Last week, I talked with Mike Volpi, longtime Index Ventures partner and the former head of M&A at Cisco for many years before that. We originally planned to talk about Index and general market trends, and we did. The topics we discussed included whether self-driving technologies have attracted too much funding and the damage inflicted by SoftBank on its portfolio companies.
Still, few could have predicted how extraordinarily trying the week would be leading up to our interview. Little wonder we spent much of our time talking about who is likely to snap shut their checkbook first, and why, in some cases, the best thing to do now is to keep the money flowing.
We have parts of our conversation available in podcast form here; other pieces, including those not included in the podcast, follow. These excerpts have been lightly edited for length.
TechCrunch: Let’s talk first about Index. You closed your last funds in 2018 with $1.65 billion in capital commitments. Are you in the market again now?
Mike Volpi: We raise funds every three-ish years. So, at some point, yeah, we’ll be in the market again. [We are] not specifically at this point in time, but sooner or later we’ll raise another fund.
More broadly speaking — and because the market is tanking so badly as we speak — do LPs tend to snap their checkbooks shut as soon as trouble hits? What’s been your experience over the years?
Most LPs, in our experience, have been with us for 20 years. And so whenever we raise, they want to put more in, and we’ve never had a situation where they’ve balked or had any issues, thankfully, because our performance as a fund has returned nicely for them.
In all candor, you know, particularly venture funds that perform well, and [this encompasses] a broad spectrum of firms that have been performing well over the last number of years, everybody knows that a spot with those firms as an LP is very difficult to come by. And people who have it will most definitely hang on to it, because if they choose to back off, it’s not guaranteed that they can get that spot back in. So I think most LPs that we’ve dealt with, and I’m pretty sure that some of our peers in the industry deal with, would not really consider backing off whether times are good or bad — particularly if they’re good or bad for two or three weeks, like it’s been now.
Chris Douvos, an LP who you may know, told me once that he said no to the Accel fund that backed Facebook and acknowledged that [once you say no to a firm, you’re forever in its bad graces].
For sure, and not only that, but if you look at the last couple of [the bigger corrections], whether it’s the dot-com bust of 2000 or the 2008 financial crisis, some pretty amazing companies were born [backed by] funds that were raised around that vintage. And that’s because when there is a down cycle, you have a buyers opportunity to get into good opportunity. So right now, savvier LPs right now would want to be in the market as opposed to out of the market.
You also led M&A at Cisco for 13 years beginning in the mid 1990s. Given that experience, how fast would you say that tech giants pull back from shopping, or is now the time for them to be offering to buy companies at a steep discount to what they might have paid 6-12 months ago?
It very much depends on the financial strength that the individual company has, and obviously the level of difficulty that they’re facing at that point in time. But broadly speaking, I think they see it as a buy. If you’re a tech giant, you’re cash rich; I would say that it’s definitely a buyer’s market.
How has all this market volatility impacted at you look at deals as a VC? How will it affect your investment pace?
It’s obviously a very difficult time for everyone. We always talk about markets, but there’s a health issue for people and that’s paramount. That’s more important than making one dollar or losing one dollar, so I think the the most difficulty and the concerns that we have are for the people in our companies: the employees, the customers that they serve, etc. These times, we probably think about that a little more than, “Oh my gosh, what am I gonna do tomorrow with my investments?”
Also, the business of venture is a very long-term one. For the average holding period we have within our portfolio companies is probably eight years. If you think about an investment that we made even, let’s say, last year, it’s going to look really different seven years from now. So these moments of fluctuation for us as VCs shouldn’t impact our thinking too much. They’re unpleasant. You have to be thoughtful about how to manage through them. But from an investment perspective, we shouldn’t really let it get too much in in the scope of how we think about it.
Do you also take into account public market valuations when looking at writing term sheets for some of your new investments?
Without a doubt public markets have some level of impact on the valuations. But in this case, the public markets have moved so much [in recent weeks that] obviously you’re not going to pay up more for a company, but how much you go down — if you go down at all — is really a case-by-case statement, particularly if you’re doing a Series A investment.
The truth of the matter is that whether the public markets have gone up or down doesn’t have an enormous amount of bearing on what the valuation will be; it’s still much more driven by the competitive dynamics of a particular deal: how many VCs are chasing it, how excited they are about it.
Does Index buy up secondary shares? It seems like you could find buying opportunities on the secondary front if so.
We don’t do a ton in pure secondary. From time to time, we make investments that have a little bit of a secondary component in there. We’re principally primary investors, which means we want our capital to go to company building rather than [to] people taking money off the table or whatever. I would imagine that if you have individuals that are shareholders or institutions that are shareholders who, as a result of the situation, feel the need for some liquidity, there may be more opportunities there rather than less. But it’s not really our focus so it’s not like we’re paying a ton of attention to it.
Where are you shopping? Looking at Index’s deals, I see SaaS and consumer deals and fintech. What are you personally most excited about?
