Gurley cites Uber shifting from burning $2B yearly to generating $10B in free cash flow through unit economics understanding.
“I mean, Uber was burning 2,000,000,000 a year and Dara had 10,000,000,000 in free cash flow last year. Being able to make that shift, it's gonna require an innate understanding of your true unit economics.”
Gurley says OpenTable had the most intellectual appeal because Benchmark invested at three restaurants with a network effect thesis.
“The one that had kind of the most intellectual appeal was probably OpenTable because we invested when there were three restaurants on the network and had a theory that a network effect could take place where it could tip towards winter, take most.”
Gurley explains OpenTable unlocked parametric search for restaurants that was previously impossible without calling each restaurant individually.
“Before OpenTable, you could not do that. You'd have to call each one of them, and so it unlocked a consumer value proposition that didn't exist.”
Gurley argues dynamic pricing is essential for digital marketplaces and giving it up would be fatal.
“And I knew that if you wanted to create a digital marketplace, you wanna use price to to cause liquidity, to get encourage drivers to come out at the right time, like you'd hate to give up price in a digital marketplace or auction, like you never would.”
Gurley told partners to pursue any company layering technology on top of black cars before seeing Uber.
“I said to my partners, if we ever see a company that's putting a layer on top of the black cars, we should run at it.”
Gurley argues network effects are easier to build when supply is fragmented rather than consolidated like Ticketmaster venues.
“Part of what I loved about both OpenTable and Uber, it's easier to build a network effect if supply is limited, I can't You know how many people have tilted against Ticketmaster and whatnot?”
Gurley knew Uber was already 20 times bigger than taxi market in San Francisco contradicting professor's TAM analysis.
“I already knew in San Francisco that Uber was 20 x bigger than the taxi market.”
Gurley notes Collison brothers suggest Stripe may never go public as VC funds tell LPs companies stay private.
“And those funds that do that turn around and tell the LPs these are the foundations and the endowments that invest in these type of things. You know, these companies aren't going public anymore.”
Gurley says modern venture capitalists refuse to take meetings on anything that is not AI-related.
“There's a reality where a modern venture capitalist does not wanna take a meeting in anything on AI.”
Gurley describes how technology waves attract speculators who rush in after seeing quick wealth creation.
“One of the things that happens any time there's a technology wave is people get rich quick and then a whole bunch of people see people getting rich quick and they rush in.”
Gurley suggests we may be in an AI bubble where people are doing speculative things that don't usually work.
“When you're in a bubbly time, and we may be right now with AI, people do silly things, things that don't usually work. They get very speculative.”
Gurley describes how most venture rounds now happen proactively with investors forcing money on companies.
“Someone thinks you're doing well and knocked on the door and is force feeding you money. And that is currently the way things happen.”
Gurley argues IPO pricing is fundamentally broken because bankers pick price and allocation instead of markets.
“The way that an IPO's price is so god awful stupid. They pick who gets the stock and they pick the price.”
Gurley notes early internet startups shifted from 100% Oracle and Sun to Linux and MySQL in five years.
“Every single fucking one of them were running on Oracle and Sun. And five years later, they were all running on Linux and MySQL, like in five years.”
Gurley argues Google's search monetization is so superior that no Bing deal could match Apple's current economics.
“So there's no like Apple's not mad about this deal. They're very positively impacted by it.”
Gurley says excess capital prevented winner-take-most dynamics from developing profitably until capital dried up and Uber's profitability skyrocketed.
“it slowed down and prevented the natural order of things. The 8020, the winner take most from developing in a profitable way.”
Gurley notes Zillow had exited iBuying before he returned to the company
“They had the the the kind of detour into home buying or iBuying, which is refreshing. They had exited by the time I came back. So, yeah. So there's a lot going on.”
Gurley says healthcare startups trying to monetize end up reinforcing bad system dynamics instead of changing them
“And then and then some of them end up in a place where they're actually reinforcing the bad stuff, you know, and making it worse.”
Gurley describes Matt Cohler's concept of remote control for your life with Uber as one-click ride example
“And my my partner, Matt Cola, used to call this the remote control for your life. And we would talk about Uber as a one click ride.”
