#61 An Insider’s Perspective on Venture Capital: Sierra Ventures Founder and Advisor Peter Wendell

What this episode is about

The discussion provides an insider's perspective on venture capital through insights from Peter Wendell, founder of Sierra Ventures, emphasizing the high-risk, long-term nature of the investment and the challenges startups face in securing funding. Wendell explains that venture capital is crucial for companies unable to access traditional financing, with investments often taking seven to eight years to yield returns through liquidity events like IPOs or sales.

Key takeaways

• In venture capital, dreams ride on high-risk investments; excitement must chase fear for success.
• Unicorns aren’t mythical; they’re built on audacity and scaling ideas, not just backgrounds or resumes.
• While founders matter, 'the horse'—the big idea—often carries more weight than 'the jockey'—the entrepreneur.
• Pitching is less about the idea and more about igniting the capitalists' greedy fires over their fears.
• In a sea of pitches, only audacious ideas attract institutional money; mediocrity won’t inspire a million-dollar bet.

Who speaks in this episode?

• Lynn Tomman (Host) · 10 min speaking
• Peter Wendell (Guest) · 24 min speaking

What is discussed, and when

1. 0:00 – 5:00: Pete Wendle, Sierra Ventures
2. 10:00 – 15:00: Harvard Business School, Tom Eisenman

Notable quotes from "#61 An Insider’s Perspective on Venture Capital: Sierra Ventures Founder and Advisor Peter Wendell"

• And Columbia Lynn tomman hi everyone it's Lyn toen welcome to another episode today I'm excited to be here with Pete wendle he founded Sierra Ventures a leading Silicon Valley…

  about Pete Wendle · at 0:21

• Book that we just used in our course this year I'm not plugging this royalties it's called why startups fail it's by Tom Eisenman at Harvard Business School he did a very…

  about Tom Eisenman · at 11:55

Who and what is mentioned in this episode?

People

• Pete Wendle — Person · Main guest · 1 mention · first at 0:28
  Primary interview subject explaining what venture capital is, how VCs decide to invest, why startups fail, and what entrepreneurs should optimize for when raising money.
• Tom Eisenman — Person · Referenced expert · 1 mention · first at 11:59
  Cited as the author of a book used in Wendle’s Stanford course to explain empirically grounded reasons startups fail (timing, competition, scale, people).

Companies & orgs

• Sierra Ventures — Company · Venture capital firm · 1 mention · first at 0:31
  Pete Wendle founded Sierra Ventures, a leading Silicon Valley venture capital firm, central to the discussion on venture capital.
  Tomman hi everyone it's Lyn toen welcome to another episode today I'm excited to be here with Pete wendle he founded Sierra Ventures a leading Silicon Valley venture capital…
• Harvard Business School — Company · Educational institution · 1 mention · first at 12:02
  Referenced in the context of a book by Tom Eisenman on why startups fail, used in their course.
  Book that we just used in our course this year I'm not plugging this royalties it's called why startups fail it's by Tom Eisenman at Harvard Business School he did a very…

Full transcript with timestamps

0:00 welcome to the three takeaways podcast which features short memorable conversations with the world's best thinkers Business Leaders writers politicians scientists and other newsmakers each episode ends with the three key takeaways that person has learned over their lives and their careers and now your host and board member of schools at Harvard Princeton and Columbia Lynn tomman hi everyone it's Lyn toen welcome to another episode today I'm excited to be here with Pete wendle he founded Sierra Ventures a leading Silicon Valley venture capital firm and serves as a board member of MC he is also served as chair of the board of prco which manages Princeton University's endowment he co- tees a course on venture capital and Entrepreneurship at Stanford with former Google CEO Eric Schmidt I'm excited to get an inside perspective on venture capital and find out how easy it is for startups to get funding and grow to

0:58 become unicorns that is to become a startup valued at over a billion dollars unicorns used to be rare but now there seem to be a veritable heard of them Pete welcome and thanks so much for our conversation today it's a privilege to be here Pete let's start with a very basic question what is Venture Capital venture capital is a high-risk long-term Equity investment in a company so let's par those words it's high risk because most of the companies or entrepreneurs that get Venture Capital couldn't possibly just go to a bank and get it it's not an Enterprise that would qualify for traditional Capital so it's a high-risk Enterprise and it's a long-term investment typically because the average company that receives institutionally backed Venture Capital it would typically be seven or eight years before that company gets to some sort of liquidity event an IPO or a sale so this is not a stock you buy in the morning

