a16z Podcast: How To Understand And Choose A Venture Investor

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0:00:22 I’m Frank Chen and today I’m delighted to be here with Scott Cooper.
0:00:23 Thank you for having me.
0:00:26 Scott and I have known each other for 15 years, maybe longer.
0:00:27 Maybe longer.
0:00:28 Yeah.
0:00:32 In the Hard Things book because we were both in that loud cloud and we’ve been here at
0:00:33 Andreessen Horowitz.
0:00:34 This is our 10th year?
0:00:35 Yeah.
0:00:36 Yeah.
0:00:38 Is this the longest you’ve ever held a job?
0:00:39 It is now.
0:00:40 I think about it.
0:00:41 Right.
0:00:42 It is for me.
0:00:43 A lot of thought-offs were if you include the HP acquisition.
0:00:44 That’s true.
0:00:45 Like if you add all those together.
0:00:46 Yeah, but almost, yeah.
0:00:47 10 years at a single entity.
0:00:50 It’s like the longest for me.
0:00:52 So Scott is our managing partner.
0:00:55 He was the first employee at Andreessen Horowitz.
0:00:56 He is also my boss.
0:00:59 So this is great that you’re here.
0:01:05 Somehow in the midst of a fundraise and managing the firm, you went off and wrote a book.
0:01:08 And so we’ll talk a little bit about that today.
0:01:10 I try to stay busy.
0:01:11 Right?
0:01:12 Yeah.
0:01:13 So here’s what we’re going to do today.
0:01:20 I’m going to pretend to be a startup CEO who is raising money and I get a free reign
0:01:25 that asking any question I want about the fundraising process about how I should think
0:01:28 about how much to raise and who I’m working with.
0:01:31 And Scott has promised to candidly answer all these questions.
0:01:34 So this should be a huge treat for people who are thinking about raising money for their
0:01:36 own startup.
0:01:41 We also have some questions from Twitter that we’re going to interleave into this conversation.
0:01:43 So it’s not just me.
0:01:48 Scott hosted a Twitter ask me anything this morning and we had some questions come up
0:01:52 that we wanted to treat with a little more depth.
0:01:53 And there were some questions we couldn’t get to.
0:01:54 Yeah.
0:01:57 We got all into a package here.
0:02:01 The three segments that we’re going to use to talk about the startup journey are basically
0:02:03 the chapters in a startup.
0:02:07 So we’re going to talk about how do I figure out which venture capitalist I want to work
0:02:08 with?
0:02:09 How do I raise money?
0:02:11 And then how do I build my company?
0:02:15 So after the fund raise, the venture capitalist typically takes a board seat and then our
0:02:16 relationship changes.
0:02:18 So we’ll sort of ask questions about that too.
0:02:19 So you ready?
0:02:20 Sounds like fun.
0:02:21 You ready?
0:02:22 All right.
0:02:23 Let’s do it.
0:02:24 Fantastic.
0:02:25 So how do you pick a VC to work with?
0:02:27 Like, why does the world need VCs?
0:02:29 This was also a question that we got on Twitter.
0:02:34 How are the VCs helping the world address the most urgent problems that the world has?
0:02:35 Yeah.
0:02:36 So it’s funny.
0:02:40 So there was a time where the world needed VCs because the VCs had the money.
0:02:44 And so if you needed to actually raise money, that was definitely the way to go.
0:02:48 And that was kind of most of actually the first 30, 40 years of venture capital from
0:02:51 kind of early 1970s to mid 2000s, I think was characterized by that.
0:02:55 People will scarce the VCs had it and therefore you went to the VCs to get the money.
0:02:56 Yeah.
0:02:57 And so the banks wouldn’t lend it to you.
0:02:58 That’s right.
0:02:59 Yeah, definitely.
0:03:00 Yeah.
0:03:01 So I mean, think of it if we even back up a step, right?
0:03:02 Think of VC almost.
0:03:07 I think of it as it’s capital, it’s risk capital that kind of has to exist because there aren’t
0:03:10 alternative forms of financing that will actually finance those types of businesses.
0:03:11 So you’re right.
