June 18, 2020
This is the transcript of the first episode of MEDICI Studio’s new video interview series, “Weekend Wisdom: VCs Debunked & Demystified,” hosted by Aditya Khurjekar, CEO and Founder of MEDICI. Matt Harris from Bain Capital Ventures offers his insights on the ideal VC-Founder relationship.
Aditya Khurjekar: Welcome, everyone, to MEDICI Inner Circle Live. Thank you all for taking the time on the weekend, and thank you, Matt, for being here on a weekend. This is the first in this series. The idea here was to use our extra weekend time wisely, especially in these special times. We have a little more time to reflect, learn, and think about how we can get ready when things do get back to normal. I couldn’t be happier to start this series off than with Matt Harris of Bain Capital Ventures. Matt needs no introduction. I can say a lot about Matt, and Matt can say about himself, but I want to simply thank him and jump right in.
We are going to focus today’s conversation (and the series) on VC in FinTech. We will try to debunk and demystify some of the myths around venture capital in general. Just a quick destination check: if you’re looking for the latest research or trends or insights, we could’ve talked about it, but that’s not what we will talk about in this conversation. We will talk about leadership and the relationship between investors and founders. That is the focus. Let me start with an obvious question:
“Investors invest in people, not businesses.” Is that a cliché, or is that true?
Matt Harris: We find that to be true, and there are degrees of it. But, if you think about the platonic ideal of an early-stage venture capital investment, there isn’t much else to bet on other than the people.
In the way of economic traction, generally, one doesn't have a complete product. So, the choices are: you can bet on a market, or bet on a team. There are some firms that specialize in betting on markets, and those firms often acknowledge that they have to replace teams as they go. But our strategy has been to bet on teams, and we view it as somewhat of a failure if we have to make changes to the team along the way. Our hope when we make an early-stage investment is that we’ve got the team that can build this company with many additions to the team, of course, through to a multi-billion-dollar result.
Aditya Khurjekar: Is that more true in an earlier phase of the investment? You have seen a whole gamut of investments right from the seed stage back in your Village Ventures days all the way to now—late-stage investments. Is it more true in a certain phase or stage of the investment?
Matt Harris: We do think it’s more true at the early stage. We have a couple of ventures. We continue to do seed in the early stages. It’s about half of what we do. And half what we do is growth-equity-stage companies often with more than 10 million revenues and sometimes as much as 30 million in revenue. When you are meeting a founder who’s built a business to 30 million in revenue, the proof is kind of in the pudding at that point. You can acknowledge that she has a lot of positive attributes because just de-facto she’s built a meaningful business already, and there’s a lot of data in that. So, often at the growth stage, we spend much more time thinking about the business itself and leveraging our analytic toolkit to really understand its competitive positioning, the quality of its financials, the quality of its product, and the happiness of its customers—all the things that you can do diligence from the outside in. And, we are both willing to stipulate that the management team is high-quality in that they’ve demonstrated it. Let's say you have a company with 30 million in revenue, and it’s on its way to 50 or 70 or 90 million. Let’s assume you need to make changes to the management team hand-in-hand with the founder who frequently will come to the board and says, “I’m great up until 50 million in revenue, but we need to hire an executive who can take this from 50 to 500,” you can actually recruit that person. There are managers out there who know how to take a company from 50 to 500. That’s an act of executive leadership and management skills. So, you’ve got way more degrees of freedom when you’re trying to recruit somebody into a scale business than when you’re trying to swap out management—god forbid—with a million dollars in revenue, then the founder we find is just essential and usually irreplaceable.
Aditya Khurjekar: You’ve seen a founder start businesses and take them to that point where it’s obvious that it needs a manager who’s not the founder. How often is it that that decision is not mutual vs. it being a difficult conversation? Is that something that happens often?
Matt Harris: It hasn’t happened as much lately. The whole sector of entrepreneurial companies and the venture firms that serve them have matured in the past decade as the industry has scaled. That’s led to a couple of things.
One, on the part of investors: I have conversations not frequently, but inevitably with founders where the conversation is not, “Hey, buddy, we got to make a change here.” It’s “Hey, Sarah, I think I’m seeing signs that you’re losing the ability to manage this company fully, and here are the four or five data points. How are we going to address that? We can hire a CEO or president to solve some of the deficiencies that we are seeing. If you don’t have a coach already, you should have one.” I think almost all of our founders utilize coaches, and we think that’s essential. But the dialogue from the venture capital side is much more consultative. It’s just “Hey, here are some of the objective facts that we’re looking at where the company has missed budget, the company’s NPS score is dipping, and the team’s morale is struggling in these areas. How do we address them?”
