On this week’s episode I chat with Jeremy Levine, a Partner at Bessemer Venture Partners. Bessemer has been around for over 100 years and was originally founded by a family that partnered with Andrew Carnegie back in the day.

Jeremy has been at the firm for 21 years and has seen a few cycles. He’s a hell of an investor and has quite the track record. He’s been on the Forbes Midas List and his investments include the likes of Yelp, LinkedIn, Pinterest and Shopify.

If you’re interested in how the VC industry works this is a great conversation for you. We cover how Bessemer operates, how to be a good early-stage investor, the impact of macro trends on the VC landscape, Jeremy’s point of view on contrarian investing and much more. Enjoy.

Show Links:

Transcript (this is an automated transcript):

MPD: Jeremy. Thanks for being here today, man. It's 

Jeremy Levine: great to be here. Thanks for having me. 

MPD: Very cool. So starting off at the top, can you give us an overview of best. 

Jeremy Levine: Sure. So Bessemer, we think of ourselves as a venture capital firm, we've been rafts for the Royal we 110 years. We were started by a guy named Henry Phipps who was part of the Carnegie steel.

Launch and success. And he set out to invest in other high-risk high growth companies back in the early 19 hundreds. And we are essentially a continuation of that over many decades, eventually evolving from manufacturing technologies to information technology. We have offices in the U S and Israel and India and China, Europe.

We invest in everything from twenty-five thousand dollar angel style investments to multi a hundred million. There's equity investments. But most of what we do is series a series B series C venture capital. And we will often do it. 

MPD: When you say you think of yourself as a venture. What's the subtext there.

Jeremy Levine: It depends on how you define a venture firm, and so I think of a venture farm as doing series a series B in serious investments. I don't think it would venture is writing, a hundred million dollar checks. I don't think of a venture Tom as writing angel checks. I don't think of a bunch of farmers is doing software buyouts.

Can we do all this? Most of what we do and what we're most well-known for are the classic venture capital investments make a significant million dollar million to $15 million investment to buy 15 to 30% of a promising idea, very early stage company. That's most of what we do, but we do a 

MPD: lot of other stuff too.

So when you guys do the other stuff, the non traditional venture investments, is that the same team or who's doing that? Is it. 

Jeremy Levine: Yeah, so we take we describe as a crawl walk, run approach, almost everything we do. And years ago we never would've contemplated in a hundred million dollar investment.

And then one of our partners at one point said, wait a minute, instead of letting some great growth oriented firm, come in and write a hundred million dollar check to one of our best companies, why don't we write the check? And and we started, we didn't do it necessarily with a hundred million dollars the first time, maybe the first time it was a twenty-five million dollar check.

And then the next time it was a 50 million check. And so we slowly crawl and walk our way into something new. And so it almost always. Starts with, in fact, not almost, it always starts with one of our existing partners extending what we've just done in a slightly new direction. And sometimes that feels like a 90 degree left turn, and sometimes it feels like a 70 degree, slight and redirection from where we're otherwise heading.

And if it works and we feel good about it and decrease our conviction, we'll do it more and eventually even bring on a whole team of people dedicated to that. But at first it starts with someone on our core team. Comfortable and excited about it. 

MPD: We're an interplay we're going through that same evolution right now.

We're raising our first opportunity fund with the concept that, we're handing off, we're handing off some of the deals that we'd like to put some more capital into, but it seems we had on the show a long time ago. And Greg craft has built a pretty robust growth fund at this point where they're doubling down and writing bigger checks.

It seems like once you wet your appetite for larger checks, a lot of people have trouble going back. The smaller checks become, I want to say irrelevant, but less critical, right? To the financial performance of the firm. Have you found that you guys have shifted increasingly towards the larger checks or you've done them as one off, but the passion, the heart is still in the early stage.

Jeremy Levine: Yeah, I think the passion and the heart is still very much early stage venture. I made it's where we've made most of our returns and it's where we've gotten involved with most of the best companies over a long period of time. And so it's also the case that for us, we do have a separate, dedicated funds across investing.

And we've had that a couple of those now, 90% of the gross equity investments we've made. I have come into companies that were already, our portfolios from the early stages and frankly, growth investing is insanely competitive prices are high. It's a really tough way to make a living these days, if you ask me, but if you're already an investor in companies, because you happen to get in at an early stage.

You're not having to compete on a true arms market basis with every other growth equity investor. When those companies are looking for more capital, because they already know you, they already trust you. And frankly, you can get in and even contemplate maybe slightly smaller financing four months before they would have otherwise hit the market.

And that's most of what we've been doing with growth, but you can't do that unless you have a really robust. Practice that feeds those growth opportunities. And so for us, it's always been the tail and the dog as has been the venture business. And letting the tail wag the dog just doesn't work. 

MPD: There's a little bit of strategic wisdom in there potentially for LPs.

I don't know if it was intended. The idea that when you're evaluating growth stage investment firms, finding the ones who. Have existing relationships through an earlier stage vehicle might have an unfair advantage. Has that been born out anywhere in data? Any numbers to support. 

Jeremy Levine: Yeah, I probably my guess is not because if you look in the rear view mirror and what's happened, if you were any kind of growth investor for the last 10 years and didn't do really well, then you're a fricking moron because the market has gone up so dramatically every year in each of the last 10 years up until 2022.

And to be getting a better than market clearing price as a growth investor, which you've done really well because the market clearing price in 2013, went up by 20%, 2014, and again, in 2016. So even if you paid above market prices in 2017, you still did really well because the market just kept going up.

