Ron Conway (SV Angel Founder) – Startup School 2012 (2012)

Chapters

Abstract

The Evolution and Impact of Venture Capital: A Deep Dive into Ron Conway’s Investment Philosophy and Strategies

In the dynamic world of venture capital and startup investment, few figures are as influential as Ron Conway. His strategic approaches, from early investments in companies like Altos Computer to his visionary focus on internet software with SV Angel, have greatly shaped the tech landscape. This article delves into Conway’s career, examining key aspects such as his early venture capital environment, changes in the startup ecosystem, investment philosophies, and notable successes and misses. Through Conway’s story, we gain insights into the evolution of venture capital, the importance of supporting innovative entrepreneurs, and the transformative power of e-commerce and social networks like Google, Facebook, and Twitter.

Early Venture Capital Landscape

In the late 1970s, the venture capital scene was markedly different from today. Investment was primarily reserved for startups already demonstrating profitability and rapid growth. Ron Conway, co-founder of Altos Computer, experienced this firsthand, securing funding from Don Valentine of Sequoia for business expansion. Don Valentine is considered a pioneer in the venture capital industry, and Conway’s experience at Altos Computer shaped his understanding of entrepreneurship.

Changes in the Startup Ecosystem

The startup world has undergone significant cultural shifts. Though fundamental success factors like determination and leadership remain constant, modern startups emphasize a healthier work-life balance, transitioning from daily alcohol consumption to designated happy hours. This shift reflects changes in workplace culture, with companies moving away from the “work hard, play hard” ethos that was common in the past.

Investment Portfolio

Ron Conway’s investment firm, SV Angel, has funded around 650 startups since 1994. Conway discovered his passion for mentoring entrepreneurs while angel investing. He co-invested with Ben Rosen, who was the chairman of Compaq at the time. Their investment strategy was to focus solely on internet software companies, and this approach proved successful, as the internet market experienced tremendous growth. Some notable successful investments include Ask Jeeves, Google, Facebook, Twitter, PayPal, Pinterest, Airbnb, and Dropbox.

Motivating Employees and E-commerce Potential

Conway’s pivot to solely focus on internet software investing in 1994, a decision made in collaboration with Ben Rosen of Compaq, marked a significant shift. He foresaw the internet’s disruptive potential, targeting internet software as a growth sector. In the early days of hardware, companies focused on shipping products quickly rather than consumer satisfaction. The internet was still in its early stages, with concepts like email and TCPIP being relatively new. Conway and Rosen invested exclusively in internet software companies, recognizing its growth potential.

Conway views e-commerce as an opportunity as vast as the internet itself. He particularly notes Pinterest’s potential as an e-commerce engine, recognizing its unique growth trajectory and the broader implications for companies leveraging e-commerce. Conway sees e-commerce as a vast opportunity, with the potential to be as big as the entire internet market today. He believes companies like Pinterest, with their e-commerce capabilities, have significant growth potential.

Missed Investment Opportunities and Common Investor Blind Spots

Conway openly acknowledges missing out on investments like Salesforce.com and Pandora. He attributes these misses to various factors, including overvaluation during the dot-com bubble and a lack of understanding of emerging concepts like crowdsourcing. Conway missed out on investing in successful companies like Salesforce.com, Pandora, Palantir, and Kickstarter. These misses were due to factors such as valuation concerns, market size uncertainty, and not fully understanding the potential of crowdsourcing.

Investors often overlook truly innovative and disruptive companies. Conway cites Pinterest as an example, facing fundraising challenges due to its unique concept. This suggests a broader trend of investors struggling with unfamiliar or innovative ideas.

Investing in Entrepreneurs and Twitter’s Origin and Growth

Conway emphasizes the importance of investing in entrepreneurs rather than patterns. SV Angel focuses on individuals and ideas, seeking long-term relationships and supporting entrepreneurs through various ventures, exemplified by his investment in Sean Fanning’s sixth startup. Conway invests in entrepreneurs for life, supporting their subsequent startups unless they do something wrong.

Twitter, originating from Obvious Corp and incubated by Evan Williams, attracted Conway’s investment based on his trust in Williams as an entrepreneur. Twitter’s user growth, despite an initial lack of a clear monetization strategy, indicated its potential, mirroring the early growth strategies of Google and Facebook. Conway had previously invested in Odeo, a company founded by Evan Williams and Jack Dorsey. When Odeo failed, Williams returned the investors’ money, demonstrating his integrity and dedication. Conway invested $75K in Twitter without due diligence, based solely on his belief in Williams as an entrepreneur.

Google’s Early Days and Monetization, and Introduction to Sequoia

Google founders Larry Page and Sergey Brin were upfront about their lack of a clear monetization plan, instead focusing on the quality of their search technology. This transparency and focus on relevance and page rank set them apart and resonated with investors. Conway played a pivotal role in connecting Google with Sequoia Capital, crucially influencing their funding journey. Google’s ambition to partner with Yahoo was a key motivator in selecting Mike Moritz from Sequoia, who was on Yahoo’s board.

