Transcript: Alfred Lin at Post Seed 2015

Early-stage strategy talks with Bambi Francisco of Vator

At Post Seed 2015, hosted by Bullpen Capital, Vator and Venture 51, Alfred Lin, Partner of Sequoia Capital, sat down with Bambi Francisco (Vator) over a Fireside Chat. 

Fireside chat with Alfred Lin (Sequoia Capital) & Bambi Francisco (Vator)

[Introductory music]

Francisco: Alfred, welcome.  

Lin: Thank you. Thank you for having me.

Francisco: It’s always a pleasure to interview Alfred. He is one of the most sincere, genuine and self-effacing people I know and he’s had such an impressive track record. He doesn’t seek out the press or interviews, but so humble and so I’m sure you’re going to enjoy a lot of his stories about his experiences as a successful entrepreneur and an investor with just a great track record.

I want to start with a story that many of you have probably heard of. I heard it first from Tony Hsieh, his partner in many ventures. They met at Harvard. Tony sold pizzas. How many people know this story about the pizza and the slice? Okay, well I’ve known this story for quite a while, but I didn’t really know the story so I want him to share it again because when I first heard the story, when Tony told the story about Tony selling pizzas, whole pizzas at Harvard, and Alfred buying the whole pizzas and then selling them by the slice, I thought, “Wow, this guys is a shrewd businessman.”

And then, when I spoke to Alfred, I finally realized why he was doing it. I think it gets to the heart of entrepreneurship. You don’t do something just to be a shrewd businessman. Yes, you should make money, but it actually started as a service. So, I wanted him to share the real story about the pizza and the slices.

Lin: [indiscernible 00:01:52] Tony loved sharing this story because that’s how we met. He was always an entrepreneur so he was like that, not in his senior year, but his upcoming junior year, he was buying the rights at the grille in our dorm. He was going to own it for two years. That’s the only way that he could capitalize the cost of having a pizza oven in our dorm because most of the grille, they just served hamburgers or fries and milkshakes which wasn’t really high market.

He’s always very entrepreneurial. He had this concept of selling pizzas. I had a large college [indiscernible 00:02:29] so I went downstairs and bought a pizza from him every single day. Then, I would just get a discount because I bought it every single day. And I would buy pies, one or two pies every single day. And I would bring it upstairs. The pizza per slice downstairs was $2.00. He gave me a discount so it was probably $1.50 or $1.25 per slice.

I asked my roommates for a $1.50, $1.25 back and I would always get 2 bucks. I was curious, why this was happening? I found out later that, “Oh, the quarters were too important of a commodity for them to give up their quarters.” It’s an interesting lesson because in college, quarters were a prized commodity because you needed them for washing machines, drying machines, vending machines, arcade games and people didn’t want to walk in the cold to the bank and get quarters and bring them home and then giving them away.

It was an interesting business lesson that even a commodity like a quarter can be valued more than a quarter which is what happened.

Francisco: You started a service and you were making 50 cents a pizza per slice so –

Lin: Tony was very upset that he would calculate how much he made per hour and I made technically more than him per hour and he was doing all this hard work. I’m like, “Come on. You made more money at the grille than I did,” because all I did was go downstairs and pick up a pie and bring it upstairs.

Francisco: From there grew this amazing friendship because you’ve done a lot with Tony. You started venture funds in 1999 and that was – you and I spoke earlier and you said, when I asked you, “How is that, starting a venture firm in 1999, a year before the bubble burst?” You told me that was the worst time ever to start a venture fund. I want to ask you that question again whether now is not such a good time to start a venture fund? We heard the audience earlier, First Republic Bank had a report out that said 300 venture firms or institutional funds have emerged in the last – since 2009, to invest in the early stages.

But now, the market is a little frothy. We’re not seeing too much – there’s a little lack of discipline in the market so is now a good time to start a venture firm?

Lin: I think if you’re starting anything, whether it’s a venture fund or a seed fund or a company, if you’re thinking about doing it for the long term, it really doesn’t matter if this is the best time to start a fund? I don’t know, probably not because valuations are high. But that doesn’t matter, if you’re going for it long term. [indiscernible 00:05:10] think about not one or two years or a moment in time. If you’re building something enduring, it’s going to last decades or generations, you’re going to face lots of ups and downs anyway. You might as well start learning today as opposed to kicking the can down the road.