Founders are more mature about this as well. There are enough examples of founders from Bill Gates on down who realized at a certain point that they were much more interested in and useful and excellent at the founding stage than at the scaling stage. And there’s no shame in that. It used to be stigmatized, and now I think it’s celebrated to have a founder raise their hand and say, “You know what? My work here is not done, but my contributions are much more leveraged as a chairman or a board member,” or “I’m going to start my next thing.”
I think it's an incredibly stressful topic, but it's way more constructive at this phase of the game in our asset class's evolution and our industry. The final thing I’ll say is we (I back a couple of ventures prevalent throughout the industry) really look to back founders where possible, where we think, and they think, they can go the distance.
I have been doing this for 25 years. In the first 5 or 10 years of my career, it was pretty common that you’d have founders who were, for instance, technical founders without any management experience who were just not going to develop it on the job. So you’d have lots and lots of hard conversations. Now, that’s not to take nothing away from technical founders. Technical founders are behind many of our greatest companies. But we have fewer conversations.
I would say it’s rare to have these challenging conversations happen at Bain Capital Ventures.
Aditya Khurjekar: I think that’s a healthy sign. We have moved away from founders with big personalities.
Matt Harris: This topic is often overlooked. Founders bring unique things to the table. What we found is when you replace a founder, you lose something. You lose the extra motivation; you lose a spark, and you lose the thing that many of the employees were there for. You lose some element of courage really—the courage to reinvent the company often is something the founder has because they took that initial risk, and a hired-gun executive might not have that quality. I think there’s more than just politeness that keeps us from wanting to replace founders. It’s like this commercial instinct we have. Founders bring you a unique set of attributes to the table—that spark is irreplaceable. Now you can bring lots of other things when you bring on somebody who’s scaled a business before, but it’s always about pros and cons; something is always lost in that transition.
Aditya Khurjekar: Is it easier for you now to attract the best founders to invest in compared to 25 years ago? Do you think it makes a big difference for you as an investor?
Matt Harris: I think it does. In a nutshell, I started Bain Capital in 1995, and then in 2000, I started a firm called Village Ventures with my partner, Bo Peabody. For 12 years, I ran that firm and then eight years ago, came back to Bain capital. That transition would definitely put some wind into my sails as an investor—not just into the brand of Bain Capital but the platform of Bain Capital.
When I sit with a founder in a competitive situation and talk through what they get, what our value proposition is—a 100-billion-dollar asset management firm with a global presence and 200 multi-billion dollar companies that we own who could be customers—it’s a more constructive conversation than, “Hey, I’m here from Village Ventures. It’s like Bo, me, and my golden retriever. And we’re here to help.”
So I think there are three things that founders are really buying when they buy our product. One is domain expertise—I have 20 years in the saddle doing nothing with FinTech. And not everybody who wants that. There are plenty of founders who are like “Look, I can hire domain expertise. I can bring on an independent director who’s a payments nerd. I don’t need an investor who is one.” But a lot of founders like going to board meetings and having an investor who doesn’t have to be reminded what interchange means and all that stuff.
The second thing they’re buying is the interpersonal relationship.
Aditya Khurjekar: That’s almost like a marriage, right? I mean, you have to make it work. Is there a playbook for the ideal “marriage”? You probably have to figure out as you go, right?
Matt Harris: Yeah, I’ve got 10 “marriages” going right now. Ten different founders, and in every situation, it's fundamentally different. And then, more importantly, the psychological makeup of that founder. I think that’s what founders need to really evaluate the investors when they’re picking them. You have the domain expertise or lack thereof. You have the platform and the brand where the investor is sitting. And then, you have the person, and you need to do your work on that.
There’s a lot of great people out there, and there are investment firms that just aren’t a fit for a given founder. So, it’s not just about whether a person is nice, or has good character, although these things are really important. But it’s also as you point out, like a marriage. It’s really about the fit. What are their proclivities? What are their habits? How do they communicate on what cadence? And do you like that?
Because unlike a marriage, you can’t just decide to get divorced. They have purchased the right to be on your board, and you’ve got to deal with that.
Aditya Khurjekar: I have heard founders complain and get frustrated, saying, “I feel like I’m working for my board. I feel like I need to educate them. They don’t get my business. I’m spending so much time just teaching them the basics. I wish I had more time to run the business than keep teaching my board members what this means.”
