GOAT Talk

Somewhere in California

In 1995, a new type of venture capital firm was quietly founded in Menlo Park. In contrast to traditional VC firms with strict hierarchical structures, this one had a modern twist. All five of the partners involved shared profits equally, and no CEO position was established. Silicon Valley, meet Benchmark.

But perhaps the most contrarian part about Benchmark was their fee structure. Much like today, the most common fee structure for VCs was 2% management and 20% performance.

Benchmark, with no fund track record, decided on a 30% performance fee. The reaction was outrage from potential LPs/investors - nonetheless, they found backers that loved them fiercely. One of these backers was Horsely Bridge, a large investment fund of funds that made a huge bet on Benchmark Capital Fund I. With Horsely’s stamp of approval, Benchmark was able to raise $85 million.

This fundraise was not without significant pushback. As stated above, the predominant reaction from potential investors was outrage. Stanford, the university most of Benchmark’s partners attended, was particularly livid at the audacity of these ambitious alums. Not only did they refuse to invest, they attempted to sabotage the firm by calling for other endowment funds to close their doors on Benchmark.

Unfortunately by the time Benchmark finished their raise circa 1995, a lot of great deals had just closed. Amazon was wrapping up its round, as was Yahoo. Then, in 1996, Val, a partner at Benchmark, made the decision to leave about a year after raising the first fund. The energy was low.

Golden Child

A year later something changed.

Pierre and Jeff were two unlikely startup founders working on an online marketplace known as eBay.

For months, they pitched their already profitable company to Silicon Valley investors and watched doors close on them.

But for some reason, Benchmark took interest. They saw the potential to build a strong management team around an already proven product that needed to scale, and the idea of the Internet revolutionizing retail excited them.

An offer was made… And at the same time, Knight Ridder, a large media conglomerate, offered to buy eBay for a nice sum.

• Benchmark: Offered to invest in eBay for $6.7 million at a $20 million pre-money valuation. Also extended $1.5 million in the form of a structured loan for the founders to feel comfortable, per The Washington Post.

• Knight Ridder: Offered to acquire eBay for $50 million.

Against all odds, Benchmark won the deal. And just one year later, eBay went public.

eBay Money

When eBay went public, Benchmark’s $6.7 million investment in the company was worth $400 million. An elite IRR for just one year…

But Benchmark had a lockup period. A lock-up period is a pre-determined amount of time post-IPO, where large stakeholders are restricted from liquidating their holdings.

So when Benchmark’s lock-up expired in the spring of 1999:

• Their original $6.7 million investment was worth $4 billion

• This 597X markup took place in just two years

• If all other investments in their first fund failed, they still would have returned 47X MOIC

• This is widely known as the greatest venture capital investment of all time

• Their first fund is widely known as the greatest large venture capital fund of all time, returning 92X.

• Benchmark gave equity in their fund (carry) to every employee, which led to stories about Benchmark secretaries becoming millionaires

Benchmark ended up distributing $4 billion from the eBay deal back to the fund and their investors.

Although this investment is the definition of an outlier, there are still a few simple takeaways we can dwell on:

1. Early Equity Builds Wealth. Benchmark was the first money in for eBay. Therefore, they had the highest upside compared to later stage investors. Investing early (pre-seed/seed) has higher risks involved, however, real wealth for investors is typically built before Series C+ / IPO stages.

2. Your Interests Can Make Money. Investing in areas that you are interested in will pay the most dividends long-term. Benchmark’s partners were excited about the potential for the Internet to revolutionize retail. In the same way, taking initiative to learn more about things you are genuinely excited about will open doors to get involved early with high-potential startups/funds.

3. Access to Funds Is Essential. eBay is the magnum opus for the Benchmark guys, but it was also one of many startups they invested in through Fund I. The majority of individual investments will not lead to significant returns or distributions. A combination of fund investments and hand-selected startup deals provides great risk-adjusted exposure for private market investors.