Chip Hazard; General Partner, Flybridge
Whenever I present on venture capital, a regular question is, “What have you learned from your losses?”. I used to answer highlighting companies that failed due to some combination of being too early, in too small of a market, or with a team that never came together quite right.
However, given the power-law of venture returns, this really isn’t a helpful answer. The real losses as a venture investor are the missed opportunities, the companies you passed on that you should have invested in, and the blind spots they reveal about your investment approach.
At the risk of great pain and ridicule, I want to share learnings from a personal loss. In the summer of 2008, one of our portfolio company founders introduced me to a guy named Jeff Lawson, who was starting a company called Twilio. The first slide of Jeff’s pitch deck is below.
I had a call with Jeff, and while I was impressed with him, I passed on the investment. My reasoning was that voice apps were not going to be a mainstream application in the near future (my fund had looked at a number of VoiceXML companies in the years prior that never took off), and that the customers that would be attracted to the Twilio platform would be small businesses that would generate limited revenue and therefore result in a relatively small market.
Of course, I could not have been more wrong. The company went public in 2016, describing themselves as a provider of a “Programmable Communications Cloud software [that] enables developers to embed voice, messaging, video and authentication capabilities into their applications via simple-to-use Application Programming Interfaces, or APIs.” Today, the company has a market capitalization of $17B, and that initial investment, had I made one, would have returned over 500x.
Where did I go wrong? My mistake was thinking of the company as it was pitched, not as what it could become. Instead of seeing it as a developer-driven cloud platform, which was a thesis of ours at the time, I viewed it as a provider of voice applications, which of course is only a small portion of the story as the company evolved. I also failed to tease out Jeff’s broader vision for the company and the wave of smartphone adoption the business was about to ride. I also passed due to a market not working in the past, without thinking about how market conditions changed and why the current environment could make it work- a dangerous mistake. Finally, I never met with Jeff in person, and all I knew about him beyond his pitch was that he lived in LA, running his company out of a surf shop. I’d like to think that if we had met face-to-face, I might have come to a different conclusion about the opportunity.
For me, the generalizable takeaway with high-quality founders is to always push my thinking on “what can go massively right?” and “how can the initial entry point become a stepping stone to something much larger?’’.
As an investor, you’ll also have blind spots, so a critical key to success is to learn what yours are so you can improve your approach.