It only gets more competitive. It never gets less competitive in this world. In some ways, in a macro sense, is this the best time in this one or two year period? Maybe it’s not the best time. If you’re going to wait, three, four, five years, it’s still going to be more competitive three, four, five years down the line than it is today.

Francisco: It was definitely competitive. I remember last year, on this stage, Peter Thiel, I asked him whether seed stage investing was harder or easier since he had invested in Facebook in 2004. He said it was actually harder because it was so competitive now with so much of this new capital. And yet, if you talked to Josh Kopelman, he will say that it’s actually easier because a lot of the startups have far more traction. You and I talked before and you said there’s a lot more opportunities. Is it harder or easier when you first started seed stage investing over ten years ago?

Lin: It’s both. I think it’s the best of times and the worst of times. You can’t play the same game you played in 1999 or 2001 and 2002. The game is different. If you’re trying to intuitively figure out something, whether a market is going to kickoff or a product is going to take off, that doesn’t work because back then, there might be only five or 10 or 15 companies that you can see and you can see all of them, play with all their products.

Today, there’s probably five or 10 or 15 of them being produced in a day. The scope of innovation is much broader so you can’t do the same thing you used to do. You have to be smarter about it and you have to use different tools. Back then, was there any measurement ability for companies to figure out whether you were having great traction? No.

Today, you have App Annie. You can go lookup how – you have public rankings and you can go into App Annie to get even more details about how well the app is doing, whether it’s downloads or engagements. There’s such a lot more information that you can absorb, that you can use into your decision making. Does that make it harder? In some ways, it makes it harder, but the access to that information is easier.

I’ll also point out that back then, there were maybe millions of people on the internet. Today, you have billions of people. And so, that makes a huge difference. It also allows you to be wrong every now and then and still get to a soft landing as opposed to back then, I think if it probably didn’t work, it’d probably just crash and burn.

Francisco: It’s harder now because you have a lot more competitors. You’re investing in one company and five other VCs are investing in the same company, a different company but in the same industry. That requires you to then potentially put in more money into that company so they can compete with the other companies. Do you feel that – that seems to make it a lot harder, regardless of the opportunities and all of the transparency that you have.

 Lin: I think you should ask people who have been in this business for long periods of time. They probably would all say every year, every decade, the amounts of money back then seem like an incredible amount of money being invested that time. I think that’s been true for the last, I don’t know, 20 years, whether I was an entrepreneur, as an investor and you can thank the Fed for that.

The Fed has kept interest rates over the last two decades at clearly close to zero. You can’t really make money in the bond market. There’s more people who used to invest in bonds, invest in corporate bonds. Because the corporate bonds don’t have to pay as much because the risk-free bonds, the government bonds don’t pay as much, the corporate bond people now invest in stocks. People who invest in stocks, invest in the growth rounds of the private rounds and the growth investors invest all the way to Series B companies that are just getting some good level of traction and trying to pick them off because they feel like that’s where you can make money as a growth investor.

The traditional venture investors are going down all the way to seed level. And so, I think it’s always been hard to – when you see that happen, it’s always been hard and it’s going to continue. Good thing is – I think there’s a bit more rationality today. The Fed is about to raise interest rates. Many project that next year, they’re going to raise interest rates once a quarter and basically, interest rates will go back to some level or norm and there’ll be less money chasing all the way down the spectrum.

There’ll be some level of normalization. That’s good news and bad news at the same time. I think it’s also going to bring a little bit more rationality. The good news about this is that there’s no catalyst in the system that will cost a financial meltdown, not like 2008, 2009.

Francisco: I want to talk about – well, I didn’t want to talk about valuations and bubbles at this point, but you just mentioned something. Mark Cuban does say, that he thinks this time is actually worse than ’99, 2000 because now, the valuations – the frothiness is happening in the private markets where there’s no liquidity at all. He actually thinks there’s going to be a bigger downturn.