So I think looking at data to understand the importance of this on a look back basis is irrelevant on a go forward basis. I think it will be different. Interesting. 

MPD: Okay. Now, does your firm manage outside capital? I know you guys had like an evergreen thing. If I'm not mistaken in the big. 

Jeremy Levine: W what's the contract?

So our largest investor is Bessemer securities corporation, which you could think of as the family office of the chips family. And then we, the folks who work at Bessemer venture partners are also supplying and Lamar to capital. But now for about the past 15 years, we've also had other limited partners who represent a range of charitable foundations, universities, pension plans, and so forth.

And so we have a, what I call a traditional looking set of LPs that compliments the original LP Bessemer securities 

MPD: money is the goal though. Expand the outside LP base over time. You guys have is our 

Jeremy Levine: trajectory here. We've grown, I've been a pastor man for 21 years and we invested, on the.

A hundred million dollars a year when I first came here and now we're investing in something closer to a billion dollars a year, maybe a bit more. And so we've had to extend our capitalism in order to support that. But our basic, when I first joined Bessemer, we had maybe six active investing partners today we have 22.

And so our basically. Premise is well two-fold. One is to keep growing or will die. Like our request also notable is that we have 22 active investing partners in 17 of the 22 grew up at Bessemer venture partners. So one thing we've learned to do really is we've learned to grow partner. As opposed to just hire partners, most firms aren't industry, hire partners, whereas everyone at our firm for the most part starts as an analyst or an associate.

Typically I call it the puppies right out of college at school I, myself as white. And so I'm a product of this system. I'm really proud of this is I think it works. But not only do we use that system to find our next partners, but I think we also find many of the next partners for other firms in the venture.

And so to put it into perspective I haven't done the math, but I bet you that we've exported more partners to other venture capitalist firms than every other venture capital firm combined. And just off the top of my head, Sarah tablet benchmarks started at Bessemer. Chris Dixon. Christina Shannon started at Bessemer there at Andreessen Horowitz.

Now he's at Excel now. Mitchell, not Mitchell green and Brian died, or they started their own multi-billion dollar ventures. They both started at Bessemer, Larry Chang, if Alicia and he started with Bessemer Lisa LeWitt at Norwich, she started at best. I could probably go on for 15 minutes and just name all these partners at Anaconda CRVs.

You started at Bessemer. And so one thing that's one really knows how to do is develop young people into career venture capitalists. It's a fantastic place to grow up. So that's the core of what we do. As we grow more partners, our goal is as long as we find folks who have the work ethic, intelligence and judgements to be good investors, and we want to make sure we have enough capital to support them in making additional investments that supplement a conflict with the rest of the.

And so if we keep finding more people to be partners at a faster rate than others of us retired, we could go from 22 to 30, two to 52 partners over time. And some folks have criticized that idea and said wait a minute, like, how are you going to scale a venture firm, 52 partners? And in my logic is we don't have in space.

High market share of all the best deals today. We do plenty of them and we have great performance and we're proud of that. But but it's not like we have 85% of the best deals we do. And so if we can keep adding more partners and getting more of the best deals out there we're thrilled to do it.

So that's our general mentality. We'll keep adding capital to support the partners we have. 

MPD: But Jeremy, wait a second. How are you going to scale a venture for him by adding more partners? I'm just kidding. That's the question you said people are asking you. Hey, but for real quick, real question with. There is an operational constraint when you add a lot of partners, right?

And you're 22, you're already way past it. Small firms, when their partners are in a room, they can all put eyes on the same deal. They can all evaluate it. You can have a healthy conversation between two, four or five people. How do you operate with 22? What's the decision-making process for investment.

How do you communicate between the partners? Is there silos or sectors or what's the construct that makes us float? 

Jeremy Levine: So our system requires and encourages massive independence and autonomy. So we don't have a person or a pair of people who sit in the corner office and make all the decisions.

We've got 22 partners who make decisions independently and autonomous. And then we hold them accountable. And so over time you make a series of really good decisions. You become a full co equal partner in our firm. And if you have a series of decisions with data turned out to be bad decisions, you will you'll find your way to the exit door.

So we don't have to have, because we don't have to have one or two people making all the decisions. We can keep scaling out as long as people continue to exercise good judgment. And of course, when you're a brand new partner, you invest a little bit less capital and have a little bit less freedom than once you're have a proven track record, but that's our system.

And so we encourage people to think really independently to get feedback and criticism from their colleagues so that they can make a really good decision. Asking someone else would a good decision. As in fact, I'll tell you an interesting anecdote. So we had a, an association with John just a couple of years ago, shortly after the pandemic.

And she had come from another investment firm and in about 30 or 60 days, For a time at Bessemer, I did a sort of a half an hour zoom catch up with her just to ask her, Hey, how's it going? What are you finding different or interesting about Bessemer? And she says to me the, this thing that just stuck in my head and she said you can't believe how honest the investment memos are.

And I was taken aback. I said honest, like where you used to be, like they lied in the investment memos and yours. No, it's just that where I used to work really there was a committee, it was a small committee with the people who actually made the decisions. And so when you made an investment memo, you were asking the committee for permission to interview.

And so not surprisingly, the demos were like sales documents and sure. You'd write what you thought were the downsides and the risks, but you would totally sand them down and gloss over them because if you accentuated the downsides too much, you get rejected by the committee. So you're essentially running a sales stock.

