VC Discusses His Many Hits, Plus One Miss

Back when Starbucks was just a startup, Steven Dietz’s firm invested in it and helped it grow. It also backed Costco, PetSmart, Office Depot, Zany Brainy, Egghead, a number of other well-known brands. In this interview you’ll hear how he co-founded his firm, GRP Partners, and some of the stories behind hit investments like DealerTrack and Zag.

You’ll also hear an open discussion about what went wrong at one of Steven’s misses, iMotors.

Steven Dietz

Steven Dietz

GRP Partners

Steven Dietz is a Partner and co-founder of GRP Partners, the venture capital firm whose portfolio has included Bill Me Later (acquired by eBay NASDAQ: EBAY), DealerTrack Holdings (NASDAQ: TRAK), Koral (acquired by Salesforce.com (NASDAQ: CRM).

 

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Full Interview Transcript

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Here’s the program.

Andrew Warner: Hi, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. Today’s guest is Steven Dietz. He’s a partner with GRP Partners, the venture capital firm that has backed over a dozen companies which have gone from inception to selling for over a billion dollars.

One of its most recent successes, which many of you are aware of, is Bill Me Later, which sold to eBay for a billion dollars.

GRP has also invested in a few startups whose founders have either been on Mixergy or will hopefully soon be on Mixergy, including Ad.ly. I know that Sean, the founder of that company, will be here, I think, in a week or two. RingRevenue has been on here, GumGum.

Welcome, Steven, to Mixergy.

Steven Dietz: Thank you. Happy to be here.

Andrew: So, Steven, I talked to Mark Suster, one of your partners at GRP, and he was telling me the history of GRP in preparation for this call. How it started out as a partnership between Carrefour and DLJ, where they were making investments together. This was before GRP was actually an organization on its own. Can you tell us about some of the early investments that were made by Carrefour and DLJ?

Steven: Sure. The way we got started, I was an investment banker at DLJ with another gentleman, and we would occasionally have companies come to us to raise money that were a little too small for DLJ. But if we liked the team enough and the business opportunity enough, we’d agree to raise capital on the belief that there’d be follow-on opportunities.

We found a very like-minded investor in Carrefour, which is the second largest retailer in the world. They were looking at the U.S. as a dynamic environment where they could learn things. And we started making investments together. We made a total of 13 over a period of about 12 years. In those 13 investments, Carrefour put up most of the money. Most of them were sourced by my partner and I at DLJ. And we generally took 20% positions. So we took 20% of Costco, PetSmart, Office Depot, Zany Brainy, Egghead, a number of other companies, all when they had about somewhere between five and eight locations. We had 6% of Starbucks also, when it probably had about six or seven locations.

It worked really well. Obviously, the companies turned out well. Both parties made a tremendous amount of money. And my now partner, Yves Sisteron, who was at Carrefour, and I both found that working with these young companies was the funnest part of our jobs.

Carrefour decided they did not want to make these strategic investments any longer, but we wanted to keep making investments. So, given how much money had been made by them, they gave us $50 million to create a fund. We went to DLJ and said, “This is what we want to do, and we’re looking at leaving to do it.” And DLJ said, “Don’t leave. Do it here and we’ll give you $50 million also.” And then Paul Allen from Microsoft, who’d been investing with us for a while, also gave us $35 million. So those three investors represented 90% of the first fund, which was GRP One we call it. We closed on that in 1996 and started making investments.

The thesis at the time was all the companies we’d funded were basically shortening distribution channels and delivering better value through those distribution channels to the customer. We looked at the Internet. I’d been playing on it since about 1992 when Paul got me interested in it. And said if the Internet ever gets adopted broadly, which in ’95 was still a question, the communication power is so strong, it could change the way goods and services are distributed.

So, that first fund’s mandate was retail and consumer businesses and Internet companies. And as things evolved, Internet isn’t necessarily a business that facilitates all businesses, and we’ve made changes accordingly.

Today, we’re about halfway through investing GRP3, which is a $200 million fund. We invest about 40% to 50%, I would expect, will be invested in financial services related businesses. Another 20% or so will be retail consumer businesses. Another roughly 20% will be in companies that are in the content area, mostly monotyping content. We’re not taking content creationist generally. And the last 10% are other things that we find interesting.

Andrew: Going back to the beginning, I understand DLJ’s interest in investing. I understand Paul Allen’s interest in investing. But Carrefour is a major retailer. I got a Carrefour just a few blocks here from my office in Buenos Aires. That’s where you go and get everything from coffee to shirts to shoes. What was their interest in investing?

Steven: Well, the companies that Carrefour invested in were all retailers, as I mentioned. Costco, Starbucks, Egghead, Office Depot. Carrefour’s probably got some of the best supply chain talent in the world. They really understand how to get products through a pipeline. What they were looking at in the U.S. was the dynamic retailing environment where they could learn things, where they could look at new approaches to distribution and marketing. And the way they wanted to do that was to have an ownership position in companies they thought were leaders or had the potential to become leaders and were driving change in retailing. A lot of those companies that I mentioned really did drive a lot of change in retailing in the late ’80s, early ’90s.

Andrew: Do you have an example of how a company like Starbucks, or one of the other portfolio companies, helped educate Carrefour, of what they were able to take back into their business?

Steven: Yeah. Probably the best one would be Costco. It was a two-way street. Costco, when they started in business, it was really dry goods. Carrefour was one of the most experienced retailers in the world on fresh products. In that case, Carrefour really pushed Costco to start adding fresh products, mostly vegetables, produce, initially.

