If Everybody Thinks It's A Good Idea, It's Probably Not: A Conversation With Niko Bonatsos
There exists loosely held wisdom that anybody older than 20 won’t be able to spot or understand the next big movement or application within social media. The age gap in users for Snapchat illustrates this perfectly.
For a company with a fanfare-filled IPO that dominated business news cycles for a week, there’s still quite a deficit within the general adult populace of how exactly Snapchat works or why it’s important.
Niko Bonastos, a managing director at General Catalyst, was one of the first venture capitalists to spot the Snapchat team and recognize the potential of its application. But even he concedes that he doesn’t try to evaluate social media applications as a user, “especially as I get older,” he says. “My instincts are not those of the core native user, a teenage user or a young college student.”
Instead, he examines new apps for what they could be, for what they could become. He doesn’t judge something to be a failure because he won’t be a user or doesn’t understand why others would use it.
The other thing he looks for with new applications is some degree of controversy on how people perceive them. In his experience, when everybody within General Catalyst thinks a new product is nearly guaranteed to a be a success, it’s almost always the case that it won’t be. “Operate with conviction,” he says.
Bonastos has built up an interesting set of operating theories and guiding principles as one of the VCs of the moment in Silicon Valley. He shared many of those with viewers of a FundersClub Live event recently with FC CEO Alex Mittal.
Here are some of the other key takeaways from Bonastos’s talk:
The VC isn’t the superstar, the entrepreneur is. Bonastos doesn’t look to imbue his investments with his own takes on a space or theories of how the startup should operate. He doesn’t possess an overwhelming itch to be an operator and to jump in with sleeves rolled up. He supplies advice and guidance, of course, but it’s up to the entrepreneur to supply the vision.
Bonastos “ruthlessly” manages his time, and always leaves space for new ideas and for meeting people outside his current network. This ensures that, over time, he doesn’t accumulate a huge network or a giant body of work in areas of technology and business that could become irrelevant. He views getting exposure to other fields and new areas as one of his core job requirements. “If you can do something today,” he says, “do it.”
Many of the biggest applications of the future will be greeted by most people with scorn. They’ll be looked upon as toys to which nobody important pays attention. Facebook, for instance, was viewed as a bauble for college students—until it wasn’t. Bonastos sees this as the classic path to dominance. Disruption from beneath, from a class and age of people who aren’t inhabiting board rooms and corner offices, at least not yet.
Winning in consumer hardware, especially for companies who find their traction via things such as Kickstarter campaigns, requires special kinds of founders who can balance the operational load of shipping products now while constantly seeking and planning the next iteration of the product. Hardware can be usurped so quickly now that the need to iterate and release—while also building out network effects—is of the utmost importance.
Below, readers will find a version of the conversation between Bonastos and Mittal. While this conversation has been edited for clarity and, in some cases, brevity, it should be noted that this was a live exchange with questions from an international audience arriving in real-time. Many of the questions come directly from viewers. Mittal’s words in bold:
A quick question to start: My understanding is that you initially studied engineering at Stanford, and at Cambridge. I think you even worked as an engineer professionally in Japan?
I did, yeah. I was an incompetent engineer.
I'm going to assume that you didn't grow up dreaming of being a VC one day. I'm not sure if one dreams of that. But what was the event or the spark or the life event that led you to pursuing a career in venture?
I grew up between Greece and the UK. I was a perpetual student for many years. I was a curious mind, which is something very relevant to my current role. I traveled, worked and studied in a bunch of places. In the UK, Harvard, and here in the Bay Area at Stanford. While I was in the UK, at Cambridge, I was 24, 25 years old, and for the first time I was exposed to tech startups. I met the founders of ARM, and others.
I quickly realized that the most ambitious startups sooner or later moved to the Bay Area. Either to raise money, or to find customers, or to hire executive team members. I got lucky and got a full-ride scholarship and moved here seven years ago to go to Stanford. While here, it was 2009, and I tried to launch a social network. Like everybody else, I went and watched Social Network, the movie. I was very inspired, and felt like we had a shot to build the next big thing, and we found out that LinkedIn was opening up its platform after releasing its API. We tried to build something on top of LinkedIn, but failed miserably.
During that process, I met VCs, and I was very intellectually stimulated with everything that they were doing.
What does a VC do? You meet a ton of people who are incredibly passionate, and work on solving a specific problem. You pick a few of them every year that you work with for the next decade.
As a curious mind who loved technology, I felt like this was the right personal fit for me.
As a curious mind, do you ever get so curious that you wish you could jump back into the operating side, and go really deep?
I don't. I think that's, for better or worse, one of the advantages I have. I don't get agitated, like, "Oh my god, this is a great idea. The team sucks. They are not doing well. I'll go in, let me show them." I'm not that kind of person.
