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Venture Capital and Enterprise Cloud Investing with Jeff Richards

7investing lead advisor Austin Lieberman interviews GGV Capital Managing Partner Jeff Richards.

September 21, 2020 – By Simon Erickson

Jeff Richards is a Managing Partner at GGV Capital where he focuses on enterprise/cloud and marketplace investments. He led GGV’s investments in Appirio, Belong Home, BigCommerce (NASDAQ: BIGC), Coinbase, and others.

Jeff is also passionate about investing in public equities  and applies the long-term “venture capital” approach to investing his personal portfolio. He bought shares of Salesforce (NYSE: CRM) during its first year as a public company and still owns them today.

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Join Jeff and 7investing Lead Advisor Austin Lieberman as they discuss wide-ranging topics from mental health to what companies and trends Jeff is interested in the public markets.

Public equities mentioned on this podcast Salesforce (NYSE:CRM), Crowdstrike NASDAQ: CRWD), Zoom (NASDAQ: ZM), Amazon (NASDAQ: AMZN).

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Austin Lieberman

Welcome to the podcast. Our mission at 7investing is to empower you to invest in your future. We do that by providing a ton of free educational content like this podcast. And by offering a monthly subscription service where our team of advisors provides our seven best ideas in the stock market each month for just $17. I have had a lot of fun. And I’ve learned a lot from talking to the different guests on our podcast. And one of the areas I’m really personally trying to study is venture capital. Because I think there’s a lot that we can learn as public market investors about the way venture capital firms and investors operate. Some of the framework works. They use the long term mindset we talked about, we talked to Jamin Ball from Redpoint Ventures before and today I’m excited to talk to Jeff Richards, who is a managing partner at GGV Capital. Jeff joined GGV in 2008, after spending 13 years as an entrepreneur and operating executive in the US and Asia. He focuses on enterprise and cloud marketplace investments. And he led GGV’s investments in Big Commerce, Coinbase and a few others. Jeff, thanks for joining. I’m excited to talk to you. Can you fill in any holes I missed about your background? And then also tell us a little bit more about how GGV is set up?

Jeff Richards 01:35

Yeah, I don’t think there are any holes. But no, I mean, I guess the short version is I grew up in Seattle, I went to school on the east coast. I actually played basketball for four years in college, which was a lot of fun and taught me a lot about managing my time. And I moved to Silicon Valley in 1995. So I’ve been in Silicon Valley since 95. I worked in the US in Hong Kong, from 95 to 97. And then I started my first software company in 1997. So it was kind of a crazy ride, I was 25 years old, and ended up raising $125 million in the .com bubble, which was a lot of money back then. So and then, you know, essentially walked away from that company in 2002 with nothing, it was a big zero. So I learned a lot in a five year window about raising money and a whole bunch of other stuff, got married, started my second company in 2003, do the exact opposite, raised a million dollars from friends and family and then sold it to a public company called verisign. And I then spent three years at VeriSign got to work with amazing people, which we can talk more about. And then joined up in 2008 by the new venture capital for 12 years. And it’s been it’s been a lot of fun. And, and as far as the firm goes, we’re a global venture capital firm, we manage about six and a half billion dollars. So we’re in in Asia, Southeast Asia, China, India, Latin America. And then about half the firm is focused on the US. So been investing in the US for about 20 years, and Asia and more broadly for 20 years. So the firm was founded in 2000. I joined in 2008.

Austin Lieberman

Thanks for sharing. And that’s really interesting. And one of the reasons that I’m really excited to talk to you because of your firm and your experience internationally. which right now is it’s always important, but now is as important as ever. And you were on Howard Linds ons, panic with friends, March, I think it was March 11, that you actually recorded the podcast. One of the things I found interesting about that podcast is that you and the firm had seen some indications from some of the companies you own and probably some some other areas, you were looking at that, that were kind of leading indicators as far as how, you know, things were going to unfold. You mentioned, mentioned playing sports in college, I, I played sports in high school. And then my first my first year I played baseball in college, and I found that it wasn’t as fun as it was in high school because it felt more like a job because you’re trying to earn scholarship and stuff like that. I didn’t finish my time in college playing but you did. So would just love to hear your thoughts on that real quick kind of completely not investing related.

Jeff Richards 04:17

Yeah, I mean, look, it was I was essentially kind of a walk on. I went to Dartmouth and the Ivy League wouldn’t have scholarships, but they had recruited five other players and kind of lightly recruited me. But you know, I just I really wanted to play and so it was one of those things where I had to work my ass off to be on the team starting as a freshman and did a lot of things that you would normally do to be part of that team. But it was such a great experience. And yeah, I mean, it’s definitely a it’s definitely a level up from high school and I’m sure the pros is a level up from college. You know, the hardest part is is managing your time. I mean, I was you know, you’ve got two or three hours of practice every day. You’ve got an hour, an hour and a half of working out lift, weight lifting weights. You kind of have to eat Right, although you’re in college, so you’re still eating a lot of burgers and things like that. But, you know, it just really taught me about time management in a window in time where a lot of my friends who didn’t play sports, you know, were sitting on the couch playing Sega hockey, or drinking beer or whatever. And so it just, you know, it just teaches you a lot about time management and discipline. And I think team sports in general, at least for me, teaches you a lot about winning about losing. You know, my think it was my junior year, we lost 10 games in a row. And coming into the gym at 730. On a Saturday morning, when you’ve lost 10 games in a row. It’s pretty hard. You know, later in life, you can kind of draw on some of that experience, because, you know, nobody’s career goes straight up into the right. I mean, we all have a lot of challenges, raising a family, getting married, raising kids, I mean, there’s so many things along the way that can get you down. And I think, you know, you and I chatted a week or so ago, I do think one of the things I learned from my dad and from my mom was just to be positive, right, no matter what situation you’re in, try to be positive. And it’s tough. You know, particularly right now, with everything going on in the world, I think we all are struggling to stay positive. That’s one of the messages I keep trying to reinforce my kids, I think part of it is the way I grew up. And part of it is having played sports and just, you know, you got to suck it up when you lose 10 games in a row and get back on the horse. And good news is we want our 11th game. So

