Ravi Mhatre, Partner at Lightspeed Venture Partners, is one of the veteran VCs in the Valley. With over 20 years of experience in investments and 15 exits, he is considered one of the most prominent venture capitalists for Enterprise IT, mobility, and cloud startups, and has been recognized on the Forbes Midas List of top venture capital investors.
During his most recent visit in Tel Aviv, I got the chance to meet Ravi at the lounge of the Royal Beach Hotel and get some insights on how VCs look at the current market, how billion dollar funds still make seed investments, and why you won’t get his attention if you are trying to build a $100 million company.
Yaniv Feldman: Everyone is after the next unicorns (billion dollar companies) at the moment. But in order to get to those companies and to those entrepreneurs at such an early stage, you have to place a bet. When people come to you with a vision at such a young age for a company, which is basically more of an idea, how do you make your big bet? Based on what?
Ravi Mhatre: I’ve been in venture capital 20 years now and it’s pretty personal at some level. It may not seem that way, but as a firm, we have seven or eight senior partners, two of whom are in Israel. We all know each other really well. When you meet an entrepreneur, it’s very personal. You’re making a judgment: Do I believe that person? Is this person inspiring me? Do I believe the way they communicate their vision to me? Do I believe that they’re going to be incredibly passionate and motivated, because it’s hard to build a startup? Do I believe this person is going to outlast everyone else? Do I believe that when I work with this person and they have to turn around and they have to convince the best of the best to come work with them and follow them that they’re gonna have what it takes? Some of these are very experiential judgments that you have to make on people early.
Venture capital is not a business of batting 1,000, but it is a business if you are a high-quality, early stage VC that has been in the business a long time. And I’m not really talking so much about angels who put money in and then lean back.
You’re only making relatively few bets and then you are kind of saying, this is a company where if I’m in, then my responsibility is to help them get to the point where it’s being all covered. For people who invest like that, a lot of it is the early judgment about is this a person who, at some point, I can get behind and basically be in a position where I am fully and totally committed to that person’s success.
And if that person doesn’t succeed, I have to be, in the bacon and eggs sort of analogy, as much the bacon as the entrepreneur. You don’t get a chance to head your bets somewhere else.
“It’s really not about the money.”
If you go in with that mindset and that’s the culture of your firm — I’m going to make a decision now that I believe in this person so much that I want to get behind that person and in all the ups and downs, whatever it takes — I’m gonna be in the trenches with that person.
There aren’t hard and fast rules. It’s really not about the money. They [the entrepreneurs] just have an incredible passion or motivation to do something because you know how hard it’s gonna be over a long period of time. You have to be able to run ten marathons in a row strung together.
We also look for people — I call it being an adaptive learner. These people who are really hungry learning machines because over a seven- to ten-year period, you may have a vision about what you want to do, but the markets change or the exact way a market plays out…it is impossible to know in that early stage if you’re talking about a big idea.
You really want to get a sense of people who have that intellectual course of power and that intellectual curiosity that, as things shift and evolve, their vision may stay the same, but the way they evolve the messaging around that— how they package that and present it to the market — those things can change so you end up landing exactly where the market is gonna go. So we call it being adaptive learners. There are some people we meet who index really high on that. We look for that.
The last thing is no company can be built by one person. We look for people who we just think are gonna be really compelling when they go out and we talk about the best of the best. There really is a war for talent out there and these are the kind of rare breed of people that we know other people are gonna want to follow. So those are just probably three of the most important things and we spent a lot of time really getting to know the entrepreneurs.
As I said, it’s very personal. Once we’re in, we’re in. So we have to believe that these are people who we believe in. We can’t predict the future, but we feel that these are the people who have a really good shot at making the future.
One of the questions entrepreneurs are facing when they are approaching VCs in those stages is do we present the product that we want to build tomorrow or do we present the vision of where we want to be in two years from now? You obviously know that when you build a presentation it’s very hard to see both ends. It depends obviously on the type of VC that you’re sitting in front of, but what would be your take on that?
We say there’s two things. Long-term vision and your initial entry point. And both have to be well thought through. Entry point without vision is really a feature, not a company. Vision without entry point is really a strategy, but not a product.
