Inside Benchmark Capital During Dotcom 1.0

People used to define themselves by their jobs. Today, we define ourselves by our investments. Instead of building the economy with labor, we build it with savvy, as we search for value, bravely face down risk and delay gratification for the sake of the ever-compounding future. Or at least that’s the theory.

The reality is day-traders stampeding from one rumor to the next, while the rest of us suckle complacently at our mutual fund cash cows. But one corner of the financial industry still upholds the heroic ideal of investment, writes Randall E. Stross in his engrossing book eBoys: The First Inside Account of Venture Capitalists at Work.

eBoys gives a fly-on-the-wall view of the workings of Benchmark Capital, a Silicon Valley venture capital partnership that finances Internet startups-including eBay, which grew from a $20 million pipsqueak to a $20 billion behemoth under Benchmark’s tutelage. The Benchmark partners present the very antithesis of the passive, absentee investor. More like management consultants with equity, Benchmarkers provide not just capital but expertise to the fledgling companies they invest in. They take seats on the board, develop business plans, recruit management teams, and nurse their charges through thick and thin.

Stross, the author of The Stubborn Earth: American Agriculturalists on Chinese Soil, 1898-1937, supplies a good analysis of the business considerations that govern Benchmark’s investment decisions. While some companies offer little more than those nebulous “e-solutions,” most are prosaic ventures to sell lumpen things like watches or groceries over the internet. Those that really seem to capture the market’s imagination are the ones-like eBay and Priceline-which, by letting you bid and haggle over your purchases, make consumerism seem participatory and authentic. As the venture capitalists try to figure out what exactly these companies do and how they will make money doing it, Stross gives clear and engaging insights into the fundamentals of management, finance, marketing and distribution.

The eBoys seem as far removed from the investor-as-speculative-parasite model as you can get; in an economy careening along on momentum, they are committed to fundamentals. Stross makes much of the blue-collar pedigree of Benchmark partners (one of them even went to the General Motors Institute in Flint of all places); he sees them as the vital link between the solid, bricks and mortar old economy and the weightless new economy. They want to build websites that will last as long as factories.

The glitzy, pornographic auction-house superstructure of the Internet is intrinsically interesting, but the nerdy, machine-code infrastructure is not, and Bunnell and Brate do little to make it livelier.

Their commitment to the long haul stands out in a Silicon Valley where you can sell a cocktail-napkin diagram for millions. Like their flagship venture stake, eBay, whose pony-tailed, socially conscious CEO Pierre Omidyar is pointedly contrasted with rival Amazon.com piranha Jeff Bezos, Benchmark seems less concerned with short-term profit than with building a community. They even practice a kind of “Communist Capitalism” in their partnership, sharing profits equally, regardless of seniority.

Still, the legacy of venture capital is a dubious one. Venture funds have posted stupendous returns during the past decade, but only by virtue of stock prices that are way out of whack by any coherent theory of valuation. Dependent on fat IPOs to recoup their investments in often unprofitable tech startups, venture capitalists rely on the kind of speculative frenzy that buries fundamentals under hype. The payoff to the economy as a whole is meager, since the capital-intensive tech startups they like to fund don’t provide much of a boost to employment.

While venture capitalists like to pose as champions of the visionary small businessman, Stross points out that they prefer to fund people who already have a track record as managers and CEOs. Often their first priority after investing in a company is to oust the eccentric visionaries who started it and recruit experienced corporate bureaucrats to run things. Venture capital, like other kinds of capital, is rarely on the side of the little guy.

eBoys: The First Inside Account of Venture Capitalists at Work by Randall E. Stross (Crown Business)