Whereas the Bessemer, we really empower individuals to make decisions as part of. And like I said before, we hold them accountable. But as a result of memos are truly intellectually honest and they say, here's on, I want to make this investment, but here's all the great things about this opportunity. And here's the stuff that scares the crap out of me.

But I want to do it. And so what do you think? And then they get feedback from the other partners, which can be super critical. Very rarely does the group ever say, no, you can't do that. But quite often it'll the group will give us critical feedback that the original sponsoring partner will say, wait a minute, maybe I don't want to do this.

And so they'll actually get permission to make the investment, but then they'll turn around and say, you know what? I changed my mind. And I've decided I don't want to be forward here. 

MPD: Now. It sounds like you guys are quantitative. Is there some sort of formula for evaluating. Or measuring or determine how much capital a partner can employ deploy.

Jeremy Levine: There's not a formula, but there's a we because we're w we've you know, when I joined Bessemer, we were about to 20 some odd employees. Now that farm has about 150 employees that have started from the bar. And so in order to manage the company, which is Bessemer venture partners, we've had.

Invest in infrastructure and processes and systems and committees. And so we have no CEO. We have no managing partner. It's a group of equals, but we all can't be involved in everything that would break down pretty quickly. It's like having an orchestra with no conductor, but we don't, none of us want to work for somebody else.

And so people very rarely leave voluntarily because it's a great place. You don't really have. But in order to run that kind of an organization, you need processes and systems. And so we do it through committees. So there's a. I'm not on the committee. I actually don't remember who's on the page, which also shows you how flexible and free willing it is to some extent, but there's a committee that ultimately steps the capital budgets per partners is here's the ceiling of how much capital you can invest.

Now you can appeal for more. And if you're doing really well, you'll get more. You can also team up with others to share responsibility on certain investments, but that's basically 

MPD: how it works. Interesting. Now you mentioned that you guys are really good at growing and developing talent. Any wisdom insights in there for other VC firms, but also more broadly for anyone listening.

Who's trading. 

Jeremy Levine: Yeah, sure. Yeah, I think the main is there's a few things. One is you have to attract really talented people in the first place. If you can get really talented people in the door, it's much easier to grow new partners. And so then the question you ask yourself is what are the preconditions to get the most talented people to want to come work someplace?

And the answer I think is first and foremost, The potential for them to be in charge one day. And so if you've done a work someplace, you've seen, there's a CEO, particularly a CEO whose name's on the door of a company. Like they're always going to be the boss. You are always working for the man or the woman has a baby in venture capital.

These days, it's mostly men, but hopefully over time, it also be the woman. But most really talented, really ambitious people don't want to work for somebody. And so the first thing you have to demonstrate is actually, if you come here and learn and succeeding, bro, you can be the man or the woman.

You, you can be a true coach, equal owner stakeholder at the table. And in order to make that believable, you have to show examples of other people who've done it. And I view myself as example. I joined Bessemer at age 20, something like middle to late twenties in 2001. I had no ownership of the firm.

I had no venture capital experience. I had no carry anything investments that I made or other people made. I wasn't necessarily trying to learn the business. Now, 21 years later, even though I didn't start the firm, I wasn't there. It existed for 80 years. Even before I joined now, the ownership and management group of partners.

Yeah. And I'm not the only one, my colleague Byron Deeter joined in that fashion and grew up my colleague, Brian Feinstein joined in that fashion. He grew up to be one of the partners and on down the list. And so as a prospective analyst or an associate. That the storm, doesn't just say you have a chance to become a true Coby.

Cool. But there are in fact, 17 of the 22 partners all started in the same way you are and grew up in that fashion. You believe it. And they say, okay this is interesting. I don't have to just learn the business there and then find the courage to go start my own thing somewhere else. And that's how we get to this top organization.

I can actually grow all the way through the. That's hugely empowering and motivating to the right kind of person. So that's the one thing we do, I think we do, which I think is really interesting and unique is we allow our young professionals to invest their own money in the investments we make.

And my dad used to tell me growing up that, practice makes perfect. If you want to get good at anything, you have to practice it and practice it. The problem in the venture business or any investment business, really, if you're a young professional, is that you spend a lot of time.

Recommending what you would do, but not actually deciding because you aren't the decision maker who is typically a partner for a committee, that's going to make the decisions. And so if you really want to get good at. If you ultimately want to be good at making a decision recommending is indirect practice.

It's if you want to get good at the three point shooting in basketball, but you took lots of foul shots. You'd probably get better at three point shooting, but you get a lot better, a lot faster if you actually just took three point shots over and over again to my practice makes perfect.

And so at Bessemer by, by allowing each of our individual professionals to invest their own money in each investment we make over the course of the year. If the farm makes 40 investments, those young professionals are making 40 actual decisions. With their own checkbook out of their own bank account on how much money they're going to best and believe you me, we all tend to remember loving the really great deals in hindsight.

And we all tend to remember them not liking the ones that didn't work out that much. But when you have a record that you have to look at yourself of what you wrote in terms of a check to invest in a certain deal, you can't remember incorrectly anymore. It's sorry. I really love that. Why did I raise such a small check for no check at all?

If I really didn't think that was a good deal. Why don't I write a big check? And so we have all these systems to hold ourselves to account to what you really thought as much as you practice doing the job. And even though making a decision, which you know, for a young analysts might be about whether they're going to invest $300 or $500, we'd give a deal.

Whereas the season partner might be making the same decision where it could be $300,000, $10,000. The fact is when you're investing your. You tend to learn lessons much faster than when you're simply making a recommendation about what to do with somebody else's money. It makes a big difference. That's a really 

MPD: interesting dynamic you've set up.