Andrew: Mm-hmm.

Steven: And then started pushing them on other products, predominantly meat. They put a butcher in the store. Costco took that further and started experimenting, really, with bakery products, and it worked very well. And Carrefour started incorporating some of the learning Costco had on bakery products.

Both companies had philosophies on real estate. Carrefour is a much larger store than Costco is. Although people here all find that hard to believe, because Costcos obviously are very large as well.

Carrefour learned a fair bit about merchandising in a smaller store environment, which is something they’ve used, that format, elsewhere in the world, not in France. So, learning went both ways.

Andrew: Was there any concern that maybe Carrefour as an investor would end up copying or otherwise taking away ideas and competing?

Steven: No. Carrefour didn’t have operations in the U.S. They tried in 1978. They opened two stores in Pennsylvania, in the Pittsburgh area I believe. Didn’t really work out for them. They concluded that they did not know how to merchandise and market in the U.S. So for them, Costco was a great way to learn about other approaches to merchandising and marketing. And they also, at the time, were pretty light in the UK.

No, there was never an issue with respect to store operations, merchandising, marketing, product supply. In fact, they cooperated well on all that. Ultimately, when Costco became large enough that they were investing internationally, one of the strong reasons Carrefour sold its position, after a 14-year holding period, was that there became competitive issues between the two companies on real estate internationally.

Andrew: Mm. You mentioned that you and Yves went off and launched GRP together. What are the strengths that each of you brought to the table?

Steven: It was Yves, myself, and another gentleman named Steve Lebow, who were founders of GRP.

Andrew: Mm-hmm.

Steven: I think any good team, different partners bring different things to the table. Yves has great interpersonal skills. He is always the good guy in discussions. He has a really good big-picture sense for what can be achieved in a company.

My partner Steve had really good deal sense. I tend to be quite analytical. I think we complemented each other pretty well.

Andrew: Okay. Do you have an example of how the three of you maybe worked together on a deal and used each of your strengths? I’m trying to get a vision and a picture of how you guys worked together.

Steven: You’re asking questions that go back a long time, and it’s probably easier to describe how we worked together as a team on a more recent transaction.

Andrew: Okay. Please.

Steven: Let me think of one. We had a company called UGO that Yves and I were investors in. This was about three, four years ago. Company was having challenges, advertising driven revenue model. When the market collapsed in 2001, that became a challenge. We continued to back the company. Yves and I were on the board. There was a fair bit of restructuring that had to be done with the capitalization. I think Yves and I took very complementary roles in getting that done. My role being to figure out structurally how to achieve it, mechanically getting the transaction done. Yves being the one more responsible for communicating with the other investors that if you don’t participate in this round of financing, it’s going to be dilutive. And doing that with a smile and having everybody feel good about a transaction that, for a lot of people, money would be lost.

Andrew: I see. One of the reasons, I was asking myself, “Why am I asking him how they work together?” I realized it’s because when I did research on you, it was very hard to find information about you. In fact, every time I put in your name and GRP Partners, you know who came up? Mark Suster. Mark Suster who’s out there everywhere. I can tell you what Mark Suster had for lunch today because if he didn’t tweet it out, somebody else, one of his fans would have tweeted it out.

Steven: Yep.

Andrew: Is it intentional that you’re intentionally not online? Or is it just not in your make, it’s not who you are? And by online, I mean put your personal side out.

Steven: Yeah. It’s certainly more the latter. In fact, that’s the case with Yves, Brian, and I. The three of us don’t tend to put ourselves out there on a personal level. One of the things we looked for when we brought Mark to GRP was somebody who complemented our skills. I think a good team has complementary people, and Mark does that very well with us.

Andrew: All right. Let’s talk a little bit about Mark Suster. Partially because I’m interested, and partially because if we talk about him, all his fans will end up tweeting out this interview, which can’t be bad for me or for you.

Steven: Okay.

Andrew: I read a blog post where he said that he got an early offer for his company which you backed. You wouldn’t stand to make that much money as a firm if he sold it that early. But he would’ve done really well. You could’ve said, “No, let’s hold off. Let’s wait until we can both do really well and take the risk with me, Mark.” But instead, he says, and he’s grateful to this day, that you said, “Let’s do it. Let’s make the sale.” Can you talk about that decision-making process?

Steven: I think it worked out pretty well in hindsight considering I got Mark again.

Andrew: [laughs]

Steven: At GRP. You look at businesses as entities that go through a life cycle. And there are times in people’s lives where decisions get made, you have a choice to make. Sometimes it’s between two good paths. Look at who else is affected by it.

That was the case with Koral. We had a business that was looking attractive. We had an offer that was reasonable for the stage of the business, for the length of time we had been invested. We invested in Mark and in Koral in that case because we thought the company had good long-term prospects. But it wasn’t going to be a company that would be worth a billion dollars one day. It was a company that would create a fair bit of value though. We had a CEO that said, “This is a good time to sell.” For the most part, if the CEO feels that way, it’s probably a good time to sell.

The style at GRP isn’t to run a portfolio company. That’s not what a VC, I believe, should be doing. Our job is to support our CEOs. In this case, we had a CEO who had a goal in mind. He was very transparent about it throughout the process even before we invested. The opportunity to sell the business came up a little earlier than any of us thought, and it worked out well.

Andrew: Was there any concern inside? Was there any pressure to keep him hanging on or maybe to bring somebody else in to grow the business? Or did you come to the same conclusion he did that this was the time?

Steven: Mark’s a pretty talented guy. I never would’ve considered, in a situation where the CEO thinks it’s the right time to sell, taking the position of no, it’s not.