Austin Lieberman

Yeah, and with sports, a lot of times, it’s when things start going bad, you stick to the process that you’ve you’ve learned and built over time, and then trust that, eventually it’s gonna get better. And you have of course, you have to adjust and you know, make minor adjustments. But, but sports teams generally don’t go make some massive change, because because they haven’t been winning, they double down and stick the process and then adjust as I need to. So lots of lessons to learn. The other thing, and kind of probably last thing on sports. My high school coach, we had a slogan on our baseball team that I think is stuck with me my whole life and career is that hard work beats talent, when talent stops working hard. And so through sports, you learn lessons like that, right, which I’m sure you’ve applied a lot of lessons you’ve learned to your career and everything you’ve done. So that’s cool. Thanks for thanks for sharing that, Jeff. One of the things I’m a big fan of yours on on Twitter, and as much as there’s the whatever that account is that makes fun of venture capitalists, which is funny to look at sometimes. They’re easy targets. I do. Yeah, I do appreciate what a lot of different people share. And one of the things I appreciate, appreciate about you, Jeff, is you talk a lot about mental health. So that’s where I want to kind of start this podcast after that. You wrote a tweet. It was on August 26. That said, “to be honest, if you don’t have some level of anxiety and depression right now, I’m not sure you’re human. We’re having this talk weekly with our kids. And it’s not infrequent that an adult is crying. I’m as optimistic as anyone on the planet. But these are challenging times.” I think we’re getting better about it. But there’s been a stigma about sharing things about your mental health and about depression. So I wanted to ask you, what are some things you’re doing right now to to focus on your mental and physical health?

Jeff Richards 08:19

Well first of all, I think you’re right about the stigma. And I and I think you know, like, just last week, you saw Dak Prescott, who’s the quarterback of the Cowboys talked about it. And he got criticized by a journalist who I think was way off base. But it just shows you like how far we still have to go. I think, you know, for me, it’s something that I didn’t really understand until I became an entrepreneur. And, and even in my first company, I was kind of too young almost to realize how stressful it was. But the second time around, you know, I had, I had just gotten married, and we had our first baby about a year after we got married. And so I was in this weird vortex of like, I just got married, I started a company I was making, we were paying ourselves zero, we had no salary. So I was living on my wife’s salary, she was working in an investment bank, she had health care coverage, thank God. And it was super stressful, right. And I just remember that feeling of like the world is on my shoulders, I’ve got to create this company, I’ve got now got people working, who are relying on their paychecks to rely on me for their paychecks, I got a wife, I got a kid. And what’s interesting is most of us kind of go through the peak of our career in our 30s and at the peak of our career, but we start to get into a really good time in our careers workwise in our 30s. But that’s also the time when a lot of people are starting families and buying homes and dealing with a lot of issues that they haven’t had to deal with previously, and so I just think it’s a really interesting vortex that for whatever reason, you know, 20 years ago, maybe maybe even 10 years ago, nobody talked about. And so for me social media, if nothing else, you know, forget all the negative aspects of social media and Facebook with the elections and everything else which I dislike. I think that openness about mental health and you’ve had a lot of prominent entrepreneurs ambassadors, etc, come out and talk about it has been super positive, because I remember, back then this feeling I was probably 32 or 33. Like, where did you go for that there was no social media, it wasn’t cool to go to a therapist, you didn’t really have networks of entrepreneurs that you could spend a lot of time with. And so it was really hard to deal with. And it was a, it was a struggle. So I, you know, I’m very empathetic to the entrepreneurs that we back the companies that I’m on the board, I’m always trying to talk to them, make sure they’re in a good space. And then the more you can sort of put it out there on social media, I think when people who are in a position to do so to sort of validate the feelings that people have, I think it’s positive and so more of that, in my mind is a good thing. And I thought, you know, I thought Dak Prescott coming out and talk about it was great. I mean, imagine how many athletes are I mean, as an athlete, not only are you are you working your ass off to be a professional athlete, but you could get cut at any time and lose your lose your livelihood? Most people don’t feel that stress every day. So I just thought it was really honorable that he came out and talked about it. Yeah. And then you ask the question, What am I doing about it? I mean, you know, people ask me, like, what are the great life hacks, one of my great life hacks is marry the right person. I got lucky. And you know, married my wife, actually, 18 years ago, we just had our anniversary last week. And being married to somebody that you can sort of talk about the things that are stressing you out, have open conversations about how you need to manage your time and the trade offs that you’re making. As individuals as you grow up, we have four kids, retired have four kids, studying from home is about as stressful as it gets. And, and so we’ve had to have a lot of hard conversations and kind of figure things out as we go along. And we’ve certainly had some arguments and frustrating moments. But you know, one of the ways that I’ve been getting through the last six, eight months is just by by having a great home life and relationship that even on a bad day, it’s still better than where I would be by myself. And so that’s one too. You know, as I mentioned to you, I try and get up and work out every morning. That’s something I kind of grew up doing playing basketball, even if it’s just a 20 minute walk outside, I think it I think it jogs your brain and just kind of puts you in a good frame of mind gives you a little minute to kind of just think, typically, when I mean, you know, I’ve been doing zoom meetings this week, on Mondays, we do our zoom meetings until about nine o’clock at night, because we have our team in Asia, that’s the morning for them. So Mondays can start at eight and end at nine it’s a it’s a, it’s, it’s hard when you’re in the office, it’s really hard when you’re sitting looking at a zoom screen all day. So if you can get out, take a walk, I have found that talking to friends on the phone, not on zoom for 510 minutes, and just catching up has been therapeutic. So there’s, you know, there’s a lot you can do. I think it all revolves around not just doing the same thing all day, and try to get a little diversity in your day.