Lin: I don’t agree with that because I think the people who are investing in these companies, most of them have long term views and they’re willing to invest for long periods of time. I’ll just speak for Sequioa, I can’t speak for everyone, but our LPs, our foundations, and sureties and institutions that are trying to survive in perpetuity. They have very long view on when they need to get a return. So long as that’s true, I think the institutional investor doesn’t need to rush to an exit.

Francisco: You don’t need to get out.

Lin: We don’t need to get out. The institutional investors don’t need to get out. The individual investors, do they need to get out? I think they’re seeing some level of liquidity with secondaries. Some of these companies that have what are called “[indiscernible 00:12:18] unicorn” or “unicorn valuations”, some of that comes with a secondary, where they buy out early in investors and early shareholders and to that level, that’s not going public, but it’s kind of like going public.  

Francisco: Yeah, of course.  

Lin: There is liquidity, we just don’t measure it that way. We don’t see a company go public. In the past, you see a company going public and that’s liquidity. You see them being sold and that’s liquidity. I think it’ll be interesting to see how much secondary has actually flowed back to early shareholders and early employees of some of these companies.

Francisco: I want to talk about – most of the investors here, again, from seed to early stage investors, a lot of them trying to figure out what their early stage investment strategy is and one of the things we’ve been seeing a lot of is because – you’re saying a lot of these traditional VCs are now also investing a lot in seed. There are 300 new venture funds that have formed. Some of them going to seed, post-seed and what the result has been, has been this increase of proliferation of this strategy of option buying, not really doing your due diligence, following on with someone, with a friend or so, but what is the upside and downside to that?

Upside is great. Some of these entrepreneurs get funded, but what are the upsides and the downsides to all of these option buying that everyone’s doing?

Lin: I think the negative way to paint that is either you call it option buying or – because you just don’t know and therefore you want to buy all those sort of companies. You think this category is interesting. I don’t know which one of these companies will succeed. I’m going to invest in a little bit in all of them and then next round, I’ll invest in the next round. That’s the option buying idea.

There’s no guarantee that you get to invest in the next round. That’s the only question. I think that’s the negative side if your option buying. It’s much better to pick, in my opinion. If you have a parallel distribution, it’s much better to pick. Even if you have to pick a little later, you get the right one because most of them are going to fail. If you believe the parallel distribution will continue to exist in venture, then I don’t think the option buying where more negatively, spraying and praying methodology works.

On the flip side, if you believe that the market in technology investing is mature, and you still don’t know which one it is, then there is a lot of theory in just creating an index. Creating an index have worked in the public market. The question is will it work in the private markets? I think it will if the distribution is not as parallel-distributed as it has been in the past. That’s a debate that people can have.

We, at Sequioa, still believe that it’s going to be a parallel distribution and we’d like to pick, even if it’s a seed. Our partnership – each partner makes, on average, one to two investments per year. In some years, it’s zero. In some years, it can be three or four per partner. The reason for that is we believe in really trying to understand the market, get to know the people that we invest in and then pick. 

Francisco: Yeah, and I think – I like the way you put that, by the way. I think it’s going to be a new euphemism. “It’s not diversification. We’re creating an index fund.” It’s a good way to look at that investment strategy in that way. You mentioned that if your – you do seed, you do about three to six, as you said, but if you don’t lead a seed, you do Series A, one or two a year and some of the companies out there who do pull these funds together, without a lead, with just, “Hey, we raised $2 million with half a dozen people throwing in $250,000,” it’s a bad signaling sign for you, even though to me, it sounds like they’re being scrappy.

They’re trying to raise money.  Sure, they weren’t able to get a lead, but they were able to get a syndicate together. But for you, why isn’t that scrappy? Why do you think that’s a bad sign and something you wouldn’t actually look at?

Lin: It’s not a good or bad, black or white kind of thing. It’s nuanced. If you believe the market is well-capitalized and you can get money from lots of people, then you should pick the people that are going to bring you the most value. And then, you want to give them enough ownership in the company that allows them to want to work on your behalf. I kind of think of it as an interesting play if they’re only investing $100, $200,000 out of a fund that’s $100 million, that’s not going to really move the needle.