Andrew: Really?

Steven: Yeah. That subject wouldn’t come up.

Andrew: Okay. All right. I’d love to push, but I don’t know enough about the deal or enough about the situation to know where to push, so.

Steven: Okay.

Andrew: I’ll take it there and then maybe I’ll have Mark on again and we’ll find out more about it. One of the things that I wanted to spend time with you on here is the auto industry. I know that you’ve got an interest there. I know that you’re especially interested in merging the Internet with the auto industry, and I’ve got a few companies here that you’ve personally backed. Why don’t we start with DealerTrack and get a sense of what your interest . . . in fact, why don’t we start with the industry as a whole? What’s the opportunity that you see here?

Steven: It’s a big industry . . .

Andrew: Mm-hmm.

Steven: . . . with a distribution channel that’s challenged. If you look at the cost of a car today, about 23% or so of the cost of a car is incurred after the completed vehicle comes out of the manufacturer’s line in distribution and marketing.

That’s a tremendous amount of money to spend. It’s partially a legacy of a supply chain, a distribution chain that was created 110 years ago by Henry Ford, when it took a long time to get a car from point A to point B. It took more time on the floor to get it sold, and Ford couldn’t afford to pick up, to cover the holding costs, which is called flooring, the costs of all that inventory while it was being shipped. So the franchise system was created to accommodate that.

I think any system that has that high a cost structure associated with it has opportunities. Auto is one. Frankly, alcoholic beverages is another, with mandated three-tier distribution. It’s silly and creates a tremendous amount of cost. Unfortunately, that one’s more regulated. I keep looking but I’m leery.

Those are the things about auto that are interesting. In the case of DealerTrack, what we had was a business where there was clearly a huge inefficiency in how customers financed their cars. Most people, 80% of cars are financed when the customer goes to the dealer and selects the vehicle. At the time, that was a very long process. From the time the finance and insurance manager met you until he actually could write you up would usually take about two hours, because he’s going through this process of pulling a credit report, taking that information and faxing it to the various lenders, having them approve the loan, get back to him, he needed a few back, figure out which loan he’s going to recommend to you. What DealerTrack did was to automate that whole process, take something that used to take 45 minutes to an hour and get it done in about 60 seconds.

They launched. We were the only financial investor in the company. The rest of the investors were the large banks that were the lenders to the dealers, and those banks were a great distribution channel. One of the things that we respect greatly in this company is the interest in traction . . .

Andrew: Is what? I’m sorry. Your headset just. . .

Steven: Companies that show traction on distribution.

Andrew: I see.

Steven: Where you can say, “Wow. The customers want this product.” Revenue model may not be proven yet, but having the uptake from the customers is a good start.

Andrew: Okay. How’d you meet the entrepreneur behind the company?

Steven: I tried to hire him to be CEO of one of my other companies about four years earlier. So I’d known him for a little while and then had the good fortune of running into him at a conference and talking about what he was working on.

Andrew: And that’s when he told you about the idea that eventually became DealerTrack?

Steven: Well, he was further along. DealerTrack was actually created inside of Chase Automotive, which is the largest prime auto lender in the country. Chase had already brought on three other banks, three or four other large banks, and they needed somebody to run the business. They had found Mark and hired him to come run the business. It had, the technology was built, the product had just launched about four or five, six weeks earlier, and they were looking for an investor. Not so much for the capital because between the various banks involved, there was plenty of capital. They wanted an investor who would bring something to the board room in terms of industry knowledge and independence, and we were pretty unique in that sense.

Andrew: Do you have an example of how you were able to bring your industry knowledge into the business to help shape it?

Steven: Yeah. Actually a pretty good one. We funded that company. My partners were all excited about it, as was I. Put our money in. Within a week after that, completely independently, a competitive joint venture was announced. So we had funded DealerTrack, and three other companies got together and decided, “Hey, we should be doing this.” And those three companies in the joint venture were DaimlerChrysler, Ford, and General Motors. Their joint venture was going to, basically, do what DealerTrack contemplated.

It was not a fun morning when I went in to my partners’ meeting and told my partners we just funded DealerTrack and it turns out there’s a competitor out there now. But we sat down with management, two senior people at management, a couple board members, and another friend who’s very knowledgeable in the auto industry, and spent two days just sort of gaming out what does this change in the market mean strategically. Ultimately reached a conclusion that there was an acquisition we had to do to maintain leadership in the industry. It was much earlier than we otherwise would have wanted to do the acquisition, but we figured out a way to do it. And I think, most importantly, GRP’s contribution, aside from pushing hard to do it, was figuring out a way to get it done such that the seller got what they wanted out of the transaction as well.

Andrew: What was that and how’d you do it?

Steven: Oh, that’s probably one of the VC trade secrets.

Andrew: [laughs] Maybe without talking about the details, can you tell us what it is that you were doing? Or maybe give us another example of a deal that you were able to put together.

I’m curious about what you do and I know that if we get together over a drink, or a coffee, I don’t know if you drink, I’d be able to hear some of the stories. But I also want to demystify the process. I know you bring more than money to the table. I know from hearing other people talk about how much they’ve gotten out of working with GRP, that there is much more than just having another body in the board room. I’m curious about that, and I thought maybe we could demystify it together here.

Steven: I don’t think there’s much mystery. We’re relatively sector focused, as I mentioned earlier.

Andrew: Mm-hmm.