Or when you come across a really interesting idea and team that is performing well, and you have been operating in the background, often you're projecting your own vision into what they're building. You're like, "This is good, but with my idea it's going to be 100x better". I don't have that. I'm very happy to be not the superstar. The entrepreneur is a superstar.
You're probably meeting lots of people every day.
On top of that, you probably have other responsibilities. A lot of the people in the audience today are founders, aspiring founders, some startup investors. In other words, people who also are working very hard and doing a lot of things. How do you manage your time? How do you deal with time management, as a VC specifically?
It's one of the hardest things to do, right? Because the only thing that we have as venture capitalists is our time, which is our main currency, along with our reputation. In regard to time, I constantly ensure that I leave time for new ideas, for new people outside of my network to come in. But most importantly, I ruthlessly prioritize. Ruthlessly. So that over time, I don't accumulate a huge network or a giant body of work in areas that could become irrelevant.
Every day, one-third of my time is spent on my portfolio companies. Another third is spent meeting with new founders that could become portfolio founders. The final third is general ecosystem building. Being here, doing office hours at YC, teaching classes at Stanford, attending conferences, creating for the firm. Stuff like that. But every minute counts, and every email that you reply to, "Yes, let's meet up", it matters. Because it adds up very quickly.
Do you start your day knowing that you have a prioritization for that day? Do you say: "This day I'm going to accomplish these things, in these three different buckets?”
Yes, that's right.
What do you do about things that just sort of hit you? Because sometimes as a VC there's things that just happen. Both with portfolio companies, and with new companies.
Every day in the morning I have a couple of things that I want to accomplish. Every single day. I really prioritize these things, and make sure they are going to happen. After that, my calendar is pretty much booked for the whole week, so I can review it all the time with my assistant. Then I don't leave something that I can do today for tomorrow. My dad was always giving me this advice growing up, "If you can do something today, do it. Otherwise you'll never do it.”
How many hours a day do you work?
It's a fair amount. It's 14 to 16. But it doesn't feel like work. It's a privilege to be doing what I'm doing. The only risk is for me is putting on a lot of weight over time. But other than that, it doesn't feel like real work.
Question from the audience: "Would you be open to partnering with the founders of a company that have a clearly disruptive consumer product or service, but that need to connect with a celebrity endorser to make it a household name?"
We've done it before as a firm. We invested in the owner's company, they had Jessica Alba as a core co-founder, and hired the CEO. It helps a lot with consumer goods and physical products. I think this concept was very novel three, four, five, six years ago. Now every consumer goods company has a number of celebrities, or if they're a media consumer company they can get hold of a ton of influencers through Instagram and other social outlets.
So, yes, I would be open, but it depends on the idea, the timing, and the market opportunity.
You mentioned Instagram, which recently was inspired by Snapchat to roll out a stories format. Some people in the audience may know this – Niko actually sourced and met Evan at Snapchat (co-founder CEO).
Could you tell us how you learned about Snapchat, first of all, and what inspired you to reach out? What kind of caught your attention about them back then? Also, how you did you get in front of the founders?
I cold emailed him. I heard about him from a couple of different people in my Stanford network. I was a year and a half out of school.
Just to clarify, does that mean that you knew people who knew him?
Yes I did, I knew a lot of people who knew him. Some of them said, "He has the most brilliant product design team at Stanford.” Some others said, "He's a guy who's a little bit hard to work with, because he's very opinionated.”
When I hear stuff like that, it gets me excited. Because when people make comments that are very passionate and emotional, it means that they care. That was half of the equation.
The other half was, people were either very excited or extremely dismissive about the product. That was like, "Wow, that hasn't happened to me in a while.” That people are very vocal, and care a lot about both the founder and the product. So I cold emailed him on LinkedIn, and he replied.
That's what I was curious about. Why not ask for a warm introduction from the people that you knew?
Sometimes I ask for a warm intro. Back then maybe I should have asked for a warm intro, because my hit rate wasn't that great. I was a year and a half in this industry. I don't know, sometimes it's easier to cold email others. I didn't think much about it then. He was a Stanford student, so I thought he would probably reply.
It sounds like part of it was about the founder himself having convictions and clearly being passionate. The other half was about the idea itself turning some people off.
Yes. Older people. His classmates were very dismissive. Because it came out of a class project that started in early 2012. What was interesting to me was that everyone wanted to build the fastest camera app out there, and he was obsessed with making communication on media and mobile much faster. He was obsessed with that.
The metrics were amazing. 20 percent of people were using it over 50 times a day. You don't see this very often, especially with a product that didn't have a single player use back then. You either use it to send snaps, or receive snaps. You couldn't do anything else, by yourself.
There wasn't a stories thing.
Nothing, no. Then the last thing is, he was obsessed with making people smile whenever they heard of Snapchat.