If it’s $100, $200,000 and the person’s net worth is a million or two, that’s a big statement. So, I don’t really have a judgment on the $100,000 or $200,000. I have a judgment on whether someone really is going to make an impactful contribution to my company if I were the one raising the money.

Francisco: Right. So when you do a seed round, you actually take the majority. I mean you take a big stake in a company. You would never go in around and – you basically want to lead those seed rounds.

 Lin: Generally, if we are interested in making a seed investment, we generally like to lead the round or partner with someone. Probably we’ll take $1 to $2 million around.

Francisco: So then, talk about the seed rounds and what it takes to get the round as well as the Series A because most – how many people are trying to raise a Series A?

Lin: A fair number of people.  

Francisco: A fair number. When you raise money for Link Exchange – I don’t remember when that was, 15 years ago or so, you raised, for your Series A, it was $2.75 million you raised for a Series A. Today, that $2.75 million would be basically a seed round. Regardless of what we name it, what kind of proof points did you need to get $3 million then? What does it take today, what kinds of proof points does a startup need to raise $3 million today?

Lin: Yeah, that sort of changed from what’s an A today versus what’s an A back then, what’s a seed back then? Link Exchange started with $100,000 in seed.

Francisco: Wow.

Lin: It was from a friend of a family member and we had to figure out how to build data centers in co-location facilities. This is not like [indiscernible 00:19:19] time where you can just go – We had to build a data center so it was quite interesting that today’s seeds are anywhere between $1 to $4 million and Series A are $5, $10 –

Francisco: Up to $25 million.

Lin: – $15. One of my partners call that vanity sizing in the venture business. So, I think the proof points are pretty much the same as it was back then. For investing in a Series A, we’re looking for founders that are a rare breed. They’re creative spirits, they’re the underdog, they’re resolute, they’re independent thinking. It’s on our website, what we look for. Another way to summarize it is they’re relentless and they just don’t give up. They have unique insight into their market and why the world should be different and why they can win.

The way they’ve gotten into that unique insight is to keep asking why? Why is this industry been created this way and where are all the assumptions that don’t make sense anymore? Finally, they’re just people that sort of want to change the world. That’s on the founder side. On the market, most venture capitalists will tell you that they’re looking for a large market, which is always true. We’re always looking for a large market.

I think the concept of the market is more nuanced now, just like what we find to be a great founder is more nuanced than “you’re unstoppable”. The nuances are no market is perfect, but we would like a large, growing, non-competitive market. Those are not always going to be the same so it’s very nuanced. Are you in a large market, but it’s not growing anymore? Are you in a large market, but it’s hyper-competitive? Are you in a smaller market, but it’s growing really quickly and there’s no competition? Are you in a market where the trends are favoring your company versus the incumbent because of the changes in technology or the changes in the business model or changes in the service?

There’s a whole nuance of our understanding of the market. We’re looking for a product or service that customers and clients really love and they’re willing to pay for it.

Francisco: Does that mean that they have to have revenue? You’re doing $4 million to $25 million Series A rounds. You’re writing out checks as little as $4 million, probably on average, $10 to $15 million. You talked about the traits that an entrepreneur needs, the market size – it has to be quite large, but what about the traction and where do they have to be? Do they have to be generating revenue? Do they have to have a certain number of customers?

Lin: You don’t have to have a specific number. I think if you’re on the enterprise side, you certainly need to have some pilots and some ability to show that those pilots have converted. That’s much more important on the enterprise side. The consumer side, obviously, there’s lots of [indiscernible 00:22:24] models and you can show – you don’t have to show a lot of revenue, just show a lot of users and an interesting conversion rate to paid. The number of paid may still be small. All the way to companies that have great traction and great retention, but no monetization.

I think the challenging part in building an app today is that it’s very hard to get into the top 100 apps so you’re going to have to figure out how to do that.

Francisco: If you’re investing in an app company, do they have to be in the top 100?

Lin: They don’t have to be top 100 when we invest. The dream is that they are an important application today, a mobile application today. The dream would be is that they’re going to be the top 1 to 50.

Francisco: You, at Sequioa, you guys have looked at Uber for their Series A. They certainly had an entrepreneur with a lot of conviction and personality and a big market. Why did you guys say no?

