A Conversation with Peter Fenton
Before he turned 35, Peter Fenton had already made his name (and his fortune) on Sand Hill Road, thanks to early investments in tech companies such as JBoss (BusinessWeek.com, 4/11/06). In 2006, Fenton left Accel Partners for Benchmark Capital, another high-profile Silicon Valley venture capital firm that put early money into Internet giants such as AOL (TWX) and eBay (EBAY), as well as newer hot properties such as Yelp and Zillow.
He spoke with BusinessWeek.com to offer his advice to entrepreneurs looking to raise venture capital. Edited excerpts of the conversation follow.
What is the biggest mistake you see among the entrepreneurs seeking funding today?
Focus is imperative in a young company's life—I think more of our companies die from lack of focus than any other single mistake. Something I'm concerned about, that I've picked up on in the past two years, is the perception that it's easier to early-stage round today, because there are more positive outcomes than there were in, say, 2003 and 2004. I think it's leading to an erosion of the idea of winning over a core before you expand your horizons.
Venture people want to back big ideas and big markets that will lead to big companies, but when you go back and look at the big winners, they usually started with very little capital and very focused offerings. That's particularly true in consumer Internet: Google (GOOG) began as just page-ranked search, Yahoo! (YHOO) was a very focused directory of the Web, and eBay was really winning in core collectibles. They did just one thing extraordinarily well—better than anyone in the world. When you have more money, you're more likely to hire more people who can do more things that can mask over the fact that you're not being successful in your core. You have breadth taking over depth.
Can you point to specific companies that have failed because of breadth over depth?
Gosh, yeah, a lot. I'd contrast Insider Pages to Yelp. Insider Pages went very broad across the U.S. and wanted to be the alternative to the Yellow Pages, with reviews, with a national directory, with lots of different things. They raised a significant amount of capital. Yelp, on the other hand, took a very focused view in San Francisco, and said: "We want to create the single best directory of local services with user reviews in San Francisco."
Another example is Spoke vs. LinkedIn. Spoke struck me as having extremely broad conditions and a far broader feature set, whereas LinkedIn started very narrow. It was a simple place to go and put your résumé and make connections, whereas Spoke had an e-mail plug-in, an enterprise product, and a Web product. Spoke raised venture money before it had real uptake, and I think it has really struggled with its moving parts.
How does lack of focus typically reveal itself in a business plan?
Focus starts with defining the market. In most business plans (BusinessWeek.com, 1/7/08), the market is either undefined or defined in platitudes such as "We're going after 18- to 35-year-olds in urban cities." Well, that's not a market. A market has to be defined by natural boundaries—the kind that people use when they talk among themselves. With Facebook, Mark Zuckerberg very clearly defined his market as college campuses—that's a natural boundary—and he said, "I'm going to get 90% market share of that."
Another major red flag is when the entrepreneur says, "We're going to do lots of different things to delight the user," vs. calling out the one or two things that are going to grab someone by the throat. If you take all that breadth and you add lots of money to it, it doesn't tend to get more focused; it tends to get less focused.
One of the traits of a focused business is that there's an ability of the entrepreneur to describe in very concrete terms the compelling user experience they're trying to create, like what Richard Barton did at Zillow. He was focused on trying to create a way for people to understand the value of their homes, which led to the "Zestimate" and a whole engagement model that's quite distinctive from somebody who said, "We want to build a big database of homes on the Internet and get lots of data and make it available to the user." There's an authenticity of somebody who's really focused on the user experience, and it's infectious when it's right.
How does authenticity come in to play?
There's an old saying my partner Bob has, that we're suspicious of companies that are better at separating venture capitalists from their money than they are customers from their money. It sounds trite, I know, motherhood and apple pie, but it's a gut check that we apply as venture capitalists. If you're doing it because of the game—if raising money and appearing like you're going to be the next big thing is more important than the user experience and the mission of the company—then you need to be honest with yourself, because we tend to see through that.
Evan Williams wrote a really wonderful series of blogs about why he stopped doing Odeo. He didn't have the authenticity of focus and ambition for podcasts that he would need to be a great entrepreneur, and so he gave the money they raised back. That's pretty rare—in fact, it's pretty much unheard of. But it allowed him to get into this other company, Twitter, where he's been very successful.
Of course, as an entrepreneur, you're not going to wake up every day and say, "This is what I want to be doing, this is 'authentic.'" Some days are a real slog. But if enough time passes—weeks and then months where you're not deeply connected with what you're working on—you owe it to yourself to reevaluate whether or not you're in the right place.