Steven: I spend a lot of time, for example, in auto. My partner Brian spent a tremendous amount of time on financial services. I think having that sector focus, going to the conferences, the industry conferences not the VC or banker conferences, going to the industry conference, knowing a lot of people in the industry means that when we sit down with the CEO of one of our companies, we can have a conversation at a strategic level that can benefit the business.

We know who their competitors are. We knew them before we met the company. We understand the competitive dynamics. We know the other players in the industry as individuals. I think we’re able to bring that strategic perspective to our companies. It’s one where a CEO, who has his head down dealing with daily issues and also needing to deal with strategic issues, I think our strategic perspective brings a strong conversation to the party.

Andrew: Do you have another example of how you helped influence the business? One maybe where you can talk a little bit more in detail?

Steven: I try to think of things that stand out, but it’s actually, really, the day to day of what we do. I’m also trying to think of businesses where it’s far enough past that I don’t disclose any competitive issues. Let me come back to it.

Andrew: Okay. All right. By the way, do you drink? And if you do drink, would you have a more open conversation over a drink?

Steven: I enjoy wine and I’d be happy to have a more open conversation.

Andrew: Done it. Olivia, let’s get malbec here from Argentina, and we’ll take it up to Southern California. How is Southern California?

Steven: Perfect.

Andrew: It seems, perfect. That’s where I’m from. I haven’t been there in a few months. How is it? It seems to be growing. It seems to be growing as a startup community. It seems to be growing as a hub. It seems to be getting a lot of attention. What do you see having been there for so long?

Steven: It’s getting a lot of attention from a small number of people. I think the context of your question is from a venture perspective. Southern California’s represented about 8%, closer to 10% of all venture investments over the past 8, 10 years. So, certainly the statistics would not suggest that it’s become a more important market, but if you peel it back a little bit, historically a lot of the dollars invested in Southern California were going to life sciences.

The life sciences isn’t getting nearly as large a share. This is an industry that is cyclical. Different sectors of investment opportunity fade and then flare in terms of their appeal to investors. So while the life sciences is not seeing as much attention, the Internet-related businesses, to use the broadest category, social media-related businesses, content-related businesses have picked up a lot of that slack. So the gross number hasn’t changed but there’s been a large shift. As that shift has occurred, where the life sciences businesses tend to be further south, Orange County, San Diego, the media-related businesses all tend to be clustered around L.A., which is the content capital of the world. For somebody in L.A., the perception is, “Wow. There’s been a big shift.” I think from a slightly broader perspective, there hasn’t been a big shift in dollars. It’s been a sector shift.

That’s one of the things I was told when I started in the VC business a long time ago, by a gentleman who had been in it, at that point, for a long time and said, “As a venture investor, you can’t focus on a single sector because sooner or later that sector falls out of favor. And you’re stuck trying to capture the attention of investors in an out-of-favor sector and it’s challenging.” I think it’s an important part of a VC strategy. To be effective is to actually do business in enough sectors, have enough diversification that, even though one sector may fall out of favor for some period of time, you still got enough going on to have the business.

From our perspective, what we’ve seen is a pickup in the activity in the content-related businesses, the media-related businesses and of course finding reduction in the level of activity in the retail, particularly retail consumer-related businesses, which also goes through cycles.

Andrew: What’s the advantage for a consumer-related business, for a company like Zag to being in Southern California instead of maybe Northern California or any other city? Is there one?

Steven: I don’t think there’s any particular advantage to being in Southern California. I don’t think there’s an advantage, in fact, there may very well be a disadvantage to being in Northern California. What does the company require? If you have a national reach, which Zag, for example, does and built a national dealer network, customers don’t particularly care where you’re located. So it’s really what are the resources to execute your business? And ultimately, execution is key in any business.

In some cases, those resources are pretty clear. For advertising-related businesses, it helps tremendously to be in San Francisco, Chicago, or New York.

Andrew: Mm-hmm.

Steven: For an entertainment-related business, being in L.A. is certainly a big advantage. It’d be hard to, for a lot of the companies that are here in the media area, it’d be hard for them to do the same thing in Des Moines or Dallas.

For a company like Zag, there’s a fair bit of auto DNA in Los Angeles. There’s manufacturing facilities down here. There’s a lot of design facilities in Southern California. Fairly strong dealer presence, some very highly talented auto dealers here. I think being in L.A. helps in hiring people who have auto background. There’s very little auto industry presence in Northern California. So that’s a help for Zag.

Then there’s hiring the engineering talent. You can do that in each city.

Andrew: Mm-hmm.

Steven: Pricing’s a little different as between the two. Then there’s the rest of the team that you need to hire to make a business successful. I think you can find that talent in many places.

Andrew: All right. I want to move on to iMotors where there were a few setbacks. But before we even get into that, Mike B. in the audience is making a good point. He’s saying, “I want to get to know the human side of Steven.” So I thought maybe I’d ask you about what were you like in high school? What were your passions before you got into business?

Steven: I was a geek in high school and my passion was skiing. I grew up in Canada in a town called Calgary.

Andrew: Mm-hmm.

Steven: I lived up in Banff most of my time, and I probably skied 80 days a year.

Andrew: You can be a geek and ski? I thought once you ski or you’re engaged in any kind of sport, you’d be cool automatically.

Steven: Maybe down where you are.

Andrew: [laughs] Yeah. I was in New York. If you could do anything at all athletic, you weren’t considered a geek. So, I see.

Steven: That would include a walk in the park.

Andrew: [laughs] Yeah. I wasn’t even going to do that. I would sit in the park with a book. That’s the kind of geek that I was.

Steven: Okay.