2:07 and sell in the afternoon this is your in for the Long Haul and the last descriptor I had there was it's typically an equity investment that is you invest in the ownership of the company and the Venture Capital investor receives back for his or her money and ownership stake so their fate and the entrepreneurs fate are now linked for life if this has a good outcome everyone's going to get rich and if it has a bad outcome everyone's going to lose all their money or in the case of the entrepreneur his or her time so it's a high-risk long-term Equity investment so Pete you've been pitched thousands of times maybe even 10,000 times you turned down most pitches how does someone get you to back their startup what makes you say yes that's a great question with institutional venture capital and again I distinguish institutional that means it comes from a venture capital fund or a firm that does this professionally

3:11 rather than something that comes from some rich doctor up in Scarsdale who puts out $25,000 a year to someone who strikes his fancy but for institutional Venture Capital we do get pitched thousands of times thousands of times a year and the biggest thing that tends to separate wheat from CHF is the size and scale of the opportunity most people who are thinking of starting a business have given it some thought themselves their ideas have some viability they've talked to their girlfriend or their boyfriend they talk to their wife or their husband maybe they got some additional money from one of their relatives they're not totally insane when they walk in the door but the point of differentiation is that some people who seek institutional Venture Capital have a really big idea something that if it works and as we'll talk about often they don't work but if it works it can produce a great big company the kind of

4:15 unicorn that you alluded to in your opening comment because for Venture Capital firms they know have millions of dollars they have tens of millions hundreds of millions couple of venture firms even have billions of dollars of cash they have to put this cash out to ever make a return just because you invest it doesn't mean you'll make a return but if you don't invest it you'll never make a return so they have to invest large amounts of capital and they're only going to own part of the company for making this investment so if they're going to put tens of millions of dollars into a company and still only own part of the company and they're going to get a big return on their investment the company itself has to grow very large and the biggest point of differentiation between most deals that a venture firm funds and those they don't is they fund the ones where at least some of the partners at the firm

5:18 Are intrigued that there is a path there is a scenario to create a great big hunking success out of what they've just heard so when you pitch a capitalist it's all about getting him or her to really let their excitement and greed overcome their fear because you listen to any of these pictures you're gonna have a certain amount of fear that it's gonna Crash and Burn taking enough risk if you didn't but what the entrepreneur is trying to do to the Venture capitals is to get his or her greed their anxiousness for success to overcome the inherent fears and risks associated with any of these things it sounds like it's the idea that is the most important thing it's not the experience of the founder or the background of the founder well those things can certainly be important there's a big debate in the Venture Capital world we teach about this at Stanford about whether the winner of the race is the best horse or the best

6:27 jockey okay the horse is the idea it's the essence of what they're trying to do it's the concept it's what looks big and really interesting the jockey that's the men and women driving the horse that's the management a lot of venture capitalists are jockey betters they say I'm just gonna bet on great people because great people they find the oxygen in the room they find the Big Ideas they find the Unicorn I'm going to out source that to the management to do all that but a fair number of people in the Venture Capital business tend to bet on the horse they say listen give me a big idea that where the timing is right this could really be a hit and we'll get the right people to run it if the person who pitched me just didn't seem like they were going to take this the distance then so be it if it's as big an idea and as much of a success as I think it's going to be I'm a venture capitalist I got a big

7:31 Rolodex of entrepreneurs I teach at Stanford I've had two or three thousand former students I can get someone great to come in and run this just give me an opportunity that's Unstoppable and huge you mentioned eight years as the term of many of your Investments what is the relationship like between a venture capital firm and a startup that it funds first of all it's pretty enduring relationship if you're a startup founder as I'm sure many of your listeners are if they hire their accounting or audit firm and they don't like them they can fire them if they hire a law firm and they don't like the advice they got they just get rid of the law firm a venture capitalist is Scotch tape it's more like fly paper I mean they once you sell a venture capitalist a sliver of your company you're not getting rid of them anytime soon okay so that's why I say hey this is a long-term relationship The Learning in that for the entrepreneur is