That's fascinating. Making sure people smile, that was a stated priority.
Stated priority, yeah. But of course it was very controversial in many ways. All the 14-year-old male minds, whenever they heard of Snapchat, were like, "Great for sexting." Which wasn't the case, because 80 percent of the users back then were women. Then the other side of it was: How could this ever monetize? They don't know anything about the user. They're not using the Facebook graph. Content disappears. How could it ever monetize?
That’s interesting, because it seems like the companies that go on to grow really large, and impact people's lives have little in common except this factor of polarization that you’re talking about. The ideas that are amazing can seem kind of dumb or silly to a lot of people in the beginning.
Yes. Dumb, or they annoy people. Or sometimes they sound stupid. They're like toys. I love that there's a theme. Any time I hear somebody who is very dismissive of a product, or laughs at the idea of it, or even feels insulted, I want to check it out. I want to talk to the creator.
That's interesting, because I think the lay person assumes that if everybody likes something, then it's probably good and if most people don't like something then it's probably not good.
You think of a restaurant on Yelp. If most of the ratings are five stars, then it’s likely good. It's almost like in venture capital, or startup investing, and just as an operator, you're not necessarily looking for the initial consensus views.
As an investor when you're meeting an entrepreneur then, do you find yourself having to actively disregard your own initial instincts, or impressions, and try to be more objective?
Yes, especially as I get older. My instincts are not those of the core native user, a teenage user or a young college student. What's going on in my head is, "What could this be?” Not that it's going to fail. That's the number one thing. The second thing is, operate on conviction. If everybody agrees that it's going to be great, at least from what we've learned in our firm, it's not going to be great. All the investments that we've made where all the partners were like, "It's going to be great. We cannot find a reason not to invest", all of them haven't worked out. We need some controversy.
I was speaking with Josh at First Run Capital. Similar data there.
Some firms have figured it out, and they're very consensus driven. We are not.
Another audience question: "Who is your favorite billionaire, and why?"
My favorite billionaire? I don't know. I don't have a lot of billionaire friends, but I know a lot of billionaires. The ones that I admire the most are the ones who have the most curious minds. They've very hungry, and they want to have a positive impact in the world. People like Warren Buffett, as well as the tech billionaires. Bill Gates, the Google folks, and Mark Zuckerberg.
It's amazing to meet people who have created so much wealth. They have an unbelievable network, and they have so much to do. But at the same time, in the case of Zuckerberg, he picked up Chinese, and now he's doing stuff in philanthropy. It's inspiring.
When I think about myself, and it's like, “Jeez, I don't have time to do something else, or to take care of myself,” I'm like, "How can a Fortune 500 CEO make the time for his friends, or to pick up Chinese?” People who can continue to push the envelope and grow as individuals inspire me.
This next question: “Have you done something recently that you're particularly proud of?”
Got married. Very proud of that, thank-you. My wife is amazing; she makes me a better person. That's probably the most recent thing.
Congratulations! Do you think getting married has changed in any way how you think about startup investing?
Everything that you do in life, especially as you mature, can help broaden your perspective. Or later on, hopefully when we have kids, it's going to open up whole new areas of the world that I have no idea about.
Next question: "What are your thoughts on the state of hyper local?" I assume that would include things like On-Demand. It seems like no one has nailed it, but users are definitely intrigued. What are your thoughts?
So many people have tried to do things in the space. The Yik Yaks of the world. Or the Ubers of the world. Some of them that have a transaction model, or got started 20 years ago like Craigslist, have built really good businesses. On the media front, there are a shipload of dead bodies, of local news, or hyper-local media and networking products. I'm actually looking into that space right now. I'm not looking at it as a space where one can create an end user destination that could be massive, but more like: "Hey we spend all of our time online now. There's all this data. But we've never felt more disillusioned about consuming the right ones at the right time".
You're referencing content?
Yes, content. You go on all these different products. Answering the question, "What's happening in the world around me right now?" and nobody has a good answer.
Such a basic question.
Such a basic question. It's like, if the New York Times were to be started today, or if Twitter were to be started today, how would they look? Especially knowing that it's really hard to become the end user destination. But you spend 10, 12 hours online, so anywhere that you are hanging out, can you find the best answer to that question? I think there could be a massive company built on that front.
The next question: As a startup investor, how do you mentally switch back and forth between investing in pre-revenue consumer companies, versus enterprise businesses, or other businesses where you actually are expecting to see that framework?
Fundamentally, we're in the business of backing the most ridiculously ambitious founders who want to build category-defining businesses. In essence, the metrics themselves don't matter a lot, especially if it's really early on. The good news is that we have a good team with functional experts for enterprise stuff. We have some amazing partners, like the former CDO of VMWare, and others who know these things. I can rely on their judgment, sometimes more than more.
