tv The Communicators Scott Kupor CSPAN August 25, 2019 11:30am-12:02pm EDT
we can provide introductions to them and help them navigate new challenges as they go through the business we like to think of ourselves as a money provider. >> peter slen: why can a company just go bank in traditional avenues. speak one good question. >> scott kupor: sometimes they're a very risky businesses that are going to lose money for a long period of time in banks unfortunately just aren't in the business of doing that or taking risk of losing their capital so we are willing to take that risk in fact about half of what we invest half of an we will lose that money. i can't see a bank being happy about that. >> peter slen: where does the original money come from. >> scott kupor: the way our business works as we go out and raise money from a couple of different folks. university endowments are big source of capital so if you look at a stanford university or yale university, they have large
endowments and the abysses endowments to earn a return. that money then goes to help subsidize obviously the cost to support the university large foundation so non- profit validations such as afford example. if an investor of ours. with these companies are doing art is they are trying to use venture as a way to drive a very high rate of return in their portfolio. they are looking for us to generate 25 to 30 percent annually from the business. as part of a broad portfolio, they will have venture capital, they might have stock, bonds, this is deftly kind of a high risk but hopefully with a high reward. >> peter slen: what is a normal pitch like. >> scott kupor: it's fun, usually a few members of the founding team will come in and often they have just a powerpoint presentation so they generally haven't often built to product at this.in time. is really an opportunity for the entrepreneur to tell us about their vision. how big can the market be forum.
ultimately, why is this team the right team to go be be able to go after that. it's very fun and intellectual process by which we get to learn all sorts of new and interesting things. ultimately being able to make a decision if this the team way back. >> peter slen: is this unique to the tech world? >> scott kupor: so is deftly the case that not all venture backed companies are tech companies but is also the case that many of the companies that take venture capital are in fact, completely not completely unique. the willingness of somebody to as i mentioned take a chance on something where the odds are extremely low. hopefully if it works, the payoffs are very high. in our business, one or two companies and are part polio will drive most of the returns. the rest of the portfolio or polio won't be as good.
>> peter slen: your new book is called sequences handheld road. where is it and why is a significant question mark. >> scott kupor: it's in the middle park california which you are otherwise no exhibit a mile or two east down that road is stanford university. you can think of sandhill road as if you are a music fan, music row in nashville or wall street in new york, is a bit of a mythical pate place where it just happens to be where a lot of the venture capitalists congregate. it's not that exciting about to write home about. but there is a lot of opportunity for entrepreneurs there. it actually looks like a bit of old industrial park, is land that has been owned since the very beginning by stanford
university and it's never and there are no fancy high-rises there. a lot of two-story buildings. i think maybe and partly there may have been voting restrictions that causes but is just upstaged by much more famous neighborhood such as stanford. they just want to make sure that it was left los glamorous. >> peter slen: you are the managing partner of and reason harlots and reason. we are a venture capital firm. we invest in very early stage startup companies and hope that over time we can help them grow in a very large businesses. we are about a 10 million-dollar business which means we raised about $10 billion over our ten year history from limited partners that we talked about. our job is to be on top of all of the things happening in tech and entrepreneurship. particularly those businesses
that have software as a foundational component to them. >> peter slen: what is the technical or legal explanation of what a limited partner is. >> scott kupor: limited partner is someone who is a in this investor they are truly limited in the sense that they don't have any control over the investment that we make. our win or if we sell those investments. think of them as a passive investor. they give us money, we have an obligation obviously to be a fiduciary of that money and hopefully earn a good return forum. but the decisions about what comedies we invest in and when we choose to sell them, is 100 percent in our portfolio. >> peter slen: what is a typical day for you. >> scott kupor: usually we will be seeing a couple of different pitches in a day. we might have a couple hour long meetings with entrepreneurs. if we are working on deals, we will awful often be doing due diligence. now were getting closer to
understand the product in more detail in the financial in more detail. then we also a lot of time building relationships. huge art of this business is being well-connected into the entrepreneurial ecosystem. one of the professors doing at different universities. we spent a lot of time on what we would call outbound relationships and activities. >> peter slen: what is your expertise that you bring to this position. >> scott kupor: i've been in tech for about 25 years. i was a banker in my early days, that i was a start up company for about nine years that ultimately god sold to hewlett-packard and now i've been in this business for ten years so i think what i bring is an appreciation for both the capital markets and the financing side of businesses but also a real appreciation for what it means to be a start up and go through the start up company process. i hope that means is not only do i provide empathy at and an incredible amount of respect for the process but also allows us to be better investors and more patient investors and understand
and recognize that these things just don't go up into the right all of the time. starting the company is a series of ups and downs and i think we bring patients to that investing process. >> peter slen: often there isn't a product necessarily associated with a pitch, is that correct. >> scott kupor: there is a product idea usually but is often the case that in the early stages there is no product that has been built. we are trying to understand that not necessarily what is the final product but tell us about what we call the idea maze. how did you think of the idea for this product and how do you believe it's responsive and what the market is. we recognize that companies do what we will have it. they will change over time as i get products into market. we recognize that that's the companies delayed process. we want somebody who is capable of kind of sorting data.to the market and being responsive to what the needs are to the market as i go about that product.