Why have why should founders take Bessemer's money? This is the underhand pitch. 

Jeremy Levine: Yeah. It depends on there. Isn't really one Bessemer. The other thing that's really fun. And to me is that. At Bessemer, we accommodate almost any style. We have a, no, a no jerks or no assholes policy. But other than that, you can be super extroverted.

You can be super introverted. You can be really intellectually, all of us are intellectually curious, but you can be really. Bottoms up and spot where you want to invest in how we can be very reactive. There's lots of ways of that we accommodate with the styles. And so for an entrepreneur, if you want and are compatible with a given style, you'll probably find that among the various partners at Bessemer, but we don't try to force.

A particular approach. It's not my business anyway. And part of that is because we've been geographically distributed, so such a long period of time. We're not all in one office, drinking the same flavor, coffee, and using the same language over and over again. We do have some common beliefs in Tennessee.

That we and values that we hold really dearly, but we then accommodate a really broad range of self. So one thing is you're going to get something that's truly custom tailored to you as an entrepreneur. And if you find your match, you really enjoy it. If you don't that's okay. The second thing though, is that we tend to be really roadmap for you.

We talked about this a lot internally, and so we tend not to be all that reactive to what's happening in the market, but rather we do what we even think of as a bit of an ivory tower exercise where we'll spend six or nine or even 18. Just researching an area, trying to develop a series of hypotheses.

And then we often will proactively reach out to companies in the areas that we're interested in, as opposed to waiting to get inbound deal flow and people knocking on our door and we'll, and even when we do get referrals and inbound flow, we'll have already articulated all the reasons why we like, or don't like a given area.

And we'll talk about that with an entrepreneur and bring real expertise to this. And when they suddenly realize we know a lot about their business and their industry, because we researched it for weeks or months in advance, they tend to really like that. And so we, and then the last thing I'll say is we're not operators, some of us are, but most of us are career.

And in my mind, particularly when you're pairing up with a venture capital firm, you end up essentially selling a part of your business, typically a minority part of your business for some capital, but you're also selling some engine limits. And so you're bringing on a partner and you're agreeing to work with that partner in partnership.

And oftentimes that manifests itself in the form of a board seat. And and so you're in some sense, selling, it's not really this crass in reality but if you blow it on, you're selling a board seat to somebody. And my argument is if you're going to do that, you want to do that to someone who's going to compliment you not supplement you.

And so I'm never going to sit and tell an entrepreneur, oh, when I was in your shoes and I had to make this decision, I had to deal with this HR issue or deal with the strategy. This is what I, this is what I did and this, therefore, this is what. I don't say that because I don't know that I'd never sat in the entrepreneurs, see world war, his or her shoes.

But what I do say is here's what I've seen other people do. And more importantly, let me connect you to three CEOs that had to make that exact decision. And then you can see the three flavors of how to do it, and you can pick what's right for you. And having somebody who's more neutral or Switzerland give you that advice, as opposed to someone who says this is how I did it.

And therefore, if you, the entrepreneur just had to do it a different way, you're challenging and ignoring the advice that you're getting. Some of you are investors in someone to whom you effectively sold the board seat feels really uncomfortable. And so I think the other thing that I like to tell founders is you want to get operational health, mentors and guide.

But you want to get them on your terms? Not on someone else's terms and by working with folks who are purely investors, who just want what's in the company's best interest, don't have a bee in their bonnet about how to build your company, because it's your company, not theirs, it will serve you well. So those are a few of the examples I can go into too many more, but but that's what makes Bessemer just think that maybe I'll say one last thing, which is, I mentioned this earlier, we really empower the individual partners investment.

You make decisions. So when you're as an entrepreneur, working with a partner at Bessemer, you can talk to them, understand what Bessemer thinks, because it's what that partner thinks. You don't need to wait for them to go back to headquarters and ask the person whose name is on the door of the company to say this is what I think, but is that okay with you?

And then, go back or have to wait until you can go back. And and find out what the real answer is from Bessemer, because you had to wait to get to the, your partner's boss or the Judases maker, and that's refreshing. It makes for really quick, efficient dialogue and real partnership, as opposed to thinking that you're dealing with the service sales agent who has to go back to the CEO and find out what the true answer is.

MPD: Jeremy, you've been in this space for a long time, 21 years alone at Bessemer. How did you get here? What was the path for you from childhood onward? Yeah. Is it a straight line in the rear view mirror? Was it a from childhood again now? I feel like 

Jeremy Levine: I have to lie down on a couch to answer this question.

So I guess I was always super into tech and I laugh cause we, we hire analysts out of college every year. And I think in, at many of the top schools where we through something like 350 or 400 students these days and a typical college class for computer science majors when I graduated from duke in 1995, and there were 12 computer science majors in my entire class, 11 of them were men and one was a woman and most of them were really strange present company included.

This just wasn't a thing. And but I ended up after college going to join McKinsey where I was charmed by the extremely articulate people. There's lots of fancy. And then after that I tried my hand for two years doing private equity investing, which was then called leverage buyouts. And that was interesting for two years, I learned a lot about money and finance, but but it was unappealing to me on a few dimensions.

So then I tried my hand at a software startup and to do that for two years and realize how hard it is actually build a company. I wanted to go back and be an investor. And then Bessemer was my fourth job for two years. At which point my father was a doctor thought something was very wrong with me.