Andrew: So were you into business then? Were you starting companies? Were you investing in the stock market on the side in preparation for one day when you’ll finally be out there in the world and have to take it on?

Steven: Yes, to all of that. My father was an entrepreneur, had a number of small businesses. So I grew up around it. When I was very young, I guess when I was 11, he took me to the bank to get a $300 loan to buy a snow blower. I had a route clearing snow and made a couple thousand dollars a year, starting when I was 11.

When I went to university, I started a publishing company with a friend. I always thought I was going to be an entrepreneur. And then I found out about this business called investment banking, and it sounded really exciting, a great way to learn, which it was. So I went off and did that for a while.

Andrew: What got you into investment banking?

Steven: It just was suited to what I was interested, analytically intensive, you learn about a lot of different industries. It was an opportunity for me to . . . it was a great first job, an opportunity to learn a lot. And I did it for a long time. I was with DLJ for 14 years.

Andrew: What was the publishing company that you started?

Steven: When I was at university, we had a business called Class Quotes. And we basically had a graduate student sit in on the large first and second year classes, take notes, type them up, had printing equipment, we’d print them, and then sell an annual subscription to the students in the school.

Andrew: [laughs]

Steven: I did that in Boulder and then at another school as well.

Andrew: Uh-huh.

Steven: When I left university, when I graduated, my partner and I had a difference of opinion with regard to the prospects for the business, perhaps coming back to your first question about Mark selling. I felt that it was time to sell the business. He thought it had a lot of growth ahead of it, so I sold my half of the business to him.

Andrew: And in retrospect did it have more growth?

Steven: I was right.

Andrew: You were right. [laughs] What size deal was that? That’s far enough in the past that we can talk about it.

Steven: Oh, that was a long time ago. The business was doing a couple hundred thousand dollars a year in revenues. And I sold it for, I don’t even remember now, probably $20,000.

Andrew: Okay. And you were still in school at the time?

Steven: Yeah.

Andrew: So I remember when I was in school, doing little businesses, I was looking for validation, and I was looking for something that would just express what the future was going to be like. Did it feel that way to you, that once you were able to actually bring in a few hundred thousand dollars that you were meant for something great? Something beyond the crafts classes that were forced on you?

Steven: Well, no, in that particular case, I felt that the business had probably peaked out. I don’t know what I was ever meant for. I think one of the fun things in life is you keep exploring and discovering that.

Andrew: Mm. Seems like you’re meant for this. You got a great track record here. You’ve got an interest. . . sorry? Yeah.

Steven: I love it. I tell my dad I get up in the morning and I can’t wait to come to work, and at the end of the day, I can’t wait to go home and see my family. It’s a pretty good way to lead life.

Andrew: Let’s talk about iMotors, which I hinted at earlier.

Steven: Okay.

Andrew: Okay. So huge, huge opportunity. I actually read a few older news stories about iMotors. It was just full of promise. I heard one analyst say, “We’re selling cars at about $20,000 a pop.” You’re talking about potential revenue that’s bigger than Amazon. I’m looking at that business, and it seems like it had a huge potential. But then in 2001, it shut down. Let’s talk about the history of it. Starting off, what was the opportunity that you saw?

Steven: That’s interesting because it comes back to your question of what we do in a business. We funded a company called Auto Choice, which was similar to CarMax, selling used cars, fixed price, reconditioned, in great shape, at a traditional retail facility. We had a CEO, guy named Adam Simms, who was great, really understood the car business, great at running a dealership, and very analytical.

He was noticing a trend with customers who’d come into our store. We had one store at the time. The trend was interesting. What he found was that if we were the first store a customer visited, he had about a 12% closing rate. If we were the second store a customer visited, he had about a 20% closing rate. If we were the third store the customer visited, he had about 70% closing rate.

The reason for that was pretty simple. When somebody goes out to buy a used car, they have in mind their dream car. They figured out what they want, they know the color, the make, the model, the color, the options. They go to a dealership, and the number of permutations that exist for any given vehicle are tremendous. In fact, the Ford F-150 can be configured in over 1.2 million configurations.

The likelihood of a customer going to a used car dealer with a couple hundred cars and actually finding what they want is infinitesimal. So they move on to the second dealer. And by the time they get to the third dealer and haven’t found exactly what they want, it’s very easy for that dealer to switch them to a car he has on the lot.

So Adam’s epiphany was the realization that there’s lots of cars that are out at auction, and if you could figure out what was at auction at any point in time, you could basically build to order the car. The customer would come in and he created what he called a “built to order” program where the customer who came in, if they didn’t find exactly the car they want on the lot, which they almost never did, and they were thinking of moving on, Adam would find out the car they want and Adam would tell them, “I can get you exactly that car, reconditioned. It’ll take 30 days and a $500 refundable deposit.”

When he did that, it changed significantly the dynamics of his business. The close rate on first, second visitors because those people would still leave the lot, but when they got to that second or third dealer, rather than settle, they’d come back to Adam and say, “Okay. Can you get me what I want because I can’t find it.”

My partner Yves is the one who really had the epiphany that that sounds very much like the way Dell used to, or still does, sell computers. You order it, and then they build it. We decided this might be something that could be done online. The real question is would people buy a used car online? Launched the business as iMotors. Was doing pretty well, had a little bit of a burn rate, a few hundred thousand dollars a month, nothing extreme, and customers were ramping up. We were getting that traction.

Then we were cursed by 1998, ’99, which was an environment where people were raising hundreds of millions of dollars. There were two competitors, including Cars Direct where Scott Painter, the CEO of one of my companies, was the founder, and Greenlight, each had raised $300 to $400 million pursuing mostly new car sales online. We said, “We need to do that. We can be a national business.” Told our CEO, the board directed the CEO to come up with a business plan to be national and to get there in 18 months. And he did.