0:03:15 You know, we do have these things called banks and they do things called loans.
0:03:17 And there are plenty of businesses where people might say, “Hey, great.
0:03:20 That’s a perfectly good way to finance the company.”
0:03:24 The problem with loans is number one is obviously there’s some risky categories like startups
0:03:26 in general that they generally don’t like.
0:03:28 And then two is it’s not permanent capital, right?
0:03:31 So the idea of a loan, of course, is you have it for a period of time.
0:03:34 You pay some interest on it and then you got to obviously give it back.
0:03:39 And the theory of VC financing is number one, to finance those very risky assets, but also
0:03:42 to be able to kind of be what we call permanent capital in the business, right?
0:03:44 So that you never have to give it back to me.
0:03:48 I hope, of course, that you go public or something happens and I earn a return on that money,
0:03:51 but you know, you don’t have to think, “Hey, five years from now, just when my business
0:03:54 is starting to get going, do I have to kind of come out of pocket and basically repay
0:03:55 that money?”
0:03:57 Got it.
0:03:59 So let’s follow the money trail.
0:04:05 So if we need VCs to fund things that banks won’t fund, where do we get our money?
0:04:09 So we are lucky enough to have what we call limited partners.
0:04:12 And there’s a bunch of categories, probably the most prevalent and the easiest examples
0:04:14 are university endowments.
0:04:18 So we’re sitting here on Sand Hill Road, Stanford is just down the road from us.
0:04:23 So Stanford has an endowment where graduates have over time given money to, and the goal
0:04:26 of that endowment is how do I earn a return on that money?
0:04:29 Because I need to be able to help subsidize the high costs of college education and make
0:04:32 sure that the professors are all taken care of.
0:04:37 And so they build a whole portfolio of which venture capital is one component.
0:04:40 But venture capital is a very important component for them because it’s kind of their major
0:04:43 high risk, high growth, high returning asset category.
0:04:48 So if you look at Stanford, you look at Yale, what they’re saying is, “Hey, look, I need
0:04:52 to earn 25%, 30% annualized returns on this money.
0:04:55 Venture capital is one way where I can put a portion of my money there.”
0:04:58 All they’d put some money in stocks and bonds and things of that sort as well.
0:05:02 But basically, they effectively think of it as they lend us the money.
0:05:06 We take that money, invest in great entrepreneurs like yourself, and then hopefully some years
0:05:09 down the road, we give them the money back with some interest.
0:05:14 And the surprising thing is that they have a pretty big stake in private equity and venture
0:05:15 capital, right?
0:05:16 Yeah.
0:05:17 If they think about portfolio.
0:05:20 If they think about their portfolio construction and sort of how much a Yale or Stanford would
0:05:23 actually allocate to private equity.
0:05:24 Yeah.
0:05:27 So we talked about this a little bit in the book, but Yale was really kind of the founder
0:05:30 of what a lot of people call kind of the modern endowment theory model.
0:05:35 And the whole idea behind that is to have lots of different asset classes to provide
0:05:36 diversity.
0:05:38 And an asset class just means something to which you invest in, right?
0:05:40 So it could be real estate.
0:05:43 It could be literally like timber or oil and gas.
0:05:44 It could be public stocks.
0:05:45 It could be bonds.
0:05:48 It could be venture capital and private equity, obviously, or a component of it.
0:05:52 And what Dave Swenson, who’s the person who kind of has run the Yale endowment for I think
0:05:57 almost 30 years now, his basic innovation was he said, “Look, if I could find places
0:06:01 where there is imperfect information in the markets, there’s an opportunity for managers
0:06:04 in those markets to hopefully earn excess returns that you otherwise might be able to
0:06:07 earn if you’re just investing in public stocks.”
0:06:11 And so he said, “Look, what people like Yale and other endowments have is we have the benefit
0:06:15 of time,” which is the goal is for Yale to be existing in perpetuity.
0:06:19 And every year, of course, he has to give some money to the university to kind of pay
0:06:20 for annual expenses.
0:06:26 But he’s got a $30 plus billion kind of endowment that can live for the next 100 plus years.