Cause I couldn't hold a job down to one, two years, age 19 when he was going to do for the next 60 years of his life. And so I'm now my fourth two year job stuck. I really enjoyed it and I was pretty good at it. I was also in the right place at the right time and I've been there for 21 years. But my advice, anytime anyone asks me, I get lots of 20 somethings reaching out about like, how do I get into venture capital?

Or what should I do? My advice that I give to almost any young person is try the most interesting job that you can get for two years. And if you love it, keep doing it. And if you like it, but don't love it, try something else and then try something else. And when you're early in your career, And the friction costs of moving from one job to the other is pretty low.

And you can find what you really love. There were a lot of things I liked about my first few jobs, but I didn't love any of them. And if I hadn't had the courage to keep trying something new was fire was painful. You have to start over each time. I think in my third job, I was making less money than I've made in my first job.

But but I. The long game, that wouldn't really matter. What matters is finding something you really love. And if you find something you really love to do, chances are you'll be successful at it. And chances are, you'll be richly rewarded for doing it because you're more likely to be good at something that you like doing 

MPD: successful.

Indeed. You've been on the Forbes Midas list. You've been involved with Shopify, Pinterest, LinkedIn, and many other incredible companies. When you look back at. Your evolution as an investor. What has been your superpower when it comes to investing? What has served you. 

Jeremy Levine: No, there isn't really one big thing.

I think there's lots of little things that matter. I'll give you a few examples of easier if there were sort of one thing one thing is like I don't spend a whole lot of time with other venture capitalists. I think that's mostly a waste of time. Everyone wants to like, what are you working on?

What's interesting. And if you're doing what everyone else is doing, or you're usually on the spot with everyone, else's. You'll never find compelling and contrarian ideas. And that's where all the money's made in venture capital. Will you have the right idea and it's something other people don't necessarily believe them.

It also gives to this idea, a lot of people, particularly early in their career covet the safety, the feeling like you're in a pack with others, and you're not doing too far off the mainstream because if you're wrong as everyone else's wrong and how bad can it be? But the flip side is it's hard to be really.

When everyone else thinks the same thing, particularly because the venture industry is competitive and you, if you have to pay a price to get into it, And make an investment that talented people want to make. Chances are, you're paying a much higher price when you're trying to invest in an area that hundreds of other people like, but if you're also living on your own in an area that isn't all that grounded, the ability to make a really great investment at a really reasonable entry evaluations is much higher.

And I like to say the more alone you feel in venture capital, the more likely you are really onto something that could be big. Maybe the last thing I'll say is just, you have to be really patient. And so in 21 years, doing. I've had what I think are three roadmap ideas that were really compelling and at least somewhat contrarian at the time.

So let's take one good idea every seven years. And as I described this to entrepreneurs, often say, if someone said to you, you have to start a company this month pick the best company idea you can come up with to start this month. Chances are you're going to do. Less well than if you could take the next three years to pick the best company idea you could come up with because like really good ideas, they don't come along all the time.

They come along to have random moments when you're in the shower or on the toilet or reading a newspaper. And what's key is to be patient and wait for the really compelling idea that you're, you can build conviction and isn't well understood. And if it takes three months for that to happen, great. It takes three years.

That's what they do if it takes six years as okay. But what matters is once you, when you do find it, you act aggressively and swiftly to take advantage of it because they don't come along that often, but you got to patiently wait until the next one does arrive. Do you 

MPD: know when you have that idea? Your heart's pounding and it's the moment of clarity or is there a lot of self doubt 

Jeremy Levine: and that no, there's enormous stuffed up because you get people looking at you like you're crazy.

As an example, in 2010, we invested in this company called mind body. It was software as a service for yoga studio. And literally even within our partnership, people were highly skeptical about this opportunity because the simple math was there were 50,000 yoga studios in America. If you got every single one of them to sign up and pay the a hundred dollars monthly subscription sheet, that would be $5 million a month of revenue.

That's $60 million a year. Why are you bothering to invest in a company that's only ever going to be able to grip $60 million a year in revenue? Now, th the thesis was that phew, invested in a horizontal SAS company like Salesforce. You can maybe get to 20% market share, which if the market's big enough, this is a great business.

But if you invest in a very specific software tailored for an industry, you can get to 80% market share. And then not only do you get the revenues associated with your software, but you can essentially become a distribution channel to that entire industry and monetize that distribution talent by layering on other products and services to sell to the same customers.

And that's in fact what happened with MINDBODY. Eventually they got into the payments. When they started to process all the payments for all the yoga studios, that revenue, I think roughly tripled that, choose what they're getting from each individual, a yoga studio. And then they realized that there are other businesses that are really similar to yoga studios that didn't take a whole lot of change to make this offer work like a Pilates studio or a CrossFit studio or a gym.

And eventually it got all the way to hair salons and chiropractors at the same base of software. And so at the beginning, when we started investing in vertical software, It was really hard. Peoples thought we were half nuts doing it. Eventually when you're vindicated, it turns out that you're right.

Everyone wants to make those same investments, which not only makes you feel good about making a good choice, several months or years before, but it also means lots of capital becomes available to your portfolio companies that relatively attractive for the companies. Which helps further accelerate or drive more growth because access to capital can sometimes be a limiting factor.

So to answer your question, it's really scary when you're trying to do something new and different that other people aren't doing, because you just wonder am I the only video or am I the only person with the insight? And sometimes it's a very fine line between unique insight and a truly idiotic.

And only with the benefit of some hindsight, do you know? Which is which, so we put a lot of time and we're pretty patient to try to build conviction because doing something that's different is really hard. It's never feels good at the time. It only feels good after this. 

