into the present and sort of like increasing the margins? How do you think about that?

• 53:56Speaker 00

  I think the number one thing that I see is is complacency, although from what I can tell, Amazon is not a complacent company by any means. But certainly, there are plenty of examples of companies that that got leapfrogged, that got disrupted in some way by a new company. I'll give eBay as an example. I mean, eBay Which Benchmark was lucky to be the early investor in, so it's been just a phenomenal company. And yet, at the same time, you can't help but see that that company is being unbundled by new startups, that there are vulnerabilities.

• 54:41Speaker 00

  The hard thing about being a horizontal platform like an eBay is that you have to try to be everything for everyone. And what that forces is this kind of lowest common denominator product. Whereas, I take GOAT as an example here, where GOAT was a company, I don't know if you're a sneaker head.

• 55:02Shane Parrish?

  No.

• 55:03Speaker 00

  It's a marketplace for sneakers, secondhand sneakers and now new sneakers. If there's that pair of Yeezys you've been eyeing, you can go there Shane and get them.

• 55:14Shane Parrish?

  Definitely.

• 55:15Speaker 00

  And the experience, the company started, what I, the folklore at least, is that the company started because the founder had been working on another startup. It was running on fumes, looking for a new idea, and he had ordered a pair of sneakers on eBay, Jordans or something, opened the box, and it was a pair of counterfeit sneakers. It was, they were not authentic sneakers. And that was the light bulb for him, that there was this vulnerability to this huge, huge marketplace that had hundreds of thousands of SKUs for Nike sneakers.

• 55:57Speaker 00

  But it was that people didn't know, had to do a lot of work in order to make sure they weren't going to get counterfeits. And that, and they didn't always trust that if they were going to buy something, that it would be authentic. And so GOAT went after that vulnerability, first by creating a policy that it was always good, that they were going to vet all the inventory to make sure it was authentic. And then they also created a product that was focused on this white-hot center of the sneaker vertical that was mobile-first and had features that eBay just couldn't build because eBay wasn't for just sneakers, that let them disrupt eBay and leapfrog what they were doing.

• 56:39Speaker 00

  And so, there's kind of this, what's that saying, that there's only two ways to make money, bundling and unbundling? The creative destruction that is part of what we love about startups. And certainly, I think that any big horizontal platform, while they have this incredible strength, which is their scale, there's also a vulnerability there that we might see evolve.

• 57:03Shane Parrish?

  What's the most interesting thing that you've seen, or most surprising thing that you've seen recently in terms of startups?

• 57:13Speaker 00

  Well, you know, the thing that has just been so fascinating over this past year is kind of the effect of shelter in place. It is transformative in so many different ways. You know, there's a class of companies where the future has been pulled forward, you know? Where things that would have been on that three to five year roadmap become on the like, we need to do it now roadmap, you know, the kind of like, and there's, you see that in the success of a lot of these software businesses right now. And it's, you know, we've seen the benefit of that and it's, it's just transformative.

• 57:55Speaker 00

  And then, of course, there's this change to the way we work where we had always, you know, the default answer had always been, we're going to have an office and we're all going to be co-located and we're going to go into a room together and we're going to, you know, get through that roadmap planning together. And like, that's the way we're going to work. That was the default. And now, of course, everything's changed, you know? We are, we are in a place where the default has been completely changed to the mirror image and we're having to make decisions now, all these companies of, will the new default that we have now persist post shelter in place?

• 58:37Shane Parrish?

  Or does it revert back?

• 58:38Speaker 00

  Right. And what, and like, you kind of feel that It's not, it's not going to go to the way things were. Like there are, you know, we've seen an acceleration in the technologies that we have now to, to make it so that when you're working remotely, it can actually be better, more productive than it used to be when we were in the same place. And, and in a way, like you had technologies like Slack and, and Zoom that I think facilitated a new way of working, which was the ability for us to be remote, but, but aren't actually native to the way we are working when you're working remote. And so you're seeing a new generation of companies that are native to this either fully remote

• 59:23Speaker 00

  or, you know, future hybrid workspaces that I think are going to be transformative for the way that we work with each other and collaborate across function. So that I think is incredibly exciting. And then there's also the consumer world, which is, you know, it, it right now, you're just seeing in, you know, if it had been for the last three years, this, you know, it always felt, rather not the last three years, that, you know, pre-COVID, that consumer was just, it was owned. It was owned by Facebook and Amazon and Google and Apple and, you know, and, and if you wanted to build a consumer company, you were pushing against a rope.

• 1:00:06Speaker 00

  Right now, because of shelter in place, people can't spend time in the real world. All these ways that we used to spend our time are no longer available to us. And, and so because of that, it has created this new gold rush or a land grab, really, for all these minutes that used to belong to offline minutes are now suddenly fair game for all these digital products, mobile products. And it's created this, you know, wonderful new renaissance for these consumer social companies. And so that has been really interesting to see. And then, of course, the question is what, what persists? What thrives?

• 1:00:49Speaker 00

  Once, you know, you and I are able to be in a conference room together or give a friend a hug.

• 1:00:53Shane Parrish?

  Yeah, that's a really interesting question because it's like the longer it goes, the more your habits will probably change. They're probably not going to change fully to where they are now, but you're probably going to get more takeout than sitting at a restaurant. You're just used to, I mean, that you develop that pattern of behavior.

• 1:01:09Speaker 00

  It really is huge. And it's, you know, I, like, the longer that we are in this suspended state, the stronger these new habits will be. And, you know, you, of course, there's the, there are good and the bad. There's the, the good, which is how people are collaborating with each other and connecting in this kind of global maximus states where the geography becomes, you know, not as important than, you know, just being able to connect somehow. And then there's the bad, which is that, you know, I do think, I'm, I, I didn't, I never knew if I was an extrovert or an introvert. And now I know

• 1:01:51Speaker 00

  I'm an extrovert. Like, I think people, you know, miss each other and should spend time together. And like, you know, how can you not, like, the, the physical presence? And there's, you know, there's, there's, there's a lot of people who, that habit, especially when you're younger and you get, you know, more and more engaged with, you know, games and other things, changing back to the world, the way things were. You know, it's going to be some give and take. And it'll just be really interesting to see how that evolves.

• 1:02:25Shane Parrish?

  Thank you so much for your time today, Sarah. That's a great place to end this conversation.

• 1:02:30Speaker 00

  Thanks so much for having me.

• 1:02:33Shane Parrish?

  Hey, one more thing before we say goodbye. The Knowledge Project is produced by the team at Frontam Street. I want to make this the best podcast you listen to, and I'd love to get your feedback. If you have comments, ideas for future shows, or topics, or just feedback in general, you can email me at [email protected] or follow me on Twitter at Shane A. Parrish. You can learn more about the show and find past episodes at fs.blog/podcast. If you want a transcript of this episode, go to fs.blog/tribe and join our learning community. If you found this episode valuable, share it online with the hashtag The Knowledge Project or leave a review. Until the next episode.