On the other hand, I have also seen founders pretty much give homework to their board members. Give them assignments. Get them to work for them. Who works for whom, Matt?
Matt Harris: Well, I think 99% of the time, the board works for the founder. Our view of venture capital is that we’re in a service industry, and the customer is the founder. There is that 1% of the time, or hopefully less where the board has to act and it’s governance capacity as the boss of the founder. But, much more generally, the board and the founder are working hand-in-hand and serving all shareholders. The founder is the conductor of that orchestra. The founder is the one who calls the shots about who does what and who can bring it, watch the table, and what those responsibilities need to be in that given moment.
So this phenomenon that you point out about expertise and knowing the business is very common. Now, part of it can be solved again by choosing an investor who has a focus on your area. So you aren’t responsible for providing them like all that background information over and over again. And hopefully, in an ideal case, they see some stuff that you don’t see because your heads down into business and maybe they’ve got a little more time to spend time with industry executives and be part of the MEDICI Inner Circle and inform themselves about what’s going on and help you come up to speed.
But I think founders need to have the swagger to understand board members: when governance demands it, they act as your boss. The rest of the time, you’re the conductor, and they’re the oboist. You need to direct the orchestra on how to serve all shareholders. And that requires you to be quite assertive, but not obnoxious.
Aditya Khurjekar: Is there an example from your experience of that 1% where there’s probably a teaching moment here that you will share with founders who are listening to us?
Matt Harris: So there’s that less than 1% where we’re talking about boards that need to remove founders, hopefully collaboratively, and sometimes, unfortunately, not. Again, I haven’t personally seen that in the last decade or more in terms of companies I work with. But, there’s a greater incidence of cases where boards and founders disagree on something important. I would say the most frequent examples, to make it crisp, concern senior team members.
Too many times to count, you have this dynamic when the founder hired somebody early on, frequently somebody who had to step up and for the first time, be the head of marketing or head of talent or chief revenue officer—that was their first time in that seat. The company was a million in revenue at that point. Now the company is 20 million in revenue or 50 million in revenue. That person is still in that seat, and the founder has an incredible loyalty to that person, not just because of interpersonal relationships but because they're the person getting them from a million to 50 million in revenue. Their whole experience with this individual is just an extraordinary achievement. There's gratitude & loyalty, and there's also the impression that this may be the best marketing person ever because of the founders' lived experience. That's the best marketing person they've ever seen. A lot of board members who've done this for a long time may have seen a company scale well past 50 million in revenue and may have the perspective, but they may not be the best marketing people. That's somebody who is awesome at 5 million but has no idea how to get from 50 to 500 million. Both of those are valid sets of beliefs and feelings.
The founder is correct that the person is owed a massive debt of gratitude and loyalty and is an extraordinary performer, but the board member is correct that the company’s not being well served by that person at this stage of the game, much less the next stage of the game. So those are some of the hard conversations where a board has to sit with a founder and say, “Look, we don’t control who your chief marketing officer is. You get to choose that. We don’t have any leverage.” Somebody once said to me that board members have no bullets, we only have bazookas. We can’t do anything about the small stuff, but there’s one thing we can do: performance manage the CEO and so as it relates to their direct reports. All we can do is give our opinion. One of the things we look for in a partner at Bain Capital Ventures is the ability to be influential because the job there is not power; the job there is influence. Convincing a founder with data, with persuasion, with examples by setting them up in conversation with other founders, and by introducing them to scale chief marketing officers, so they know what excellent looks like—that whole toolkit of influence to try to get founders to make hard decisions sooner rather than later is where a lot of the sort of tense moments come in between founders and boards.
Aditya Khurjekar: Right. I want to turn to the positives here, Matt. I have seen both the pros and cons of not having raised institution money for MEDICI. There are days when I feel like maybe I should have. We have a good maturation in the ecosystems, even in emerging markets, especially places like India, where you have seen the entire cycle of founders getting exits and then coming back into the investment world and becoming VCs is that a good thing? Does having been a founder automatically make you a better investor?
Matt Harris: I would say yes. Founding a company, raising venture capital, and dealing with venture capitalists on your board does make you a better venture capital investor. My sort of lightweight example of that is when I started Village Ventures, I had this in mind. So I created a board of venture capitalists who invested money in the firm and the fund. So Mark Donnelly from Bain Capital, Paul Maeder from Highland, and some legends in the industry were my board directors for eight years, and they kicked the hell out of me on every corner.