Lin: Yeah, that was a big failure on our part. Seriously. I think sometimes we were too smart for our own good and that’s an example of being too smart for our own good. I think we sort of looked at the market. First of all, we looked at the service and we loved it, as a product and service that we would liked. We looked at the entrepreneur and he’s obviously relentless, an original thinker. What we got stuck on was the market. The original pitch in the Series A was that it was going to be a black car service. We did not dream with Travis, what we call dreaming with the founder, on what this could be.

I think if we had dreamed with him that this could transform transportation, I think we would’ve gotten their more easily than thinking that it was going to be a black car service.

Francisco: Was he trying to get you to dream and think bigger and you guys just kept thinking “black car, black car,” or was he talking “black car” and maybe both sides should’ve had a bigger vision and his vision came after his Series A?

Lin: I don’t know. It’s five years ago, both sides will probably rewrite history to some degree, but we left thinking that it was going to be a black car service and it was going to be very hard to get into taxi. He probably said, “I’m going to go into black car because it was unregulated and taxis are regulated and we’ll eventually figure out the taxi.” He didn’t have a solution like Uber app at the time where even talking about it to the degree that he had been. But he certainly was thinking broader than the black car service.

Francisco: You’re an investor personally in Uber. You invested $30,000. You clearly had the vision, but as you said correctly and rightly so, that it’s easier to write a $30,000 check than it is to write several million dollars and you have to have a lot more conviction at that point. But Peter Thiel was on the stage last year and he is an investor in Lyft. He disclosed that, but he felt that Uber was overvalued. At the time, I guess it was $40 billion.

You’re an investor. I’m sure you’re a big fan. Explain to us here why Uber – what is the opportunity now for Uber? $40 billion seems – why should it be $100 billion?

Lin: I think if you take the point of view that it’s a commodity service and that it’s – I have a lot of respect for Peter Thiel. I think he use it as a commodity service that it doesn’t really have powerful network effects. It may have local network effects. It’s a street fight for every single city that you go into. If you take that point of view, then maybe it is overvalued. But you can also take the point of view that their traction has shown that they have some secret playbook that they’ve been able to go into markets where others have been dominant and out-execute them.

Then, you start thinking maybe they will have a global brand and a global network which then allows you to think about all sorts of other things that could happen. This could transform transportation, it could transform logistics. That’s the dream scenario. I don’t know where the ultimate end game will come out. I certainly hope for Uber that they’re successful. I would just point out that there are a lot of companies that you could write off as commodity companies, but they have figured out a playbook that no one else has in the past.

E-commerce is one of those areas. I think you have Amazon that is worth multiple hundreds of billions now that you could’ve said it’s a book business or it’s in a competitive market. It’s a low, sort of commodity value by moving a product from point A to point B, taking orders on one side and getting suppliers’ inventories and then sending it out. It is a competitive market. It’s not a zero to one sort of company as Peter Thiel would call it, in my opinion.

Does that make it not a good investment? If it turns out to so competitive that you can’t establish market leadership, maybe it’s not a good investment. But Amazon was able to figure out market leadership. Uber seems to be figuring our market leadership, at least in the United States. The jury’s still out whether they can be globally dominant, and so, we’ll see.

Francisco: I wanted to ask you questions about AirBnB too because you’re on the board and you’re an investor since the $7 million Series A, Sequioa invested back in 2010 –

Lin: We actually invested in the seed.

Francisco: In AirBnB?

Lin: Yeah.

Francisco: Oh, right, the $600,000 seed round as well in 2009, but I also want to mention that we are taking questions as well, so do we have the microphones over there? If anybody wants to ask a question, please feel free to just walk up to those mics that are on the side of the – on the aisles. I want to ask you a question – I don’t know, I’m sure a lot of people here read about Mike Moritz essay, your partner at Sequioa.

He wrote an essay about subprime unicorns. He basically said that investors – that basically these prices are illusory. They are basically – the investors are – what did he say, exactly? I will tell you, he said that, “Investors have structured their investments as dead in all but name, meaning they still stand to profit if the company is far less,” so I’m assuming he’s referring to liquidation preferences. Just wondering, is this a warning sign to entrepreneurs out there? Are they sitting down with investors and just demanding higher valuations and not understanding that at the end of the day, the VCs call the shots when it comes to the terms and they may not be that good for them?

