By Alex of the Macro Ops Substack
What if there was a way to distill all the knowledge that someone’s written over the last 25 years into one, easy-to-read document? And what if that person was a famous venture capital investor known for betting big on companies like Uber, Snapchat, Twitter, Discord, Dropbox, Instagram, and Zillow (to name a few)? Well, that’s what I’ve done with Bill Gurley’s blog Above The Crowd.
Gurley is a legendary venture capital investor and partner at Benchmark Capital. His blog oozes valuable insights on VC investing, valuations, growth, and marketplace businesses. This document is past two to the one-stop-shop summary of every blog post Gurley’s ever written, part 1 can be found here.
February 2, 2004: The Rise Of Open-Standard Radio: Why 802.11 Is Under-Hyped (Link)
Summary: WiFi will dominate wireless communications for the same reason Ethernet dominated networking and x86 dominated computing: high switching costs. This wide-scale adoption causes capital to flow into the standard as companies look to differentiate on top of the existing platform. In doing so, it further entrenches the “open-standard” incumbent.
Favorite Quote: “Open standards obtain a high “stickiness” factor with customers as a result of compatibility. Once customers invest in a standard, they are likely to purchase more and more supporting infrastructure. As their supporting infrastructure grows, their switching costs rise dramatically with respect to competitive alternate architectures. Customers are no longer tied simply to the core technology, but also to the numerous peripherals and applications on which they are now dependent. All of these things make challenging an accepted open standard a very difficult exercise.”
March 24, 2004: All Things IP: The Future Of Communications In America (Link)
Summary: South Korea and Japan are leading the world in broadband speed and connectivity. South Korea, for example, sports 80% broadband adoption. The US on the other hand, less than 50%. Different players battle for the future of US communication. Free services like Skype offer high-quality VoIP calls. But it’s the cable companies, with their mega-cable infrastructure, that lead the way. At the end of the day follow the money. Comcast went after Disney not because of distribution, but because of content.
Favorite Quote: “Now, while voice should be free, that doesn’t mean that it will be free. The two conditions outlined above are nontrivial. First and foremost, it is not at all clear that we have enough competition in the U.S. broadband market. Innovations in the wireless market, particularly recent innovations around mesh architectures, have the opportunity to change this. As of right now, however, many users simply lack choice. Additionally, the many state municipalities around the country are eager to place their hands on VoIP. A poorly executed policy could in fact “increase” the long term pricing on voice services for all users (for example, would you really tax a free service?).”
May 6, 2004: Entrepreneurialism And Protectionism Don’t Mix (Link)
Summary: Protectionism and entrepreneurialism don’t work together. One prides itself on open dissemination of ideas, talent and problems (entrepreneurialism). The other (protectionism) desires to keep what’s theirs and turn a blind eye to competition. There are seven reasons why these two ideologies don’t mix: it hurts the economy (comparative advantage), start-ups don’t receive government subsidies (that encourage protectionism), disincentivizes diversity, more start-ups start with a global presence, the hot markets are ex-US, it goes against our global open standards (WiFi, etc.) and its inconsistent with the entrepreneurial mindset.
Favorite Quote: “It is hard to imagine a successful entrepreneur arguing that he or she deserves a job over someone else that is equally skilled and willing to work for a lower wage. The entire spirit of entrepreneurialism is based on finding ways to do something better, faster, and cheaper. It is the whole nature of the game. If someone can do something better somewhere else, it simply means it’s time to innovate again – with intellect and technology, not politics.”
October 19, 2004: The Revolutionary Business Of Multiplayer Gaming (Link)
Summary: Multiplayer gaming is an incredible business featuring five “Buffett-Like” business characteristics: recurring revenue (subscription pricing), competitive moats (switching costs), network effects/increasing returns, real competition with others and high brand engagement. Those that fail to realize the importance (and power) of the video game business model (40%+ operating margins) will miss a huge investment opportunity.