The lightning in a bottle test
Growth versus profitability. Usually when you’re looking for the big companies, the really, really big ones are the ones that are aiming for growth. One of the things that most people say especially today’s so called “private market bubble” is that the near future is not so obvious and no one really knows what’s gonna happen in the next few months so they should build something that lasts on its own and not burn money to make the company bigger and than make it to the end of the runway with no money in the bank.
Are you looking for people who would be profitable from six or 12 or 18 months from today or when someone comes to you and says, “I have a vision in a market that’s evolving right now and it’s gonna peak in four or five years. That means I’m gonna need a lot of money in the next four, five years. But, in five years when this market matures, I’m gonna be on top of it and become an industry standard.” Is that something as a VC you can understand, and if so, how does that stand?
That’s a good question. We tend to break it down. I think Peter Thiel actually did a good job of describing that companies go through the zero to one phase and the one to end phase. The zero to one phase is really that creating something out of nothing. It’s establishing product market trade. It’s going from “I know there’s a vision of how I want to change the world that I have and others don’t believe, but I have to figure out how to substantiate that in a way that I have product flow and I can get the engines spinning. That’s sort of zero to one. And when you do have that, one end phase is, “I want to scale up because I have lightning in a bottle and I want to cover the earth with it. I want to do that faster than anyone else so that I can grab as much of the market as I can.”
There is an important distinction in the zero to one phase and the one to end phase. And there’s also an important distinction in the way the entrepreneur needs to think about the problems that they’re solving. The zero to one is sort of clarity out of ambiguity. The one to end is, I have clarity and now I need to run as fast as I can.
So if we’re gonna work with an entrepreneur, we try to be really calibrated with the entrepreneur about where are we in the phase of the company’s life cycle. And depending on where we are, it informs what are the most important things to do. And we’re not shy about what we do.
That’s why, even though we’re an early stage investor, we manage to put half a million dollars. Why is that? Because the zero to one phase isn’t about trying to put tens or hundreds of millions of dollars into a company.
Frankly, less capital sharpens the senses because what we’re really trying to do is be very fast and test and refine and get to the market and really not build ten features, but build two and see if they’re right. And if they’re not, you force correct. So you want to be really lean in that stage. Once you feel like — we quoted the lightning in the bottle test — when you start to feel like you have lightning in the bottle then, as they say, “Damn the torpedoes, full speed ahead.” Then is when we will write large checks, $20, $30, $40 million. We will go raise $100 million because at that point, we know that we can bring that money in and efficiently spend it.
As a firm we’ve been around a long time and we’ve worked together a long time. We were around in the early ‘90s. But, this idea of, “Let’s raise $100 million and let’s go hire 1,000 people and let’s build some stuff,” I think we’re just really conscious that you have to know where you’re heading before you start to go down the path.
“No one person is smarter than the wisdom of a crowd.”
Yeah, but the question is if and how can VCs understand companies that would take two or three years in getting from zero to one. Most of the companies you invest in are enterprise IT companies so obviously, the kind of market for these kinds of companies is a bit different. But if someone comes to you with a “Palantir” vision or something of that sort, that tells you, it’s gonna take me at least two years to get to where I want to be in the product stage before I come out, which is a lot of time in terms of the tech market. How would you as a VC look at that? Is that a disadvantage?
We’re believers that it may take that long to build a finished product. But, I think one of the things we have learned is it’s really dangerous to build things in a vacuum.
In the zero to one phase, you really want to be as much as you can touching and feeling the market and your users and customers in a way that you can. The best companies develop incredibly fast feedback where they find really lean, efficient ways to touch the market and get feedback on whatever the current state of what they’re building is and then wrap that into the product and then go out again. That leap iteration: test, iterate, refine. They learn extremely fast. So if an entrepreneur were to come to us and say, “I have a big vision and here’s my 24- to 36-month $10 million plan for how I’m going to go into that room over there and go build it and I’m going to come out and present you a product.” We say, “Wait a minute.”
No one person is smarter than the wisdom of a crowd. I’m exaggerating to make a point. We think of the most successful companies, [who have developed ways] to go from where you are, which may be nothing — just you and an idea — to fulfilling that vision.
How can we turn that into a process, which is incredibly lean and efficient and as rapid as possible? Build a minimum viable amount of capability and take it to the market in an unfinished, controlled way. Get feedback and then build a muscle memory around turning that crank really fast.