Lin: I don’t know if we call the shots because the entrepreneurs are demanding higher and higher valuations. On what Michael was talking about, his notion – basically he calls it, it’s structured almost like debt and it’s only equity in name, in equity only is his notion of multiples of liquidation preferences or ratchets. I think most people will tell – would advise entrepreneurs to avoid those.

I think the reason to avoid those is it’s an unfair situation because as an entrepreneur, you raise money, I don’t know. Let’s call it three or four or five times in your company’s life and maybe you’re a part of three or four companies, and so, maybe that’s ten times in your lifetime. That’s not a lot of experience on dealing with things like ratchets or liquidation preferences, to the extent that you just want plain vanilla, just ask for clean terms and let the market price – the valuation, to the extent that you don’t think that that’s the right value for the company and you think you have more information and therefore, you think there is more upside to your company than the market is giving you.

Yes, entrepreneurs have asked that we give them a higher valuation in exchange for downside protection. I think the unfairness of that is investors have done this more time than you have and they probably understand the downside more better than you do. And so, my advice to entrepreneurs is if you’re going to entertain that because you want the headline number of whatever number the valuation is, that you really think about the downside and what happens in the downside.

Truth be told, Zappos was one of those companies where we actually took a liquidation preference that’s more than one X on purpose because we wanted to leverage that liquidation – the valuation. We believe in the company so much that we can leverage the higher valuation to get more debt financing for the company. And so, there are good reasons to do that, and in the end, it’s very interesting when we did the analysis because Tony and I went back to the emails. The deal that Sequioa would have given us on plain terms, basically ended up being about the same as the terms with the higher liquidation preference, with the higher valuation.

Francisco: You’re able to attract more – you wanted the higher valuation to attract other investments?

Lin: We were using the higher valuation to attract debt investors so we raised a fair amount of debt to finance the company as well.  

Francisco: But today, it’s even tougher. These entrepreneurs are hearing these markdowns like Fidelity so not – they’re getting a high valuation, but now, they’re stuck with terms that aren’t so favorable and potentially, they could see their valuations marked down.

Lin: Yeah, but you could also look at the flipside. They raised a large round and a high valuation and they have the cash.  

Francisco: Okay. So you’re saying that if you truly believe in your company, then great, go for the high valuation and get the one X liquidation preference. That’s common though, right? One X is pretty common.

Lin: I think most entrepreneurs, obviously believe in their companies. Their natural inclination is to ask for the higher valuation with these terms, but my counsel is to really understand what happens in the downside scenario on those terms.

Francisco: What happens in a downside scenario?

Lin: Well, if it’s a ratchet, a full ratchet means that all the stop that you raise at a high valuation gets re-priced to the lower valuation so you really didn’t raise money at the higher valuation. I think you just have to understand the downside. The downside is if you have, let’s just call it an extreme case, if you had an investor who has a 3 X liquidation preference or 4 X liquidation preference on your company, the day they invest in their company, they won’t make 4 X, the next day they will make 4 X if they liquidated the company, guaranteed.

They’re not actually on your side to help you built the company for the long run, unless they could dramatically overcome the 4 X. And so, I think that that’s something you really have to consider very carefully.

Lin: Does anyone have questions? I don’t see anybody walking up to those microphones. This is a great opportunity to ask Alfred a question and he has been a three time, four time entrepreneur, has sold all of his companies. I’m sorry, they didn’t sell them, they were acquired for several hundred million, including Zappos for $1.2B. Now, he’s a successful investor. I think, there’s one person right there. You have a question?

Audience member: Yeah, sure. I just want to ask, since you did invest in AirBnb, what did you see in their value that you didn’t see in Uber, because they both seem sort of early on [indiscernible 00:35:19]?

Lin: I wasn’t at the firm when we invested in AirBnB. I joined a little later, but AirBnb, if you asked the partnership, they would’ve said that they came with a much more prepared mind, because they’ve been looking at the vacation rental market for a lot longer and seeing how that would work. AirBnb also has this interesting, sort of phenomenon that most people don’t talk about. It is one of the rare global network effects companies in commerce. And so, that was something that we got our minds around as the proprietary defensible thing and advantage and one of the things that we always look for in a company that we invest in is some form of proprietary advantage that allows you to win.