He came back with a plan that required $300 million of capital to become a national business. Said he was confident he could execute on the plan. It seemed like an absurd amount of money. I think those were his exact words. But, we brilliant VCs at the board table, and there were four of us at the time, said, “No, no. You got to get big fast.”

It was really the board that killed that company. We directed the company that moved forward with the plan, raised $150, I think, $160 million for the first phase. The company was completely on plan and needed its second $150 million in 2001. The money wasn’t there, so we had to shut it down.

Andrew: Wow.

Steven: But that’s a company I would, knowing everything I know now, if I could go back in time and not make that one mistake about how fast we ramped, I would back the exact same guy on the exact same deal again.

Now, the world’s changed. You don’t need nearly as much money to do what iMotors was doing. Adam still does that at Toyota of Sunnyvale, which is the dealership he has. They’re the largest online retailer of Toyotas in the country, out of a small dealership in San Francisco. So he does it very efficiently on a small scale.

Andrew: The one dealer in San Francisco is the largest online?

Steven: Toyota of Sunnyvale. Yeah. Toyota of Sunnyvale is the largest online retailer of Toyotas.

Andrew: Oh, wow. Was there a way . . . how would you have grown it, looking back? Considering that all these other guys. . .

Steven: My answer today is probably different than what it would’ve been seven years ago. More organically, grown it on a regional basis. There was still a tremendous amount of cost that was incurred to get a handle on all the inventory, and today that’s all available online. But had that remained a regional business, starting in the Bay Area, which is where they did, expanding to Southern California, stayed in that area, the burn which was about $400,000 before we embarked on get big quick, it would’ve dropped within a year or so to be a break-even business, and it would’ve been able to grow organically.

Andrew: How did you feel at the time? Do you ever get so full of self-doubt that you wonder whether you’re in the right business? That you wonder how you’re going to come up with the great ideas the next day?

Steven: I don’t think it’s a VC’s job to come up with the great ideas. The day we do that, we’re becoming entrepreneurs. And coming up with ideas, frankly, isn’t a special talent. It’s executing on them that is. That’s a lot of what we look for in our management teams.

There were certainly periods of doubt in 2001, 2002, when a lot of companies, in ours and everybody’s portfolio, were running out of cash. There were no prospects for outsiders to fund them, and you had to look at your own resources and make decisions as to where limited dollars could be deployed. Those were the most challenging times I’ve had in this business.

Andrew: How did you feel at the time? And how did you get over it? I’ve had other venture capitalists here admit that they’ve woken up in the middle of the night with worry. I’ve had one personally tell me that, during the same period, he went through a self-improvement book to get his mind back on track.

Steven: I woke up all the time in the middle of the night.

Andrew: Mm-hmm.

Steven: That was fairly common. Worrying about decisions that had to be made. Got through it by working hard and making the decisions and moving forward.

Andrew: It never stopped you from continuing? Have you seen an entrepreneur who it stopped?

Steven: In that time?

Andrew: Mm-hmm.

Steven: Well, certainly a lot of them stopped because there was no more capital to move forward. There are certainly entrepreneurs I know, or people who have tried to be entrepreneurs, and who found that the stress of being the person making the decisions was not something they were cut out for and went back into a more traditional job. Whether they did that because they perceived shortcomings in themselves, or they needed money, most people need an income, and that was not an era where you could say, “Okay. This entrepreneurial adventure didn’t work in 2000. I’m going to start a new one in 2001.” Some people did it, but not a lot were able to, if they needed outside capital.

Andrew: Mm-hmm. What keeps you up more, or in your lifetime what’s kept you up more, business or family issues?

Steven: I’m blessed. I have not had family issues keep me awake.

Andrew: So it’s business? Business keeps you up. Still to this day?

Steven: Not as much as it used to.

Andrew: Why not?

Steven: We have a portfolio that’s in great shape.

Andrew: Mm-hmm.

Steven: When the portfolio’s doing well, companies are growing. They’re finding the talent they need. Those are the times to sleep well through the night.

Andrew: Is it also the newer guys? Is it Mark Suster’s job now to wake up in the middle of the night because he’s got the younger companies?

Steven: No.

Andrew: No.

Steven: It’s not Mark Suster’s job to wake up in the night.

Andrew: [laughs]

Steven: And if he starts doing that too often, or if any of us do, it’s because there’s problems and the job is to take risk, but not to the point where the problems are overwhelming.

Mark Suster’s job, and my job, and Yves and Brian’s are all the same. We have a venture capital fund that we need to find great teams, great opportunities, make decisions as to which ones we should support, where we bring the most value to the table, where we’re the most differentiated as an investor. Once we’ve invested in the company, do what we can to help the CEO. Use our resources, our relationships, our experience wherever we can to help the business grow.

The companies do face decisions. Some of them are perceived as the tough decisions of, “Do I let somebody go?” or “Can the business continue?” But tough decisions also come in a good way. “Do we put more capital at risk to develop a new product line?” “Should we take a strategic investor with all the goods and the challenges that a strategic investor brings?” I think Mark actually wrote a good piece on that. Those are decisions that have to be made as well. They’re strategic decisions that usually the CEO is looking for advice from his investors on.

But in terms of stage, most of the companies we fund, when our first money goes in, they’re pretty early. I know when I need to report to our investors and they ask questions. About 80% of the money GRP’s invested has gone into companies where our first dollar went in when they were very small, doing less than a couple million in revenues. Half our money’s in companies that were first funded when they were pre-revenue.