Austin Lieberman

Yeah, and, you know, not to turn this whole thing into a mental health podcast, but um, we, so you and I talked about this before, too, I’m still in the Air National Guard. But when I was on active duty, there were people in the squadrons in the squadrons that I was a part of that. attempted suicide and things like that. And the the the common theme, really, among all of them was that nobody saw it coming in. And so I guess the last point I want to hit on, and maybe it’s a question for you, too, is, especially in this work from home environment, which I think is great for a lot of reasons. We’re opening up opportunities to different people throughout the world. And I think there’s a lot of innovation and a lot of great things that come from it. But one thing that that is challenging, are conversations that you have with people in person in the hallway, or in the common kitchen at work or whatever, where things just come out and you can see people and you can you can tell if they’re off or not feeling feeling right that day, a lot of times, we’re we don’t have that anymore. So is there anything that you’ve any ways that you’ve found to be able to connect with teammates or companies that you’re invested in? to just check on them mentally, and see how they’re doing remotely?

Jeff Richards 14:01

It’s an issue for all of us. Right? And, you know, we as a firm, probably March, April May started having conversations about how do we recreate that kitchen, you know, that snack room atmosphere. So we’ve been doing all hands every week, we gave our team extra vacation days and asked them to take them before October 1. We said hey, we want to give you extra vacation days and we actually want you to take them. And we say even if you don’t go anywhere, just take a day off, don’t respond to email, don’t do phone calls, don’t do Tech’s you know, go to the Go go go to the Humane Society and, you know, hang out with animal do do something other than sit in front of your resume all day. It’s just not healthy. So I think that’s part of it. And then you know, I’ve been just blown away by the way that many of our entrepreneurs and CEOs have been way out ahead of us on this. So I’ll give you one example from the CEO of a company called Workboard. She created a program where they send flowers every week to every employee plays home. And there was just a I tweeted it out last week in a TV segment about it. And you know, her thing was like, I’m not saying everybody loves flowers that people love just knowing that somebody is thinking about them. And if they look across the room where they’re doing their zoom, whether it’s their laundry room or an office or the couch or they see some flowers, they’re like, okay, somebody is thinking about me, I think that’s powerful. And so I’ve just been, you know, we have an electric they’re doing group cycle rides on peloton, we’ve got companies that are, you know, meeting outdoors and doing socially distance activities. Because you’re right, it’s super hard to replicate the the kitchen conversation, the hallway conversation, the off sites, and humans need that right. Not to mention, we’re not going to sporting events, we’re not going to concerts. I mean, I have, I love concerts, I have friends who go to concerts, like religiously several times a month, and it’s killing them. So we kind of forget how much of our society is oriented around social interaction. And when you remove that out of the equation, it’s it’s brutal. I think we’re gonna look back on this 2020 era and find out that there’s a lot of lasting effects. And it’s, you know, we can talk about beyond adults, kids, like kids aren’t going to school, right, so much of your life as a kid revolves around going to school and playing with your friends and going to recess if you’re younger, and you’re just all that interaction that they’re not getting, I really think it’s, um, I really think it’s tragic. So the sooner we can, you know, move beyond the COVID-19 crisis, the better it can’t come fast enough.

Austin Lieberman

Yeah. Yeah. Great. Um, thanks, again, for spending some time talking about that topic. And for what you share regularly out there on Twitter, I will share this at the end and in show notes, but everyone can find Jeff @JRichLive on Twitter. I’ve found what you share to be helpful for me with with mental health and mental awareness. So thanks for sharing that. So let’s talk about investing a little bit, right. And so some people listening to this are probably familiar with what venture capital firms do, some probably aren’t as familiar. So to give you an idea, I would love to just maybe hear about how an investment opportunity kind of flows through the different stages of your firm from kind of discovery or where you might hear about it through making an investment.

Jeff Richards 18:26

Yeah, so I mean, just at a basic level. So venture capital is really just investing in private companies. And in our firm, it’s all tech, we only do tech, some firms do healthcare or other other industries, but it’s just investing in private companies. The reason they call it venture capital is because it’s theoretically supposed to be very early and very high risk, but also high reward. So our best investments, you know, our worst investments, we lose our money. So we can put in $5, $10, or $20 million or more into a company and it goes to zero, but our best investments, you know, we can make 100 times our money. So GGV, sort of well known in the Asian venture capital community, but we were the early venture capital firm behind Alibaba Group, and we invested a $200 million valuation when it was a $10 million revenue company. And today, I think Alibaba is market cap is something like $700 billion. So when you get it, right, the returns from venture capital can be enormous. And it’s a different, it’s a different game, if you think of the public markets is sort of a batting average game. In other words, I want to own a basket of stocks and return 10 or 15% a year, with venture capital, it’s more of a slugging average game. So I might make 100 investments and if five of them, you know, our home runs, they make up for the 80 to 95 that don’t go anywhere. And, and so it’s, you know, it’s a really important part of our economy. A huge percentage of the jobs in the US are actually created by venture backed companies think about Google and Amazon and Netflix and others because it’s risk capital. So it’s it’s capital, that is designed to get Somebody who has a crazy idea whether it’s Ilan Musk, or Jeff Bezos, or you know, your friend down the street, give them capital when nobody else would, and it looks insane. But if you get it right, the return on your investment is enormous. So that’s it. That’s what venture capital is. And for us the way that our firm has been around for 20 years, so when I joined, we were on fund three, now we’re on fund seven. You know, for us, we’ve now got a team of about 90 people around the world. And that team of people we are developing focuses on sectors and thesis that we think are interesting. And then diving into those sectors and thesis and trying to find great companies and great entrepreneurs to invest in. And so I’ll give you an example, which is, in the e commerce category. You know, we were early investors in Alibaba, we sort of watched the commerce of the e commerce market grow up around the world, and had a thesis that when the iPhone and the App Store came out, and kind of the 2010 timeframe, there would be a new wave of e commerce that would be unlocked that kind of hadn’t really been there on the web, because Amazon was so dominant. And so we made a whole bunch of investments, we led the Series B in a company called wish we did the Series B in a company called house we did the series being a company called Poshmark, we invested in peloton. So a whole bunch of companies that were kind of in and around the e commerce space, because we believed that as more people got onto the internet via mobile phones, they would do more of their spending on on mobile and on the internet. And that would drive ecommerce adoption upwards. But again, that was you know, seven, eight years ago and and we also invested we were looking for a way to invest without in the in the software space invested in a company called Big Commerce back in 2016. So we made all these bets five or six years ago. And what you’re seeing now is a number of those companies go public Peloton went public now has a $25 billion market cap. Big Commerce went public now as a $5 billion market cap. And companies like Wish and Poshmark are very well run multi-hundred million dollar revenue businesses so they’re long term bets, and you kind of pick sectors and thesis that you think will take time to play out. If you look in the software space, the whole bet on cloud has been just incredible for venture capital investors, and frankly, for public market investors, which we can talk more about. But, you know, they’re long term bets with with high return multiples. And generally our thesis is, you know, we have we have T-shirts who made say, #golong because our theory is, if we can invest in these companies and bet on the long term growth of the company, we can generate outsized returns. And so that’s the whole idea behind #golong as well.