0:06:30 And so that allows him to kind of invest in things like venture, which will take a long
0:06:31 time for them to realize.
0:06:36 But in return, that gives him exposure to hopefully imperfect markets that give him an opportunity
0:06:39 for return that’s much higher than other assets.
0:06:45 So he might have, for private equity and venture, venture’s probably almost 18, 20% of his assets.
0:06:50 And then if you layer on other private assets, he probably has kind of 40 plus percent, maybe
0:06:53 even 50% of his assets in the private markets.
0:06:55 And that’s a little bit higher than others.
0:07:00 But the idea is he’s just looking for abnormal returns, and he thinks the private markets
0:07:01 is a great place to get it.
0:07:02 Yeah.
0:07:03 So 40% seems super high.
0:07:08 That’s great news for an entrepreneur, because not only does David Swenson have a lot of
0:07:12 Yale’s management money tied up in this asset class, but people who have emulated Yale’s
0:07:15 portfolio strategy have also poured in money.
0:07:18 And so as a result, you’re a direct beneficiary.
0:07:19 That’s exactly right.
0:07:22 David Swenson saying 40% of my money needs to go into private equity.
0:07:23 Yeah.
0:07:31 And there’s a historical anomaly here, which was before the kind of mid-1970s, institutional
0:07:36 asset managers like Yale actually were prohibited from being able to invest in assets like venture
0:07:38 capital that were considered too risky.
0:07:42 And there were a lot of changes that came along the way, but basically there was this
0:07:46 thing called the Prudent Man Rule, which came in and said, “Hey, we think it’s actually
0:07:50 reasonable for pensions and other people to invest in these assets, as long as they do
0:07:51 it, of course, in a reasonable way.”
0:07:56 And that really opened up the floodgates in the mid- and late-1970s to venture in private
0:07:59 equity as a broad institutional asset class.
0:08:02 And you’re right, we’ve been the beneficiary of that for the past 40 years.
0:08:03 Yeah.
0:08:04 Great.
0:08:05 So there’s a pull of money.
0:08:11 David is chasing, and all the fund managers like David, is they’re chasing asset sort
0:08:17 of outsized returns uncorrelated with public stock market or sort of other asset classes.
0:08:18 So how does it work?
0:08:21 How did the great venture funds make their money?
0:08:24 And let’s talk a little bit about sort of batting average and slugging percentage.
0:08:25 Yeah, sure.
0:08:26 Yeah.
0:08:29 So we use this baseball analogy inside the book.
0:08:35 But the basic way to think about a venture portfolio is about half, 40% to 50% of what
0:08:38 we do, we’re going to get wrong.
0:08:41 And there’s this very euphemistic word that we have in this business, which I know you
0:08:44 and I’ve talked about called, you have an impaired asset, which is a very polite way
0:08:47 of basically saying you lost all your money, right?
0:08:49 But it sounds much better to say it’s impaired.
0:08:53 So you’ve got 40%, 50%, that’s for all intents and purposes is zero.
0:08:55 And then you’ve probably got 20% to 30%, where you make a little bit of money, right?
0:08:57 You might get your money back.
0:09:00 You might make two times your money, three times your money.
0:09:01 That’s a lot more fun.
0:09:02 But if you do the math, right?
0:09:07 If you’ve got 50% at zero and call it 30% at 2X, you can tell you’re still not even
0:09:08 back to one yet, right?
0:09:09 You’re still kind of…
0:09:10 You’ve not filled the pothole…
0:09:11 That’s exactly…
0:09:13 …that you’ve created for yourself by wiping out 40% of your portfolio dollars.
0:09:17 So basically what that means is the way this business works, the difference between success
0:09:22 or failure in this business means you’ve got 10 or 20% left of your investments that need
0:09:25 to basically generate 90% of your returns.
0:09:31 And so you have to find a Facebook or a Google or a Twitter or an Instacard or Airbnb where
0:09:35 you can earn 10, 20, 50, 100 times your money.
0:09:37 So it’s a very kind of skewed distribution, right?
0:09:40 So unlike kind of a normal distribution, right?
