Index Ventures – a company with investments in companies like recent IPO Dropbox, a series of successful gaming companies like King, and others including Slack and IPO Zuora to come – experienced a lot movements in recent months.
There was the departure of her partner Ilya Fushman at the beginning of the year, but the firm also recruited Sarah Cannon of CapitalG as one of her recent big employees. Index has also encouraged the former Dropboxer Mark Goldberg to associate. Prior to joining Index, Cannon led investments in companies such as Looker, MultiPlan, Oscar and Care.com. Cannon will focus primarily on the growth phase, and is now an advisory observer for Slack. Goldberg has been with the firm for about three years and has worked on contracts such as Nova Credit and CoverWallet.
We spoke with the two new partners to discuss some of their plans, as well as some of the broader parts of the business ecosystem. Here is the interview, which has been slightly modified for clarity.
TC: What does the investment committee's decision process look like today?
Mark Goldberg: In the last step, we have a partner presentation, where the entrepreneur presents and we debrief. Then it's a vote at the partner level. Everyone votes 1-10, and if it's over 7, it's approved. If it is between 5 and 7, it is the discretion of the sponsor. On average, it is in the seven range. Some partners always rank lower, their most enthusiastic is 8. This ends up being a fairly honest discussion intellectually, each vote is the same. I've already worked in other funds, and it seems like it's becoming more of a horse trading business. It sounds like a constructive debate, we operate as one team. It is also 6:30 in the morning on Monday, so there is that.
TC: When working with entrepreneurs, how do you make them progress – especially when some seem allergic to product changes?
Goldberg: I speak more about my background of being a rental company at Dropbox, but it remains focused on the end user and building something that people want really use. Whatever the paradigm, [we ask] do you build a product where, at the end of the day, the end user is happy?
Sarah Cannon: Much of your role on the board for individual decisions is concentration. My role is not to make decisions but to focus, realistically, and perhaps share an example with another company that you respect. The most effective way is to connect them to a peer. We were investors in Lyft and Stripe, and there would be a lot of learning between these companies. We would say, let me connect you to the head of the product at Lyft. After this coffee, the priorities have been reduced to a few.
TC: What is the filter for companies?
Goldberg: First, the [series] A is where we are really focused. I think that, historically, Index had really built a brand in Europe. King, SuperCell, Skype and others. When we set up the team in the United States, we ended up being pushed into more B series. We would have liked to see Series A on many of these companies, but we were new, it was harder to proactively obtain these bargains at the previous stage. So, we push earlier in this series A. Maybe 7 of the last 10 transactions were [series] A for us. The challenge is, how can we find these great founding teams and category winners at this stage. Despite the evaluations, we want you to check these boxes.
Canon: When you move later, it's a lot more about the economy of unity. That's the first part – really understanding the economy of unity, what can be the size of a company. The market could be really big, but how big is the price. These are the two things I focus on. It's easy to look at the economy of unity. There are exceptions to the rule, like Amazon, where margins did not look good along the way … Traditionally, these companies did not make money, and so it is. that you miss really exceptional companies. They are transforming companies. That's really how I changed my way of thinking.
For consumer businesses, I think it must be a massive pull of users and whether you see wild adoption or differentiated technology.
TC: What do you think of the current state of mental health in Silicon Valley? How do you help your founders in this regard?
Goldberg: I think that being a founder is an extremely lonely job. I think that one of the things that a strong risk partner can do is to be a good sounding board. The emotional fluctuations in these companies are extreme. A founder must be, even if they are resilient and have a lot of courage, they will absolutely feel the ups and downs. If you are talking about what makes the value of a venture capital fund and a partner, it is the ability to cushion some of that volatility by being available. If someone calls me on a Saturday night, I take the phone and am present and have this prospect. If you do this job well, you can help the entrepreneur to feel less alone.
Cannon: [Part of it is] regulating both the ups and downs. You had the advantage of working with a lot of companies. You can say, it's a great time, celebrate, but it's not like we have to go public tomorrow. In the stockings, you remind them of the good times, you modulate in the middle and give some perspective .. It is important to intervene as an investor, and to say, "ok, it was a scary moment, but that is why I have a belief in your business. "
This is a subject that has a lot of shame. It's very similar to an artist, there is an individual genius designer but there is a dark side. There is a very well-known perspective in the founding world. I hope we have some brave founders coming out and saying, look, I really struggled, here's how I managed to take care of it.
