Benchmark Capital is often recognized as the hallmark of Internet venture capital. The numbers speak for themselves; in 1999, 15 of the firm's partner companies debuted in the public marketplace. Among the IPO stand-outs were Ariba (ARBA), Juniper Networks (JNPR), Kana Communications (KANA), and Red Hat Software (RHAT). The combined market capitalization of those four companies' alone equals almost $100 billion. Seven of Benchmark's partner companies were sold during the same year including Accept.com, acquired by Amazon.com (AMZN).

It's clear that Benchmark is attracting the best entrepreneurs with the best Internet models and market opportunities. So it's safe to say that public market investors should be watching the firm's moves closely for clues on markets, models, and companies to invest in.

Reporter@Large had the opportunity to sit down for an exclusive interview with Bill Gurley, a General Partner at Benchmark Capital. Like Softbank's Bill Burnham, Gurley worked as an analyst on Wall Street before entering the venture capital business. In fact, he was the lead analyst on the Amazon.com IPO.

Reporter@Large: Let's talk about traditional venture capital firms vs. the new-age incubators of today's Internet economy.

Gurley: A lot of people are out there talking about the incubators. The problem with incubators is the following: name an Internet Capital Group (ICGE) partner company CEO...you probably can't. But you can name a bunch of the ICGE guys.

We don't see the world that way. We're not at the top of the pyramid with everybody underneath us with puppet strings moving them around. We see ourselves as service providers to entrepreneurs. We want Keith Krach to be a hero as the CEO of Ariba. We want Meg Whitman to be a hero as the CEO of eBay. I think that if someone has a killer idea, they want to have our company building expertise, the brand building, and the network of contacts we provide in order to make them the best possible company they can be.

Reporter@Large:

Gurley: We've played B2B pragmatically. We've chosen to focus on horizontals with products and services that cross verticals as opposed to independent vertical exchanges (i.e. SciQuest.com, SQST). In a lot of ways I see the independent vertical exchanges like some of these more narrow-niche business-to-consumer (B2C) categories (i.e. CDNow, CDNW). The more narrow a vertical, the less of a market opportunity.

Reporter@Large: So where is Benchmark in B2B?

Gurley: We've done three enormous B2B deals. One of them is Ariba, already public. Two others are Impresse and TradeOut (both now in registration for IPO). Impresse is an online printing exchange which obviously crosses multiple industries. TradeOut is an online marketplace for businesses buying and selling excess inventory and idle assets.

Gurley:Yeah, I'm extremely excited about Nordstrom.com's potential and glad that I'm able to be a part of it. It might sound funny, but I don't think at Benchmark we have a profoundly positive view of working with large companies. Those things may not sound the same, but the Nordstrom management team is extremely open minded, really wants to see this thing succeed, they've put their total weight behind it and have allowed it to be independent. Under the leadership of Dan Nordstrom, we're doing some very innovative things. We're not just another e-commerce company, and we're not just the Nordstrom brand with a dot com added on. One of the initiatives is to convert catalogue shoppers to Web shoppers, which gives us more leverage across sales costs and customer service costs. We're doing several hundred million dollars a year in revenue.

Reporter@Large: What about another partner company you also have a seat on the board of, epinions.com?

Gurley: epinions.com is a killer, killer company. We aim to be the #1 destination on the Web where people go to make decisions about buying products and services. I sat down a little over a year ago with Naval Ravikant, who is the founder and CEO of the company. I was trying to talk him into joining another company. He said to me: "Let's play a game, let's come up with the most interesting business model on the Internet--what would it look like?" We came up with the following: 1) it would have to be a content company because you don't want high variable costs, 2) it would be "viral," 3) something where the site gets better every time someone visits it, and 4) something where the community does all of the work for you. He went out and designed a business around that skeleton. This company is now made up of the best and brightest of the valley.

Reporter@Large: Can you give us an example of why this model is so attractive to users and potential advertisers/e-commerce partners?

Gurley: Definitely. We believe that the best people to do reviews are the people out there buying and using all of the products and services. Now, let's think about the thought process that Lexus goes through when they run an advertisement in Wired Magazine. They're making two bets. The first bet is that the demographic or readership of Wired fits with the demographic of people that buy Lexus cars. Well, a lot of young people that can't afford a new Lexus read Wired. Perhaps 20 percent of this population can afford to buy a Lexus. The next bet, of those 20 percent of Wired readers that fit the demographic, how many are in the market to buy a new car? Well, let's say you buy a new car every five years. So Lexus is buying an advertisement in Wired and hoping that four out of every 100 people that read the magazine see their advertisement. By aggregating content that helps consumers make a purchasing decision, epinions.com can go to Lexus and say "we have a section on our site where every user is making a decision on purchasing a luxury car." There are no wasted eyeballs whatsoever. We do this across every consumer category.

Reporter@Large: OK, and the next company I was going to ask about, Vstore.com, certainly has similarities to epinions.com in terms of its approach and model. Is there a trend here?

Gurley: Yeah, I've got a very, very strong minded view of where this thing is going (deep breath). The Web is not about fulfillment. The Web is about merchandising and grabbing customers. Amazon is now doing these button deals (link on Amazon's site) like they did with Drugstore.com where they get $100 million in pure-profit revenue. They get that because they've aggregated buyers. They don't get that because they've built a country full of distribution centers. Buyer aggregation is the name of the game. It's the exact area where successful Web companies want to or should be.

I think Vstore is to e-commerce what Infospace is to content. Infospace stands behind all of these portals and destinations and gives them applications/services that they can't aggregate on their own. At Vstore, we let any one have a store, anyone can incent demand. (Vstore.com provides anyone who has an internet marketing idea the full infrastructure needed to succeed in e-commerce. Vstore.com offers over one million products to sell, full customer support, order fulfillment, high speed hosting and transaction processing.) Just last week eToys cut their affiliate fees. That model isn't working. You know why? In the circumstance where an affiliate is generating the demand for a product, the etailer adds absolutely zero value. At Vstore, we can pass our orders directly to the distributor that can ship the products to the customer. We can provide an "affiliate" that was able to aggregate that demand, with their own user environment, where the customer never leaves the site, and they can keep getting paid as people continue coming back to make transactions ("Vtailers," it could be you or I, get a cut of every transaction that occurs in our store).

We're also the e-commerce provider behind About.com's stores and MyFamily stores.

Reporter@Large: Sounds like more channels for revenue. Thanks a lot for your time Bill.

Gurley: Thank you Luke. Take care.