I think what you learned from that, most importantly, is empathy. Because nobody likes the lifelong investor: the Wharton grad who lives in a spreadsheet, thinks he or she is a god among men, never had to make payroll—that person is not that useful to a founder in my experience if they haven’t gone through the wringer of starting from scratch, having a board of venture capitalists, and dealing with those quarterly board meetings from the founder seat, not just the board member’s seat.
So, I think that empathy is something that you can only learn through hard experience, and I benefit from it. With regard to the other venture investors who I sit next to on boards, I can tell the difference between those who have done it and those who have not. Now, I would distinguish that from operating experience.
Operating experience can be a double-edged sword. There are plenty of former operators—founders or non-founders—that have an incredible depth of knowledge about whatever it is, whatever industry they operated in, and whatever discipline they came from. They can say things in board meetings that I could never say. “Well, when I scaled a company from one 100 to 300, here’s exactly the challenges I faced, and I lived through it.” I can’t say that because Village Ventures didn’t scale from 100 to 300.
So that’s a superpower. But it’s also, “You know what? You had one experience. Okay, for your company, to go from 100 to 300, this is what you faced. That may be relevant here or maybe not.” But, the problem is, for a lot of former operators-turned-investors, whatever they went through is canon. And because it’s their superpower, they lean on it way too much.
It’s like, “You know what? Let’s be a little more flexible here. Maybe in this particular case. Splitting the job of CTO into VPNs and architects is not a good idea, even though that’s what you did, and it worked for you. Maybe now, it’s not a good idea because the circumstances are incredibly different in this company.” So, I think the dogmatism that certain former operators-turned-investors bring to the table based on their relatively limited but deep experience will be really painful for founders.
I could say, “I’ve been on the board of 100 companies; about 30% of the time, this works and 70% of the time this works. Let’s look at the facts and circumstances and look at, in your particular case, what the right answer is for your company.” So, I think there’s plenty of operators who are open-minded, but the danger lies with the ones that believe that whatever they went through ends up being canonically the right answer.
Here’s the other thing: for bootstrapped companies that scale without outside investors, you know the product I’m selling is a bundle. It is a brand, and it is my service as an adviser to the company. It is my network, and it is my money. It’s like there's a set of things you get when you buy my product. You can also buy them separately.
You can buy the network through independent board members and advisors. You can buy guidance and oversight through independent directors. It’s hard to get the money separately. You can get it in debt and other things that you know, but you can disaggregate the venture product and get what you need. I talked to a lot of bootstrap founders who don’t need the money or have decided not to take it, and I always recommended them to think about what they’re giving up and then buy that separately. You don’t have to take it as a bundle if you don’t want to.
Aditya Khurjekar: I think you covered so much ground in the last seven minutes here. I think people should rewind and listen to this slowly. I met you for the first time in 2008 or something like that, and you’ve grown through the ecosystem and have become a pre-eminent VC investor, or rather FinTech investor. The world has changed a few times, and some things haven’t changed. I feel like something about you that hasn’t changed is just how thoughtful you are. Now, the fact that you have this radio voice made an attractive first taste for me. But, regarding the way you have always approached in a very thoughtful way of looking at things, is that a reflection of who you are? Is the brand of Matt Harris the same as the real Matt Harris, or are you an impulsive guy inside?
Matt Harris: I have six little kids, and I was just wrangling them all by myself, and I think they might say there’s another Matt Harris that they occasionally get to see who is short-tempered and impulsive.
I’ll give you a little anecdote since you mentioned the “radio voice.” My older brother is a TV personality who hosts Good Morning America at ABC. He became a Buddhist seven or eight years ago, and he now spends a big chunk of his time running a company called “10% Happier.” And, for him, mindfulness and, in particular, meditation an hour a day is a necessary thing to separate himself from the emotional turmoil that, frankly, everyone deals with. My read on that is I’ve been very lucky in that score. I do meditate, but I was sort of born with this ability to observe my own emotions. You know, I’m doing this with you, Aditya. There are a lot of people watching, and it gets recorded and lives forever. I need to be thoughtful about how I come across. But I can see the nervousness in my head. I can see that little worm of nervousness, and I can tell it to behave, and I can carry on without letting that nervousness dominate my effect or what I say or how I react. The same is true for emotions, like anger, jealousy, insecurity, and a lot of the emotions that played me just like everybody else.