>> peter slen: what is your one loss record. >> scott kupor: we don't actually think of it that way. the honest answer is is pretty poor if you look at it that way which is the generally on about 40 to 50 percent of the things we invest in, there is a very polite way of calling them we lose all of our money. typically about 20 to 30 percent of the comedies, you make a little bit of money in the real difference between success or failure in this business is what happens with that remaining ten or 20 percent of that coming. do they become a google or facebook and you make a lot more money. that's the way this business works. the way we measure success is really based upon total returns. those returns will be driven by a very small number of companies. >> peter slen: if you are a 2 billion-dollar company and you've had said successes. what is one you can tell us about. >> scott kupor: yes sure, we've had some nice successes. i'll give you in a great example. we have a company call okay ta the people me know about is in
the security space. we invested in that coming for the first time back in 2009. as one of our very first investments when we started the business. it was what we call effete investment. we put about a half a million dollars and to get the two founders an opportunity to build out their idea and the product. over the years of course we invested more money is another venture capitalist firms but it went public about a year and half ago and you look at today i think it's added to it ten to 12 billion dollar cap. it's a great example of a success case and we've been working with them from inception. the founding team there has just been an doing an incredible job in building up a sustainable freestanding and very valuable as this. >> peter slen: i apologize if i missed this. what does or what did they do? >> scott kupor: is a software company. if your business and you might have lots of cloud -based applications which means applications that you are not running on your premises but are that are running in the cloud.
so you might have gmail for example for e-mail and you might do a .com for your sales force, you might have a software called arcana which manages your marketing, all of those software's because they run in the cloud, every user has to be able to log into them and have security controls around their ability to run around those applications. with this company does is essentially providing single sign-on. so you don't have to know all of your passwords for all of those different applications, you log into this one place and indirectly managers your access into all of those applications. it's a tool that the it department will manage security with it in the shop and they will manage user access management. when applications do we give them application to, how do we remove access, is a tool to manage all of the security for a variety of applications. >> peter slen: first those of us at a certain age names like ibm and general electric, where did
the name come from? >> scott kupor: is a very good question. i don't know the origin story. i will drop you a note on it later, i wish i had a better answer and fortunately i think you stumped me. >> peter slen: is silicon valley successful because of venture capital question or see one no, silicone valley is successful because of entrepreneurs who have built the businesses. to take the risk in building something. it might have a 2010 to 20 percent chance of being successful. it's just really an enabler. as i mentioned we are fast dancing source. hopefully we can add value to these companies but we shouldn't get ourselves at the end of the day, the innovation in the development of these companies, because 99 percent from the hard work and the efforts of the entrepreneur put in. >> peter slen: what are the things you talk about in secrets of sandhill road, is that products or ideas are often quote ten years ahead of their
time. what you mean by that? >> scott kupor: you see this recurring theme that businesses didn't work later will work. you may recall a comedy called webb and in the 9899 we had tech level webb and where they were trying to do grocery delivery and the way they were doing it at that time was they were building massive warehouses and basically kind of stock all of the produce materials they needed and then they would use bands to deliver as name appli applies. it was a wonderful service for people but it was a very small market opportunity because of them number of people who thought about the idea of home delivery for groceries were willing to use their computers at the time and cell phones didn't exist to be able to do that ordering, it just wasn't that big of a company and ultimately was not successful. if you got forward to the day,
