Mastering Venture Capital and Founder Strategies with Rory O’Driscoll and Mark Suster

Rory O’Driscoll joins guest host Mark Suster. (00:00:00)

• Rory O’Driscoll, a former entrepreneur turned venture capitalist, shares his experience of running a business for four years despite it being a "dumb deal" and a "fail".
• He emphasizes the importance of recognizing failure quickly and not wasting time on ventures that are not viable.
• Rory O’Driscoll discusses his investment philosophy, which focuses on investing in founders rather than just ideas.
• He believes that successful founders have certain characteristics, such as passion, resilience, and the ability to learn and adapt.
• Rory also emphasizes the importance of understanding the market and the competitive landscape before investing in a startup.

Rory’s advice for founders with traction but not yet booming. (00:02:33)

• Founders should evaluate their passion for their business and assess the likelihood of reaccelerating growth before deciding on an aggressive growth strategy or focusing on cash flow break-even.
• Founders should consider their long-term commitment and ensure alignment with investor expectations.
• Rory O'Driscoll shared his experience of transitioning from a company he wasn't passionate about to a successful one acquired by Salesforce.
• Mark Suster emphasized that the decision to leave a company is highly individual and context-specific, involving personal factors like passion and fulfillment.
• While dedication is important, founders don't owe their entire lives to their companies. Venture capitalists may be initially disappointed but will eventually accept an ethical and well-communicated transition.

Aligning incentives between founders and venture; reminding CEOs to be "selfish.” (00:09:09)

• CEOs should be selfish in ensuring their incentives are aligned with the board's.
• The board's job is to create alignment, simplifying the CEO's role to doing what feels right for them.
• Passion, evidence of success, and insanity (in a positive way) are important factors for CEOs.
• Actions speak louder than words, so if a venture capitalist tells a CEO to keep going but doesn't provide more funding, the CEO should take note.
• Rory O’Driscoll believes it's important to have an open dialogue with venture capitalists.
• Entrepreneurs should not hesitate to discuss their concerns and feelings about their business with their venture capitalists.
• It's better to have an informed conversation than to be left in the dark about the venture capitalist's thoughts and intentions.
• Some venture capitalists may not be emotionally intelligent enough to have these conversations, but it's still worth trying to have them respectfully.
• Mark Suster agrees with Rory O’Driscoll's perspective on the importance of open dialogue with venture capitalists.
• He believes that entrepreneurs should be able to openly discuss their concerns and feelings about their business with their venture capitalists.
• It's important to have these conversations to avoid misunderstandings and ensure that both parties are on the same page.
• Some venture capitalists may not be receptive to these conversations, but it's still worth trying to have them.

Reflections on thirty years of internet cycles and their impact on venture capital. (00:13:25)

• The next two decades in technology will involve integrating artificial intelligence (AI) into cloud-based applications.
• Unlike the previous shift of moving applications to the cloud, adding AI requires a complete reimagining and reinvention of the entire application's functionality.
• AI companies aim to revolutionize workflows rather than merely transforming them from one computer architecture to another.
• The rapid evolution of AI companies means that strategies and beliefs considered valid just a few years ago may no longer hold true today.
• Current venture capital and founder strategies differ from those used in the past, with a focus on adopting new technologies and strategies rather than simply moving companies to the cloud.
• Staying updated on the latest trends and technologies is crucial for success in the current venture capital landscape.

Debating AI: Does it favor the incumbents? (00:18:25)

• There's a debate on whether AI favors big players like Microsoft, Amazon, and Facebook or new entrants.
• Rory believes it will be similar to the cloud infrastructure market, where there will be a few dominant players for foundation models.
• However, at the application level, there will be opportunities for startups as everyone has specific needs and workflows.

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What Rory and Scale Venture looks for when investing in AI. (00:21:35)

• Rory and Scale Venture look for companies that build on top of foundation models and provide an orchestration plus layer, such as orchestration plus workflow.
• They also invest in companies that leverage foundation models but add their own models and workflows to solve specific problems, such as Revier, which automates the processing of medical records for healthcare payers.
• Rory believes that simply being able to rotate between models at an orchestration level may not be enough.
• He thinks that companies that provide a combination of managing multiple models interchangeably, having the surface area around the training of those models, and the workflows around that will be successful.
• Rory also sees opportunities in companies that leverage foundation models but add their own models and workflows to solve specific problems.

How OpenAI has changed the landscape (00:26:20)

• OpenAI changed the consumer expectation of how users interact with AI.
• OpenAI made many previous AI investments functionally obsolete.
• There is now a corporate imperative in every company in America to have some kind of AI use case.
• Companies that are slow to leverage AI technology risk falling behind their competitors.