Favorite Quote: “Some skeptics argue that MMOG is still a “niche” business and that the same half-million users are migrating from Everquest to Ultima Online to City of Heroes. Under this theory, MMOGs will never be mass market and will never really “matter” in the $20 billion interactive entertainment business. However, with billion dollar businesses now dotting the NASDAQ, it becomes harder and harder to invoke such skepticism. And if new paradigms, architectures, and broadband speeds allow for titles that meet the needs of a wider demographic, ignoring MMOGs may be equivalent to ignoring the successor to television.”
March 11, 2005: Believe It Or Not: Your State Leaders May Be Acting To Slow The Proliferation Of Broadband (Link)
Summary: In 2005, rumors circulated that laws would pass eliminating a city’s right to offer telecommunications services to its citizens. Gurley suggested states should say “no way” to this offering, and opined six reasons why (straight from the post):
The primary reason for the proposition is to reduce or eliminate competition for incumbent telcos
An oligopoly doesn’t make a marketplace
Taking rights from municipalities will have negative overall impact on American innovation
Even if a city has no intention of deploying wireless services, it is still in that city’s best interest to retain the right to do so
In 2005, isn’t it reasonable for a city to choose to offer broadband as a community service?
A founding American principle — localized government whenever possible
Favorite Quote: “In what is ostensibly the cornerstone “democracy” on the planet, one would think that the citizens in each of America’s cities could simply “vote” on the services they believe make sense for their city to provide. Running a wireless network in a city like Topeka, Kansas simply has no overriding impact on the state as a whole. As Thomas Jefferson aptly wrote in a letter to William Jarvis in 1820, “I know of no safe depository of the ultimate powers of society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform them.””
March 21, 2005: The State Of Texas Refuses To Block Municipal Broadband (Link)
Summary: Gurley’s post before this one did its job and Texas removed the harsh language around cities offering broadband access to its citizens. According to Gurley, the battle moved to Colorado.
Favorite Quote: “This proposed bill, in its original form, would prohibit a city from helping any new carrier whatsoever get started. It’s a pure and blatant anti-competitive move. It’s been modified slightly, but it is still one of the harshest proposals of any state, and once again created only to help the incumbent carriers by removing competition. Consumers do not benefit from this language.”
March 24, 2005: Texas Two Step – Backwards (Link)
Summary: After celebrating the removal of restrictive broadband language three days prior, Texas reinserted the notion. What’s crazy is that the member who reinserted the language, Robert Puente, serves in a district where a large telco company has its headquarters. Hmm …
Favorite Quote: “It is shocking that these local reps really don’t care if broadband deployment in America continues to fall further and further behind the rest of the world. Just shocking.”
June 2, 2005: Texas Sets Key Precedent For Other States In Refusing To Ban Municipal Wireless (Link)
Summary: It’s interesting that fixed broadband incumbents in Texas are so opposed to wireless broadband. The incumbents claim wireless is a weaker form of their product. But if it’s so weak, why do they want it banned from their state? Why won’t they let natural competition run its course? If it is indeed weak, there shouldn’t be a reason to impose sanctions and restrictions.
Favorite Quote: “The reason the pro-broadband movement was successful is because they organized, they gathered the real data on the success of municipal wireless deployments, and they were able to inform the citizens about this effort by the incumbents and their key legislators to use regulation to restrict competition. They leveraged the Internet, blogs, and mailing lists, and made a huge difference. The tech community also played a role with the AEA, the Broadband Coalition, and TechNet all speaking out against this effort to intentional slow technical progress. These lessons and resources are now focusing on other states to ensure the Texas outcome.”
July 12, 2005: DVD Glut (Link)
Summary: Gurley saw the rise of TiVo and its effect on the DVD industry. Why would people pay for DVDs when they can record their favorite movies on TV and watch them whenever they want? There is no practical use for DVDs outside nostalgia and collection.
Favorite Quote: “Could it be that people are watching Shrek 2 on Tivo and saving that on Tivo for future viewing? Could it be that other activities, such as Internet usage, is infringing on DVD time?”