TC: How have things changed because of the change in the corporate landscape, for example with mega-funds like Softbank?
Goldberg: We consider this to be a good thing, for us it is an additional option for many companies in our portfolio. Before SoftBank many times your option is [just going public]. Softbank is not the only one, there is the growth of Sequoia, there is a lot of money flowing around the last stage. This has been a boon to our businesses – we usually play at a stage before we are competitive [with that].
Cannon: For the last step, it absolutely changes the return profile. To the credit of Softbank, it's a brilliant strategy, it's like an index on private markets.
TC: How do you differentiate the founders for the companies in which you invest?
Cannon: For me, the adjustment [to earlier stage] was a couple of things, like adjusting your risk reward. You take a much bigger risk. It is easier to rely on cohort data, thinking that I have seen this for three years. [At earlier stages] It's less data, and you're taking more risks, you have to spend more time thinking about the team. You must believe that the founder is able to bring this high quality team. To advance sooner, you need to have a lot more conviction. In later stages, you have a group of investors already at the ceiling table.
Goldberg: I think it's absolutely essential that the market be multistage. We are agnostic and focused on expertise. We will see a company in Series A or Series B, and we will know the founding team. We do not expect the formation of the round, we preempt it, and if we do not do business, we have a future relationship.
Canon: [I also think it’s] very specific to the case. If it is a startup of IT infrastructure, the person must be very technical. It corresponds to the company. Do they know their own strengths and weaknesses, do they know the strengths and weaknesses of their current members?
TC: What do you think about diversity in the future?
Cannon: The main goal is how can I meet this challenge. The numbers speak for themselves in terms of diversity of all types. Many founders are not satisfied with where they are, we think about what we can do specifically about it. It is there that we had a lot of discussions – how do you give fair reviews, how do you make sure your pay is the same. There is always the question about the funnel and how do I see different candidates? My point of view on this is that we should do a much better job in companies and businesses by selecting the specific attributes you need in the job. We want to push people, rather than going to pools that are easy, like banks, and say that the important attributes for an investor are emotional intelligence, analytical thinking, and so on. They do not necessarily come from the same people.
Goldberg: What has changed is that it is now a conversation at the board level. At the last 4 to 5 meetings, it is now a subject on par with the KPIs of the company. It did not usually exist. I agree with the tactical points, we can do a better job with diversity, we have these conversations ..
TC: What about idea applications like the Rooney Rule?
Cannon: I think that's exactly what's tactical. People only ask for an idea, something that I can commit to change my funnel. Change my process to be fair, the founders, I think, are very open.
TC: How do you manage expectations with your LPs base, especially as a time threshold between an IPO and founding stretches?
Goldberg: I think we are lucky that as a fundraiser and with LP's base, we have the opportunity to have a long-term vision. As the chronology expands, we do not feel the pressure. To the extent that companies continue to create value, returns will look pretty good. We have not felt the urgency of trying to make gains faster, and this is part of our broader philosophy and philosophy of investing. We are here to support entrepreneurs, and I do not want to be prescriptive in an outing.
I think we need to be thoughtful when we take a secondary investment. To make big secondary in the first companies can be detrimental. When we look at the towers where the side ones are available we ask about the distributed products, we want to know [if it’s just certain executives or for the whole team].
Cannon: You want to think about employees who have made important contributions. In a market where companies stay private much longer, for employees, I want us to find a way to have liquidity. The key is how you structure it. You could buy a house, but you do not need a mansion.
Goldberg: What I do not like, is when the founders or a select group of executives are able to make money. As long as it is equitably done in a way, as 10% to 15% of liquidity being offered to employees.
TC: What lessons have you learned from what is happening in China?
Cannon: We are not investing in China right now, but I want to learn from China and see what ideas we can get from companies out there and how they will be different to United States. If you watch live video, many companies have taken off. The e-commerce business social, mid-mail, how does this change with the transactions.
Goldberg: On the Fintech side, it's almost as if the world had been reversed, I'd used to do a lot of cleantech where we feared that China would copy the intellectual property. In FinTech, the most innovative companies are coming out of China. If you look at digital payments in China compared to the West, they were already way ahead of the curve, and now it's even more true. It's really, for us, to learn what's around the future. We push ourselves.