Gurley predicted black car marketplace would work better than taxi due to less friction before finding Uber
“Because there's going to be less friction and we're going to be able to use the tools that entrepreneurs know how to use to be successful.”
Gurley tests marketplace strength by asking if value to one side grows exponentially as the other side scales.
“When I push entrepreneurs to think about this and it gets to your increasing marginal utility, but I just say, as you penetrate a supplier base, one side of a marketplace, whatever, is the value proposition to the other side going up? And ideally, it would be going up exponentially, which is super hard.”
Gurley argues increasing returns vary in strength, with some linear and some exponential, forming a scale of network effects.
“It's arguable there are levels of increasing returns. Like, you could come up with some kind of scale or index because some of them are more linear and some of them can go exponential.”
Gurley argues Waymo faces unsolvable dilemma: building fleet to average demand disappoints peak users, building to peak wastes expensive CapEx.
“And if you build it to peak, you're gonna have a bunch of very, very, very expensive CapEx sitting around doing nothing mostly.”
Gurley found Dell's return on invested capital was 20 times higher than competitors, initially unbelievable.
“Like, night and day, like, 20 to one. Wasn't even close. And in fact, it was so ridiculous.”
Gurley recalls OpenTable's CFO wanted to quit because his model capped market share at 17 percent.
“And one day I showed up early for a board meeting and and the CFO comes to me and he says, Bill, I'm I'm gonna quit.”
Gurley says Second Life grew from zero to $70 million revenue in under eighteen months.
“I think the company went from 0 to 70,000,000 in revenue in less than eighteen months. And so you had this vision and excitement about what was possible.”
Gurley explains Minecraft and Roblox succeeded with simpler primitives and child demographics versus Second Life's complexity and adult focus.
“One, primitives are simpler. And so the creator tools at Second Life, you could do amazing rich things, but they were a little harder to use.”
Gurley says decentralization wasn't a limiting factor; Second Life creators were cashing out $100 million annually.
“If I made a list of 25 things that I think inhibited us from getting to a higher place, I don't think I'd put decentralization on that list.”
Gurley notes Second Life creators were cashing out $100 million annually from the platform.
“The creators were cashing out a 100,000,000 a year last time I had access to the number. So Philip gave the GMV, but they were taking out a 100,000,000.”
Gurley says tokenization's intersection with marketplace and UGC companies is remarkably nuanced and tricky.
“There's a ton of people that are thinking about tokenization and how that intersects with a marketplace company or a UGC company and a game company.”
Gurley argues tokenization with appreciating currency can provide massive advantage for marketplace bootstrapping through incentive structures.
“And so if you build the right incentive structure around your tokenization, that could be a massive advantage to an on ramp, especially if you're able to get your currency to appreciate over time.”
Gurley argues governance tokens without economic rights would be worth a small fraction of tokens with rake ability.
“I think it's a fundamental question if that term weren't in the DAO or if instead it said the community will never rake a transaction, what would that do to the value of Uniswap?”
Gurley argues shift work is incompatible with parenting, school, or supplemental income needs that flexible work serves
“You can't be a stay at home parent with shift work. You can't try and be an artist and meet supplemental income. You can't pay that.”
Gurley claims remote work increases matching efficiency between skills and needs by two orders of magnitude
“The the ability to match as I was talking about earlier like the ability to match skill type with need goes up, you know, two orders of magnitude when you just open it up to everyone on the planet which is is a really good thing actually.”
Gurley reveals Benchmark is a lead investor in Upwork under Hayden Brown.
“We are actually a lead investor in Upwork. Hayden Brown's done an amazing job there the past couple of years.”
Gurley confirms Benchmark is a lead investor in Upwork and sees large opportunity in gig talent marketplaces.
“We are actually a lead investor in Upwork. Hayden Brown's done an amazing job there the past couple of years. And we see this as a big, big opportunity.”
Gurley predicts more vertical-specific talent marketplaces will emerge, fragmenting LinkedIn's horizontal model.
“People have talked about kind of, you know, the opening up of LinkedIn where people go into more specific verticals and are able to drive better outcomes, real work opportunities right away.”
Gurley contrasts InstaWORK's immediate job placement and training with traditional job listing sites like LinkedIn.
“The the the app tells you exactly where to go. The app teaches you how to do the job better before you actually show up.”