July 19, 2005: Do VCs Help In Building A Technology Platform? (Link)
Summary: There are two important implications for venture capital’s lack of investment in Microsoft’s .NET platform. First, VCs are investing on the Open Platform. This is likely due to (what Gurley calls) “a more benign” platform. Such a platform allows for more creativity and application. Second, VCs aren’t investing in .NET applications because Microsoft’s simply going up the software vertical (owning each spot). There is a lack of opportunity within the existing .NET framework.
Favorite Quote: “Venture Capitalists look to the public markets for clues on where to go next. There is no point in investing in technologies that don’t lead to liquidity events. What the article stresses is that the majority of VC money these days is being spent on top of the Open Source platform rather than the Microsoft’s .Net platform.”
July 22, 2005: Wifi Nation… (Link)
Summary: This article gives us an excuse to talk about Innovator’s Dilemma. Clayton Christensen coined the term in his book with the same title. Wikipedia defines the term as, “the new entrant is deep into the S-curve and providing significant value to the new product. By the time the new product becomes interesting to the incumbent’s customers it is too late for the incumbent to react to the new product.” In short, WiFi is disrupting the incumbent broadband and their end consumers. Also, WiFi isn’t built for the incumbents. It’s built for the next generation.
Favorite Quote: “What you will see, and what many continue to deny, is that Metro-scale Wifi isn’t a theory, its a reality. The networks are live. They perform way better than EVDO or any cellular alternative. They are cheaper to deploy. AND, there is huge momentum around more and more networks.”
Years: 2006 – 2008
April 5, 2006: Why SOX Will Lead To The Demise Of U.S. Markets (Link)
Summary: Sarbanes-Oxley (SOX) killed the small and micro-cap public market spirit. Like most regulations, the creators of SOX thought their stipulations would preserve the growth of public markets. Instead it stunted growth. SOX is an expensive requirement for smaller public companies. The costs disincentivize companies from going public. In return, US capital markets offer less opportunities than global companions. Will this lead to more money flowing overseas?
Favorite Quote: “Ironically, the two gentlemen that created SOX did it with the intention of “preserving” U.S. capital market leadership. Their fear was that people viewed our markets as too risky, and so they created SOX to ensure that investors would “trust” our markets.”
April, 2006: As Wifi Grows, So Do The PR Attacks (Link)
Summary: There will always be haters when new technology replaces old, resentful incumbents. Can you blame them? WiFi completely destroyed their business model. Of course they’re going to run sham campaigns. But that’s the beauty of the Innovator’s Dilemma. WiFi doesn’t care about fixed broadband and incumbents. It’s serving its new wave of customers who want something incumbents can’t offer. Look for this in other up-and-coming technologies.
Favorite Quote: “Better performance than EVDO at a much lower cost. You won’t stop this with an AP article. Are their issues? Sure, but I drop 5 cell calls a day in Silicon Valley and that technology (cellular voice) is over 25 years old.”
April 27, 2006: MMOs (MMORPGs) Continue To Rock (Link)
Summary: Gurley again emphasizes the importance of MMO video games — particularly out of Asia. In fact, he mentions that Nexon (Japanese gaming company) plans to file on the JSE. Gurley believes the JSE filing is directly correlated with Sarbanes Oxley (from the article above). Regardless, the real winners in the video game industry are coming from Asia. Winning games will be based on community and entertainment, rather than pure competition. It’s no wonder Fortnite is so popular today. Gurley gave us clues almost 20 years ago.
Favorite Quote: “Many of the rising stars of multi-player interactive entertainment are more social than interactive. They also target much broader demographics than gaming ever dreamed of hitting. Consider three sites targeted at younger children and teens that are all doing extremely well — NeoPets, HabboHotel, and GaiaOnline (Benchmark is an investor in HabboHotel).”
June 19, 2008: Back To Blogging (Maybe)… (Link)
Summary: Gurley returned from his writing break to mention a few of his favorite reading sources. Gurley notes that he reads each of these websites every morning:
Favorite Quote: “The bottom line is I have been really busy. Busy with our investments here at Benchmark, and busy with three growing kids at home. But in the end, I am quite fond of writing, and I have been inspired by some of the great writing of others.”