0:09:44 Where things are kind of normally distributed around a bell curve, you will hear people
0:09:47 talk about the concept of a power law curve for venture capital, right?
0:09:52 Which basically just means you have very small number of N companies that will drive the
0:09:56 very, very large portion of returns and then this very long tail, quite frankly, of companies
0:09:59 unfortunately that won’t move the needle on your economics.
0:10:00 Got it.
0:10:03 So let’s turn that into concrete advice for me as the startup CEO.
0:10:08 So what type of business is going to be attractive to somebody who’s optimizing their portfolio
0:10:09 for sort of slugging percentage?
0:10:11 Yeah, so that’s the right way to think about it, right?
0:10:16 So what you as an entrepreneur need to understand is what are the incentives that I have based
0:10:21 upon the incentives that my investors have given me, which is exactly that, which is to
0:10:25 continue the baseball analogy, I need to swing for the fences, I need to try and hit a home
0:10:26 run, right?
0:10:30 And so for you to determine whether venture capital is right for you, you have to decide,
0:10:31 okay, is that what I’m signed up for, right?
0:10:34 Is there, is the market I’m going after big enough to be able to sustain a company like
0:10:35 that?
0:10:38 And then even if it is on a personal level, is that the kind of business you want to
0:10:39 grow, right?
0:10:42 So maybe you decide, hey, you know what, I can build a really nice business here and
0:10:46 in two years, Google will come along and buy it for 30 or 40 or 50 million dollars and that’s
0:10:49 a life-changing event for me and my family.
0:10:51 And that’s a perfectly fine outcome.
0:10:55 There’s no normative, you know, kind of reason why you shouldn’t do that, but that’s probably
0:10:59 not the kind of alignment of interest that you would have if you took venture capital.
0:11:02 The venture capitalists would probably be disappointed with that outcome and they would
0:11:06 want you to kind of be playing for a much bigger opportunity and a bigger long-term vision.
0:11:07 Got it.
0:11:11 So the reason that they come to my board meetings and say faster growth, higher margins is right
0:11:15 because they’re trying to get the company to be as valuable as possible because they
0:11:20 need like a huge Facebook style return to cover up for all the mistakes they made.
0:11:21 That’s exactly right.
0:11:24 So, you know, unfortunately, we don’t necessarily know which of the companies at the beginning
0:11:29 are going to turn out to be in that upper right quadrant of returns and so everything
0:11:34 is kind of option value from a venture capitalist perspective and so they will be encouraging
0:11:38 you to kind of try to ultimately find ways to get your company into that return profile.
0:11:39 Okay.
0:11:43 So it’s important for me to understand that as I go fundraising the VC, which is there’s
0:11:47 going to be a situation where our interests don’t align if I don’t want to build one
0:11:48 of these enormous companies.
0:11:49 That’s right.
0:11:50 Yeah.
0:11:56 So, does it matter when I go raise money with a fund and here I want to talk about
0:11:57 the J-curve, right?
0:11:58 Sure.
0:12:00 So maybe explain the J-curve and then let’s talk about whether it’s important that I
0:12:01 understand that.
0:12:02 Sure.
0:12:05 So the J-curve, and you’ll see a beautiful picture of it in the book, is literally looks
0:12:09 like a J, which means you basically kind of have this dip and then, you know, it comes
0:12:10 up, right?
0:12:15 And so the concept of the J-curve is that in the early years of a fund, we are investing
0:12:16 money.
0:12:20 And the faster, if you’re a limited partner in my fund, you have negative cash flow.
0:12:23 So I’m asking you to give me money so that I can go and invest in what I hope is going
0:12:26 to be the next Facebook or Google or Twitter.
0:12:30 And so from your perspective, you are in the bottom shallow end of that J-curve where you
0:12:32 are negative in terms of the cash.
0:12:37 We hope after three, four, five years, you kind of cross the X-axis to start to generate
0:12:39 positive returns from a cash perspective.
0:12:45 So what that means is it’s mostly relevant for limited partners.
0:12:47 It has probably less relevance for an entrepreneur.