MPD: What are you focusing on now? To the extent it's not an issue initiative share.

Jeremy Levine: I'll give you the medium length answer to that question. Cause it's hard to explain really quickly, but the context is that I made a lot of consumer investments based on the thesis that you could get significant free distribution of a consumer app from maybe 2004 through 2011 or 12. And you mentioned some becomes as we invested in, Yelp was amongst them and Yelp leveraged really smart search engine optimization to get free distribution and LinkedIn.

Essentially email spam. There was a day when you could send an email, you could, as an app maker, you can convince users to send an email to 80 of their friends and tell them to try the service. Those days are no longer. We can't get anyone to send an email to 80 of their friends anymore, unless you trick them.

Which is not a very good way of building a trusted relationship with your users. But you could, at one point get access to lots of consumers through the Facebook newsfeed, Facebook, more or less, cut that off. If they see an app leveraging their newsfeed to get distribution, not just eliminate it from the news.

Algorithmically. And so from oh four or maybe even predating before, but I started doing it four to 2011 or 12. You could get lots of free distribution until what I call the internet oligopoly golf lists, basically who Facebook, Amazon, and apple, they cut off three distributions that were in your techniques left.

And so I really tell them to down my consumer investing starting around 2013, Because I was somewhat uneasy with pure spend money to acquire customers through marketing acquisition technique. And I didn't see any new three acquisition techniques existing anymore. And that was disappointing to me because consumer investing is a ton of fun and the potential to build something really special.

I'm like a household name really only exists in consumer investing. It's hard to do that through business software or other domains of technology, but what I've noticed more recently as I think a couple of really interesting. Distribution techniques have re-emerged that are outside the control of the Google Facebooks and Amazons and apples of the world.

And they generally rely on, this category, it's human beings, why called superhumans, but some people call them influencers or creators and and they tend to have significant followings of their own and Google and apple. They can't stop them. They there's nothing they can do about it. And if you can build a service or.

That's really valued by those super humans. You can get them to essentially port for, or put their users, their followers over to your internet service. Now you need to offer them something in exchange, but it's really powerful and it doesn't necessarily take your money or marketing dollars to do it. So there's a bunch of businesses that were starting to see you.

They're leveraging this, maybe most famously as discord. We're very small investors and just what I wish we were larger investors, but clearly it's a business that has managed to take advantage of this idea. We're just Gord as a massive consumer property, but it doesn't spend any money acquiring consumers.

It's just built a really compelling service for these super humans to introduce to their followings and their consumers. 

MPD: So you're talking about some deals that. For quite a while ago. And I think a lot of these lessons still apply, but the VC game has changed a ton. How have you seen the industry evolve in the last handful of 


Jeremy Levine: Mostly it's just it's intensely more competitive and more crowded. And so I think there's probably three or four sources of capital today for every one source. There was even 10, 20 years ago and each of those sources now has two or three or four times as much money as. A decade or two ago. But I actually think that the the truth is the areas that are interesting are the ones that are not crowded.

And so if you're working in the mainstream where everybody wants to invest, you'll feel that competitive tension in those pressures pretty intensely. But if you find stuff that's a little bit contrarian what some would call on the fringe of Manchuria? It will feel no more crowded than it was 10 or 20 years ago.

You'll feel just as lonely. And so it's another reason why it's the lonely feeling and VCs probably. So your, why slowly are you? The only idiot is certainly the question to ask, but if you can find those less exciting to the mainstream areas the business still works. If you're having to compete against everybody else then you're essentially in the beauty contest.

And I hate beauty contests. They're not fun. Getting all dressed up and Jessie's up to try to appear like a more attractive candidate than all the others is. That is extremely tiring to me was energizing about the business is learning about something new. Getting into a new idea, rolling up our sleeves and like trying to really understand the dynamics in a new business or a business model with an entrepreneur.

That's fun. But but don't know, getting dressed up for the dance that's 

MPD: for the birds. So capital supplies up, but valuations have also been up for a bit. Even the nomenclature used for rounds. What a series a was two, three years ago does not equate to what a series A's. How has all that shifted and what's the impact of it?

Jeremy Levine: There's a sort of, there's an it's an okay narrative and there's a, it's a problem there. So I'll do the, it's a problem. Narrative source. It's a problem. Narrative is if you're having to invest three times as much. To create a company that you needed to invest 10 or 15 years ago. And by definition, the returns are going to be one-third as attractive.

And frankly, it's not all great entrepreneurs either because it means that. That's all the incremental liquidation preferences and dilution from the extra capital can be really waiting and it makes the whole thing less fun. So that's the sort of user problem. They're so much more capital dig around through your, everything.

Just spritz, a higher bar. That's tougher to jump over, but it's okay. Narratives as well, because if you look back. And if you look prospectively in 2007 or 2008, at the time, there were a handful of venture backed companies that had ever made it to be a $5 billion enterprise value. And so it made sense that you needed to keep a series, a financing it three or $4 million, because the chance of creating $5 million is so outlandishly promotes, you'd never get there, whereas fast forward.

There are dozens of companies that were created in the last 10 years that are worth well more than 5 billion. In fact, there's a whole bunch of them they're worth 50 billion, which was nearly unheard of just 15 years before. And so it's going to be okay. Scenario says, sure. It makes sense that a series of 3 million to 10 million or 12 million, because the size of the outcomes has increased so dramatic.