June 30, 2008: Bleak VC Quarter? Why? (Link)
Summary: June 2008 marked another dreary quarter for venture capital. Not one single VC-backed company went public. At first glance, this seems bad for venture capital. But looking deeper, it’s not venture capital that’s the issue. It’s the public market. Between regulations and SOX costs, small companies are opting to remain private at record numbers. As Gurley notes, fund managers want high growth and capital appreciation. But these small growth companies don’t want the issues of being a public company.
Favorite Quote: “This passionate desire to be public is completely gone in Silicon Valley. For reasons you could easily list – Sarbanes Oxley; 12b1 trading rules; shareholder litigation; option pricing scandals; personal liability on 10-Q filing signatures – it is simply not much fun being a public executive.”
July 22, 2008: BAILOUT What? (Link)
Summary: Fascinating how relevant this quote is for 2020. What we’ve seen from the US government during the COVID pandemic is a double-downed effort on its bailout precautions. Even going so far as to buy bond ETFs on the open market! Capitalism requires failure. It requires weak businesses to fall by the wayside in exchange for stronger competitors.
Favorite Quote: “Is our government really going to bail out equity investors in a failed business enterprise? I totally get keeping America afloat, but it is critical that failed businesses FAIL. They must FAIL. You can’t provide band-aids to equity failure. The whole system will come to a halt. Risk that pans out must result in failure. it is a crucial part of the system.”
December 1, 2008: Benchmark Capital: Open For Business (Link)
Summary: Gurley and the Benchmark team continued investing while the rest of their VC peers cowered in fear during the bowels of the Great Recession. Investing when others are fearful is not only a sign of a great VC firm, but any great company.
Favorite Quote: “I can’t speak for other firms, but make no mistake about…Benchmark Capital is wide open for business and we are eager to invest new capital behind great entrepreneurs. Right now. In this environment. Today. You may wonder why I feel the need to make this pronouncement, and you may even consider this a stunt. It is not. We have made fourteen new investments this year, and are actively considering new investments each and every day.”
December 5, 2008: Do VCs Help In Building A Technology Platform; Part 2 (Link)
Summary: Microsoft offers three years of free software/service to startups. This is a clear signal that Microsoft understands the power of platforms and where companies choose to build their products. Otherwise, as Gurley notes, why offer it for free? This comes on the heels of three new cloud platform technologies entering the space: Facebook, Salesforce and Amazon AWS. VCs may not choose which platform wins, but they choose which platform gets capital. And to some, that’s the same thing.
Favorite Quote: “It obviously would be overstating it to suggest that VCs help “choose” the platform that wins. That said, it is a powerfully positive indicator if VCs show confidence in a new platform by shifting where they deploy their capital.”
Years: 2009 – 2011
February 1, 2009: Google Stock Option Repricing: Get Over It (Link)
Summary: Retail investors, bloggers, and financial pundits argued that Google’s Stock Options Repricing hurt the “common” shareholder. Gurley thinks stock options shouldn’t matter because common shareholders gave up their rights (more or less) when investing in Google shares. The fact is, Google’s founder and original shareholder shares carry 9/10ths voting power. That means minority (aka second-class citizen) shareholders get 1/10th. In other words, deal with it.
Favorite Quote: “So my reaction to anyone who owns Google stock and is sore over this decision — Get Over It. You bought a stock where you gave up the ability to vote on such things, and if you don’t like it, sell the stock. But you have no right to complain, as the rules were laid out from the beginning.”
February 11, 2009: Picture Proof Of The Innovator’s Dilemma: SlideRocket (Link)
Summary: With a team of 3 engineers and a fraction of Microsoft’s budget, SlideRocket created (arguably) a better version of PowerPoint. According to Gurley, SlideRocket is a perfect example of the Innovator’s Dilemma. PowerPoint took (probably) billions of dollars in R&D and thousands of engineers to create. SlideRocket did it with 4 orders of magnitude less resources.