basically the same idea. they are executing it in right away. a workforce that is in many cases part of what we call the gig economy. people who are in a minute contractors on their own doing this. they're not staffing supermarkets themselves but they are partnering with them. to get access to the process and all the things any. they have the benefit of course of the iphone revolution which now means a lot of things that people wouldn't have otherwise done at the desktop, they are willing to do on the mobile phone and so is those kinds of examples of things where a new technology actually can create a market and expand market in a way that we just can exist in a prior timeframe. >> peter slen: when it comes to an estate card, do they go to other venture capitalists beside yourselves? >> scott kupor: yeah they do, the way this business works is people raise money in different rounds. rounds typically correspond to kind of the scale and development of the company so often people will raise a first round of financing, and that
will lapse them 18 to 24 months on average. then they will go raise another round of financing. if they are doing well, the valuation of course will be higher on the second round of financing. in general for each round of financing, at the early stage, there tends to be one major venture investor. if we are lucky enough to have that opportunity, we will be the major investor, but when they go out and raise subsequent wound rounds of financing, it's often the case that different mentors will now join and be part of the company. we have a very interesting kind of relationship with our other venture capital forms in the business. we directly compete of it against them but many times we are competing against them. we are investing alongside or later rounds in the same company. >> peter slen: do you have a say so in how the business operates during that first round of financing. >> scott kupor: yes, the way our
business works is we have a set of governance rights that typically are attached to the financial interest that we invest in the company. often, we will sit on the board of the company and we will have honestly, the rights and duties that a board member might have two obviously make decisions about whether this ceo is appropriate for the business or is the strategy of the company. we also tend to have stock that allows us to vote for things like is the company going to raise more money or try to sell themselves. those types of things. we do have a say in and we don't govern them completely obviously the founders of the company deal. but there is a little bit of balance of power that comes from that type of governance structure. >> peter slen: do you have a say so in a company like oka or insta cart today now they are freestanding companies. >> scott kupor: they don't pay back their money, the way they work is we own equity and stock in the 70s. in the case of an octave when they go public, we have the
option to sell that stock and obviously that's how we would make a return on their investment. in their case, we have one member of the board our founder, is on the board, and are typical mo is that we will send the board for some period of time after these comedies go public but then over time, look to exit the boards as these companies become more mature. today are only saying the coming is as one of many board members, and we own stock just like any other stockholder, we can vote through a proxy for other corporate activities that would require the type of vote. >> peter slen: mr. cooper and a few others are legends in silicon valley. who are they. >> scott kupor: originally made his fame as a founder of company called netscape. back in 1993 which was the first company to actually commercialize a web browser. they famously went public in august 1995.
the first really kind of tech wrote evolution in the modern era that started in the early 90s. he's been gone on to be involved in other important companies like the board of facebook and hewlett-packard. a very important venture. now we are likely to have him as a partner of ours. then i actually got to know mark because he worked at netscape and he ran a number of the products on behalf of mark. what is at netscape and they became very close friends in college through that they ultimately started a new company 1999, called loud cloud. many people have probably not heard and we are trying to build something that is very can to what amazon web services do today. kind of compute on demand. as we talked earlier with insta cart for example, is a good example that was probably a few years too early but now as we see with amazon web services is a very successful idea. the ceo of the business, he and
mark in 2009 decided to take their entrepreneurial skill set and turn themselves into venture capitalists and hopefully help for the opportunity for other entrepreneurs who are seeking to build new businesses. >> peter slen: does netscape exist today. >> scott kupor: now, sold to aol in 1998. the net scape browser is obviously the main product, kind of the main browser of course that most people are using today is google chrome or the apple safari browser. the most of those browsers of their progeny certainly to the early netscape days. >> peter slen: one of the realities and one of the criticisms of silicon valley today is that inventors or entrepreneurs will come in with the product that they are hoping will be sold to a larger company, or large-company will buy that product so there is los competition.