KP and Sequoia’s Rivalry and Cooperation, and Google’s Early Growth and Monetization

The rivalry between KP and Sequoia presented a unique challenge in Google’s funding. Their eventual cooperation, prompted by Conway’s intervention and the founders’ determination, exemplifies the complex dynamics in venture capital. Conway emphasizes the importance of growth and user happiness as key indicators of a successful company. He cites examples like Twitter and Google, where rapid growth and word-of-mouth popularity preceded revenue generation. Conway highlights the focus on user happiness and acquisition rather than immediate monetization in the early stages of successful companies like Google, Facebook, and Twitter. He suggests that once a company reaches a critical mass of users (around 100 million), it can explore monetization options. Conway shares an anecdote about Google’s first investor slide deck, which lacked a spreadsheet for monetization. Larry and Sergey were honest about their uncertainty regarding monetization, prioritizing the development of exceptional technology. Conway recounts his first encounter with Google through a conversation with Stanford professor and investor David Cheriton. Cheriton mentioned “Backrub,” Google’s early name, and introduced Conway to the concept of page rank and relevance. Conway’s experience in evaluating entrepreneurs allowed him to recognize Larry and Sergey’s potential as great scientists with strategic thinking and determination. Their strategic approach included seeking investment from Mike Moritz of Sequoia Capital, who could facilitate a crucial search deal with Yahoo. Conway reveals Google’s strategy to displace incumbent search engines like Alta Vista by securing two big OEM deals, one with Yahoo and the other with John Doerr at Kleiner Perkins. The Yahoo deal was particularly important for bootstrapping the company.

Google’s Rapid Growth and Conway’s Missed Opportunity with Facebook

Conway’s experience with Napster and subsequent meetings with Facebook’s founders convinced him of the company’s potential. Conway’s ability to identify and support companies with strong growth potential has contributed to his success as a venture capitalist. Conway’s generosity and influence played a pivotal role in securing funding for Google in its early stages. Despite tensions between Kleiner Perkins Caufield & Byers (KP) and Sequoia Capital, Conway’s intervention and the founders’ determination led to a quick resolution. Conway’s willingness to lead a $10 million round himself and his candid communication with KP and Sequo ia pressured them to come together. Google’s exponential growth within a month of negotiations highlighted its potential for long-term success. Conway recognized the company’s immense value and believed in the founders’ vision. In contrast, Conway admits he missed the opportunity to invest in Facebook early on, despite recognizing its impressive growth trajectory. Conway’s emphasis on growth as the lifeblood of innovation drove his decision. Zuckerberg’s early meeting with Conway: Conway’s initial impression of Zuckerberg was positive despite Parker’s edginess. Zuckerberg’s pragmatism and focus on moving forward impressed Conway. Facebook’s VC funding: After Peter Thiel’s initial investment, Facebook prepared for a VC round. Conway helped triage a list of potential VCs. Don Graham of the Washington Post offered a $50 million valuation, which Zuckerberg initially misunderstood as $5 million. Jim Breyer’s investment: Breyer offered an $80 million pre-money valuation, outbidding Graham. Conway believes this was a coincidence rather than a deliberate strategy to beat Google’s funding. Zuckerberg’s visit to the Washington Post: Zuckerberg spent two weeks shadowing Don Graham at the Washington Post to learn about CEO responsibilities. VCs who rejected Facebook: Conway has emails from VCs who rejected Facebook in the early days. These VCs did not believe in the concept of a social network for college students. Google’s investment multiple: Google’s angel investors achieved a 300-to-1 return on their investment. Conway emphasizes that the all-time high for Google’s stock may still be in the future.

Conway’s Recognition of Growth and Misses, Zuckerberg’s First Impression and Funding, Introduction of Google to Napster, Fame and Money, and Investment Criteria

Conway’s ability to recognize growth potential is evident in his view of Facebook. Despite missing the Facebook investment, he acknowledged its exceptional growth trajectory, demonstrating his insight into the driving forces behind successful startups. Meeting Mark Zuckerberg at University Cafe, Conway played a significant role in Facebook’s early funding stages. His guidance in navigating offers from investors like Don Graham and Jim Breyer was instrumental in Facebook’s valuation and funding success.

Ron Conway introduced Google’s Larry and Sergei to Napster’s Shawn Fanning at a party. Conway recognized Google’s potential early on, predicting it would become the largest company in the world due to its accurate and effective search results. Larry and Sergei expressed frustration over their lack of fame compared to Fanning, who was embroiled in legal battles with record labels. Conway reassured them that they would make money while Fanning dealt with legal issues.

Conway invests in people first, seeking individuals with personality, drive, and leadership qualities. He emphasizes the importance of determination, charisma, and a fearless attitude in entrepreneurs. Conway claims to be able to assess an individual’s potential within 10 minutes of meeting them.

Traits of Successful Entrepreneurs and Product Focus

Conway evaluates entrepreneurs based on a set of identifiable traits, including communication skills, leadership abilities, and drive. He believes that even if an individual does not initially see themselves as a suitable startup founder, he will back them if they possess these qualities.

Conway highlights the success of companies like Facebook, Pinterest, and Square, attributing their achievements to their founders’ focus on product quality and user happiness. He emphasizes the importance of UI and user satisfaction in today’s digital landscape. Conway describes these founders as craftsmen obsessed with the quality of their products.

The Impact of Conway’s Vision

Ron Conway’s journey through the evolving landscape of venture capital reveals the importance of not only recognizing potential in startups but also in the entrepreneurs behind them. His willingness to invest in people, coupled with a keen eye for innovation and growth, has not only shaped his successful portfolio but also transformed the broader tech industry. From the early days of internet investing to the rise of e-commerce and social networks, Conway’s strategies and insights offer invaluable lessons for investors and entrepreneurs alike.

Notes by: QuantumQuest