Favorite Quote: “One subtlety of this is that it allows others to catch up and basically recreate the same thing for a fraction of the cost. In SlideRocket’s case, it appears that a team of 3 engineers with primary work done by the founder, have recreated PowerPoint (leveraging Flex of course).”
February 18, 2009: Just Say No To A VC Bailout: A Green Government Venture Fund Is A Flawed Idea (Link)
Summary: Some VC investors wanted a bailout from the government during the GFC. Gurley originally thought this was a far-cry from a lone complainer. Then he read an article by Thomas Friedman suggesting the same thing: a bailout for VC targeted at green-tech companies. According to Gurley, VC bailouts are flawed for six reasons:
There are no lack of capital in VC
VCs don’t deserve a bailout
Those that need bailout are (likely) bad ideas
Excess capital hurts markets
Good companies don’t lack for capital
Use customer subsidies instead of government-backed VC investment
Favorite Quote: “Great ideas have never suffered from a lack of capital availability. Bringing extra government dollars to the investment side will only ensure that marginal and sub-par companies get more funding dollars, which historically has had a perverse and negative effect on the overall market.”
February 22, 2009: Just Say No To A VC Bailout – Part 2 (Link)
Summary: Continuing the rant from the previous blog post, Gurley hits on three main criticisms with Friedman’s cry for a VC bailout. First, Friedman suggested that the US Treasury give the Top 20 VC firms up to $1B to “invest in the best VC ideas”. When you consider the 2% annual fee each year that VC’s take, you’re effectively giving these firms an additional $4B in partners’ fees. Finally, Gurley hammers home the idea that to win in green-tech you need to incentivize the customer on the demand side. Create a positive ROI proposition for the customer to use the product or service.
Favorite Quote: “The key is to create an ROI positive investment for the end customer through subsidies. Ethanol isn’t falling to succeed because of a lack of capital — it’s a problem with customer ROI. Invest through subsidies in making the market huge and ROI positive. Capital alone will not solve the problem as the ethanol case proves.”
February 27, 2009: Perfect Online Video Advertising Model: Choose Your Advertiser (Link)
Summary: Gurley reveals his “perfect online video advertising model” in which consumers can choose their advertiser. It works like this. Before an online premium or VOD show starts, the content creators present the consumer with a list of 4-9 sponsors for the programming. Then, the consumer picks which sponsor they’d like to see when the inevitable ad runs during their program. The benefit to this is that content creators would know their customers’ interests to the tee, which would allow them to raise prices on advertising channels (read: higher revenue).
Favorite Quote: “Just because I am a male between 18-24 and watching “Lost” doesn’t mean I want an XBOX. You are more likely to guess that i might want it, but you would be 10X better off if I chose XBOX as my sponsor at the start of the show. Then you would KNOW I have an interest — no more guessing. Making predictions is always a dangerous game, but I am fairly certain that this will be the video ad model of the future. It makes way too much sense not to work.”
March 2, 2009: Looking For Work: Are You An Insurance Agent? (Link)
Summary: One of Gurley’s investments had an unusual circumstance during the GFC: they had excess demand for work. LiveOps, a virtual SaaS call center on the cloud, leverages a network of work-from-home call center operators. At the time of writing, LiveOps had 20,000+ live call-center agents working from home assisting companies like Aegon, Colonial Penn, and American Idol.
Favorite Quote: “Their core technology is a SAAS “contact center in cloud.” Just like anyone’s call center, it is a four-9’s operation that is highly resilient. What’s different, and very unique, is that the agents on the other end don’t actually work for LiveOps – they work for themselves. So far, over 20,000 “crowd-sourced” agents are now working from home on behalf of LiveOps customers – companies like Aegon, Colonial Penn, etc. One really cool customer example is American Idol. For Idol Gives Back, AI’s charity campaign, over 4000 LiveOps agents handled over 200,000 calls in less than five hours. Only a crowd-sourced play could handle such a ramp.”
