Podcast: Bill Gurley on “Invest Like the Best” Podcast
Bill Gurley is a partner at Benchmark, one of the most successful venture capital firms of all time. Some of Bills past investments include GrubHub, Open Table, Yelp, Zillow and Uber. In the case of Uber, the firm made an initial $9m investment in 2011 that is currently valued at c.$7bn. He has become a regular guest on the podcast “Invest like the Best” and this particular episode is a cracker.
This c.1 hour long podcast is focused on Bill’s two passions — investing and technology so is very relevant to what we do at TDM. In particular, Bill talks about what drives network effects and what he looks for in marketplace businesses before investing.
It is very hard to summarise this hour of gold in a few sentences but a few key takeouts include:
- Bill challenges the traditional microeconomic notion of ‘diminishing returns to scale’ for technology businesses. That is, Bill believes many of the current marketplace businesses have such powerful network effects that they actually display increasing returns to scale (i.e. they continue to accelerate as they get bigger). He then postulates that this could explain some of the ludicrous valuations in technology businesses today (i.e. 20x+ revenue multiples)
- He talks about the difference between a two-sided marketplace with network effects and a two-sided marketplace that is just a lead-gen for the supply side. The former is what he focuses on from an investment standpoint and these are the businesses that have increasing returns to scale
- User-generated content (“UGC”) as the next big social media business — Bill is very attracted to UGC businesses as he believes these have inherent powerful network effects. He talks about the characteristics of this type of business and what type of entrepreneur is required to successfully build one
- He talks about the disaggregation of marketplaces into more niche verticals (e.g. generalist jobs boards turning into industry-specific job marketplaces)
- He is critical of all the excess cash in the system and the ability of highly uneconomic businesses to receive funding on the assumption that they can be economic at some point. He sounds a cautious word to any business trying to go up against a deeply-funded rival — basically be prepared to go to war