They could be technology managers, they could be network effects, it could be a disruptive business model and it had both a disruptive business model and a network effect and bringing the technology to bear on a service like a bed and breakfast which lots more people than you might think would use, was very interesting to the firm.

Francisco: On that note, AirBnb has incredible network effects, it has a very unique inventory, unlike maybe Uber which is just simply cars. Why – and I don’t know how they’re doing financially, but why is it valued at $25 billion and Uber is 50% more?

Lin: I don’t – you should ask the people who do.

Francisco: But you’ve invested in all the rounds for AirBnb, haven’t you?

Lin: Sure. We invested in all the rounds. I don’t know if it’s as easy to explain valuations rationally, but I think AirBnb will continue to grow at a nice pace. It’s a little harder, in AirBnb’s case, to buy supply than – you just can’t buy supply, you go just, “Can we rent out your room?” It’s a lot harder to do that than to get people who drive their cars, so the growth rates are very healthy. I don’t think they’ve disclosed what the growth rates are, but they’re probably not growing as quickly as Uber.

Francisco: I wanted – the Uber and, well, you’re an investor in AirBnb, DoorDash, InstaCart, these are all part of the sharing economy so I want to ask you a question about how do you think about the newer opportunities in the sharing economy, but we have a question right there.

Audience member: Alfred, you mentioned about when the good time is to start a new fund and you said maybe it’s not the best year too but if you’re in it for the long haul, you might as well get going. If someone were going to get going right now, in this environment with 300 micro VCs, post seed stage firms, what would make a new fund look differentiated? What would help it stand out from the 300 others? What’s the ratio net worth?

Lin: Well, I think if you were to ask potential LPs that invest in the seed funds, I think they would just sort of want to know, since there’s so many of them, what’s your unique proprietary advantage just like we ask companies, “What’s your unique proprietary advantage?” And if you can answer that well and crisply or you have a sector that nobody else has looked at and you have real conviction on why that sector is going to take off and you’re going to specialize in that sector and you have real insights to that sector, maybe people will still look to invest in that fund.

Audience member: Thank you very much.  

Francisco: So back to that sharing economy question and just what you’re looking at, and I know that’s something that you’d like to – you’re very involved in consumer and that’s what you like, that area, so when it comes to – you can’t say you don’t like the sharing economy companies because you’ve invested in so many of them, but I know there’re a lot of people here, a lot of entrepreneurs who are trying to think about other opportunities and so, how do you think about that? I know you need to think about it as a VC. I know you’re also getting a lot of entrepreneurs who are just approaching you and just sharing their ideas, but what goes into your head to kind of figure out what the next opportunity is?

Lin: If you’re asking what areas we are looking at, I wouldn’t be a very good investor if I told everyone what I’m looking at right now. But the way I think about the sharing economy is – how do you generate network effects and make it much more of a marketplace than just a bunch of people moving product around? If you can answer that question, you’ve probably iterated into the business. That makes a lot more sense and it has a lot more proprietary advantage than just the quote unquote “sharing economy”.

Francisco: You don’t have to specifically tell us what you’re looking at, but can you – an industry, perhaps? Healthcare, education –

Lin: I won’t tell you that one of the areas that baffles my mind, that there’s not more innovation has nothing to do with the sharing economy. Right this second, if you look at the top apps in the AppStore, all those companies have high LTVs and therefore, they can pay their way to being in the top apps, almost all of them, they are either –

Francisco: They can pay their way to be a top app?

Lin: They can pay their way into the top apps because the people who are up there, they have high LTVs. Lots of gaming companies have high LTVs, casino slot games have high LTVs. The entertainment apps have high LTVs, and so the question for the entrepreneurial community is, how do you figure out how to disrupt that, because mobile distribution is now very hard for a startup. Almost every single startup cannot pay their way into it so they need to figure out some viral hook, they need the engagement, they start to monetize and then they can pay their way into it.