Andrew: Mm. Finally, I want to ask about Zag. You mentioned that Scott Painter was a competitor of yours back in the iMotors days. Today you’re backing him. What is Zag for people who aren’t familiar with it?

Steven: Zag basically runs auto-buying programs for large affinity groups like USAA, Capital One, American Express, number of others, about 40 different entities who have large groups of customers and have built trust with those customers. What Zag does is create an auto-buying program where Zag uses a network of about 2,500 auto dealers who’ve agreed to give very attractive up-front pricing on vehicles in exchange for having lead volume, transaction volume, directed to them.

What Zag does a very good job is holding the dealers accountable to great pricing. Zag developed a tool, an entity called TrueCar, which basically is unique in that it lets anybody, you can go on to truecar.com, and go in, put in the make, model of a car you want, a new car, the options, and it will tell you all the things you get elsewhere, what sticker is, what invoice is, dealer cost. But what it tells you that’s unique is what that actual vehicle that sold for the last 120 days in your market.

If you put in a car that’s reasonably common in Los Angeles, a Toyota Camry, you’ll see the last 400 transactions in this market and know exactly what people have paid. It’s all shown on a chart, in a distribution, and you can see, “Okay. The best quartile in terms of pricing, here’s the range they were at. Second quartile. . .” And you can actually go deeper and see every individual transaction.

It’s anonymous. You can’t see which dealer gave which deal. But you can certainly see what the pricings did, and armed with that information, go to the dealer and negotiate a great price. Zag uses that tool that it developed and makes it available broadly to help work with the dealers to find what really is a good or a great price on a car.

And then Zag connects the two, gets paid when the transaction occurs and gets paid by the dealer.

Andrew: What do you think it is about Scott as an entrepreneur that makes him so good? I know this sounds like a softball question, but I’m looking for a little insight into who he is, what’s made him who he is. I got to have him at some point here for an interview. But as a guy who’s watched him for so long, and who has an analytical mind, and who’s much more analytical than I am, I thought you might be able to give me more insight.

Steven: Scott attracts strong people. He’s charismatic, so he can attract strong people. Scott is a fantastic communicator. He can get his ideas across as effectively, perhaps more effectively, than almost anybody I know. He really has a missionary zeal to change the way cars are sold and make it a better experience for consumers. Most of the businesses he’s been involved with, and there’s a lot, have, one way or another, sought to make the auto buying experience a better one for the consumer.

Those are the talents he has.

Andrew: Do you have an example of how he’s convinced people? How he’s motivated people?

Steven: Probably the best example is that he started Cars Direct and auto dealers thought it was a terrible idea. And it’s now one of the largest lead sources for auto dealers. They’ve come around, said, “Oh, maybe it’s not so bad.”

With Zag, went to dealers with a much easier proposition. I’ll send leads to you and I’ll only charge you when you actually sell a car. But he was able to go back to the same group that he had been, early on had some challenges with, and convinced them to work with him again, and to sign 2,000 dealers in a matter of about a year and pull together a team that could do that.

With TrueCar, which is disclosing to the public the actual price at which vehicles are sold, he’s again had to work through with dealers something that, in many cases, the initial reaction of a dealer is, “I’m not sure I like the idea that my customer knows all this information.” The most progressive dealers have recognized the transparency. Ultimately, it’s a competitive weapon for them. And if their transparent and customers trust them, they probably can be more effective at selling vehicles. He’s been able to work with dealers and have them adopt that perspective.

Andrew: I heard a story about him and I’m going to get this a little bit wrong but I know that the message will be right. He talked to a group of students in Southern California and he asked them, “Okay. You guys all want to be entrepreneurs?” Sure. He said, “Stand up if you want to be an entrepreneur.” Most of them stand up apparently. Says, “How many of you are willing to use your credit cards to keep running your business?”

In fact, I’m a horrible storyteller, but the message is, he said, “If you’re not willing to, sit down.” And then he fired up the people who were willing to and tell them why they were going to be the right entrepreneurs. And he even persuaded the ones who sat down that they wanted to go follow him, that they wanted to be like him, that they wanted that kind of passion.

Now, I’ve got to get him on here to tell this story a little bit better. What I’m wondering, though, is, I understand the charisma like that. I understand firing people up like that gets them all motivated. But what I see usually is that missionaries end up getting slaughtered. They end up pursuing something without thinking about the business side of things. They end up going in a direction, refusing to adjust. What makes any missionary entrepreneur effective?

Steven: Judgment and leadership. It’s not just an entrepreneur who can be a missionary. You can be a missionary in lots of areas. A lot of people try new things. A smaller number succeed, and an even smaller number succeed on the scale that influences the lives of lots of people.

You can look at any of the companies that have gone on to really change, affect the economy, or certainly change the way people in their industry do business. Look at salesforce.com, which certainly has a leader who’s a missionary and full of zeal. Or any number of companies. What are the talents and abilities of the person who led that company? And why is that the one that succeeded? There’s lots of people who have tried to sell cars. Why is Zag the one having the success?

It’s a combination of having an idea that’s good. That’s the easy part. It’s understanding your industry well enough to figure out how to execute on the idea and then having the interpersonal skills to attract people who are as zealous as you are, who have the same drive to succeed and to prove something.

I think if you look at most of the technology companies, which your audience probably thinks about, that have created dramatic change, you’ll look and find a CEO who drove a culture, that said, “We can do this. It’s our mission to change this industry.”

