Notes for TWiST Ep.237 — George Zachary of Charles River Ventures

George Zachary

Today I’m covering another successful investor (Twitter, Yammer) speaking at LAUNCH Festival 2016 (March 2–4, 2016 in SF).

In this episode (Youtube, Itunes) from 2012, Jason is joined by George Zachary from Charles River Ventures, a veteran in the VC business with a lot of insights and behind-the-scenes from his years in the Silicon Valley trenches.

If you’ve been reading my notes of TWiST episodes with investors or just following the show bi-weekly, you should start recognizing a common pattern between how these individuals see the market and looks for opportunities.

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George Zachary’s background

• George Zachary of Charles River Ventures is a serial entrepreneur and serial venture capitalist
• He was in SGI, Silicon Graphics, the hot company, the Google of his time
• He worked with Jim Clark, co-founder of Netscape with Marc Andreseen-
• He’s been a VC since ‘95
• He’s invested in Twitter, Yammer, Cloudshare, Blippy, Airbnb, Vignette
• VC at its core is giving founders capital to grow their business, usually for very high-growth businesses
• Where the cost of capital compared to the market opportunity looks low
• It means that my company is growing so fast that giving away 30% for 3 millions to get there quicker or to block others to get there
• He’s the founder of ShutterFly, photo-sharing site — he came up with the product idea, sending photos to his family in Greece February Take your digital photos and send them to people in person
• He went through the bubble of ’99 and believes there’s some kind of bubble going in

Differences between ’99 and today

• The market opportunity now is huge, the people on broad band is 10–100x than 15 years ago
• Cost of computing has gone way down, open source has changed the landscape
• Cost of building a startup way lower today
• In Silicon Valley, bad behaviours from successful people are easily forgiven and forgotten
• Having commitment to reality is #1 important thing for an entrepreneur, you must speak your mind an be passionate about the topic you are talking about what founders should do, even if it hurts somebody in their board
• “This is what should be done, this is what we do”: this is leadership and to some people it may come off as jerky, but who cares, you are the founder
• The LP, limited partners of a VC fund care only about Internal Rate Return

What makes a great venture capitalist

• Finding, attracting, paying attention to things that can be “change the world” kind of companies, companies that create a new business, disruptive, listening to your own gut and intuition as opposed to market research, due diligence, data
• Luck plays a significant role
• with an estimate of 7 investments per year, 70 companies in a decade, low chances to find a Google
• If you invest in a company that becomes Google or FB it makes your career

Biggest regret

• They could have invested in Google, 8 millions for 16% of the company. As a firm they would have get 20% of those billions that now it would be worth

The business of VC is broken

• There are about 800 firms, 200 of them are zombies, dead, no new investments in the past 24 months
• 600 of them are active making new investments (for a new company or a portfolio company)
• 300 of them have made a new investment in the last 24 months
• 32 of them have been profitable in the past 10 years ( Charles River Ventures is one of them)
• Some VC firms buy shares on the secondary market and then claim those companies as part of their portfolio, that they have invested in those founders — it’s just a marketing angle
• Marc Andresseen and Ben Horowitz, very disruptive, making big bets, they want to invest in companies that matter, regardless of the price point they can enter at
• Smart of them, they are building their brands around the hits

How to tell if the VC firm you are raising money from is one of the profitable ones

• Key issue: you want to take capital from someone who will not have funding pressure from his Limited Partners, if they are worried about the ability of raising the next fund, they may try to force short term sales to juice up their IRR
• As a founder you want to work with firms that have no funding pressure, hence being able to take more risk
• How to tell which is which: by looking at their track record, exits they had compared to the fund size
• Top 30 firms these days returned 2–4x the funds they manage (some more, some less). It would be a 20% return annualized over 10 years
• Ex: 200 mln fund returned from 400 to 800
• Their goal is outperform the S&P500
• LP partners usually put 5% of their money into funds, if they put more it means we are at the top of the market, they take more risks, invest in more opportunities
• If they haven’t raised a fund in the past 3–4 years, not a good sign
• If they have raised a fund last year, great sign, it means they went to their LPs and had good returns to show them

How he choose founders

• He gets 50–100 meeting requests per week (full business plans), 20–25 are referred and he looks at them first
• Who refers them: founders, angel investors refer the best ones
• When he reads their executive summaries, if he’s more excited at the end of it than we started he’ll meet them
• They always vote for the companies they fund, and the companies that they all voted highly didn’t bring great returns, the ones that some love and some hat brought the best returns
• It’s a gut thing
• A good, disruptive idea should polarize the audience, if everybody likes it maybe it’s not groundbreaking enough
• In founders you are looking for strong personalities, need to succeed, intelligence. Leadership
• Immigrants or kids of immigrants have this
• People exposed to chaos when they are young, famility situation, geopolitical situation, economic situation that forces them to act like an adult, say “I don’t need to feel safe now through my parents or through the world, I’m gonna feel safe doing something through myself, empowered individuals from a young age and they learnt that controlling their environment, all their things they do and that magical things won’t fall from the sky
• They have to drive it — Sergej Brin has immigrants parents
• Very successful founders told him the same things: mom super involved, dad totally gone or dad super involved and mom out of the picture, dysfunctional family

How to deal with founders

• He believes you have to respect founders and their need to work through things
• It’s better to have them run the company to the ground than fire them, hire professional managers and being beaten from the competition
• Returns nowadays are bi-polarized: driven by people that want to change the world, it’s either big or meh. You can’t play the capital preservation game, LPs don’t care about getting standard results, they want home-runs
• If the people in the company wants to sell, you have to sell, they are the company

Next Steve Jobs candidates

• Elon Musk
• Jeff Bezos
• Zuckerberg

Jobs in the US

• The workforce must be retrained, you can’t regain the jobs of the past (farming, manufacture)
• You need teach them how to code and design

Contact him

• You can write him an email: george@crv.com — he replies to anybody, except from brokers
• If you need brokers… you‘ve already disqualified yourself

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