>> scott kupor: i will tell you at least our experience as early how we think about investing is we are actually not interested in backing founders and companies where they are goal is to try to sell the company. the reality as it does happen many times and in fact about 80 percent of the excess in our business when a company is exiting, happens through acquisition. but when this company starts, we want to believe at least that they are going after an opportunity that's big enough and the product is expensive enough that they can support a standalone company and ultimately go public. they do happen acquisitions do happen but i don't think about how those generally as anticompetitive in the sense that we've never had and we do continue to seek new innovation constantly happened. certainly the case that sometimes larger companies will acquire some of these younger businesses but often there is another company right behind him who is going after another segment of the market. none of that and the fact has
actually had an impact on the rate of new company formation. we continue to be privileged to see all kinds of new opportunities still happening. >> peter slen: is the culture of silicone valley thor culture there, something that you have to get used to. >> scott kupor: i think so. it's hard culture no doubt. people are working very hard, people have very high dreams and aspirations for what they are trying to build and it does mean certainly that people probably spend more hours at the office then maybe people would are the wise like to. it's also a very competitive labor market. i mean, that in a positive way. there are all sorts of an opportunities. it also puts a real premium on cultural within a company. if the ceos and the management team doesn't do a good job of helping people and achieve a worklife balance, there are so
many opportunities for mobility that it really does give the market in check. >> peter slen: can you pitch an idea to a venture capitalist on sandhill road if you live in fort wayne indiana or louisville kentucky? >> scott kupor: that's a great question. one of the things that we see in the us is that the venture businesses is still very geographically concentrated. new york and california and boston makeup i think about 70 percent of the total venture capital dollars that are invested every year. the answer certainly is you can, we are very interested in talking to those entrepreneurs. often what happens is in those vocal markets, the very early stage capital that we call seed capital typically comes from the local markets, and if they don't have larger firms beyond that, then you'll often see this comedies, out to either new york or boston or la and other places where there is a more of a concentration of a larger funds that can do the next fancy rounds for those businesses. >> peter slen: in your book you
talk about microsoft and facebook were bc funded companies. the difference in return for those companies. >> scott kupor: this is a real interesting phenomenon that is happening in our business. the average time that it takes for a company from pounding to going public has basically doubled over the last 15 years. he's to be the case that companies who go public, about six and half years after founding, now the numbers are roughly ten or 12 years and there are lots of reasons for that. it's probably beyond our scope of our conversation today. an example in the book is microsoft. they went public at a $350 million evaluation. today microsoft is i think over a trillion dollar devaluation. in all of that growth from 350 million to a train dollars happen in the public market. therefore approve the benefit of all live the public market investors. the mental exercise and talk about in the book is that facebook were to grow at that same level of appreciation admittedly every 20 or 30 year time. , it would be more worth more
than the entire global gdp today. were probably not going to see 3000 times the growth of it over the lifetime. those are extreme examples but they.out a very important thing that's happening in the industry. a lot of money that used to be happening and a lot of growth that was happening in the public markets, are now shifting to the private markets. personally as a policy matter, i think that's a problem. i think it means that los growth in the public market means that normal investors who invest in retail accounts, or their four o one k accounts are quite missing out on appreciation opportunities and i would personally like to see us have more of that growth happening more evenly between both private and public. >> peter slen: why do you think they're saying private longer? >> scott kupor: i think there's a lot of things. the most significant is the sec many years ago if you look at the data about 20 years ago, started to introduce a lot of efficient mechanisms into the public markets. to do exactly that, make them
more efficient. they did a great job. this was not at all kind of a problem with the fcc if you look at for example the amount of money it costs to trade stocks today and the amount of expenses expenses that retails bear. the been going in exactly the right direction the last 20 years. the challenges that works very well with very large caps and highly liquid stocks but when you have smaller cap stocks that aren't as liquid, the market has really become much more challenging. if you are a set of billion-dollar market capitalization happening today in public markets, you probably don't have research analysts or coming your company, nor training guests who are banks who are talking to the investment community talk about buying your stock. the result, really doesn't trade very well not very liquid. as a pretty unattractive place to be. therefore, companies are seeing private longer in order to get to a larger scale in a larger market cap, and what's happened over the last 15 years is the