0:12:51 The only relevance for an entrepreneur is you want to have a general sense of where in the
0:12:56 fund you are and the investor is when you take their money.
0:13:00 So for example, if these funds tend to be 10-year lives, right?
0:13:05 So at the early days of the fund, if I invest in you and then two years from now, you have
0:13:08 to raise money again or four years from now, I probably still have some money left over
0:13:12 in my fund because I’m at the relative early stages of the fund.
0:13:16 Whereas, you know, if you come in and you’re five or six of my fund, I might have already
0:13:20 invested 90% of the capital and so when your next round of financing comes up, maybe I’m
0:13:21 out of money, right?
0:13:25 And so the J-curve probably is less relevant for you, but this concept of kind of where
0:13:29 are you in the time diversity of the fund is a relevant thing as an entrepreneur for
0:13:33 you at least have a sense of so you know kind of how long staying the financial power might
0:13:35 be of that venture partner.
0:13:36 Got it.
0:13:40 So sort of the further along you are, the more risky it is for me and that you might run
0:13:43 out of money for my next round.
0:13:44 That’s right.
0:13:46 And then all the other investors will start asking, “Hey, why is Andries and Horowitz not
0:13:47 filling up this round?”
0:13:48 That’s exactly right.
0:13:52 And hopefully if we’re doing our job well, we will raise another fund, right?
0:13:56 So we might have money now from a new fund to invest, but you know, none of that’s guaranteed
0:13:57 of course.
0:14:01 And so it’s just something to think about, you know, kind of at the margin as you consider
0:14:03 your venture partner.
0:14:06 You get money from your limited partners like University Endowments.
0:14:10 The general partners, do they also invest money in the firm?
0:14:12 And do I need to know how much they’ve invested?
0:14:13 Do I care?
0:14:14 Yeah.
0:14:15 Or do I not care?
0:14:19 Yeah, I think to answer your second question, you know, I’m not sure you care that much.
0:14:21 The general partners typically do invest.
0:14:26 It ranges anywhere from, you know, on the low end, 1% of the fund will come from dinner partners.
0:14:28 Some funds, it will be as high as 5%.
0:14:29 So it’s meaningful.
0:14:33 Again, it’s a little bit more the LPs care about it because they want to make sure, hey,
0:14:37 you’ve got some kind of, you know, stake in the game here and you’re not, you know, just
0:14:40 relying on other people’s money, but you also actually have, you know, kind of your own
0:14:41 money at risk as well.
0:14:46 And as funds tend to get older and more mature firms, I should say, and, you know, hopefully
0:14:50 the partners have done well and they’ve accrued some financial profits themselves, then, you
0:14:55 know, you tend to kind of see that 1% kind of shift up more over time as, you know, increasingly
0:14:58 larger percentages of the, you know, financial well-being of those partners goes into the
0:14:59 fund.
0:15:00 Yeah.
0:15:05 So in theory, a general partner who has, who has to fund 5% of a fund has more skin in
0:15:06 the game.
0:15:10 I’m saying, as an entrepreneur, I shouldn’t overweight that factor when I’m raising money.
0:15:12 I wouldn’t overweight it too much.
0:15:16 Number one, you certainly don’t, there’s no public place for you to find it, quite frankly.
0:15:18 You can always ask your venture capitalist about it.
0:15:21 You might be one of the few people, though, who’ve ever asked them that question.
0:15:24 It does go, you know, I think where it’s relevant as an entrepreneur is it goes a little bit
0:15:29 to kind of the staying power of the firm and how likely are they to be able to raise another
0:15:30 fund, right?
0:15:34 So the more the LPs feel like they’re aligned and, you know, kind of, you know, they have
0:15:37 some skin in the game, the more likely, you know, of course, the LPs will also think this
0:15:40 is a long-term partnership that we want to continue investing in.
0:15:44 That’s probably, again, the only kind of potential, you know, impact as an entrepreneur that that
0:15:47 piece of information might provide, you know.
0:15:51 Now aside from how much of their own personal money they have in a fund, there’s also this
0:15:57 notion you introduce in the book of GPs with economic interest only versus GPs with governance
0:16:00 interest in sort of the management company around the fund.