Have you ever done an investment based on just a conversation?
So what would be the ideal stage for you guys in terms of companies coming to seek an investment from you? Have you ever done an investment based on just a conversation?
Absolutely. Countless. Lots of times. I’m just trying to think back in my own portfolio right now. One company, ThoughtSpot, it’s basically a next generation analytics company. It’s next generation of what a company like Tableau does. Yeah, I have known the person before, but we had a conversation like this and said, “Great. Let’s do it.” I write him a check for a million dollars and gave him an office and we started working.
They don’t all happen like that. But, the thing is we like getting involved really early because I think, the earlier we can be involved in the process, the more we think we have an ability to take resources [and] use those to accelerate the entrepreneur’s ability to get to the market, to scale up.
Take Snapchat for example. When we invested in Evan, he was in his dorm room in Stanford. It wasn’t even really a company yet.
I just think we like to get involved early. There are certain ways it has to establish culture. It has a certain way it has to go to the market. So it’s a progression.
As entrepreneurs form their companies, these companies have a life. They start to form their own identity. Sometimes we can invest in companies if we really like the identity that has been established and we think that the entrepreneur has built a company that’s its way of going to market is going to allow it to be a market leader, then we’ll invest.
But, a lot of times when we get involved early, we like to think that we can be a partner. Again, there are some things that are common in successful companies. At the early stage, you have the most opportunity to put on the table: Here are ideas. How can we help you as an entrepreneur, the partner we’re working with, how can we help you take what you want from that, the best of that, and internalize it? It’s just much easier for us to do that if we get involved at the very ground level.
You need to recruit a fourth founder
Do you have a story you can give me as an example, something extreme that you did for a company— for an entrepreneur— when he needed something that was not normal?
There are a lot of tactical things we do like introductions that entrepreneurs don’t have. An example I would be most proud of is [when we invested in former employees of] Palantir. Palantir is a very distinct [corporate] culture. We really liked them and the vision they were gonna go after.
[But] we said we need you to recruit essentially another fourth founder. There were three of these guys [and we wanted someone] who comes from a totally different background from them. We helped them identify someone who was an exceptionally strong person in terms of their product experience and we convinced that person to join the company.
Now a year and a half later, it’s really interesting to see this company. They have a much more creative tension in the system. So the finished product is actually something that customers can consume a lot more of. It’s starting to show in their rate that they’re growing. That’s one example.
What about the flops?
So the success stories are something that everyone likes to hear. Do you have a story about a company that didn’t work?
It’s easier to talk about those that are successful … Sometimes things don’t work for notwithstanding the best of efforts and best intentions. We do like to do our work right on the front end and get to where we really have something to offer, where we’ve really gotten to the point where we know the entrepreneur.
One of the things that is very common here is that when entrepreneurs get to the trenches, there are some VCs who would have “less time” for them because they have to spend more time with the more successful companies in their portfolio, because that’s where their money will come from. They don’t want to talk. They’re less eager to help when times are tough. Everyone says, you’re here for better or worse. But, it happens a lot that they don’t.
Yeah. If any one of the partners raises their hand to say, I want to recommend something, we do it. With a company with a million dollars or more, we take very seriously the fact that we’ve chosen to work with that partner for better or worse. And that means being a partner.
Look, we don’t have perfect clairvoyant vision. We’ll be with an entrepreneur in the market and the market dynamics will shift. Something will make this situation such that it’s doesn’t make sense to try to continue to build a company and create a market leader. Then you’ll have a frank conversation with the entrepreneur and try to say, hey, here’s our assessment of the facts on the ground. What do you think? Let’s problem solve that together.
Sometimes that means to agree to have a discussion with the entrepreneur that it’s time to have a pivot. Sometimes it’s hey, you know we’ve invested a lot and we’ve found ourselves in a place where it’s gonna be really challenging to build a successful company here. Let’s be clear-eyed about that and if it is, let’s figure out how: If it’s sell the company, find some other partner to merge with, let’s just be really good about it.
A good partner is someone you can have an open conversation with. It doesn’t mean we sugar coat it. It means we’re there to be supportive and in the trenches when things aren’t going well, to try to problem solve.