Gurley explains Didi's competitive strength internationally could separately impact Uber's valuation.
“Uber also competes with DD internationally. And so whether or not this affects DD's ability to be competitive is a different force that could impact Uber's valuation.”
CNBC Television
“And I said, well, what does Airbnb have to accomplish to earn out this valuation that it has?”
Gurley states 64% of Robinhood revenue comes from options trading despite democratization claims.
“it's now known that 64% of their revenue comes from options trading. And so the company wants you to believe and and goes on public television and claims that their mission is to democratize investing.”
Gurley notes order matching systems existed for twenty years and corporate bonds already use supply-demand pricing.
“Let's let supply and demand matching, which, you know, unfortunately have been available order matching systems for for over twenty years.”
Gurley notes that OpenTable's two venture-backed competitors went bankrupt during the 2001 downturn, enabling OpenTable's success.
“And as a result, you know, I think there were network effects, but nowhere in the history of OpenTable success story does anyone read two companies went out of business, but that's what happened.”
Gurley recounts how Zappos extended payables to 90 days versus industry standard of 45 during crisis.
“And I don't remember the exact number, but he said something like 90. And having worked with Nordstrom at nordstrom.com, I knew the industry standard was like half that, like 45.”
Gurley argues network effects decay as platforms scale, citing LinkedIn as an example of diminishing marginal value per user.
“Like what's the value of an incremental member joining LinkedIn? It's probably less than what the value of the 10,000 person that joined LinkedIn.”
Gurley shares his unpublished formula for evaluating network effects using value versus market penetration.
“If it's a two sided network, you could build one for the value to the supplier, one for the value to the consumer. On the x axis is your penetration into the market.”
Gurley says marketplace success requires doing unscalable things early, which frustrates most business school-trained entrepreneurs.
“And if you took 90% of the entrepreneurs that have been to business school and understand scaling, it drives them nuts.”
Gurley explains Mechanical Turk failed to show network effects because value didn't increase with supply penetration.
“Rather than say don't work, let's say didn't show signs of a network effect was Mechanical Turk that Amazon built, which was a labor marketplace for perfunctory work that could be pushed over the internet.”
Gurley explains labor marketplaces fail because 5% supply provides same customer value as 95%, preventing network effects.
“It turns out that if you get just 5% of the supply, the value you provide in customer is no different than if you get 95% of the supply.”
Invest Like the Best
“Yeah, the flow of cash and the competition and how that money is being used.”
Gurley describes Stitch Fix using machine learning and collaborative filtering to deliver items customers haven't seen yet via stylists.
“We try and learn as much as we can about the individual, and then we use machine learning and collaborative filtering, a whole bunch of algorithms that helps of our stylists, and we deliver something to you that you haven't even seen yet.”
Gurley describes Stitch Fix's approach as ultimate recommendation engine that doesn't show customers the choices.
“Our head of algorithm says it's the ultimate recommendation engine because we don't even let you look at the choices. And that level of curation is something that's highly unique,”
Gurley claims Stitch Fix knows 10x more about customers and merchandise than competitors like Nordstrom's and Macy's.
“So you can put us up against anyone, Nordstrom's, Macy's, any of these players, and I am certain that we know 10 x more about our customers and even 10 x more about the merchandise.”
Gurley calls healthcare marketplaces extremely dangerous with forces in five directions and misaligned incentives.
“It's extremely dangerous because the the laws of most, marketplaces doesn't exist. You know, there's not a simple gravity. There's forces in five different directions.”
Gurley explains why targeting sales instead of HR made Salesforce wildly more successful than their HR SaaS company.
“the sales executive has a green light on any purchase in a company. The HR executive does not. They had a product where you could put it on a credit card.”
Gurley compares late-stage private valuations to a Bernie Madoff dynamic with unaudited markups creating feedback loops.
“And I think what we see right now is a almost Bernie Madoff like dynamic where capital comes in, it gets marked up without any public scrutiny, unaudited financials.”
Gurley says 140-150 companies have valuations that wouldn't sustain in public markets.
“So we have 140 companies, 150 companies that have valuations that I think wouldn't sustain in the public market.”
Gurley warns the gap between capital deployed and liquidity returned has reached record levels without returns available.