TC: The majority of this property belongs to a few platforms like WeChat or Alipay. Is this a good thing?
Goldberg: Some of these platforms become monolithic conglomerates at this point. My broader thesis on this point is, let's see a new set of companies and winners from the last few years that will bring together the rest of the feature-rich companies into larger platforms. They build massive user bases with extreme commitments. You imagine what else can you sell crossover once you have that brand engagement and affinity. We will see the big winners of the categories of the next digital bank in the United States.
TC: How do you think of ICO?
Goldberg : We observe them opportunistically. I think crypto and blockchain have a lot of press time, which bothers me for financial services. Holders are absolutely vulnerable as they have never been before. We see a huge success ..
Cannon: We are very motivated. Both domains are really around blockchain and AI. We've just made a presentation that we call Monday's daydreams – we've had them on gambling, bitcoin and crypto in general – it's an area where we are actively trying to build our body of knowledge. I think that there is a lot of interest and that the moment is conducive to a lively debate.
One of the challenges is to be an effective unit of economic transaction, to know your client, and as long as you will have nation-states, it will be difficult to have a volume of blockchain transactions. I do not think Facebook will give up regulatory protections. You will have to transfer your bitcoin to books or other currencies at some point.
Goldberg: I had a challenge to find a [high-potential] Dapp. (Dapp is the abbreviation of decentralized application)
TC: Where do you find these new areas of talent?
Goldberg : I did not find a quick fix. This is an aggressive push to reach a diverse set of supply channels.
Cannon: [Companies have big pools of strong candidates] The challenge at an early stage is that it is more difficult to learn about these companies. At first, it's hard for people who are not as well connected. What is the role that a large company has in a large pool, how can they help them connect. I'm thinking of how to do it in an evolutionary way. The innovation that Google really did is to do interviews. Rather than saying we are going to look for people in the best schools, we are going to do a test that will test the engineering skills for that job. If you can prove that you have these specific skills, I think that's a great way. You get people who have the skills.
TC: What are you looking for in startups that focus on machine learning?
Sarah: The way I thought about investing in AI is three buckets. One was on generalized AI, and what would replace a human. It's a lot of science and a lot of risk at the very beginning. The second bucket is AI vertical, and the third in the field of health is how to analyze the data on claims. Google and Facebook can afford to hire data scientists of an incredible caliber, but most companies can not.
On the vertical plane, there are many technological constraints. I would love to contract, but [you have to] think of what is possible – what you can do with a camera, where we are with the artificial vision and applications of this in an immediate business context. [We look at] how many engineers and data scientists do you have, what are the top 5 applications of your technology. You will find very quickly that they are doing something that could be automated quickly.
Goldberg: Ninety-nine percent of the arguments I hear in all industries speak to machine learning. It's become so ubiquitous that it's almost insignificant, or it's as horizontal as big data. What I'm looking for is proprietary data. What is really critical is not just the algorithms, but your ability to form a model faster than anyone and in a more unique way. You have access to a pool of data, and the data is ultimately what sets it apart. For the vast majority, it's a buzzword that they believe will increase the valuation. One way to test this is to look at the technical DNA in the team. For me it's a lot of suss out is this really learning the machine, or is it empty words on a page.
TC: Which verticals are you focusing on right now?
Goldberg: There are massive segments of the economy coming online right now. Agriculture, construction, logistics, we look at where the data has been locked out of shape as on paper or excel. As the software brings it online, many of these industries are ripe for machine learning.
Cannon: [For me] The two that interest me most are health care and financial services. It 's about having an exclusive data set, but also huge savings in dollars. You can do a lot of analysis, but it will be very difficult to convince companies. A health care company that can convince you [a hospital that it can] saves you $ 1 million per patient, that is, when people change their buying habits. There is also fraud, I have seen many companies that can pick up the insider hit in the banks. They are huge savings in terms of the dollar and the regulation and the compliance.
TC: What signals are you looking for in mainstream startups?
Cannon: I always think that chance favors prepared mind. I want to do a thesis work in the field of consumption, and think about the areas in which I see models. When I see the monthly data of active users, [I ask] is it consistent with the world. Millennial has a contrarian thought, one thing that came out when the founders of Robinhood spoke, was that millennials did not want to pay upfront fees. I wonder if there are other models to which they are resistant. Maybe they do not want to be monetized by the ads, and are there any businesses that could evolve from that point of view.