Things either aren’t going well because it’s something structural that has changed [and] then the goal is you have to be accepting of that. It’s really sad sometimes or unfortunate that the opportunity has costed them their time to do something that is just not going to succeed. Our job here is to be a counselor and say, can we get on the same page about what the situation really is.
Sometimes there is a market opportunity and for whatever reason, with the best of intentions, the company is just not finding a way to successfully execute. And then frankly, our job as a partner is sort of like a good friend who doesn’t always tell you things you like to hear. If what we see in a situation based on our collective experience is that companies aren’t executing well, our job is to communicate that in a clear way and say, “How do we change the facts on the ground about that?” And sometimes that’s hard.
But if you’re not able to have those conversations, in the end, you should not pick those people to be with. If you’re successful, not all people are gonna like you all the time. Our job is to be what we consider very valued. If people can look back and see they may not have always been emotionally happy but they see that they were treated fairly and consistently, that’s what our job is.
Last call in the Valley
There has been a lot of chatter going on lately about what’s going on in the private markets. We’ve been seeing less and less money going into public markets and more and more money going into private investments.
But, as someone who has been through I would say two market downturns at least, how would you capture this? Now it feels like “last call” for startups trying to raise money in the Valley.
I would agree with you that there’s a correction that has happened.
It has happened? Or it needs to happen?
Well I think a partial correction is already happening in the public markets. Some of that was originally because of things that came out of China. That has sort of trickled back to the later stage financing markets or private companies.
I don’t think we’re gonna go back to the mindset people had six months ago which is growth at all costs and basically there is capital available to finance anything. I think people are going to be a little more analytical now about what is the business model. I think that’s healthy, though.
In the end when you have a bubble, there’s usually positive underlying trends which justify investment of capital. We’ve certainly been in a very frothy environment in the last several years in tech and in Silicon Valley specifically. There’s just a real fear of missing out [FOMO in the valley language]. In an environment like that, good decisions don’t get made. I think the fact that we had some volatility is forcing a little more of a return to normalcy and a good return where there’s opportunities.
To get in early on an early stage investment, it takes seven or eight years. You can’t really play the [get rich quick] game easily because you’re just investing in the entrepreneurs. And the time it takes to build a company means that by an issue, you can’t play the market timing cycles.
Yes, there’s a bit of a correction that has happened. And yeah, there’ll be less easy money. But what we’re seeing is for companies that have been really thoughtful about what is my product, where does it fit in the market, eventually what will my business model be and how do I show fundamental metrics about how I grew to achieve ultimately some kind of viable company that truly has value? For those types of opportunities, capital is still available.
As a VC, you obviously look at the exit strategy when you look at a company. Today where the IPO market is shrinking, when you value a company today, do you look at its chances of going IPO or are you looking at its potential of building a business?
We want to invest in entrepreneurs who want to build big companies. If we do that as a first principle, the rest usually takes care of itself.
Yeah, but, more commitment to your investors is to make a return on your investment.
How aggressive you wanna be on growth versus profitability. That’s always a good question to ask every half year in at those stages. There are different answers. It’s probably one of the most important discussions the CEO should have with himself and with the board.
It takes a lot of forethought to design your company in a way that you can sort of change that dial and say, I can go faster and I can earn more money, or I can grow less fast and I can earn less money. I think in today’s environments, the companies that can actually demonstrate to investors that they have that capability, those are the ones that will still attract capital because investors are more nervous and they don’t want to put money into something that’s growing like crazy. You know the management team can’t come up with a credible way to continue growing the business for a long time.
What have been your biggest misses?
Most of them — at least the ones active in Israel — are not capable of having scale in the terms of the amount of companies out there. Listen, I don’t know your portfolio by heart and I do think if we look back a few years, there are opportunities that you guys missed.
Let’s describe what a miss is. There are two types of misses. One is you didn’t see the opportunity. And the one that you saw it and you decided to pass. I don’t know if you want to drag it out, but I would challenge you to look at it and basically say, now you’re running and you need to make bets in Israel. How many bets would you make? So we look at the deals by our peers. We trust judgment. We want to see that coverage. It’s a good exercise for you.
I’d be thrilled to hear what we missed, because we want to learn. For us, that’s the most important: what we’re not seeing.
We’ll invest in one out of 100. We want to do that. We’re early stage. That, I think, is the message. I don’t think many understand that.