Josh Stein has been an investor for the past 16 years, joining the firm DFJ as a young operator, rising through its ranks, and ultimately, along with fellow managing director Emily Melton, becoming the most senior member of the firm, which was last year renamed Threshold Ventures.
Stein, a Box board member for the past 14 years, has always focused primarily on enterprise companies and helps out with a number of companies at Threshold, including Doximity (an online networking service for medical professionals), Rippling (HR) and Front (which makes tools for sharing inboxes with teammates), among others.
When we caught up with Stein this week, we wanted to talk more broadly about the venture industry, four months after much of the U.S. shut down due to the pandemic. We zipped through everything from his current investing pace to a possible liquidity crunch to the zany public markets. Our chat has been edited lightly.
TechCrunch: A lot of very nascent companies are getting funded. Is that because, whether or not VCs have met the founders, they see seed-stage startups as lower risk?
Josh Stein: It’s a trap, thinking that smaller checks are lower risk. They still require a lot of time — even more in some cases.
We’re four months into this pandemic in the U.S. Do you think the impacts of COVID are becoming clearer?
What froze up a lot people was not knowing how businesses would be impacted. If a company had been making sequential progress, you projected those trends forward, but COVID was such a disruption that [suddenly those projections were irrelevant]. We have a company that’s going after the home construction space in the same way that Redfin is going after real estate agents, and that industry shut down; you had to adapt to that. On the other hand, it feels almost distasteful to say, but some have been impacted in a very positive way. Demand for [the remote customer service portfolio company] TalkDesk [in our portfolio] has been off the hook. Companies can’t do on-prem customer service [so need companies like TalkDesk].
Are you back to the same pace of investments as before COVID-19 struck?
The pace of decisioning has slowed [across the board]. There’s less of founders saying, ‘I have four term sheets; make a decision.’ We have more time to get to know founders and to do due diligence.
Do you think this has been a humbling experience for founders?
I don’t this has been a mustache-twisting moment for investors. I do think people are more reasonable — more willing to get to know investors, maybe not as focused on optimizing so much. It feels more normal to me.
It did feel like things were almost spiraling out of control before this hit.
I think people like to overplay the whole dynamic thing [between founders and investors]. I think if you look at value creation in the tech sector, it dwarfs anything lost to excess, like at WeWork. If you aren’t bullish on tech in the medium to long term …
How many bets have you made since March, and on how many teams that you’ve never met offline?
We’ve made two investments post-COVID and a third that’s a signed term sheet, and we’re finding it’s perfectly workable. In one case, we [have not met with the team offline] but it was referred to us by a trusted referral source, and we spent a lot of time having virtual coffee and virtual beers with the founders. Do you lose something in body language? Maybe, but it’ll be interesting to see if doing that removes any of the bias. In the meantime, we can still do all our normal diligence — going through models, going through code, calling customers. I would prefer 10 hours of video over three hours of in-person meetings [as a way to get to know a team].
You must have some concerns about your industry, given what’s happening in the world.
From a macro standpoint, if you see the continued dislocation of jobs and unemployment, that’s going to have trickle-down effects on consumer spending. Some of that is being offset; for example, Box and Zoom and remote collaboration software companies and online grocery services are growing while airlines have been a net loser. So there are shifts. But if the overall output is less and GDP growth slows, that means headwinds.
There is a lot of capital to invest across the board, yet there’s always some venture investing “stage” that’s particularly disadvantaged. Who is positioned the worst right now and why?
Later-stage investors because they’re on a shorter line [meaning a shorter timeline]. They have the hardest job right now. But if you are killing it as a later-stage company, people are throwing money at you. By the way, that’s not true if you’re mediocre or even good. People are really chasing what are perceived to be the best deals.
The Financial Times just wrote a story noting that a funding slowdown could also result in a liquidity crunch for VCs. Agree? Disagree?
We actually distributed a crap ton to our LPs last quarter. We took [the digital health startup] Livongo public in July of last year; at the end of Q1, its shares were trading at $28 — now they’re $100. So companies that are net beneficiaries of [this pandemic-driven shift] are making a difference. Another company, nCino [which sells cloud-based software services to financial institutions], went public today and its book was something like 50x oversubscribed. We’re not seeing a slowdown in liquidity.
NCino’s stock went bananas today. What do you make of the stock market?
I don’t totally get it, but I think a lot [of its strong performance] centers on policy decisions and investors that are biased toward it because they have to be. If you have to generate 5% per year in returns, you have to find it somewhere. The market is certainly more bullish than people on the street.
There’s also this big X factor, with things clearly loosening up in lots of places because it’s summer, but flaring up elsewhere, especially in L.A. and Florida.
Should big tech be regulated?
Some people say no way, never. I’m less of an absolutist. I think broadly that regulation is well-intended but can have poorly thought-through consequences. I’m not opposed to it but in general, it would be nice if it were more nimble and flexible and less politically driven.