Austin Lieberman

Yeah, that’s awesome. You talked about a couple questions from that you said, you talked about your biggest losses, where you might lose 90 to 100%, I would actually argue those probably aren’t your biggest losses, your biggest losses are probably companies you passed on that went on to return, you know, whatever percent, right, and I’m pointing that out, because I think we’re going to kind of transfer this over to public market investing in a little while. I think that’s an important lesson for for public market investors is, you know, investment can only go down 100%, which sounds like a lot. But as long as you didn’t bet your whole account or your whole firm on that one investment, that’s fine. But selling something too early, or passing on it, or whatever can actually be your your biggest loss.

Jeff Richards 23:23

Yeah, I think another big lesson there. Maybe it’s the same point is, when you get it, right, the returns are bigger than you think. And so, and that’s particularly true today, where we have 7.3 billion people around the world, several billion of you know, I always love it on watching CNBC or another show, they’re like, Oh, it’s like bubble. And I’m like, in, bubble, there were 100 million people in the world on the internet, in the world. In China alone. Today, there’s 400 million millennials that have internet access. So it’s like the the economics of the technology distribution model around the world are completely different than they were 20 years ago, I think a lot of people still haven’t wrapped their heads around that. They’re probably still trying to figure out what a what a DNS address means and where that where that content comes from. But to your point, when we’ve missed a company, or pass on a company on investing in a company, very often it was because we didn’t realize how big the market opportunity was. So usually, we we underestimated the team, which you know, as an entrepreneur, I can tell you, there’s no better feeling than have somebody pass on investing in you. And then later on, you build a giant company. But you know, we we underestimate the team, and then we didn’t understand how big the market opportunity was. I think what you’re seeing now is, you know, people are trying to figure out why there’s so much fervor around the IPO market. And it’s because public market investors have realized what private market investors realized several years ago, which is if you get it right, the outcomes are enormous, right. And so I remember we wrote an investment memo on Twilio, which is a great company run by Jeff Lawson, who I think is one of the best founders and CEOs in Silicon Valley. But I went back and looked at it and we sort of forecasted, like, if we get this right, it could be a three to $4 billion company. And today, which by the way, was probably conventional wisdom among other investors as well. But today, that company is worth, I think, $35 or $38 billion. And so we were off by orders of magnitude. And so the thing that we’ve tried to adjust in our investing style is to sort of develop that bigger point of view about what could the company actually accomplish if we get it right, number one? And number two, how can we invest more over time when we’re finding those companies that are doing well as opposed to just sort of, quote unquote, letting them ride and then, you know, one of the things you famously see people criticize venture capitalists for is distributing the stock or selling their position too early. And that’s another one where you miss right? Your company goes public. You know, it gets up to a $3 billion market cap, everybody distributes their shares or sells or shares. And then five years later, it’s worth $50 billion. Yeah, so those are those hurt as well.

Austin Lieberman

Yeah. And the last thing was, you mentioned the Alibaba metrics. I think you said, what they’re doing $2 billion in revenue and invested $100 billion valuation, something like that.

Jeff Richards 26:13

We invested at $200 million they were doing $10 million revenue, then. Yeah. Austin Lieberman So I’m guessing that was seen as super expensive and overpriced at the time, right? And in obviously, it wasn’t if you had a long enough term mindset and exactly the things that you’re talking about. Jeff Richards 26:31 Look at, I think, if you look at that scenario, like in hindsight, we all look back and say, Well, of course, there were going to be a billion internet users in China. And of course, because you have this move into the urban centers in China, there was going to be more spending and rising incomes. And when they were rising incomes, they rarely spent online, not physically. I mean, China, ecommerce is more than 50% of retail today in the US, as of January was only 16%. It rose to 40% in q2, which is one of the greatest economic booms we’ll ever see. But in China, it’s been about 50%. So in hindsight, you’d say, Well, of course, all that makes sense. But if you want back the clock to 2003, there were less than 100 million people in China on the internet, the incomes weren’t high and weren’t rising. Capitalism was a relatively new concept in China. So there were a lot of reasons to bet against that trend, even though you and I would sit here today and say, Well, that was a no brainer. Yeah, but but at the time, they aren’t no brainers. And that’s where I think we kick ourselves a lot as investors like, for me, I, I’m on my iPhone three, Tesla’s I love it. I think it’s one of the best products I’ve ever bought. I don’t own the stock. And I’m like, and it’s funny, because my dad who’s 78 years old, when I bought my first Tesla, he bought the stock. And so he was just telling me that it is like, Man, what a great return, he goes, I hope you love your car. But I just thought it was too expensive. You know, I was like, Oh, my God for the amount of volume they’re producing is too expensive. What I missed was the genius of Ilan musk. And when you back one of the greatest, you know, I think, arguably the greatest entrepreneur of our lifetime, the magic that he can create is incredible. You can argue about the valuation and the multiple of revenue and profits and everything else. But like, what he’s done is incredible. And when you find that rare and unique, entrepreneur, CEO, they create so much outside as well, right? Jeff Bezos is in that same category. Or, you know, if you look at Steve Jobs, and Tim Cook, I mean, Tim Cook has created more market value than Steve Jobs. But like when you find those companies, and I think one of the things that we have as individual investors, we don’t have to produce returns. So a fund manager has to kind of trade in and out of stocks to generate returns for their investors, for you and I, we can buy these things and hold them. Right. I bought Salesforce when it went public, because I had a couple friends who worked there. And I’ve never sold the stock. Now I only had I didn’t have that much money. So I only bought like a couple thousand dollars for the stock. But it’s like, I never had to sell because I never had pressure on me to generate any returns for anybody. And so when it went down in Oh, 809. I was like, I’m not in any hurry. Oh, hold on. One of the hidden secrets of venture capital is a lot of venture capitalists, when they when they get an exit. they distribute that stock to their limited partners. They put it in their own account, and they sit on it. So you’ve got partners of venture capital firms that are sitting on Google stock from, you know, whatever it was 17 or 18 years ago, because they’ve never had to sell and just watch it appreciate over time. And I think there’s I think there is definitely something to learn from that as you think about being a public market investor. If you can afford to buy and hold, unless you’re betting against the American economy, which I’m not. It’s been a good investment. And that sort of goes back like 2030 years, not just the 10 year Bull Run we’ve been in.