money is just follow that. the public market investors recognize that. that's why you see sometimes usual funds like a fidelity or t. rowe price actually investing in private comedies. they recognize growth, they now have to go into the private markets. because of the elongation of the cycle. >> peter slen: in your world, are you still the wild west in the sense that you are outside a lot of the regulations that banks and et cetera have to face? >> scott kupor: it depends on the type of venture capital firms. we actually are what we call investment regulator. hedge fund regulation and similar tea. that means we are subject to the fcc coming and visiting us and subject to a variety of compliance rules, and a provincial capital firms actually have lesser regulatory scrutiny. it's really a function in our case of the investments we are doing. we need to subscribe ourselves
to a higher regulatory standard. some firms are not regulated that way and they still ultimately obviously are kind of responsible to the fcc and obviously if they are doing fraud or bad behavior. they have much lesser regulatory scrutiny than with the bank or financial services institution. >> peter slen: what kind of products or catching a ride today. what you are looking for. >> scott kupor: we are lots of ideas about where we think the most exciting things will be over the next five to ten and 15 years. one great area where we are spending a lot of merit to is at the intersection of computer science and life sciences. there's a whole new set of companies that are trying to generate new drugs or create new diagnostic test for disease. they're using components of computer science to have improvement that process. particularly things like machine learning that can improve the learning ability of computers to detect cancerous cells and blood for example.
that's me is one of the most interesting areas. the other part of our business is we need to be quite frankly open to meeting with all kinds of different entrepreneurs and understanding the ideas they have. we certain don't believe that we know all of the greatest trends that are going to be important over the next ten to 20 years. so a lot of our business is just getting ourselves in front of really smart individuals who are doing really cutting edge work in software and then trust to do the diligence to determine do we think that business hamza chance to ultimately grow into a very large and self-sustaining company. >> peter slen: the lessons learned from the '90s. >> scott kupor: does a both good things to talk about. the lessons of the 1990s are mostly a lesson of what i would call market size. the ability of businesses to sustain themselves. we always like to use netscape, when they sold itself to aol in 1998, the entire side of the
internet population globally was left 150 million people. as you may recall, where using these horrible screeching dial-up modems in order to get internet access. everything about that, coming like a pet .com which is benefit the news lately because we had recent ipo of another company called iie .com successfully this year. pets .com no matter how great of an idea it was, they have dog food online could never be big enough to acquire enough customers and ultimately to sustain an individual economics the business. ultimately failed. but i think the big lesson of the '90s is the size of the market really matters because it drives how costly it is to acquire customers, how many of them you can get to and ultimately much profit you can drive from his comedies. inferences to me as an example we often live in a world where sometimes you've got to willfully suspend disbelief in order to kind of go along for some greens dreams that on to producers avenue. there is a difference between what appears to be and with the
sec does work, the difference between fraud and misleading people versus having big dreams and ultimately failing to be able to accomplish those dreams. i think the lesson there is to make sure that we investor in those dreams appropriately and we understand the difference between the ambitious plan and one that might have actually bad behavior associated with it. >> peter slen: he is the managing partner and he is the off author of this book of sandhill road venture capital and how to get it. thank you for being our guest on the communicators. all communicators are available as podcasts. the new cspan online store now has book tv products. see what's new for book tv and all of the cspan products.
up next on tv the us elementary school students. , high-end kia anderson i'm so excited to be here today with natalie. to discuss her brand-new book the knowledge gap. they didn't because of the broken institution system and how to fix it. welcome natalie. thank you i am delighted to be here with you. tell me why you wrote this book and what was your inspiration for writing. >> well i had been writing about education reform efforts here were many, somewhat involved in the educati i