0:16:01 Does that matter to me?
0:16:05 Do I need to pick only one or the other or am I indifferent?
0:16:08 I think the most important thing, I think there is some relevance, but I’d say the most
0:16:12 important thing is more of a meta point, which is, you know, you and I both come from the
0:16:14 enterprise software world, right?
0:16:18 And for any of your viewers here who are used to enterprise selling, there’s always this
0:16:22 concept of enterprise selling of kind of, you know, who is your economic buyer, you
0:16:26 know, who is your kind of champion, your sponsor, the organization, and, you know, ultimately
0:16:27 who’s the decision maker, right?
0:16:31 And so the way I would think about venture capital is in the same, was in the same way,
0:16:34 which is there may be different partners who play different roles as it relates to your
0:16:36 fundraising process.
0:16:41 So ultimately part of your job is to map the firm and understand, okay, what is the decision
0:16:42 making process?
0:16:46 So at some firms, for example, maybe, you know, there are certain senior partners who always
0:16:49 have to sign off on the deal to get something done.
0:16:52 You know, here at Injuries and Horowitz, we do things differently, which is as long as
0:16:57 people follow the process, you know, consistently, you know, any single general partner has the
0:17:01 ability to ultimately make a decision to invest and go on the board of a company.
0:17:04 But understanding that’s important, you know, understanding, kind of, you know, if there
0:17:05 are differences.
0:17:11 So some people, you know, kind of use the term general partner to encompass, you know, different
0:17:15 job categories, you know, for example, here at Injuries and Horowitz, a general partner
0:17:18 to us means you can write a check and you can sit on the board.
0:17:22 And so if you understand that based on the different firms you’re acting with, you’ll
0:17:25 understand kind of the selling process in a way that I think will make it more effective
0:17:27 for you to try to close your deal.
0:17:28 Yeah.
0:17:29 So it is like enterprise sales.
0:17:30 Yeah.
0:17:31 To identify who you’re working with.
0:17:32 Yeah.
0:17:33 What budget do they have?
0:17:34 Who owns the budget?
0:17:35 That’s exactly right.
0:17:36 Right.
0:17:37 Yeah.
0:17:39 Rather than sort of narrowly asking the question, do they have governance rights in the management
0:17:40 company?
0:17:41 Yeah.
0:17:42 Yeah.
0:17:43 Yeah.
0:17:45 I mean, that’s more, quite frankly, sometimes, that’s more a symptom of how the firm is set
0:17:46 up.
0:17:49 But I think if you understand the decision-making process, then that will incorporate all the
0:17:51 information you really need to know.
0:17:57 And then comparing contrasts for me a little of the, I’m going to do Silicon Valley financial
0:17:59 investors like us versus sort of other categories.
0:18:04 So maybe talk a little bit about how our corporate venture capital general partner is
0:18:06 incented and is it different?
0:18:08 Like they probably don’t have limited partners, right?
0:18:11 Because the capital probably comes from their corporation.
0:18:15 And so what other incentive differences are there and how should I think about when do
0:18:17 I put those guys on the cap table if ever?
0:18:18 Yeah.
0:18:20 So corporate venture capital actually over the years has grown a lot.
0:18:23 So kind of, you know, it was never that prominent.
0:18:26 I don’t know the exact numbers today, but something like 15, 20 percent of deals often
0:18:27 have a corporate partner in them.
0:18:30 So it’s grown a lot over the last 10 years.
0:18:32 And so the answer to your question is, look, they vary a little bit.
0:18:37 So some of them, you know, like a Google Ventures, for example, is a corporate VC.
0:18:40 You know, Google is their only limited partner in that sense.
0:18:41 And so, yeah, you’re right.
0:18:42 They don’t have to go raise money.
0:18:46 Some corporate venture firms do have some external LPs, but most of them are kind of
0:18:49 captive to the corporation they do.
0:18:52 So it does change the incentive structure for them, right?
0:18:55 Because oftentimes they’re not purely financial investors, right?