8:37 you don't want to think too transactionally when you're dealing with your venture capitalist because you may get the better deal in the first round of financing or you may get your way with regard to doing X or Y but you know what the Sun is going to come up and is going to set for seven or eight years on that relationship so you really want to think think in the long term so the first thing about the relationship between an entrepreneur and a venture capitalist is that they tend to be long-term and enduring secondly they're really symbiotic they both need the other and hopefully they're quite synergistic a good Venture Capital firm has backed hundreds of companies a fair number that have become big successes the mere fact that that Venture Capital firm would invest in The Venture is a certain impr promada on the Venture itself then what comes with the investment is a partner and a team from

9:38 the Venture firm who helps the entrepreneur be successful make no mistake The Venture capitalists are the stage hands the entrepreneurs of the actors our job as a mentor capitalist feed them the line when they're about to miss it get them a contact with this firm find them another in for the next round get them their first big customer Venture capitalists are here to help and support they also typically have a governance role usually the lead venture capitalist will serve on the entrepreneurs board of directors so there's somewhat of a formal governance relationship too but mainly the best relationships are those where the entrepreneurs and their Venture backers are in the trenches together building value over a long period of time so that they share in a mutual success about what percent of companies The Venture capitalists invest in make money the short answer is pretty low the academic studies that have been done

10:45 across a wide number of venture firms over wide periods of time suggests that most institutional Venture firms make 90% or more of their return on about 12 to 15% of their Investments now I should tell you my wife constantly counsels me to just do those deals and to come home for lunch every day unfortunately you don't know when you're doing them which bucket they're going to fall in but the direct answer to your question Lynn is that it's a reasonably small percentage probably in the teens somewhere that produces the vast majority of any profit for the 80 to 85% or so of the startups that fail what are the most common reasons that they fail again if you look at the academic literature which has polls of venture capitalists about why their companies fail what do you think the Venture capitalists say they say oh it's because of the management right but actually I don't think that's true I

11:53 think failures and there's a great new book that we just used in our course this year I'm not plugging this royalties it's called why startups fail it's by Tom Eisenman at Harvard Business School he did a very systematic set of returns and came up with far more interesting answers than than Venture Capital Sy the management didn't do a good job first of all there's the issue of timing some companies that we back are too early I mean they have a great idea but how many artificial intelligence companies were back 20 years ago when AI was a glint in the eye and they turned through a lot of money how many robotics companies were backed in the 80s and the 90s when robotics was still too primitive to really be effectively commercialized so sometimes they're too early sometimes they're too late how many AI companies are there now hundreds does the world really need 102nd AI company so first of all it's

12:53 getting the timing right not too early not too late another important contributor to things not going well is how the competitive landscape rolls out some opportunities are best pursued by great big companies because they already have a customer base they have the Salesforce they have the resources so often when we look at an entrepreneur pitching us we say does that person have an interesting company or do they have an interesting product they're coming to us with an interesting idea but this is really going to be a product in the Proctor and Gamble product line or in the Google set of offering so some things are very interesting but goes back to this notion not being big enough as a platform to build a big success around they're more Niche products and not big platform ideas the men and women involved do play a role we've all had Executives that we've worked with or for or have worked for us where they just

13:59 were in a good fit and a lot of people in life are in a good fit but usually it's the ability to correct all that quickly so you hang with management that's not doing so well quickly and had you Chang the management these small entrepreneurial companies change goes very quickly and they have a limited time to catch their wave and ride it to shore so you can't mess around with hanging too long when the team isn't working or the people aren't working so people is a reason for failure on some occasions but often it has to do with the timing too early or too late trying to catch the wave often it has to do with the scale of opportunity and whether this would have been a good product in a big company rather than a standalone company itself and thirdly it does sometimes have to do with the men and women who are in management if only about 15% of Investments are profitable you must look for enormous Returns on