Austin Lieberman

You’ve talked about a few of these things. You mentioned leadership in people like Jeff Lawson being being an awesome founder, leader, Elon Musk being incredible. So clearly leadership is important. One, what are some things you look at to evaluate the leadership at a company and then Also, are there any metrics you look for in companies? So you know, you talk about you invest in tech. Right. So is it dollar based net expansion rate? Is it revenue growth? Is it customer acquisition costs? Are there just a few things that you that you look very closely at?

Jeff Richards 30:16

Yes, when we’re doing diligence on an investment, we look at a lot of very detailed metrics, I would say, let’s just focus on enterprise software for a minute. And I’ll kind of tell you, what I look for. First of all, is big market, right? Like if I think about, you know, for example, back in March, when I was you mentioned, Howard’s podcasts when I was on Howard’s podcast, I think my recommendations were Zoom, CrowdStrike, Smartsheet, I’m not sure what else but I know those were in there. And the point that I made the Howard at the time was like, CrowdStrike, I think it traded down to like 33, or 35, or something. And we were never an investor in CrowdStrike. But I’m a huge fan of the company, great management team. And I said to Howard, like, is the market for endpoint security going to go away? No, when people move to work from home, what becomes more important endpoint security. So, you know, I can’t tell you whether that stock was going to go up and triple in 90 days, like it did, or it was going to grow up 10% over the next five years, I don’t really know. But directionally I know that category is a good category. I know the management team is a good management team. And the fundamental metrics in terms of net dollar retention and expansion are really solid. When a company has strong net dollar retention, you could find these metrics on the internet. Now they didn’t public companies didn’t use to report them. And nobody actually analyzed them five years. Sounds crazy. It was like, you know, the covered wagon days of software investing. We took we had a company called success factors. We took public back in oh eight, the market did not understand software at all. They were like, Well, why don’t you get why don’t you sell a license? Don’t you get paid up front? Why does it install on prem? So the market has come a long way in 10 years. And now you can get a lot of data. But to me, one of the most important metrics you can look for is that net dollar retention rate, because what it tells you a customer that spent and I’m going to simplify it because we have to net out churn, but a customer that spent $100. This year, if I have 130% net dollar expansion rate, that customer on average, is going to spend $130 next year, which is incredible, right? I don’t have to go resell them, I don’t have to go sign a new contract, I don’t have to raise their prices. There’s so much leverage in that model. And so what you see is companies that have high net dollar retention rates, like Slack, like Smartsheet, like Snowflake, which is going public this week, get very high valuations, because investors have figured out, I can do the math on the growth of that business. And if I just take the organic expansion rate, and then I layer in new sales and new bookings. On top of that, I’ve got a great business, and I’m not actually paying as high multiples as people think I might be down the road. So to me, that metric has become one of the biggest unlocks in software investing over the last five years, again, five years ago, most people weren’t disclosing the metrics that you needed to analyze it. Number one, and number two analysts and investors didn’t really understand it. The markets come a long way. But it’s still I mean, you can just look at a screen of the highest net dollar expansion rates, software companies, go buy those companies, you’re probably going to do well over the next three to five years. Like don’t even I can’t tell you the market, you know, I don’t have that list off the top of my head. But in general, what they’re doing the other thing that people have figured out about software and SaaS is it’s it’s a tremendous free cash flow model. So they’re not showing profits and paying out dividends to their shareholders. But they’re generating cash from their customers, which is growing every year. They’re reinvesting that in the growth of the business, which one of the other points we can talk about is why do these companies do so? well as public companies, right there, I’ve tweeted out many times the returns for IPO investors and software over the last four years. They’re exceptional. Why? Because you have companies that are hitting their stride. They go public, they generate brand recognition, and they have additional free cash flow to invest in their go to market. So there’s my pitch for software investing. The stocks look very expensive right now. That’s, that’s I get that it looks very expensive to where they were March 16, and 17th. But you know, if you take a five to 10 year view, which is generally how I think about things, and again, I’m not I’m not somebody who’s trying to time the market, if I have a software stock that I love, it’s at $90 a share right now. And I own a bunch of it and it goes down to 50. I’m going to buy more. Now. That’s just me. I kind of mentally how when I look at my account, I think if I lose 30% or 40% I better have a List of ones I really want to double down on. And that’s basically what I did on March 16. And 17. I invested more money in the public market in two days than I had in the previous previous five years.