0:18:57 So they clearly don’t want to lose money, and they’d like to obviously earn a living
0:18:59 on the profits from the business.
0:19:03 But ultimately it’s a diversification strategy for the firm to say, hey, look, there’s new
0:19:06 technologies that could come up and impact our business.
0:19:09 This is a way for us to kind of keep an eye on that technology.
0:19:13 Oftentimes it’s a pipeline for business development or even M&A opportunities.
0:19:16 And so I think there’s good and valid reasons to take corporate venture capital.
0:19:21 The big advice that we often give our companies is the thing you want to be careful about
0:19:25 is you don’t want to sell your business to a corporate before you’ve actually received
0:19:27 an acquisition premium for that.
0:19:31 And what we mean by that is, right, if I allow them to invest at a point where they own so
0:19:35 much of the company, that quite frankly it almost makes it impossible whether legally
0:19:40 or just from an external perception perspective that nobody else could ever buy my business,
0:19:43 you know, I’ve essentially kind of almost sold the company without quite frankly getting
0:19:46 paid what you would expect to get paid for the company.
0:19:51 So I think they can be great partners with kind of more limited economic interests.
0:19:55 You want to make sure they don’t have any rights, right, that would kind of cause, again,
0:20:00 other companies that might be interested in the company over time, either from a partnering
0:20:03 or an acquisition perspective to kind of be scared away.
0:20:06 But in that context, they can be very good partners.
0:20:11 So in my seat as the startup CEO, it sounds like the optimal ordering if I’m trying to
0:20:16 build like the biggest possible company that I can is try to find a financial investor
0:20:20 first who doesn’t, who’s not trying to buy me, right, they’re just trying to give me
0:20:25 fuel so I can build and then later maybe find a corporate investor or a set of corporate
0:20:28 investors who can go together into a round.
0:20:29 I think that’s right.
0:20:33 Or I think the third alternative is you could couple a corporate investor with financial
0:20:38 investors but probably just size them appropriately, right, where you might want to have the financial
0:20:42 investor have a slightly bigger stake and, again, make sure that the corporate investor
0:20:48 doesn’t have rights that might kind of deter future corporates from partnering or potentially
0:20:50 being an acquisition partner.
0:20:52 Keeps my flexibility as open as possible.
0:20:53 That’s right.
0:20:54 Option value high.
0:20:55 Yeah.
0:20:56 So, we let a question from Twitter.
0:21:00 So what are the return on investment pressures and time horizons for corporate VCs and how
0:21:02 do they differ from the ones you and I have at A16?
0:21:03 Yeah, they’re definitely different.
0:21:07 So the way ours work, right, just to understand it is, our funds tend to be about 10 years
0:21:12 long, right, as you know, and to be successful in this business over the long term, you probably
0:21:17 need to return two and a half to three times the money that the LPs give you over that
0:21:18 10-year period.
0:21:21 And 10 years is a little bit of an inside joke in this industry because actually even though
0:21:26 funds legally are supposed to expire after 10 years, they often go 12, 13, 15 years.
0:21:29 So let’s keep the fiction and stick with 10.
0:21:33 So over 10 years, you know, we need to basically generate those kinds of returns.
0:21:34 So it matters.
0:21:36 It goes back to the question you and I talked about earlier.
0:21:40 It matters a little bit about where are we in the fund when I invest in your company?
0:21:45 Because again, if I invest in your company late in my fund cycle, I might have pressure
0:21:49 to be able to kind of in a relatively short number of years before my fund expires to be
0:21:50 able to show some results from that.
0:21:52 And so that could have an impact.
0:21:56 The corporate partners, corporate venture partners tend not to have those constraints
0:21:59 because they don’t have to raise typically fund by fund.
0:22:02 They typically just are investing often off the balance sheet of the corporation.
0:22:06 And so therefore, arbitrary timelines are less relevant.
0:22:09 And as we talked about earlier, they certainly have some financial pressures, right?
0:22:13 I mean, I’d be hard pressed, you think, for a corporate VC to stay in business if they
0:22:15 always lost money on their investments.