I counsel founders on this topic of attachment. You know you’re incredibly attached to your company, its economic success, your employees, and all of these credibly loaded topics. You need to be, and you need to harness that as motivation. You also need to be able to separate yourself. You’ll be able to manage that attachment so that from time to time, you can be clinical and make really hard decisions that are more dispassionate and let you respond to things versus just reacting to things.
So, I think this is me. I'm less proud of other facets of me—moments when I am dominated by my attachments. But, I think that knowledge of the battle we’re all fighting gets you half the way there—just acknowledging that our brains aren’t our friends all the time. We need to think hard about how to control those emotions and not stifle them. But, just acknowledge them and then don’t let them be the boss.
Aditya Khurjekar: That’s really important. Thank you so much for sharing that candidly with us, Matt, because most people don’t come out of the typical box of what it is to be a VC. The human being inside is what is truly driving both the business from a founder’s perspective and the investment from the VC’s perspective. I think you said it so well. I appreciate you sharing that with us.
We are in difficult times. This is not an easy time to run a business. We all have to make hard decisions in our families, careers, as founders and CEOs. They have to make decisions about managing cash & employees and paying your bills. It is not an easy time.
I think what you just said, Matt, is something that would help us as we reflect on that ability for us to dissociate the objective as kind of “What is it that I need to do? What truly is the need of the hour?” as opposed to an Excel-driven business. I mean, we could talk forever. I want to end with something that we are doing for these tough times. Before I do that, and before I let you go, is there anything that you want to share with those watching (and those who will watch this in the future)? Is there something that I might not have asked you that you want to share with us?
Matt Harris: Yes, there are two sayings. They may be trite because they’re sayings. But they’re incredibly meaningful and worth studying. Firstly, one of my favorite books is Dune. I’m a science fiction nerd, like probably many of you. This right now, in particular, I feel like reminding all of my founders that fear is the mind-killer because you can’t help but be afraid right now. You’re not just afraid for your business; you’re afraid for your health, your family’s health, the state of the world & our society, and how divided we are. There’s a long list of things that biologically are going to produce fear in us. You need to be able to reset, put that fear aside, acknowledge it, and not let it dominate your thinking. You may have to make really hard decisions because you anticipate really negative things, but that's different from being afraid of those things, and acknowledging those things as truths and highly probable outcomes is important. That’s just good management and good leadership, but don’t let yourself be afraid if you can.
Secondly, this is a goofy expression, but it’s valuable: “No news is bad news. The bad news is good news. And the good news is no news.” If you think about my seat, I sit around and wait for the founders to get in touch with me. Because the last thing the founders need is for me to harass them “Hey, what’s going on? What’s happening? What’s happening with this? What’s happening with that?” So, I generally let founders set that cadence, and this is what goes through my head. When I don’t hear from them, I have too much bad news. No news is always bad news if they’re quiet. If they give me bad news, that’s fantastic. It’s like, “Okay, great. We’ve identified the problem. Let’s solve it. Let’s nail this thing. We now know what the issue is. That is 70% of the battle. That is good news. Thank you for sharing that bad news with me. Let’s figure it out.” And then, when they call me with good news, I’m just sort of like, “Okay, we get through this.” Like, “I’m sure good things are happening, I don’t need to know that.”
“I’m here for the bad news. I’m the bad news guy. I’m here to help you solve problems. Do you want to celebrate with me? That’s fine. You can do that, but let’s get through that and then let’s talk about our problems because that’s my job.”
So, as a founder, like you don’t know when to communicate, you don’t always know how to communicate. Just try to remember that, that’s what your investors are thinking about.
Aditya Khurjekar: I truly feel that I’m a little bit wiser after the last 30 minutes. Thank you again for sharing your thoughts, and thank you, everybody, for listening to our Weekend Wisdom series. Matt Harris of Bain Capital Ventures, I really appreciate you doing this. I want to end with just a quick pitch for a COVID19 fund that we have launched. All of us are fortunate here to have these conversations and to work from home. We can afford to think about the future we have hoped for when things get back to normal; many people do not have this hope. So we, as small as we might be, are committed to serving the communities in the markets we play in. We are collecting donations. We will be contributing 100% of the donations that come in towards solo and small volunteers who are doing some good work on the ground. So, please take a moment: goMEDICI.com/donate.
Once again, thank you, Matt, and thank you, everybody. This is MEDICI Inner Circle Live.
Watch the video interview on MEDICI Studio here.