Oct 5, 2022, 2:17 PM ETInterview, Fireside Chat

Geoff Lewis: Why I Put $200M into Rippling; Uncapped Notes; "Compound Startups" | 20VC #933

Jeff Lawson first encountered Parker Harris (Parker) in 2012 through his co-founded company Sigfig, where Parker had been fired; Lawson felt the pitch lacked "power plant energy."
Lawson later reviewed Rippling (Parker's second venture) in 2012, identifying Parker as a "power plant" entrepreneur but declining the seed investment due to intense competition from other Silicon Valley VCs.
As Zenefits (Parker's subsequent venture) faced internal turmoil in 2017, Lawson began rebuilding rapport with Parker to prepare for his own fund's launch.
Bedrock Capital closed its first fund in 2018; their initial outreach to Parker occurred just after Rippling had already closed its seed round, missing the window by a few months.
The relationship spans a decade of interactions, evolving from missed early opportunities to a strategic partnership across multiple financing rounds.

Parker Harris self-identifies as a "narrative violation," a trait Lawson cites as the first reason for his investment conviction.
Lawson defines a "narrative violation" as a transcendent entrepreneur with a massive life's work vision driven by an "extra motivator" of vengeance or being wronged.
Historical examples of this trait include John D. Rockefeller's vengefulness and Steve Jobs' return to Apple after being ousted.
Lawson notes that while he has overcome his own feelings of vengeance through therapy and ancient beliefs, he recognizes the irrational, brute-force power it provides entrepreneurs.
For Lawson, the key differentiator is not just the life's work vision, but the "vengeance" element that fuels the entrepreneur's refusal to stop until a massive company is built.

Rippling is characterized as a "compound startup," aiming to become the universal "employer of record" for SMBs, mid-market, and upmarket segments.
The business model relies on a suite of pseudo-decentralized internal teams building multiple products that create a flywheel effect.
Customer upgrade rates are described as "astronomical," with clients rapidly adopting new products within Rippling's suite upon renewal.
Bedrock Capital co-led Rippling's Series D round, quadrupling their position in the company earlier in the year discussed.
The core value proposition allows businesses to flatten their G&A curve, reducing administrative costs and headcount while increasing operational efficacy.
Lawson identifies Rippling's potential to become the "AdWords for SaaS," leveraging the company's ownership of the "employee graph" to dictate how business software is distributed.

Bedrock invested in Rippling immediately after the Series A in 2019, believing in the long-term vision before the company's full product roadmap was articulated in March 2022.
The firm rejected the standard VC truisms of "you can only lose one time your money," instead focusing on companies where the preferred stack grows linearly or sub-linearly to revenue.
Rippling's preferred stack is described as "extremely small" relative to its nine-figure ARR and massive ambition, minimizing capital loss risk for investors.
Bedrock returned a 10x+ life-to-date multiple from Bitcoin and Ethereum investments in Fund 1 but did not distribute these proceeds; instead, they recycled the capital into Rippling.
The Firm allocated approximately 20% of the combined capital from Funds 1, 2, and 3 to Rippling, demonstrating extreme capital concentration.
The decision to recycle profits rather than distribute them was driven by the realization that LPs did not prioritize cash returns from a 2018 vintage fund as much as maximizing long-term multiples.

Bedrock initially attempted to lead Rippling's Series A in 2019 but was outbid by approximately $100 million due to the company's flawless fundraising management.
To avoid overpaying in future rounds where valuation is priced to "absolute perfection," Bedrock broke its "no uncapped notes" rule and entered via an uncapped note to secure a lower effective price.
Bedrock never leads formal financing processes now; they instead catalyze rounds for companies they cannot compete in during the formal bidding phase.
During the onset of the COVID-19 pandemic in February 2020, Bedrock engaged in "analysis paralysis," fearing that an SMB-focused Rippling would overpay if the company couldn't expand to mid-market.
Bedrock attempted to renegotiate their Series B investment price with Parker during the lockdown but were "kicked to the curb" after Parker rejected their lower offer.
Following the Series B rejection, Bedrock opportunistically purchased significant preferred secondary shares at various junctures over several years.

Bedrock's unique macro view in late 2021 projected a crash in growth-stage valuations followed by a migration of capital to early-stage seed and Series A rounds.
Contrary to the market trend of fleeing growth, Bedrock doubled down on Rippling in Series D (February 2022) because they identified it as the single best "private growth stage asset" with a path to 10x returns.
Lawson argues that growth investing remains viable for those who can underwrite "life's work entrepreneurs" who are unlikely to stop regardless of macroeconomic conditions.
The firm traded out of Bitcoin and Ethereum via Fund 2 before the crash, using the proceeds to fund the Rippling Series D without needing to raise new capital.
Bedrock's conviction was based on the belief that Rippling would be a "table stakes" investment even in a worst-case scenario, ensuring capital preservation.

The primary barrier to Rippling's 10x outcome is internal scaling risk, specifically managing the "compound startup" structure with decentralized teams.
Parker Harris mitigated this by hiring Matt McGinnis (a college friend and proven founder) as COO, adding significant operational credibility to the executive team.
Rippling is noted for having an unusually high density of former founders on its team, creating a culture of resilience and a "chip on the shoulder" mentality.
This culture of "survivors" who have faced skepticism and difficulty ensures the team remains driven to build a massive company.
Lawson asserts that no other company is capable of out-executing Parker Harris in the workforce management market.

Current macro trends, including layoffs and cost-cutting pressures, are viewed as positive for Rippling due to its ability to help clients "do more with less."
The platform offers tangible time and headcount savings, such as onboarding new employees in under five minutes, which is critical during economic downturns.
Lawson is not concerned about a potential "Great Depression 2.0," arguing that the need for workforce management tools remains fundamental regardless of recession.
While acknowledging that widespread layoffs could negatively impact enterprise SaaS generally, he believes Rippling's value proposition aligns with the market demand for efficiency.
Lawson concludes that as a VC, one must maintain a balance of healthy pessimism about the macro environment while maintaining inherent optimism about human agency and entrepreneurship.