But even then, it’s a long ways off. So the question is, how do you create a mobile distribution that is much more powerful than the current system? I think that’s a very interesting vein to sort of look at.

Francisco: Is this an area you’d be interested in investing in?

Lin: I think we’d be interested in investing in it. It’s an area that I think lots of our companies would actually use. It’s an area that I think can benefit all sides right now.

Francisco: So, distribution platform for mobile apps. All right. Not really the sharing economy, but it’s an idea. Okay, I think there’s a question over there.

Audience member: Thank you. [indiscernible 00:42:28] startup, I was wondering how will you [indiscernible 00:42:35]?

Lin: Sorry, can you speak more into the mic?

Audience member: Yeah, [indiscernible 00:42:46]. I have a question regarding [indiscernible 00:42:50] opportunities when you have higher [indiscernible 00:42:53] and you also have regulation affecting [indiscernible 00:43:00]?

Francisco: Something about regulation –

Lin: I think there’s two separate questions. On hardware, how do we view hardware? If it’s just hardware, unless you have the margins upfront, it’s generally not – it’s a hard business, so we shy away at just hardware companies, unless there’s some ability to provide software or services on top and to be able to charge for that. On regulation, that’s more nuanced. I think, obviously, a lot of the companies that we’ve backed have challenged regulations to some degree.

I think as a startup, you have to challenge regulations in a smart way or you have to figure out a way around it. Obviously, companies like YouTube had some regulatory problems with copyright. They had to figure out a way to sort of get around it. AirBnb has regulatory issues that it has to go around. Uber has – and then, there’s this question of whether those regulations get enforced or not.

In copyright, it gets enforced later. You have some time to figure it out. In AirBnb or Uber’s case, it also got enforced later. If something is being enforced immediately upon you, it’s generally a hard area to sort of get around and it’s not a rich area for you to sort of innovate around unless you figure out a way completely around it.

Francisco: Great. Let’s get this guy here so we can get two more questions.

Audience member: [indiscernible 00:44:35] You talked about LTVs and sharing companies [indiscernible 00:44:39] so at what point do you see like, okay, 19 bucks a month for the system? At what point do you see that this is something that you would take a look at and have a higher LTV that competes with the rest of the business that you’re talking about?

Lin: If you have nine months of data, that’s more than enough. Send us the data.

Audience member: We’re like 83% retention numbers in six months, $19.00 a month. Is that something – like at what point do you say [indiscernible 00:45:15]?

Lin: Well, subscription business, we tend to see increasing – it’s like a negative trend. You want subscription businesses to negative trend so I think the numbers are just different depending on if it’s a premium service that 80% retention is amazing.

Audience member: Thank you. A question raised [indiscernible 00:45:42]. It seems to be it’s easier to raise that than for you to start it again [indiscernible 00:46:13].

Lin: I think that’s probably true, that it’s easier to just start from scratch. People can get their heads around that. It’s a new company, it’s a new business. They don’t anchor to the wrong thing, which is all the time you spend doing the old business. If you picked the right investor, I also think they won’t care. I think we’ve backed a number of companies where they are a walk in the woods for a period of time, they figured something out and we invested in them.

I think the challenge that you have to face with your founders and your board and your investors is it’s really a new Series A company and you already have the Series A, what are you going to do the cap table to make it palatable for a new investor to come in? If you don’t have a good answer to that, I think it makes it a very very difficult because then, you’re asking us to be the bad guy and we’re going to cramp down other investors to make the cap table work. You should have that conversation before going out and raising the investment.  

Francisco: I think that’s all we have time for. We have to wrap it up, but I think Alfred is sticking around, so let’s give him a hand. Thank you, Alfred.

[Audience claps]

[End]

Editor's Note: Our annual Vator Splash Health 2016 conference is around the corner on February 23, 2016 at Kaiser Theater in Oakland. Speakers include Helmy Eltoukhy, PhD (Founder & CEO, Guardant Health), Ryan Howard (Founder & Chairman of the Board, Practice Fusion), Sonny Vu (CEO & Founder, Misfit Wearables), Lynne Chou (Partner, Kleiner Perkins) and more. Join us! REGISTER HERE.