In this episode of "20 minutes VC," host Harry Stebbings interviews Josh Brinlinger, a managing director at Jackson Square Ventures and a seasoned expert in marketplaces, discussing his journey from a mechanical engineer to a venture capitalist and his role in companies like Odesk and Rev. Brinlinger shares insights on the importance of being data-informed rather than data-driven in VC decisions, the nuances of GMV in marketplaces, and the potential rise of master marketplaces in sectors like education and healthcare. He emphasizes the significance of post-match value in marketplaces, the strategies to solve the chicken and egg problem, and the pitfalls of focusing solely on deal activity as a VC success metric. Brinlinger also touches on the evolving nature of funding rounds and the importance of high conviction investments.
You're listening to the 20 minutes VC with me, your host, Harry Stebbings, and you can find me on Snapchat at htebbings.
This quote is an introduction to the podcast, providing the host's name and social media handle.
Sure. So I started my career actually as a mechanical engineer in Boston. I went to MIT and I was from a nerdy engineering family where my dad was an electrical engineer at MIT and my older brother was an MIT mechanical engineer.
This quote outlines Josh's educational background and family's engineering history.
One of the things Charlie says, which is fantastic, is he says people calculate too much and think too little. And I think that actually happens in venture capital.
This quote from Charlie Munger, referenced by Josh, highlights the tendency to over-rely on data without sufficient critical thinking in venture capital.
No, obviously I look at a ton of data, but what I really look to first is, first of all, do I love the founding team? And obviously that's a must have.
This quote explains Josh's approach to company evaluation, emphasizing the importance of the founding team in his investment decisions.## Venture Capital Investment Criteria
"I have to fall in love with the team first, then with the product and the service, and then the data has to back it up."
This quote highlights the sequential approach to venture capital investment where personal conviction in the team and product precedes data validation.
"There's a lot of data out there about the venture capital world... But the hard thing to understand about the venture world is most of the important data is private and confidential and opaque."
This quote underscores the difficulty in assessing VC success due to the lack of transparency in critical data.
"I could write a 25K check in a late stage of Uber and put it on my portfolio page. So, yeah, it just doesn't mean much."
This quote illustrates how minor investments can be misrepresented to enhance a VC firm's portfolio without reflecting true investment success or influence.
"In venture capital, I believe the best way to get returns is to have very high conviction investments, very concentrated investments, and I think that's the way to beat the market and stand out."
This quote emphasizes Josh's belief that a focused investment strategy leads to superior returns in venture capital.
"We want as much as we can get, but the average tends to be 15 to 20."
This quote reflects the ownership goals of Josh's VC firm and how they align with the fund's size and investment approach.
"I think the previous generation of marketplaces, there's a lot of commodity. There will still continue to be that. But I think there's the separation happening now."
This quote indicates a market trend where there is a growing distinction between standard and premium offerings in online marketplaces.
"The workflow in a master marketplace might be completely different. It might be masters sign up very, very easily, but their time is leveraged very well."
The quote highlights the unique operational dynamics of master marketplaces, which are designed to attract and utilize the expertise of top professionals efficiently.
"The tam is really just going to depend on the industry."
This quote suggests that the potential for master marketplaces is industry-specific and dependent on the quality differential in professional services within those sectors.## Market Approach: Bottoms Up vs. Top Down
"Yeah, I guess I'm more bottoms up. But there's so many markets that we look, we like really big markets. Think of script ash. The pharmacy industry in the US is 412,000,000,000, I believe. So whether you do it top down or bottoms up, it's big enough, it just doesn't matter."
The quote explains that for extremely large markets, such as the pharmacy industry, the size itself makes the approach to market analysis less critical, as the potential is evident from either perspective.
"Uber has a special characteristic which is incredibly high frequency. If I'm going on business travel, I might use Uber eight times in a single day. And then at the other end of the spectrum, you have super low frequency and very high transaction size, which might be things like real estate."
This quote emphasizes the uniqueness of Uber's marketplace model due to its high frequency of transactions and explains how different marketplaces operate depending on the transaction size and frequency.
"Offerup has done that in peer to peer commerce, Thumbtack has done that in local services. And the horizontal approach is much better in those cases."
The quote illustrates how horizontal marketplaces can achieve high frequency by spanning across multiple categories, thus providing a broader range of transactions.
"Somebody comes in, spends $10 100 times with 100 different providers. That is much more valuable because you've got so much more data and network effects and connections happening within your network, as opposed to just more of a single transaction."