14:57 those Investments what kind of returns do Venture capitals look for on their Investments big and again 15% make the material profit that drives the fund if you actually do the accounting in the books probably more like 30 or 40% you make some profit but again this is an eight-year investment you put in $5 million and you get back six million you would have been better in US savings bonds know but I'm just saying it's a team percentage that materially moves the portfolio that accounts for 90% plus of the profit but that's not saying that some of the other ones aren't quote profitable Investments I just clarify that a little bit but as for your question of how big a return do you want the short answer is if you're doing early stage Venture Capital you have to see a credible scenario to make at least 10 times your money that's a floor okay now obviously do they all make 10 times their money no I

16:05 just told you Mo them don't make next to anything but for the ones that work you want to be able to hopefully make 20 30 50 times your money it's CR Ventures our early investment in into it came to be worth about 200 times what we paid for it our early investment in Terra data came worth gez something like a 100 times what we paid for so if things go right they have to really go right because remember for every 10 deals in the portfolio at least five are going to be wash outs you got three or four maybe you'll make a little bit and then you got two who are going to do all the heavy lifting so by definition if you're going to double your money in the fund when only two deals are going to do the work those two deals each have to make like 10x to get the money back and all that does is double your money which six or seven years doubling your money is interesting but not a reason that you would tie it up in Venture Capital wow

17:10 if you step back and look at overall Venture Capital industry returns compared for example to the NASDAQ which is the US stock index that is heavily weighted toward technology how do those returns compare well like anything it depends on the time period you look at but looking at long data sets over 20 30 years it it also depends which part of the Venture Capital industry you look at because while the NASDAQ is a singular index in Venture Capital there's a much wider dispersion of outcomes between the top quartile funds and the rest of the industry for example there was a 10-year period where the top quartile funds made all the money that was made in the Venture industry for 10 years was made by about a quarter of the funds because if you think of it given the fact that successes are few and far between but they're huge when they occur if those successes are spread somewhat unly across the better Venture firms then you

18:19 really don't look at just a run-of the house set of venture firms because there you would see that over again 203 year period if you just had a run-of the house set of venture firms and you compare it to the NASDAQ index there might be about a 300 or 400 basis point outperformance three or four percentage points which compounding over 20 30 years is not IM material but it's not usually exciting but if you look at the top quartile Venture funds and you obviously just keep the same top quartile forough you don't always substituting you do an honest sta iCal comparison and you keep a top quartile for 20 years that's going to perform the NASDAQ index by 10 whole percentage points thousand basis points 10 whole percentage points or more it's very material but those top Venture funds anybody just can't walk up and say they want to be an investor in those it's not lost on the rest of the world what it

19:24 means to be tied up with a good Venture fund so the short answer to your question is there is long-term outperformance in return for the liquidity of being a venture investor but you really have to work to get in the better part of the Venture industry because there's a lot of venture capital firms that you really wouldn't bother based on the returns interesting 2021 has had a record number of venture capital deals and startups valued at over a billion dollars so-called unicorns the unicorns used to be rare but now there seem to be a whole HD of them why is that are people smarter is it easier for startups to grow what's going on first of all 2021 has been a very big year for all types of venture investing so yes there is a lot more unicorns and yes there's a lot more money floating around but the overall velocity of Investments good bad and unicorns is up very substantially from two years ago which is a big

20:32 surprise I mean who would have thought during the pandemic but actually like everyone else in the World Venture capitalists have found a very efficient way to do their business over zoom and they've raised the velocity but as to your question of why this rapidly expanding huge herd of unicorns is here I think there's several factors one is that the valuation that investors in all asset categories are willing to pay not all but many asset categories has really risen like a helium balloon look at the Dow being at an all-time high the NASDAQ being at an all-time high so the valuation professional investors are paying for many assets is certainly an all-time Peak that helps create more unicorns secondly there's been a much greater concent rtion in how Venture capitalists have been investing for the last three or four years a lot of these markets are winner take all markets so when the venture capitalist

21:43 sees an existing Venture back company that's had two or three rounds of financing that's looking very promising that looks like it's going to be the winner in the field then the money pours in look at Uber as an example how many ride sharing services in a given city are you reasonably going to maybe you're going to have two or three or four but you're not going to have 20 different ride sharing apps on your phone the Winner's going to take 50% of the market the second play maybe take 30% of the market and then there'll be fragmentation a lot of these growing versioning Tech markets are winter take all markets so as soon as the Venture capitalists get a sense that a company is really moving along this isn't the first time the entrepreneur asks for Capital this is for the D round or the E round the so-called fear of missing out the fomo fear of missing out starts to overcome the venture capitalist and they