It more than justifies the extra capital that you need or can get access to at the earliest ages. So the question is which of these is true? I think to some extent I'm certainly in the, it's going to be okay. Scenario overall. I think there's a bit of an element of truth in both. So I think the outcomes are bigger, but I also think if you just look back at the last time, The outcomes were somewhat insulated from reality.

I don't think they're quite as big as people got used to thinking they were at the end of 2021, but they're definitely a lot bigger than they were being back in 2005. And so it probably doesn't, it probably makes sense for the size of a series of constant 3 million to say 10 they're probably doesn't make sense for a series of country 3 million to 30 instead that the truth is in between.

MPD: So how does the recent drop in tech valuations in the public market impact all of that? Cause there's been a, there's been a bit of a correction or a shift. No, 

Jeremy Levine: no. So I feel like we saw this same movie almost to a team in 2009. And so in two, and that was really the last time it happened. It was 13 years ago and that's long enough ago that almost nobody plays in the venture industry today was even in the venture industry 13 years ago.

So I feel like I don't feel that all, but on this dimension I do. And so in 2009, what happened was the public market prices fell dramatically. And if you're in, if you're a private company, if you didn't need to raise money, you wouldn't because you would just sit in and hope that yeah, this is a short-term downward blip.

And within a few months, prices will be back to where they used to be in the public markets. And since the public markets essentially dictate indirectly, what an investor should be willing to pay, to invest in a private company, because they're ultimately mapping to an exit in the public markets or to an acquisition by a public company.

These things are all correlated, but if you don't want to. But the public market prices just dropped by 40%. And therefore, if the private market prices also dropped by 40% as an entrepreneur, you said, we don't raise any money and you can get away with that for awhile. And so in 2009, we saw only the desperate entrepreneurs raise money in that shortly after that, that downward drop because they had to, but most entrepreneurs didn't have to.

So they dragged it as long as they could. Essentially two things happen. One is as time wears on, if the public market prices don't pop up, Which I don't expect it will people start to get accustomed to the fact that this is the reality. So yeah, you can wait another two or three months and see if anything changes, but it's been a year probably it's not going to change.

And then second thing that happens is that those. That ultimately want to keep growing. They simply start to exhaust the capital they had on the balance sheet when the market fell. So they have to go back into the market and raise money. And so I think the best, the two best vintages for investments in the past 30 years at Bessemer venture partners, which 2010.

It wasn't 2009 in 2009. I'd argue the market locked up a little bit because no one wanted to transact that the new lower prices by 2010, it was accepted. And then people came back in the market. Okay. I wish it were still 2007 and I could raise money, but it's not so to do with today's prices. And so I anticipate that 2023 will be a phenomenal year for venture capital.

I think we'll see a slightly slower pace this year. And then we have for awhile, because if you're an entrepreneur, why would you raise money now? Maybe the market will Patek. 

MPD: Yeah, I think for the growth companies, this shift is a little disconcerting. What I'm trying to figure out is how someone navigates this.

If they believe the valuations aren't going to pop back up. So either you try to grow into the valuation, right? Or you have all these people on staff who. They're underwater on their options. And you have a, if you're writing that next check, Jeremy, like if you're coming into a company where you don't know who's gonna be running it and then the senior leadership.

Jeremy Levine: Yeah. On the one hand it's a really sharp double-edged sword. I applaud the approach that Gigi took at Instacart, where she, the company who said, look, let's not pretend, we're S we're still worth what we might've been worth four months ago. And let's adjust the strike price that we issue employee options and equity to accommodate the new reality.

That's really hard to do. Particularly if you think you're going to need to raise more money. And so the trap that a lot of companies get into is they have two choices. They have three choices. One is just don't raise any more money, but eventually most companies can't sustain that choice. So then when you get to the, okay, we're going to raise more money, you have two choices.

The first choice is to just accept the reality and take whatever the current market valuation really should be for your company to raise my call clean equity. And that is equity with all without all sorts of cooks and guarantees and preferences and sort of special return features. Which, by the way, none of that stuff, gingerbread is my short term name for my short-term nickname for that, none of that stuff.

None that gingerbread existed in the market for the past 10 years, because things kept going up. And so investors got really clean deals by called straight preferred, either get your money back or you get your percentage of the company that you acquired, but not in both. So one approach companies have is to go for gingerbread free terms and accept just lower prices, which might mean a flat round or even a slight down round compared to where you were before given that the market has changed.

The hard thing about that is it's. That your company isn't worth where it was. You have to have this reckoning with all of your employees and executives about what their stock options and equity grants are worth. And you might even have anti-dilution triggers in your late financings that will come into bite and make your last finessing more semesters, then decided what's and that's all really painful stuff to deal with.

I would argue you should swap. And accepted and deal with it once and upfront in a clean way, because well, as painful as it is, the alternative might be worse. And the alternative is basically sustaining the fantasy or fallacy of the quote unquote high evaluation that is no longer true and doing it by giving your new investors a whole bunch of special rights and privileges.

That they will happily accept in exchange for paying a higher valuation than they think is really appropriate. So classic example is promising the new investor that don't get a guarantee. Two times their money in any outcome. If they're willing to pay a higher valuation than they otherwise would, many investors will take that.

And so what you can do is you can announce everybody great news. We're still worth this by price, but it's not really true. And it's not that the headline was out. And my might be true but when you get into the details that isn't, and eventually executives and employees will learn the truth and they'll feel misled misguided, and maybe even a bit manipulated because by maintaining the same high price per share, you can avoid the reckoning and the re equitization and the fixing all of those employee packages, because you're in denial, you can get away with it for a while.

