Peter Wendell: The Evolution of Venture Capital and Secular Tech Growth

Peter Wendell is the founder of Sierra Ventures, a Silicon Valley venture capital firm that has invested more than $2 billion over the past 35 years in a wide variety of successful technology companies. Peter has taught more than 2,000 Stanford MBAs over the past 30 years, specifically the very popular course Entrepreneurship and Venture Capital with Google CEO Eric Schmidt and Scott Kupor, managing partner of Andreessen Horowitz. He serves on the board of Merck. He just completed his trusteeship at Princeton. He was also chairman of the board for Princeton University Investment Company (PRINCO) for six years, during which time PRINCO doubled the University’s endowment. Peter has been recognized by Forbes magazine as one of the 100 best technology venture investors in the United States and named one of the 15 venture capitalists on Upside magazine’s “Elite 100” list of influential U.S. leaders in technology, finance, and business.

In this episode, Peter discusses the evolving nature of venture capital investing, the relationship between VCs and their LPs (limited partners), emerging phenomenon like SPACs and cryptocurrencies, whether we’re entering another great age of secular growth for technology, and his personal journey in starting Sierra Ventures.

Peter started Sierra Ventures as a young investor with some wealthy families’ money –– “they should’ve never given someone like me money to manage,” joked Peter. But it was the age where “it was hard to not make money in venture investing” –– every fund started in Peter’s time had returned money to LPs; not a single fund lost money, in contrast to around a fourth of all bond funds back then collapsing given the Asian financial crises. 

Peter bought 6% of stake in Intuit with a $2.5 million investment; now it’s a company with a market capitalization of around $145 billion –– you can do the math. This investment, along with many others, made Peter one of the most successful venture capitalists in the world over the last few decades. 

We ask Peter’s thoughts on more hedge funds getting more involved in early-stage venture investments. Hedge funds like Tiger Global and Coatue have taken a very different approach to venture investing: “be (very) aggressive in pre-empting good tech businesses; move (very) quickly through diligence & term sheet issuance; pay (very) high prices relative to historical norms and/or competitors; take a (very) lightweight approach to company involvement post-investment.” Is this a healthy development for the overall ecosystem? Is there where the future of venture investing is headed? 

We also ask Peter whether he sees us entering another period of great secular growth for technology. The sentiment amongst pro-tech, pro-growth investors seems to be that the hyper growth stocks (Snowflake, Coinbase, Shopify, Docusign, Twilio, Upstart, etc.) look expensive and many are currently unprofitable, but most have long runways, high margins, sticky customers, and steady revenues. If we value these companies on what they might look like 5 years from now, do most secular compounders still seem fairly valued? 

In response to that question, Peter thinks that valuation is frothy just by looking at the multiples. Sure, the next 5-10 years will be great for tech, but companies –– both public and private ones –– are still very expensive today. “It can be a great company, but the price level you buy in still matters a lot.” Peter explains his logic: Google was $85/share when it IPOed, and people thought it was expensive. Now Google’s stock price stands at around $2,600, and in hindsight everyone would’ve bought Google’s stock even though it was seen as expensive. However, Google wasn’t unreasonably expensive –– it was still in line with the multiple of Yahoo and many of its peers. In contrast, looking at some of today’s tech companies, Snowflake was trading at 75x forward revenue –– not EBITDA –– “it’s not impossible to justify that valuation, but everything will have to go perfectly in the next 5 years in order for that valuation to hold up.” 

Looking at the market environment today, Peter is very skeptical of the promises of SPACs. He said in his keynote address at Princeton GCEPS that the SPAC boom likely won’t end well because there is a lot of promotion, a lack of regulation, but fundamentally not that many great companies to acquire. 

The cynical (or perhaps realistic) view would be that the institutional investors and SPAC sponsors will still make a killing, and it’s only the average retail investor who will be hurt. It does seem to many that SPACs (and the ongoing buzzword trend of “democratization of finance”) still boils down to the century-old Wall Street business model of securitization that is ultimately about selling more products to individuals. The skeptical side in many sees the SPAC boom not as an opportunity for average Americans to be exposed to private market growth, but rather simply another way in which they get more access to credit and become more exposed to the swings of financial whims that will ultimately hurt the public good. What are Peter’s thoughts on this idea of “democratizing finance?” 

Peter thinks that cryptocurrency and blockchain technology are the future and certainly on the risk frontier, but we still don’t know which chain or project will eventually prevail, so the overall asset class is still a highly risky investment option. Last year, only around 6% of all VC money was invested into crypto, so it is still a relatively small percentage in the grand scheme of things. It is hard to say whether crypto is the new frontier of investment, but his friends at a16z are certainly raising money from big institutions just fine. 

A big proponent of SaaS (especially given how he’s one of the first investors that embraced this idea back in the early days), Peter also believes that we’re still at an early stage in exploring artificial intelligence and the good it could do for the world. 

Peter Wendell