Austin Lieberman

Yeah, that’s awesome. So let’s, it’s a good chance to segue kind of into more about public market investing. So the episode of panic with friends, you were on there, March 11. I think the episode aired March 13, or something like that. Lucky. That was, that was day three, you had said of quarantine. And you were just talking about how you know, you were like, trying to get used to new life basically, and the way things are going. So at that time, on March 11, the S&P 500 was down 19%. And you were pretty optimistic and felt felt good about things. Well, then, fast forward to March 23, which is 12 more days. And that was basically the bottom right. The S&P 500 was down by 34%. I think you were on his podcast. Again, I didn’t listen to that one. I don’t know if what you talked about when you came back on. But just curious. I mean, you were, you know, I would say realistic, but still pretty optimistic on the 11th. through to the 23rd. How did did it impact you the way you thought about markets or where we’re going or just opportunities at that point, and maybe it was, by more

Jeff Richards 36:22

The thing that I was trying to so I’m, I’m at a point now where I was here for, meltdown, and 911. I was here for 08-09, and, and I remember in 08-09sitting, you know, every morning watching CNBC, and just it was like a freefall and everybody’s brokerage accounts were tanking. And, you know, I remember I own one stock through a broker that I worked with, and went from, like, $111, down to $2, in 2008. And I remember being so frustrated at that time, but I hadn’t been investing long enough that I didn’t have the capital, to say at the time, Hey, you know what things are going to get better. And when they do, whoever puts money to work right now is going to make a lot of money, no fortunate and sell. And so I think we were down like 37% in 08 but I was up like 60% in 09, I still hadn’t made all the money back. But so I kind of had that memory when when the crisis hit in February and March. And I said, All right, you know, there’s a there’s a, there’s a movie that was popular in the 90s called Days of Thunder. And it’s about racecar driving Tom Cruise’s in it. And there’s a scene where he’s getting instruction from his old school, you know, driver coach. And he basically says, When you see a wreck, and there’s a ton of smoke, hit the gas, and you know, power through the smoke, that’s your best chance of avoiding an accident. And I think if you can remain calm in the middle of a challenging market, and say like to yourself, again, the stocks that I own and love, you know, your zooms your CrowdStrike, or SmartSheet, these high net dollar retention, Twilio, super well run companies, what you know, I liked them at $90 a share, I should love them at $30 a share. So buy more. And, you know, My only regret is I didn’t buy more. I wasn’t aggressive enough. And I think we all look back and say that, but if your timeframe is long, and again, when I was buying in March, my timeframe was I don’t you know, these stocks can be flat for three years, I’m okay with that. I don’t have to produce a, you know, a monthly p&l for my shareholders, because it’s just me. But if you do that, then eventually those good companies will rebound and you’ll make money. But I think the, you know, this is a little bit of where experience comes in. Right, if you’ve been through a few crisis, and I think, you know, it’s also benefiting us as venture capital investors, because I was in board meetings in March with other board members that were losing their minds. I mean, literally, the entrepreneur is calling me and going, Hey, this guy is in like a bunker in New Zealand, and he’s freaking out. And I’m like, it’s not going to be the end of the world. Part of it is we had the lens of already seeing how it was playing out in China, which started to recover very quickly. And we said, you know, unless this is way worse than China, which, you know, I won’t go into politics, but like, we’re going to bounce back and the economy will open back up, and it’s going to be okay, we’re not going to all die. So we had that kind of, for visibility to invest. But even if you look back at like, 9/11, the travel stocks after 9/11 got crushed. But if you had invested a ton of money in travel, after 9/11, you you made a fortune. So unless we go off a cliff and the American economy goes on a 10 year, you know, downward spiral, which I don’t believe it will, you’ve always made money buying in severe corrections in the US. And so, I think, you know, I don’t know where the market will go over the next year or two. Obviously, politics plays a part interest rates pay apart right now, obviously, interest rates are incentivizing everybody in the world to put their money in the market because you don’t make any money by putting it in a savings account when I was growing up in the 70s. You can make 5% of savings account So I think that’s that’s part of it. But, you know, if you just have that long term point of view, and this is, again, back to your original question, what can we learn from venture capitalists? If you believe in a company, you believe in a team and you believe in the market, they’re going after? You know, it’s like I somebody, when, when the market was down, and somebody asked me about square, and I’ve been long square for a long time, we were an early investor in square. And I just said, Look, I’m long square and PayPal, because I believe that the world is going to shift to digital payments and digital cash. Now, I don’t know whether that’s going to happen this year or in five years. But I believe that way more of the world’s economy will be digital than physical in five to 10 years. So I want to be long those stocks. But again, you have to be willing to kind of write out the short term, the short term swings.

Austin Lieberman

Yeah, I, I wish so I have not been an investor through other crisis. I wish that the market didn’t rebound so quick, so that, if we’re investing monthly, we had an opportunity to buy more longer, you know, and in the point you made about as individual investors, we don’t really have to answer to anybody is so important. And really what we wish for is that, for our favorite companies that we think have the best long term options, we want them to stay flat, or even down for five or 10 years and keep growing and doing well as a company. We want their stock prices down. Because eventually it’s all it’s it’s going to work itself out.