“And the gap that's been widening between the money that's been given versus the money that's been returned in liquidity is record levels.”
Gurley states capital burn on headcount is breaking all prior records from 1999-2000 bubble.
“And so the single biggest indicator for us is that the capital being burned in the market so this is usually on headcount, mostly people, not hard assets is breaking all the prior records of 'ninety nine, two thousand.”
Gurley predicts three of next ten years' $300-500B companies will be in Silicon Valley, rest in China.
“It's also highly likely that three of them are going be in the Silicon Valley. And then the rest are in China.”
Gurley states Uber has 300,000 drivers globally and is adding 50,000 per month, the fastest job creation he knows.
“There's about 300,000 Uber drivers right now and they're adding it right now at a pace of 50,000 a month. That's on a global basis.”
Gurley argues that for eighty years we grossly underestimated transportation demand by limiting it with taxi medallions.
“The most fascinating thing for me is that for basically eighty years, we grossly underestimated the demand for transportation services. And we limited it at a city government level with the taxi medallion.”
Gurley calls the LTV model a house of cards where numbers can be manipulated.
“Lifetime value model, where people say, as long as we're paying below our lifetime value, cost of capital. But the numbers can be run-in a whole bunch of different ways.”
GigaOm
“I think that creates, I think it should create a rather healthy M and A market, but I also think it helps create opportunities because you know, you look at the Yelp and OpenTable integration with Apple, you know, if there were only one monolith and there weren't five, that probably doesn't happen.”
Gurley describes GrubHub's track-your-grub feature as example of smartphone-enabled marketplace workflow innovation.
“You'd never done it before. And then a few weeks ago, we released a product called track your grub.”
Gurley observes marketplace companies invest equally in supplier workflow systems as in consumer-facing products.
“Lot of my marketplace companies that I'm working with are spending as much R and D money on systems, workflow systems for the supplier side as they are on the consumer side.”
Gurley explains Uber was impossible before smartphones due to cost of installing embedded systems in cars.
“You're not going to go install 700 embedded systems designs in every car and the wireless and build the contracts. You're not going to do all that.”
Gurley names Grubhub as a Benchmark investment illustrating the cloud opportunity for small business.
“Grubhub is a great example. Grubhub? You probably haven't heard of this company. It's one of our investments.”
Gurley describes cloud-connected workflows from business to consumer through apps as unexploited white space across verticals.
“Once it's in the cloud, they connect to Zillow, they connect to rent.com, they push the listings out, they communicate with the end user of the apartment, and so this workflow that starts to be connected from the cloud to the small business, to the consumer, to the smartphone app, that's all white space in a bunch of different verticals.”
Gurley lists five portfolio companies connecting small businesses online and reports seeing strong current interest from SMBs.
“we have a number of investments from Yelp to OpenTable to Zillow to Grubhub to UberCab, where all these companies build this technology to connect these small businesses, and we're seeing unbelievable interest from these small businesses in in being online and having an online presence.”
Gurley argues organic versus bought traffic is a critical distinction for valuing Internet businesses.
“One that one that I think people really should focus on is where, especially for these Internet businesses, is whether traffic is organic or bought.”
Gurley distinguishes between companies that buy traffic through marketing versus those with organic customer acquisition.
“Any company that's spending heavily on marketing to drive people in, that's just a far different value proposition than someone who has a product that's so good that everyone comes to it.”
Gurley lists Google, Skype, OpenTable, and LinkedIn as examples of companies that never ran ads to grow.
“Google never ran marketing ads, you know, in its day to get to get big. Skype never ran ads. OpenTable never ran ads. Linkedin doesn't run ads.”
Gurley argues daily deal business value is inversely tied to platform rake, like a casino.
“The thing that strikes me about the deal business is that the value to the customer is a direct function of the rake of the platform or the margin the platform maker takes.”
Gurley argues daily deal platforms with lower take rates will inevitably attract more customers than high-rake competitors.
“In other words if you had a casino on one side of the street that took a 50% rake and another one on the other that took a 10% rake, eventually all the customers are gonna go to where the rake's 10%. Right?”
Gurley predicts Facebook or Google could offer better daily deals by taking lower rake.
“So if we see a Facebook or a Google offering a much lower rake to participate, I think it's inevitable that they have better offers.”