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Debating “faux-mentum” vs. long-term sustainability in investments. (00:30:30)

• Rory O'Driscoll introduces the term "faux-mentum" to describe artificial momentum driven by customers looking to innovate.
• Mark Suster highlights the challenge of distinguishing between long-term sustainable growth and momentum-driven trends.
• They discuss the importance of evaluating whether a product or service delivers value to customers and has a clear return on investment (ROI).
• Suster emphasizes the need for a go-to ROI model that demonstrates the economic benefits of a product or service.
• They acknowledge the challenge of assessing the value of automation tools that partially assist white-collar workers in various tasks.
• O'Driscoll and Suster discuss the potential for automation in white-collar work, particularly in areas such as law, medicine, and consulting.
• They identify two types of automation in white-collar work:
  • Clear and obvious ROI: where there is a discrete task that can be automated, resulting in significant cost savings.
  • Partial assistance: where automation tools help white-collar workers in various areas, but the monetary benefits are less clear.
• They acknowledge the challenge of quantifying the value of partial assistance automation in white-collar work.

Balancing deep passion and business savvy when evaluating founders. (00:34:34)

• Founders are often deeply passionate about their product but may lack business acumen.
• VCs need to find a balance between founders with a big vision and those who can execute on that vision.
• Founders need to be able to think about both the big picture and the near-term traction.
• VCs want to see evidence of product-market fit and a clear path to profitability.
• Rory O'Driscoll and Mark Suster discuss the importance of balancing deep passion and business savvy when evaluating founders.

Rory’s approach to big-picture thinking vs. immediate traction and strategizing exits (00:36:58)

• Rory O'Driscoll and Mark Suster discuss venture capital and founder strategies.
• Scale Ventures invests at the inflection point where companies have early signs of traction, balancing risk and potential reward.
• Scale Ventures has a successful track record of backing companies like Box, DocuSign, ExactTarget, Omniture, HubSpot, and JFrog.
• The current investment landscape is more competitive and uncertain, making it challenging to make money in venture capital.
• Successful venture capital firms like General Catalyst, Insight Partners, and Lightspeed Venture Partners have raised large funds due to their excellent track records.
• To succeed in the current venture capital landscape, it's important to have a clear investment focus, be good at identifying and winning good deals, and be resilient in the face of market challenges.

The importance of picking vs. price discipline. (00:44:02)

• It's more important to select great companies than to worry about access to deals. Overpaying for a great company by 10-15% is acceptable, but overpaying by a significant amount is not.
• In 2021, many investors overpaid for companies, leading to potential losses or break-even scenarios.
• Winning deals is crucial due to the scarcity of good companies and increased competition.
• Long-term growth rates should be considered when valuing a company, as growth drives everything.
• Traditional exit strategies like IPOs and strategic M&A have become more challenging due to regulatory scrutiny and antitrust concerns.
• Private equity is stepping in to buy companies but with more rational valuations.
• Founders and investors should be prepared for emotional challenges during down rounds and exits that fall short of expectations.
• VCs should acknowledge the hard work and dedication of founders and be understanding during difficult transitions.

Advice for founders dealing with “busted cap tables.” (01:00:58)

• Founders should be aware of their investors' incentives and how they might influence their behavior, as investors vote based on their own interests.
• Founders should be transparent with their investors about valuation issues and potential down rounds, but they do not have an obligation to maximize returns for late-stage investors who may have overpaid and are pushing for an early exit.
• Founders owe all shareholders an equal fiduciary obligation and should consider their input, but ultimately make decisions in the best interests of the company.
• Founders should understand the concept of a "flat spot" and consider the career stage of their VCs, as some may prioritize maintaining high valuations to secure promotions or raise future funds, even if it means sacrificing long-term returns.
• Understanding the motivations and incentives of VCs is essential for founders, as some may prioritize avoiding negative attention and maintaining their positions within their firms, leading them to push for lower exit valuations.
• The arrival of a lead dog from a late-stage hedge fund firm in a company's cap table often signals a push for a sale, as these investors are less concerned with optimizing their position and may prioritize recycling capital into other investments.

Rory’s advice for his younger self. (01:08:07)

• Rory O'Driscoll reflects on his 30+ year career in venture capital.
• He advises against playing it too safe and encourages embracing risk in both career and investment decisions.
• O'Driscoll emphasizes the importance of working with high-quality, ambitious people and finding great deals and people to make a significant impact.
• Mark Suster adds that working with ethical people who enjoy their work and do it with humor is crucial for success.
• O'Driscoll suggests that young people should focus on working with the highest quality and most ambitious people they can find.
• He believes that this will pay off later in their careers.
• Suster agrees and adds that working with ethical people who enjoy their work and do it with humor is essential for success.