Lightspeed Venture Partners is having quite a year, between the sale of AppDynamics to Cisco for $3.7 billion on the eve of its IPO (Lightspeed wrote its first check); to the March sale of publicly traded Nimble Storage to Hewlett Packard Enterprise for just north of $1 billion in cash; to the IPO of the enterprise software company MuleSoft in March (the company is now valued at $2.8 billion); to the March IPO of the consumer tech company Snap, which is currently valued at $28 billion, despite a terrible earnings call earlier today (Lightspeed famously wrote the company its first check and remains its second largest outside shareholder).
Other exits look to be coming up fast, too. According to Bloomberg, for example, men’s retailer Bonobos is in talks with Walmart. Meanwhile, the personal styling service Stitch Fix is reportedly weighing an IPO.
Success is nothing new for Lightspeed, though its string of hits has certainly helped cement its status as one of Silicon Valley’s most elite firms. To learn a little more about the firm’s earliest days, how exactly it helps startups and whether it thinks the pace of innovation right now can keep up with the amount of capital flooding the market, investor Semil Shah of the seed-stage firm Haystack sat down with Lightspeed co-founders Ravi Mhatre and Barry Eggers at a StrictlyVC event late last week. You can check out a bit of video from that sit-down below. Here are other outtakes from the conversation that you might find interesting. Their chat has been edited for length and clarity.
SS: When you started Lightspeed, what was the mood like in the Valley?
BE: The year was 1856. [Audience laughs.] It was the early 2000s. We were sort of in the middle of the venture desert, for those of you who were there. We’d gotten out of the bubble, and we were all waiting to see what was next, and it was a long wait. And that’s where we sort of looked around and realized most of the people we’d known who were doing Series A deals had either closed shop or gone through a generational transition or just weren’t around any more and there was a big vacuum for Series A deals. That’s when we said, hey, we need to go and stake out that real estate, so that’s what we did.
SS: You were raising a first-time fund, though you had some venture experience. Presumably that helped?
RM: Barry and I and Peter [Nieh] and Chris [Schaepe] — we’d all known each other to some degree before. We’d all gone to school [at Stanford] around the same time. When we went to fundraise, I remember it was a little scary. We didn’t have a salary. We’d all done a little venture but not a lot. And there wasn’t as much venture capital firm formation as there is now, so we spent a lot of time meeting with LPs and they spent a lot of time looking at the four of us. [They wanted to know that we were] likely to stick together because it takes a long time to build a platform and a brand.
People spent a lot of time trying to figure that out about the four of us. Retrospectively, I’d say, almost 20 years later, [we were a good bet]. All four of us, we’re still working with each other. When we get mad, we might go and wrestle each other. But by and large, we’re working together and [are very much a team].
SS: You were enterprise investors, but you eventually added a consumer practice. Was that a tough sell? Did your investors want you to stay in your lane, so to speak?
BE: Because the four founders were all enterprise investors, the first thing we wanted to do was stake out and establish ourselves credibly as [enterprise-focused] Series A investors. It’s different, establishing yourself in enterprise versus consumer. It’s more of a body of work that helps you get there. But at least we had Riverbed [Technologies] as a Series A deal; it became one of the prominent deals of the early 2000s and that helped give us a platform.
RM: The bet LPs made on Lightspeed was really on the four original people and did these people have enough connective fabric to work together over a long period of time. Once they were convinced of that, once we said we wanted to go into consumer, it was less [about having to convince LPs] but find the right person to join us who could spearhead the consumer effort. [That person would ultimately become Jeremy Liew.]
SS: AppDynamics was set to go public and was scooped up. What did you envision for that company?
RM: There was no company when we invested in AppDynamics. It was Jyoti Bansal, who was the founder. I think Barry knew Jyoti and I got to know him and we decided to fund him and through the funding, he was able to incorporate the company. Then we called [fellow VC] Asheem [Chandna] at Greylock and said, we’ve got this really bright guy and we’re going to get behind him to start a company. And we walked him over to Greylock and they also got excited and invested.
SS: Why invest so early?
RM: We do have a philosophy, that success isn’t just about product design but also business design.
When you’re designing your architecture and technology stack early, you want it to have a really strong foundation, so when you bring a product to market it’ll have some sustainable underlying value that allows you to improve it for years to come so you can improve your business. Well, you also want to design your business so it can be durable and set up to grow really fast without becoming destabilized. So when we get involved early, we think a lot about business and company design. That’s where, as a venture firm, we can bring in institutional knowledge and our network and people on the business side who have experience and know what the patterns of success look like, rather than [having founders] reinvent the wheel.
SS: Companies are staying private a lot longer. How do you deal with an entrepreneur who doesn’t want to go public?
BE: We haven’t had that problem yet. Sometimes they get a day away from going public and they get acquired, like AppDynamics, but mostly [our portfolio companies] want to [get to an IPO].
SS: In the broader market, there’s a lot of narrative around founders wanting to avoid public markets today, though.
RM: I think there’s an element, when you have companies, because they’ve grown fast, they haven’t put exceptional rigor into the kind of business metrics that they operate to, and frankly, it can be easier to just stay private. It’s sometimes more comfortable. But our feedback to entrepreneurs is generally that going public isn’t the end game [but it’s good to be preparing for it from the outset]. You have to do a whole host of things to be what we call public-company ready in terms of the sophistication with which you operate and run your financial processes and your controls, such that you really can understand and say in advance, ‘This is the path we’re going to be on,’ then meet those expectations.
If you want to build something that’s going to last, [you need to set] the foundation for the things that are going to let you build a company that can be independent long term. If you don’t want to go public because you don’t want to do the hard things, that’s fine. But maybe that means your company doesn’t have the strength required to get profitable; maybe it’s something that’s not going to keep growing. If you can’t figure those things out and you stay private, it just means your chances of being a long-term independent company probably go down.
SS: Is there too much money in the market or no?
BE: Yes, there’s definitely too much money in the market. This isn’t the hedge fund market. Venture capital isn’t a scalable asset class. When we add capital to the market, returns go down. When we take out capital, returns go up.
SS: Do you feel like we’re out of touch in the Bay Area? Do you have any concerns about this region right now?
RM: I’ve definitely drunk some of the Kool Aid. I’ve been here since 1981.
The innovation cycle is a little strange, though. It’s a weird place in time, dimension and space right now. I mean, we’ve had a bubble financial market, but in the last five to seven years, we’ve had this thing where the innovation aperture just keeps getting bigger and bigger. Take Uber, a $50 billion company. I guarantee you that even five to seven years ago, if you said to a VC, “Let’s use computer technology to change the taxi industry,” you’d have gotten laughed out of the office. Whether it’s SpaceX or Stemcentrix, there are all kinds of areas where digital technology is transforming these industries where technology never really had relevance before.
So I think it’s maybe a little overdone — that always happens. But I do think the innovation cycle is extremely robust and that Silicon Valley and the Bay Area [remains] sort of ground zero [for innovation]. It’s the heart of where people think about what’s never been possible, so I’m bullish on that.
There’s probably too much capital, and that means prices will be high. But when you find these new disruptive things, even when prices are high, you can generate huge returns if you can figure which are the real deal and which are the pretenders that are going to fall off the curb.