Jeff Richards 41:43

Yeah, as an angel investor, you don’t have to trade. Yep, that’s a very powerful concept, you can just buy and hold. And I’ll give you an example. I was buying Zoom last fall, I think it was around 60 or $70, a share. And I had a friend of mine who asked me about it. He said, Hey, I know you’re big on Zoom. And I said, Yeah, I think it’ll be a huge global company. It’ll cross over from enterprise to consumer. It’ll be very popular in Asia of a light obviously didn’t see the pandemic coming. And he I have the text, he texted me, he goes, do you think it could be a $50 billion company and I said, I think it’d be 100 billion dollar company. As it I don’t know if that’s going to happen in five years or 10 years. But I’m buying on the thesis, it’s going to be 100 billion dollar company at some point. So as long as my time horizon doesn’t matter, and I’m just looking at my my capital growing over time, it’s a very powerful way to invest. Obviously, Zoom, we had a global pandemic, they got a big tail in the stock ran. But I still believe in the long term, opportunity for Zoom, I think the market is going to go digital The world is going to be more interested in in video communication, if great technology and incredibly charismatic entrepreneur who I think gets it. And I think, you know, one of the things that I hope we see more of I think, Eric, I think Jeff Lawson at Twilio, you know, Marc Benioff at Salesforce, these are founders who also get that they they need to do something for their community and for society. And so you see them picking causes, picking charitable efforts, whatever to give back to. And I think, you know, I’d like to see more of that. I think it’s frustrating. It is frustrating to me that like the founders of Google, you know, there aren’t any, where’s their version of the Gates Foundation, like Bill and Melinda Gates are gonna end up being remembered more for the Gates Foundation than Microsoft. And look at all the things I mean, they eradicated polio. Like, they’re two of the most incredible people on the planet, and they’ve devoted their lives to putting all of their money into actually creating change. So what I hope is that we’ll eventually see the mega billionaires in our country, whether it’s Jeff Bezos or sergej, Larry, or, you know, Elon Musk, put their money to good use and actually try to create some societal change in a major way. Because I think, you know, the documentary on Netflix about Bill Gates is amazing. And he talks about trying to get toilets into parts of the world that don’t have them. If you haven’t seen it, you got to watch it. It’s incredible. He talks about a billion people on toilets. And he kind of has this thing, the guy doing the documentary system, you know, why did you choose to eradicate polio, I’m going to tell the story wrong. But he basically says, like, if I didn’t, who would like the UN wasn’t going to do it, no single country was going to do it. And so I looked at it and said, I had an opportunity to use my wealth to do something good for society. So I hope, you know, I don’t know. I mean, take your pick, Larry Ellison, Sergei Brin, you know, Larry Page, Mark Zuckerberg, Jeff Bezos, like you’re talking about hundreds of billions of dollars that could go into societal causes. So I’d love to see more founders. And again, I use Jeff and and Marc Benioff is good examples where I think early on in his sort of wealth creation phase, you’re seeing Jeff Lawson do some of that as well. And that’s what I have a real appreciation for.

Austin Lieberman

It’s, it’s really cool to to see it. Not only other technologies, I think helping to improve life. I talked to Jason Evans, who was on the early team at Fastly. And he’s now a co founder of a company called Oxio. That is helping people in Latin America. It’s basically subsidizing cell phone, network data for people in Latin America, in. And I guess the whole point of all this is, is, we live in a relatively comfortable bubble here in the United States. And so what he said is that as a percentage of your annual income, it’s actually really expensive to have mobile data in Latin America. And they’re trying to help solve that through partnerships and stuff. So there’s these things that like we don’t even

Jeff Richards 45:42

There’s a woman in LA named Shivani, Surya, who started a company called tala and what and Shivani works the World Bank and what she realized she she analyzed the economy in Africa, in particular, what she what she came to the conclusion was the single biggest unlock, for these countries create an economy that can grow and thrive, like ours, is capital. If you are in a remote village in Africa, and you don’t have access to any kind of banking system or capital, you can’t start a business and fund a business. And so she created a company that provides micro loans to entrepreneurs and consumers. In Africa, they’re now in the Philippines, they’re in Mexico City. So she’s going into these countries and cities that have enormous populations of people who are underserved. They aren’t even in the banking system, and giving them access to capital. It’s a huge unlock. Right? I’ll give you another example. In India, reliance geo, which is basically giving away free cell phone service is going to change the landscape in India because you have hundreds of millions of people who now have access to the Internet, and and via their mobile devices via reliance geo. So I just again, go back to the beginning, we talked about being optimistic. You give healthcare access to people via mobile devices, you give banking, access to people via mobile devices, you give people access to mobile internet, over the next five to 10 years, I think you’re gonna unlock a huge amount of potential in in the world. And you know, yes, tech companies will benefit from that. But you can bet on that as an investor bet on the rising incomes bet on the world getting better, as opposed to, you know, watching the news every morning and freaking out with all the bad stuff that’s on the news. And I don’t even watch the news. Yeah, I watch CNBC in the morning. I purposely don’t watch CNN or Fox or MSNBC, because the stuff they’re reporting on is ridiculous. Yeah. And it’s so frustrating.

Austin Lieberman

One of the things I’ve tried to do, and I got this from David Gardner, who’s the co founder of The Motley Fool is he actually cut most news out of his life, right? He subscribes to the economist and kind of reads it like once a week to still stay up to date. And I’m trying to do that. And I mean, I love Twitter. And I love there’s a lot of positive things out of Twitter, but even with Twitter is a lot of like negative stuff. Right? So it’s just negativity is just so prevailing over over optimism.

Jeff Richards 47:59

I agree with you. I love Twitter, I described Twitter as like a dog with his head out the window in a car. Like it’s like, yeah, the smells and the senses that are coming to that dog. But the majority of the world is negative. And if you are an optimist in a world of negatives, negative negatives, and whatever the world is, where it is, you will do well as an investor. Yeah, right. Because as economies grow as incomes rise, as people’s lives get better, and these companies that are providing that, do well, you will win as an investor. So being positive. And again, this is go back to your question about March, the world was super negative in March, right? It’s COVID-19, we could all die, the economy’s gonna die. Unemployment is going to spike blah, blah, blah. And a lot of that was true and very scary. But if you ask yourself in a rational world do I think and Warren Buffett came out and said this? Do I think that America will survive? COVID-19? And do I think at some point in the next 12 to you know, 16 months, life will get better? The answer is yes. I’m optimistic. And so if you if you believe that, then you would say okay, then I want to bet on the companies that are going to help make that happen. I’m gonna bet on the Amazons the zooms, the Salesforce is the crowd strikes. Even the Goldman Sachs, the Blackstone’s the KKR is like the finance guys who will make money in an upturn in the economy. So I think as an investor, if you can sort of remember that, and it’s hard right now, because people are like, oh, what are you buying right now? And like, well, not much the markets, in my opinion, pretty fully valued. There’s a few things that I’m finding that I like that I want to buy, because I just believe in the long term thesis of the business, but I’m also not selling because I’m sitting there saying, well, I love these positions i have and i think there’ll be bigger in five years in the air today. They could be down in 12 months. And then I’d love to have a shopping list and say, Okay, these are the ones I want to buy more.