This is related question: You're known for saying you enjoy investing in consumer products that people might perceive as crazy or funny. Can you defend that position from a business perspective?
Yes, I can definitely defend that, because some of the products that we're using now every day as consumers, back then they were viewed as silly. You look into Facebook, how it got started. Look into Snapchat, how it got started. They were toys. Nobody paid attention to them. Even in the early days of Facebook, the sales people who were calling to sell Facebook ads, they were saying, "Yeah, we're Friendster but for college students. Do you want to sell some ads?"
For sure, I can make the case, based on all of the previous successful examples of companies.
So kind of what you're saying is that it's about how we spend our time and what catches our attention?
Yes. In the beginning, something is controversial. But over time, you graduate from one type of controversy, and you become controversial for other groups. The whole idea is, how do you become mainstream? You use your controversy as a user acquisition strategy. Because it drives word of mouth, and as a result, free users. That's how I think about it.
So for consumer software companies, do you believe that it's acceptable for them to be, if they're in the social space, to be buying growth? Or should it be organic? For example, Snapchat sounds like it was organically growing.
Yeah. Snapchat is a communications product, right? It's inherently viral. In the early days you can buy a little bit of growth, but what you want is to see amazing, very intense engagement within certain populations. From there, if you find this incredible product market fit, you can go and buy some more. But the history of consumer internet investing is filled with false positives. Where founders start buying growth, it looks good for a little while, but then doesn't work out. It's hard to buy organic high quality engaged audiences. It's hard. Unless you know your product market fit.
Another audience question, on Snapchat’s announced Spectacles, the hardware product. Should software companies, if they feel that there's a complimentary hardware component—should they launch that at the seed stage? The A stage? The B stage? Should they wait until they have product market fit strongly on the software side before doing that? What are your thoughts?
It depends on the product, right? If they can monetize it immediately, if it's a brand new way of solving a problem, then you can get started from the beginning. It's become much cheaper now to actually design, fund, launch a hardware product than what it used to be. I was reading this really cool article the other day that said, "Kickstarter campaign owners, even before you actually make your product, there is a copycat that you can already buy in China". This is for all the successful Kickstarter campaigns.
What does this tell you? That in the consumer hardware world, what matters the most is incredible execution. Bringing products to market really quickly, and using capital efficiently.
So you think the defensibility is coming from more the network effects, and the software, actually, than the hardware?
Yeah, a lot of it is coming from that. The thing with hardware is, the cycles have become so much shorter. You can't sit and wait to maintain incredible success rates with your customers. Otherwise the next iteration of your product will come from another company and win a bunch of your customers. It's tricky to be on top of the game, designing new hardware, financing the new production, and selling it everywhere. It's really hard. It takes certain founders who are able to do that.
Yeah, hardware is hard.
Hardware is hard. That's what people say.
Anecdotally, I spent eight years of my life starting a hardware company, so I know that personally. It is quite difficult.
Next question: Given digital acquisition costs are rising – for example Facebook hiked prices on ads and paid posts around a year ago – how should startup founders think about structuring ad testing while rolling out a consumer product?
For starters, they should do a ton of A-B testing. Ruthlessly prioritize the budgets you are spending on a number of tests, and constantly iterate. Even if you have some early success, continue to test, because it may very well be a false positive. Frankly, of the capital we're investing in a consumer tech startup, 30, 40 percent of it is spent on marketing. This is also the capital that can always be better managed, and it never is.
Ruthlessly test again and again, and be disciplined about it. Nobody wants cheap growth. Unless you have access to capital, cheap growth is never a good idea.
Next question: Do you focus on a particular stage at General Catalyst? If so, could you share? For example, early seed where maybe it's more of the idea, late seed where it's still mostly an idea but there's some early traction and product market fit, series A, series B.
The good news is, we have a lot of capital. We have four billion dollars. The most recent fund is $850 million. We're not capital constrained, so we can write checks that range from a few hundred thousand to $50 million. The bulk of what we do is $2 million to $15 million.
I think of a lot of the activity that I generate, or companies I get excited about are series A, seed, and series B. I meet with 15 companies every week. Six of them are seed stage. Six of them are series A. Three, later state.
I know there's a lot of founders out there watching this. Do you usually find them? Or do they find you?
There is no dynamic, no pattern. But of course if any of our portfolio founders ask me to meet one of their friends, I'll do it.
Next question: What role do you see third party funding sites, such as FundersClub and others—and they all have their differences—having in helping to source deals in the future?
It's already happening more and more. You guys are very good in terms of sourcing opportunities, helping them with early funding. You have an interest in promoting these companies. I receive your emails, read them every week. It's like shopping for me, right? It's like going to the department store on demo day. Anything that's really cool, I ask for an intro, I reach out. For sure, it's going to be increasingly a bigger role, and that's great for the ecosystem.