Personally, I’m doing a lot of stuff in the AI and machine learning sector. I think it’s an enormous transformational technology that I find fascinating as an investor because I think that when you have platform changes like that, there’s the potential of doing well financially but also… I think a lot of what AI is going to do for the next decade or so is to help people do better at their jobs, or to give people the option to not do the most mundane jobs in the world.
Who knows after this financial crisis, but the unemployment rate in the United States was at 3.5%, which means that there were jobs for everybody, clearly. It’s just that some of the jobs are very unpleasant. Working in a coal mine is not a fun job. Driving a truck for 10 hours a day is not a fun job. When a machine can do that job, it liberates the person to do a better job. So I’m very much a believer that AI isn’t just a way to make money but it’s about improving quality of life.
It does feel, for reporters getting pitched constantly, like every company is now “AI” or “machine-learning driven.” Are there any verticals that are particularly interesting to you?
It sort of impacts everything so I understand why you’re seeing this. The areas that are actually fascinating to me is the AI stuff that crosses over to the physical world. Self-driving cars would not have been possible at all without AI. Robots that work in factories or fulfillment centers would not have been possible at all without AI. I probably find those areas, whether it’s self-driving trucks or self-driving cars or robots or different ways of flying airplanes or flying cars, pretty fascinating because they would never happen without AI.
I had the chance to meet with Chris Urmson, who heads up your [self-driving tech] portfolio company Aurora Technologies, last year. But it does feel like a lot of other investors are beginning to conclude that we’ve maybe over-indexed on self-driving cars — or that at least that what they promise is much further out than anticipated.
We’ve been overly optimistic about the timeframes of it, and if you’ve talked to Chris, he’s probably one of the more conservative guys on this.
Because people have spent so much money on it, especially incumbents like Waymo and Cruise, because they’ve invested so much money on it and they’re so publicly visible and they keep promising dates that they can’t make, it has, to a degree, deflated the excitement that exists around self driving.
The truth is that it’s an extraordinarily complicated thing to do. And I think the timeline that when we invested in Aurora we were thinking maybe four years, five years. And I think we’re probably two or three years still out now before we can really call it truly viable and not just sort of ring fenced and [a] prototype.
Then, of course, because it requires expensive hardware, like cars and LIDAR, and it requires big computers and lots of expensive, smart people, it’s a very capital intensive thing that would have never happened had we not poured the capital that we have into it. But it has come to a stage where capital is a material differentiator. Like, you’ve got to have a lot of money to be in this business. You’re not going to do it with $30 million or $40 million, but an additional zero if not more. And people have figured out that there’s an enormous difference between a couple of Ph.D. students and a little bit of open source software and something that genuinely works in a complex driving situation. So I wouldn’t be surprised if, over the next couple of years, you see a whittling down of the real competitors in the market.
Some of the big money to pour into the space has come from SoftBank, which now looks to be troubled. Does the investing world change at at all if SoftBank’s footprint becomes much smaller?
I don’t think of SoftBank necessarily as a unit onto itself. It is a representation of more capital trying to find its way to better returns. Whether they exist or not, there’s more capital coming into this business, and there’s going to be even more. And that’s principally because the returns have been good over the last, you know, five to 10 years. And so, I don’t think that whatever they do — whether the next Vision Fund is big, small, medium-size, or whatever — matters. There’s still going to tons of capital available.
I do think they’ve been a bit erratic in the way that they’ve [interacted with their] own portfolio companies, and that’s never good. It’s really important to have a long-term perspective on things and, you know, going in one day and saying, ‘Spend all the money you can grow grow grow; don’t worry about profitability,’ then saying, ‘Oh, wait a minute; actually profitability is incredibly important and don’t spend any more money’ is not wise counsel. I think if there’s any damage that’s being done to the companies, it’s that kind of advice.
If you think about WeWork. I actually think WeWork is a super interesting concept and it’s innovative and they’ve done different things. But that company is in a mess because of the advice they got from their investors. I think that’s done more damage than then anything else.
Index was founded at a time when the VC business wasn’t quite as hot as it has been lately. Do you think that VC became a little bit too hip, too fashionable?
No, actually, I don’t think so. Venture capital was for a long time kind of a cottage industry, a craftsmanship industry where you had small groups of experienced people that looked at investments. It was a very inefficient market where information was very siloed.
But over time, the venture category has made a lot of money for a lot of people. And not surprisingly, a wave of professionalization has come to the venture business. There’s more data, there’s more due diligence and information, there’s more transparency in the terms that people are getting, there’s a broader number of people who study the numbers and the facts and so on and so forth.
So I would characterize this more as an industry that’s been kind of hidden in the corner going mainstream. And I don’t think we’re going to go back to the way venture capital was. I think we’re going to continue to professionalize and that’s to the benefit of the entrepreneur who will be able to have a broader and more fair choice of venture capitalists that they choose.
Now, at the margin, you’ll have periods of time just like in the public markets where there’ll be moments of euphoria, and then there’ll be moments of correction like we’re experiencing today. And I think the venture industry will do the same. But the structure of it — the breadth of coverage, the level of information that’s exchanged, the data driven nature of what we do — has changed forever, and I don’t think we’re going back.
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