Andrew: Do you have that? Or does GRP have that internally?

Steven: I don’t think so.

Andrew: No.

Steven: I look for it. I think my partners and I have the ability to see it, or to recognize it, and sometimes we’re wrong, and both ways. No, if ultimately I had that missionary zeal with respect to a specific industry, it’s probably what I would’ve gone off to do.

I think there’s another important component. If you’re looking at Scott, or again you can use the other companies in these examples, Scott also has industry knowledge. He knows enough about this industry that he has not just the zeal to change it, but he understands from experience and relationships what’s right, what’s wrong, and what’s realistically capable of being changed.

Somebody who decides they can change an industry because they think it’s messed up but hasn’t ever been in it, it’s probably not somebody I’d be excited about backing.

Andrew: What about, you said, ‘entrepreneurs who need to prove something.” Do you still need to prove something?

Steven: Me?

Andrew: Yes.

Steven: I’m not sure what I said about entrepreneurs who need to prove something other than perhaps a reference I made when you asked about entrepreneurs in 2001, who stuck with it, who really believed that what they were doing was right even though the first iteration didn’t work out. I do respect that. On the other hand, if the first iteration doesn’t work out, you’d better have learned a whole lot to be able to have a good reason for taking a second shot at it. In particular if you’re taking other people’s money to take a second crack at it.

I’m not sure how that question really applies to me when you ask me that.

Andrew: Oh. I meant, I think you were saying that entrepreneurs who have a vision for business or an industry and they want to prove that vision out. And I’m wondering if you do? I’m wondering what motivates you. We’re at the end of the conversation. So at this point I like to see, “Well, what’s behind all this? What’s driving all these actions?”

Steven: I said it earlier. I get up in the morning and I can’t wait to come in to work. I think it’s a lot fun to watch people, to help people who are passionate and smart and engaged, create things.

Andrew: Mm-hmm.

Steven: Ultimately, it’s the reason I decided being a VC was more fun than being a banker is that it took me closer to that creation process.

Andrew: Do you have an example of maybe, one last story I’d like to ask you about. One incident where you knew you’d done it. Where you look, maybe it was when you took DealerTrack public. Maybe it was when you saw some other hit and you said, “I can’t believe we were able to do this. This is one of the best days in my professional life.”

It can be this. If it’s this interview, feel free to say it. I’ll clip that. We’ll put it up on a testimonial page. But if it’s not, what is? What is it?

Steven: It’s the high point. I don’t think I have a single answer to what you’re describing. Because, perhaps, the only thing I can say I feel that way about is my life generally. I’m really happy with it. I’m happy with where I am and what I’ve done with my family, with the work I love.

Otherwise, a lot of what you’re describing is, is there a transaction that made me feel that way? And having spent as much time as I did as an investment banker and then with GRP having backed so many companies over the past 15, 16 years, this has been a lot of transactions. I felt great when DealerTrack went public, although we didn’t sell any stock. It’s a milestone that’s perhaps public acknowledgment that you’re on the right track, but it didn’t do anything economically for my investors or for myself and my partners. That came later when we said, “Okay. This is the right time to sell our stock.”

Transactions, whether it’s an IPO or the sale of a company or the funding of a company or shutting a company down, are all part of a process. I felt great when I shut iMotors down because the three months leading up to it were agonizing. What the challenges of shutting down a business that at the time employed over 1,000 people, was burning a staggering amount of money, could we fund it, couldn’t we. It was agonizing going through that process. So finally making the decision was huge. It wasn’t necessarily the decision I ever wanted to have to make, but making that decision was great.

I think it was equally great making the decision with the board to sell Bill Me Later to PayPal, and we got just shy of a billion dollars for that. That was great. Each of them, they’re transactions and it’s trying to make the best decision you can with the information available.

So, no, there isn’t one that stands out.

Andrew: Actually, I think that’s really insightful to hear you talk about both of those together. Sometimes saying, “I’m going to make a decision that this company isn’t working out.” It can be the most liberating and satisfying decision that you make in business. To hear you say it in the same breath and the same answer as your description of, what was it, Bill Me Later, you brought up, is really insightful to me.

Steven: Mm-hmm.

Andrew: All right.

Steven: Glad to be of help.

Andrew: I’m going to take that for now. As I said earlier in the interview, we’re going to have to get together over a malbec and I will ask you for insight and I’ll ask you for those hidden stories. I know every entrepreneur, every venture capitalist has a collection of stories that they won’t talk about publicly, but they will over a drink. They will quietly share those stories.

Don’t share it with Mark Suster. He’ll blog about it. He’s been getting a lot of traffic. If he’s got a story that can give him traffic, you never know. Sometimes you stare at that empty WordPress page, you got to fill it up with something. Give him your story and he might share it.

Steven: He writes well.

Andrew: He writes well, and I’m sure he wouldn’t share any of your stories. I’m grateful to him for giving me some help in putting the research together for this interview. I’m grateful to you for doing this interview. As I said, I know you’re not on Twitter . . .

Steven: My pleasure.

Andrew: . . . you’re not blogging every day, so I’m really grateful to you for doing this. I’m also very impressed that you’re able to make the Bluetooth headset work with your computer. I tried to do it for this computer, but haven’t been able to do it.

Steven: Yeah.

Andrew: There you go.

Steven: It’s a good tool. I like Skype.

Andrew: Right on. Me too. All right. It’s great meeting you.

Steven: Thanks very much.

Andrew: Thank you. And thank you all for watching. Bye guys.

This transcript brought to by www.SpeechPad.com.

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