These things eventually tend to come home to roost and create much bigger problems. And but nonetheless, like if you're sure it's the last time you're ever going to enjoy raise money, you can maybe get away with it. But oftentimes when companies think it's their last time really to raise money, it ends up not being.

And so it is, it's a dangerous game to play. I think we'll see it happen a lot. Cause most people don't want to do the recommending and the true, truly to clean up job that's required. But I think it's going to be massive. 

MPD: So that's the founder's side. What about for VCs? What's your advice for investors out there who are staring at the new market dynamic?

Jeremy Levine: Yeah, I think there's no right answer. I think you, you can do well as an investor either way, my personal preferences, clean stuff up. And that, the more instances in which you invest with fancy terms and crazy structure to justify. It just means that you're misaligned with the entrepreneurs and the employees.

Cause there's a whole bunch of scenarios in which you, as the investor will make money when they don't. And you just don't want that. Because when you're having an honest conversation in the boardroom about what's the right strategic cancer for the company, half the people are saying one thing because they're by their pocketbook.

And the other half of the people are saying. Because they're motivated by their pocket book. And it just so happens that they have different incentives. So you can no longer have an honest, trusted partnership with somebody anymore because you're driving toward different outcomes with good reasons that you created.

Whereas if you address these mispricings. Head-on and clean things up and ensure that there's good alignment between what's entrepreneur wants and what the investor wants. You just don't have this weird subterfuge and unsaid in the genders, which I think is a very messy governance. And honestly, mostly just for lasting partnerships.

Okay. But 

MPD: That's for this particular type of deal framework. More broadly VCs are walking in now to let's say the market slows down. LP books are way overweighted VC as the nav drops and a bunch of other stuff. If we hit a normal recessionary cycle, what are the tricks of the trade for VCs to navigate those waters 

Jeremy Levine: on which to mentioned, do you mean in dealing with entrepreneurs or dealing with limited partners, 

MPD: limited partners, how they're deploying capital, more management of the firm?

Jeremy Levine: So you mentioned this idea that limited partners, VC exposure will look really high because the rest of their portfolio is now down in value, but not their venture capital portfolio. And I just think that's a fallacy. The reality is if all your equities are down except your private equities, then you'll probably be shielding yourself.

And your private equities are down. And that's your total portability made shrunk, which mean you want, you have less total capital to invest, but I think the idea that you should now stop investing in venture capital Kodak, meaningfully, because it represents a higher percentage of your total assets.

It just doesn't make any sense. Just doesn't make sense. That one equity which happens we could every day went down in value, but the other one, which isn't, didn't go down. The truth is that they're highly correlated. And if you want to be in the asset class, you've got to be in it for long-term. So I think the most important thing to do frankly, is when you're talking to prospective limited partners screen for the ones that are really long-term thinkers, not the ones who are trying to maximize their returns in every quarter, because it's impossible to do in an asset class, like venture that.

So illiquid, and so long-term oriented. And if you're aligned with LPs that are also thinking about the longterm with you, it will work itself out because they'll realize, yeah, this is a. It's a kind of investing that has his ups and downs, but in the long run, it performs really well, but you got to stick with it for the long run in order to achieve this long run results.

Then that said, if you if your Delta hand is of LPC, aren't willing to take that long-term approach. You're stuck. There's not much you can do about it. But it does suggest you gotta be really careful about who you get into as business partners in exactly the same way that entrepreneur has to be.

Really. It's also about who he or she gets into business. As an investing partner. So in that sense, the venture capitalist is facing the same dilemma or challenge of the entrepreneur space. And as I think about entrepreneurs, I like this mode a lot better. On the one hand in 2017, with hindsight, you can invest in 2017 and it's easy because everything just kept going up next four years and almost didn't matter what you did or how much work you did.

Every choice you made was properly. The flip side is we didn't really get to know entrepreneurs nearly as deeply as we could have because processes were rushed. Timelines were shorts. I think I look forward to an extension of a timelines where you don't find out about a company. You have to make a decision to invest in a week.

In my mind making an investment, is that different from getting married? Like you're in a partnership you'll make compromises. You won't always get what you want, but you're in it together. And divorce is really expensive and really painful. And so I'd rather be able to take a couple months to get to know somebody who I'm going to have a long-term partnership with.

That's going to last. I was on the for 14 years. I've got on the board of shop cards for 11 years. Like these things go on for a long period of time. Now this is not like a three months thing that you're living with. This is a long-term relationship. And if you think you can make a decision yeah.

Investor or an entrepreneur who you want to be in business with in a matter of a week or two, I think you're drilling yourself and sometimes they'll work out much. Like I do know some people who married their high school sweetheart and it can work out, but if you can actually get to know.

Over a longer period of time and really understand how they'll act and react and news what their values are much more likely to. So that part I love not only do we get to do more homework to build higher conviction and certainty in how we want to invest, but we also just get to know people in that.

And it's a really 

MPD: Jeremy we're going to end with that. That was terrific. Thanks for being on my blizzard. 

Jeremy Levine: Thanks for having me.

MPD: I really love interviewing other VCs on this pod. I feel like I'm learning a ton about how they think about the industry, how they operate their firms. So big, thanks to Jeremy for being on. All right. If you don't mind helping us out push those buttons, good reviews likes all that stuff, and you can find us if you're looking for more of our content on Twitter at MPD, and you can find a good bit of our contacts on our website.

We don't talk about that often, but on interplay.vc, you can find a lot of news about portfolio companies. We have blog content and obviously the pod. Thanks for listening.