22:44 become less price sensitive and more just wanting to be in the deal I want that deal on our firms Marquee so one there's been a high flow of capital in general coming into VC for the last couple of years two most invested asset prices are at or near alltime highs three capital is getting more and more concentrated into fewer and fewer deals and the fear of missing out on a real winner has set aside the valuation discipline which was present for several decades what areas are hot right now a lot again the answer just because there's so much Venture investing going on but as I was alluding to earlier artificial intelligence and all things AI areas of great interest and areas of huge leverage because artificial intelligence is about machines learning making adjustments learning some more it has infinite leverage you don't need a lot of people you just need programing and so AI continues to attract a lot of

24:01 dollars obviously in the last 12 to 15 months when all of life sciences has gained much more interest historically across the professional Venture Spectrum Life Sciences were 15 maybe 18% of the dollars most of it was in technology software and other technology but now life science is more like 253 % and there's huge unmet medical needs in the world we saw some obviously in the last year or to with a covid vaccine but more generally conditions like obesity Alzheimer's there's these huge negative Health impacts that affect tens of millions of people and helping to solve cure or at least control some of those very large opport I alluded to robotics earlier robotics people think of a Detroit Factory and so forth but actually there's so many things that can be done robotically and not by humans and particularly as labor pools have really dried up and some people say well it's temporary dislocation because of the pandemic but

25:22 in my view a lot of people are reassessing what they were doing with their life and saying you know I'm not going to be be a bus boy for the next 30 Years in a restaurant or I really don't want to be a short order cook now I'm not sure either of those jobs can be instantly replaced by robots but I'm saying the economic interest in doing so has gotten higher as labor shortages look like they're not going to just be a feminal but they're going to be potentially permanent in many jobs so I think those are all areas where Venture capitalists are scratching around and what are you most excited about as you mentioned in the beginning I've been a long-term member of the board of directors of MC and I've seen what medical Innovation can do for customers and for the world I do think the strides in biotechnology in RNA I think we have very exciting times coming in the next 10 to 20 years in life science and I

26:26 just hope we all live long enough to benefit from we all just have to hang in there another 10 or 20 years but I'm very excited about the life sciences side of things and also generally in the Big Data space the world is generating exponentially more data every year and now with artificial intelligence you can mine that data you can have insights to it so things in the big data and where Big Data meets a I those are very interesting and exciting spaces to me Pete if I can ask what are the biggest mistakes you've made oh my goodness we don't have long enough on the podcast I don't believe that but I were to think of them categorically I think sometimes I didn't think big enough the best entrepreneurs think usually big and Venture capitalists can sometimes see them elves as the bumper rails and really the most effective Venture capitalists learn to think bigger and unconstrained one of the very famous

27:42 Venture capitalists who comes to our class at Stanford who will go on name has a quote every year where they say almost anyone that I've made a lot of money with almost any entrepreneur that was really successful they always seemed like they kind of had a screw loose there was a screw loose somewhere but you have to have tolerance for people who kind of have a screw loose somewhere look at and again these are famous people so I'm not trying to diminish in any way look at Steve Jobs interpersonal Behavior with many people look at Elon musk's Behavior with many people Elon and Steve were and are fantastically successful entrepreneurs but the venture capitalist who back them work on the guard rail Duty and you can mentally get yourself on guard rail Duty and in the entrepreneurial world you don't want to be that way you really want to think as expansively as the men and women that you're backing because that's how you'll

28:51 get the biggest results so interesting before I ask for the three takeaways like to leave the audience with today is there anything else you'd like to mention that you haven't already talked about did we leave anything out nothing other than both entrepreneurship and Venture Capital are really fun and fulfilling life experiences they're not without frustration a lot of things go wrong but it's always about the next biggest thing it's always about tomorrow it's always about what could go right and I hope those that listen listen to your podcast think about applying their skills in these fields because generally a lot of really interesting companies have been created that were not just profitable but they were game changers for a lot of humanity so I hope people will realize this is a really interesting area and again you're great to have me on your show today oh it's my pleasure Pete what