This quote explains that GMV generated from repeat transactions is more valuable than GMV from one-off transactions due to the resulting data and network effects.
"The best way is to just keep adding value after the match. Consumers have a somewhat rational behavior of if they feel they're paying fees that exceed the value they're getting, they're going to try to disintermediate."
The quote addresses the concept that to prevent users from bypassing the marketplace after an initial match, the platform must continue to offer value that justifies its fees.
"If somebody's using Craigslist to hire, and they're using indeed to hire, and they're using your other marketplace to hire freelancers as well, you don't really have that great lock in yet."
This quote highlights the challenge of securing a dominant share of wallet when users have multiple marketplace options for the same service.
"Every car has two stickers on it, one Uber and one Lyft. And so it's really hard to get that complete lock in."
The quote illustrates the difficulty of achieving exclusive loyalty from participants in a marketplace when competitors offer similar opportunities, as seen in the example of ride-sharing drivers.
"Nowadays you might have a friends and family round and then a pre seed round and a seed and a seed extension and a postseed, and then maybe you have a series A and people get caught up in this and I don't think it makes any sense because the names don't mean anything."
The quote reveals Josh's frustration with the inflation of funding round names, which he believes do not accurately reflect the company's stage or the significance of the investment.## Valuations in Series A Funding
"Because a series A could be anything from a 5 million valuation to 100 million valuation. So the name doesn't mean anything."
This quote emphasizes the variability in valuation that can occur during Series A funding rounds, suggesting that the label "Series A" does not provide a clear indication of a company's worth.
"The partners here, we've invested in four unicorn companies and three of them equal logic, docusign and responsus. They all had bridge rounds. Some even had down rounds in their history."
Josh Breinlinger reflects on his experience at Jackson Square Ventures, noting that successful unicorn companies he has been involved with have gone through bridge rounds, suggesting that these rounds can be part of a normal growth trajectory for successful startups.
"Docusign was fascinating story because we had led around and then shortly after that, some regulations changed and basically they lost 25% of their revenue overnight."
The quote recounts a critical moment in Docusign's history where a sudden regulatory change impacted the company's revenue, leading to the necessity of a bridge round which Jackson Square Ventures led due to their belief in the company's potential.
"No, I do agree with that on the bridge around thesis, but I do want to dive into a quick fire round now. So I say a short statement and then you give me your immediate thoughts in 60 seconds."
Harry Stebbings introduces the quick fire round segment, where he will provide short statements and Josh Breinlinger will respond with his immediate thoughts in a concise manner.
"So well, I'll give you, my favorite author is David McAuliffe, and he writes a lot of history books. And one of the ones I read recently was the Wright brothers."
Josh Breinlinger shares his admiration for author David McAuliffe and specifically mentions "The Wright Brothers" as a recent read that he found particularly inspiring due to the story of innovation and entrepreneurship.
"So lots of many to many connections where lots of buyers connecting with lots of different suppliers in basically in high frequency transactions."
Josh Breinlinger describes the importance of having numerous connections between buyers and suppliers engaging in frequent transactions as a key to creating a defensible position in marketplace businesses.
"Yeah, there's a lot of different tactics. I wrote a blog post called Liquidity hacking that anybody can Google and you'll find there's a bunch of different things."
Josh Breinlinger suggests that there are multiple strategies to overcome the initial hurdles of building a marketplace, referring to his blog post "Liquidity Hacking" as a resource with detailed tactics.
"It's this cool trend of, I think of it's b to b sales in a consumer marketplace."
Josh Breinlinger discusses a trend where businesses are targeted as initial customers in consumer marketplaces, leveraging B2B sales techniques to ultimately reach consumers.
"Certainly. Bill Gurley's blog is phenomenal."
Josh Breinlinger recommends Bill Gurley's blog as an excellent source of information and insights for those interested in learning more about marketplaces.
"And the one I can talk about is scriptash. And we've talked about it a little bit already, but it hit all my metrics."
Josh Breinlinger shares details about his recent investment in Scriptash, highlighting that the company met his investment criteria and he had a positive personal experience with the service.
"Foundersuite makes software for raising capital... Greenhouse software designs tools that helps companies hire great people."
Harry Stebbings endorses Foundersuite for capital raising and Greenhouse for hiring, mentioning the success of these platforms and offering promotional discounts to the podcast's listeners.