Austin Lieberman

Yeah. So with that in mind, what not looking for six month or one year predictions, what’s a company or two, or maybe a I know you’d like to invest In, you know, big tailwinds what are some, either specific companies or tailwinds, you’re excited about over the next 5 or 10 years.

Jeff Richards 50:12

I’ll give you two. One is just digital money. Right? So I’m long PayPal and long Square long, Ayden which is a little bit of an undiscovered name, because it’s not based in the US. But these companies are just, they’re just, first of all, they’re very innovative. And second of all, they are in the right, you know, if you think about, like, where the tailwind is with ecommerce, mobile, digital banking, etc, they’re sitting in the right place, I’d love to be in stripe stripes, a private company, but stripe is sitting right in the, you know, in the optimal place as well. So I love that category, I think if you can, you know, be invested in those names, and have a five 5+ year time horizon, you’re going to make money. Again, you could argue that they’ve all had big run ups in the last 12 months. But again, if you have a 5 or 10 year, time horizon, I’m just big on that, that whole category. Second one I would point to that’s not as not talked about that much as SMB tech companies that provide technology and tools to small businesses. It’s a focus for us, as a firm, we have a lot of private investments in that category, company called slides company called electric company called bright wheel. I’m on the board of big commerce, which just went public, which is in that space. But if you look at the last decade for SMB tech, if you go back to 2008-2009, there really was only one company, wich was Intui. And then you had Square go public, you had Shopify go public, you’ve had Wix, and Ring Central, and all these companies that cater to small business $450 billion in market value created in the last 10 years in that space alone. So I’m super bullish on that space, particularly now, because I think what will happen in the US and arguably around the world, unfortunately, the way we’ve dealt with COVID-19, you’re going to have a high percentage of our small businesses are going to go under right restaurants and local service providers that just couldn’t sustain through the downturn and shelter in place in their place, you’re going to see a whole new wave of companies get created, those companies are going to be built on technology, right? If you were starting a restaurant today, you would absolutely 100% started with takeout, and started with delivery and started with a mobile app as a primary interface for your customer. So you’re going to have a whole category, it’s been in some ways slow to adopt that technology that’s going to rush into it. And we saw that in q1 and q2, as companies move to adopt slice, they moved to adopt toast, you know, these ordering and interfaces doordash UberEATS, obviously benefited. So I just think you’re going to see a resurgence of of innovation in the small business arena over the next 12 to 18 months and and SMB tech companies will benefit from that. And actually, I wrote a blog post about it, which you can share in our, you know, maybe in the session notes about this about why that happened. You know why SMB tech exploded after 2010. And it basically is a result of three things AWS launched in 2005, the iPhone launch in 2008, and the App Store in 2010. And you had the integration of payments, and FinTech with Braintree and stripe around 2008 to 2010, all three of those things combined to make software available to SMBs and unlock an entire category. So I’m super bullish on that category.

Austin Lieberman

That’s awesome. All right. Yeah, we’ll definitely link to that, that blog post and then that’s two big categories.

Jeff Richards 53:33

And I think, you know, the thing I would say about Fastly, and Twilio and Stripe and all these companies is and I’ve tweeted this a few times. I do believe there’s also a difference between what I call tier one, cloud and tier two cloud. Tier One is machine to machine. As the world moves to digital, they win, no matter what, right AWS, Twilio, Stripe, Fastly, you know, as the economy moves to digital, they win because you have software buying and consuming other software. tier two is more of a seat based software license model kind of the original Salesforce model, amazing business. We have 50 to $100 billion companies in that category today. But it’s seat based. And so it’s it’s predicated on hiring and productivity of, of people. And I think what you’re seeing now is the rise of this machine to machine universe and, you know, snowflakes, a great example, we have a number of private companies. One of them is called hashey Corp, we just invested in a company called stream with a company called that are in this kind of machine to machine universe. And I think you’re going to see over the next five to 10 years some massive companies built in that category because as the as the economy moves together.

Austin Lieberman

yeah, yeah. So we gotta get gotta let you go here in a minute. But one of the things we love talking about is just how we can help get our kids or kids interested in investing in finance. So do you have anything that you found to be effective with either your family or or other, you know, to get the younger generation thinking about investing?

Jeff Richards 55:22

Yeah, I think it’s super important. My dad, let me buy stocks when I was a kid, I would give him the cash. And he would sort of give me a phantom stock certificate I bought Microsoft went public. And and brilliantly sold it when I made two times my money returned. Well, I calculated later on that I would have made like $7,000 on a $40 bed, or whatever it was. But so back to your point earlier about your misses. So one, I think is getting your kids exposure to investing, whether it’s getting them to just, you know, just pick a stock like Amazon or Lulu lemon or whatever, something they like, and follow it and just say, follow that stock and watch what it does just for kicks. So that’s one of the things I’ve done with my kids, too, is if you can set up some kind of a brokerage account for them and let them own those names. Right. So my, my son owns Twilio, and he owns what he would say is he owns Xbox, but he owns Microsoft, because he loves Xbox. It’s just a great way for them to learn. And then in terms of budgeting and managing your money, one of the things that my dad did, and my parents did when I was a kid when I was 12, I believe they put us on a budget. And they said, Here’s your money for the year for all your haircuts, your clothing and your school lunches. And they gave it to us up front and we had to then manage that throughout the year. Like course, you know, my brother likes to famously say that I went out and bought a pair of Air Jordans. And he, you know, he bought like whatever the Sears knockoff version was and so he had more money than I did when we were younger. But like just teaching your kids to sort of forward budget a little bit. And, you know, we’re doing it with our kids and it has some issues, but it’s incredibly powerful.

Austin Lieberman

Yeah. Awesome. Thanks, Jeff. Really appreciate your time and everybody Listen, you can find Jeff again on twitter at Jay rich live at ggV capital on Twitter. And then Gigi is is the firm’s website. So thanks a lot really had fun and appreciate the conversation. Jeff.

Jeff Richards 57:13

Thanks, Austin. Take care

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