29:51 are the three takeaways that you'd like to leave the audience with well if I think about what we've just discussed I I think most of my takeaways would be directed toward your entrepreneurial audience because you probably have a lot more aspiring entrepreneurs and Venture capitalists who listen to this and I think one important takeaway is to really try to get yourself in relationship with financing sources and Venture Capital sources that can really be effective long-term Partners as you try to grow your company a lot of the Contemporary wisdom around Venture Capital comes from The Apprentice and these shows where someone says all right I'll give you a million dollars for 30% of your company and the other no I'll only give you 20% of the company for that and there's a lot of back and forth between the financing source and the entrepreneur about how much money should buy how much of the pie there's only

30:55 100% of the pie and what sliver is going to go to the money and what sliver is going to stay with the entrepreneur that's not the important thing the important thing is the entrepreneur getting in relationship with Venture Capital backers who can help them grow the pie so the pie gets so big over five or 10 years that it doesn't matter the exact angle you had because there's so many more square inches in your slice of pie because that pie got so big because you really got a great financial partner who had a lot of experience to help you build the business so the first takeaway is don't be too precise how you negotiate a deal because it's more about finding the right partner who you're going to be living with for a long time I think the second big takeaway for entrepreneurs is that they should be very cognizant of the dis symmetry of information between themselves as Entre R preneurs and the Venture Capital

32:00 backers they choose so when it comes time to do a deal and say all right how much money will buy what percent of the company and what are the terms and how many board seats are controlled by who that's going to be a negotiation that the venture capitalist has done tens of times or maybe even an old guy like me a hundred times All right so some entrepreneur he or she they're doing like their third financing ever there is a huge dis symmetry of information when Venture capitals and entrepreneurs do deals together and the smart entrepreneurs get help they get a law firm that does a lot of venture capital deals this is a specialty area of law you don't hire the lawyer who did your parents divorce I mean you get get a lawyer get a lawyer who who does a lot of these transactions and can even the dis symmetry because there's going to be a real experience dis symmetry between the knowledge of the entrepreneur and the knowledge of

33:02 the venture capitalist when it comes to doing Venture Capital transactions so the second key takeaway is get help when you first start to find a venture capitalist you like and you're trying to nail down or deal with them I think the third takeaway is just to try to keep things simple keep things simple in how you do your financing not too many bells and whistles and gee there's a special preferred term that if this happens then I get that but if that happens and I get the opportunity is over and they're still negotiating the deal just find a reputable trustworthy source of capital that's built a lot of other successes the entrepreneur should reference the venture capitalist as much as the venture capitalist is referencing the entrepreneur because of this fly paper sort of relationship they're GNA have and then just keep it prettyy simple and fundamental and focus on building your company not on the last bells and

34:05 whistles in some Financial deal that's for the first couple of million dollars a capital Pete this has been wonderful thank you so much um glad we had a chance to do this today and again it's an honor to be on the show thank you very much if you enjoy today's episode and would like to receive the show notes or get new Fresh weekly episodes be sure to sign up for our newsletter at 3 takeaway.com or follow us on Instagram Twitter and Facebook note that 3 takeaway.com is with the number three three is not spelled out see you soon at three takeaways tocom

Questions about this episode

Who speaks in "#61 An Insider’s Perspective on Venture Capital: Sierra Ventures Founder and Advisor Peter Wendell"?

Lynn Tomman (Host), Peter Wendell (Guest).

What is "#61 An Insider’s Perspective on Venture Capital: Sierra Ventures Founder and Advisor Peter Wendell" about?

The discussion provides an insider's perspective on venture capital through insights from Peter Wendell, founder of Sierra Ventures, emphasizing the high-risk, long-term nature of the investment and the challenges startups face in securing funding. Wendell explains that venture capital is crucial for companies unable to access traditional financing, with investments often taking seven to eight…

What is mentioned in this 3 Takeaways episode?

4 people, works and ideas are mentioned, including Pete Wendle, Sierra Ventures, Tom Eisenman, Harvard Business School. Each one on this page links to its own page with every episode that mentions it.

How long is "#61 An Insider’s Perspective on Venture Capital: Sierra Ventures Founder and Advisor Peter Wendell"?

The episode runs 35 min; the transcript is about 5,330 words in 32 timestamped sections.

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