March 9, 2009: How To Monetize A Social Network: MySpace And Facebook Should Follow TenCent (Link)
Summary: Social networks had trouble monetizing their websites. MySpace and Facebook failed to generate revenue like Yahoo, which did $7B at the time of writing. The problem wasn’t growing the userbase (both sites had tremendous user growth). It was the dependence on advertising to generate the lion’s share of their revenues. Gurley compares MySpace and Facebook to Tencent (700.HK). The two primary drivers of revenue for Tencent are digital items and casual game packages and upgrades. These are significantly higher-margin businesses than advertising. At the end of the day, social networks are social status symbols. This means if you want to leverage your business, you need to provide users with ways to improve their social status.
Favorite Quote: “If you removed the Chanel logo from them, and offered them for $50 cheaper, you could not sell a pair. Not one. Why? People are buying an image that they want to project about themselves. Without the logo, they fail to make that statement. The same is true for watches, clothes, cars, sodas, beers, cell phones, and many more items. People care greatly about how they are perceived and are willing to part with big bucks to achieve it. Digital items are merely the same phenomenon online.”
March 26, 2009: Note To Timothy Geithner: Do Startups & Venture Capitalists Really Need More Regulation? (Link)
Summary: The US government levied Sarbanes-Oxley on all public companies after the whole Enron, WorldCom saga. The purpose? Protect investors from future frauds. While the efficacy of “Sarbox” remains in question, one thing doesn’t: the cost on small public companies. Sarbox costs ~$2-$3M to implement. This makes it nearly impossible for small companies to go public because the Sarbox costs eat away all potential operating profits. Overburdening small companies could restrict the pipeline of new public IPOs.
Favorite Quote: “And remember that the largest companies in America that were created in the last 35 years (MSFT, GOOG, AAPL, CSCO, INTC) were all small venture-backed companies at one point in time. Do we really want to inappropriately restrain or throttle the future pipeline of such companies in America?”
May 2, 2009: Swine Flu: Overreaction More Costly Than The Virus Itself? (Link)
Summary: It’s amazing how relevant this blog post became during the COVID-19 pandemic. Gurley suggests that in some cases, overreacting to news (like swine flu) can have far worse consequences than the natural course of the virus itself. For example, Mexico’s economy teetering on the brink of insolvency as tourism represents a third of their economy. The argument for overreacting is that it prepares people for the worst-case scenario. Yet that decision has consequences. Consequences we can’t see, and might not see for a long time.
Favorite Quote: “Some people rationalize that this hysteria serves a noble purpose, in that it prepares us for the worse. This, however, ignores the fact that there are tremendous real economic costs to overreaction, and that sometimes overreaction has far-reaching negative impacts which can be many times greater than that of the original problem.”
May 8, 2009: Second Life: Second Most Played PC Title, #1 In Minutes/User (Link)
Summary: Gurley’s investment in Linden Lab paid off big time in May 2009 when Linden’s hit game Second Life ranked as the #2 most-played PC title. The game trailed World of Warcraft in number of users, but ranked first in number of minutes played per user. Data like this further reiterates Gurley’s earlier claims that selling goods online (digital signs of social status) can make for a great business. It also shows people love distracting themselves from their everyday lives.
Favorite Quote: “The truth of the matter is that the company is quite large, it’s growing, it’s profitable, it has hired a number of great people over this time frame, and as the data shows it’s kicking butt. Note that the data also shows SecondLife actually leads WOW in terms of minutes played per user.”
May 10, 2009: Bill Gurley’s Online Video Market Snapshot (Link)
Summary: Gurley did an on Hollywood talk about the massive changes in the Online Video Market. The link has an 18-minute video where Gurley outlines five things that matter in the coming online video market battle:
Great content is super expensive
Affiliate fees are a “huge fucking deal”
The Netflix Business model is widely misunderstood
HBO and the NFL are incredibly well-positioned companies
Wireless will not save the day
Favorite Quote: I didn’t have a favorite quote from this post as it was mainly a link to the video and slide deck. I highly recommend watching the video and scanning through the deck. It’s 18 minutes long but you can watch at 1.5-2x speed without issue.