0:22:19 But the primary goal in many cases is kind of not pure profit maximization, but strategic
0:22:20 maximization.
0:22:24 And so there’s other ways that they can effectively kind of generate a profit that don’t have
0:22:28 the same kind of financial constraints that a pure financial investor would have.
0:22:30 Got it.
0:22:33 And then two more questions from Twitter to sort of round out this section of, you know,
0:22:35 how do VCs work and how do I pick one?
0:22:37 Here’s a question from Varun on Twitter.
0:22:42 What’s the value of a specific advice and dedicated one-on-one help from a VC?
0:22:44 Since like, look, you can crowdsource all this stuff, right?
0:22:50 I can do a crypto IPO and then I can get some advice from Twitter and like, why do I need
0:22:51 you?
0:22:52 That’s right.
0:22:53 Well, it’s funny.
0:22:56 I talked about this in the book and you probably remember this quote, you know, our partner
0:23:00 Mark has always kind of asked us the question, are we the last dinosaurs basically, right?
0:23:03 So you know, we think we’ve got this incredibly advanced venture capital model and, you know,
0:23:06 maybe we’re just about to, you know, kind of be extinct as well.
0:23:07 The meteors are coming.
0:23:08 That’s right.
0:23:11 And so I think it does point to a very fundamental question that the, you know, the Twitter
0:23:15 user is asking, which is, what is the role of venture capital, right?
0:23:19 And so, look, my very simple answer is, you know, we used to live in a world as we talked
0:23:22 about at the beginning here where the venture capitalists had the money and that was, you
0:23:25 know, a very defined role they had, which is if you wanted the money, you had to go
0:23:26 there.
0:23:29 Today, look, money is, you know, we’re washing money, right?
0:23:31 And there’s venture capitalists, there’s hedge funds.
0:23:36 They’ll probably always be someone else who’s got more money than do we and a lower cost
0:23:37 of capital.
0:23:42 And so to me, the answer as to whether it’s ICOs or crowdfund or anything else, whether
0:23:46 those exist and whether venture capital in its current incarnation exists, to me is really
0:23:49 a function of whether venture provides something other than capital.
0:23:52 And you know, obviously, you know, since you’ve been here since the beginning, you know, the
0:23:57 whole way we set up entries in Horowitz, the way we did was to kind of invest in, you know,
0:24:01 100 plus people in addition to our investing team who day in and day out think about how
0:24:03 can we be valuable to our companies.
0:24:07 And you know, my personal view and obviously we live this every day in the firm is, you
0:24:12 know, for venture to be a viable entity for the next 10, 20, 30 years, capital loan is
0:24:16 not a differentiator and, you know, we will all have to find other ways to provide value.
0:24:22 And so I think to the, to the, you know, Twitter person’s question, he’s right, which is if
0:24:23 we don’t do anything else, then you’re right.
0:24:26 We’re no different than anyone else and you probably don’t need us and, you know, it’s
0:24:30 incumbent upon us to demonstrate the way actually have some other form of value.
0:24:31 Perfect.
0:24:35 And then last question in this section, broad strokes, how does the VC game look different
0:24:36 in 10 years?
0:24:37 We’ve been doing it for 10.
0:24:38 Yeah.
0:24:39 Yeah.
0:24:40 We’re looking forward to the next 10.
0:24:41 Yeah.
0:24:43 So I think if you look at the last 10, the biggest thing that happened was the introduction
0:24:47 of SEED as its own kind of investable category.
0:24:49 And you know, for people who are old enough to remember, you’ll remember these things
0:24:53 called angels, which were actually people who wrote money out of their own checkbooks.
0:24:57 You know, Ron Conway being a very famous one and even, you know, Mark Inves and Ben Horowitz
0:25:01 before they started the firm here, we’re doing that on their own.
0:25:03 That really changed the whole competitive dynamic.
0:25:06 I think for the next 10 years, I think you have a couple things that are going to happen.
0:25:10 Number one is, I think the competitive dynamic is going to continue to get even more challenging,
0:25:13 partly because of this issue we talked about that money is not scarce, there’s plenty
0:25:15 of availability capital.
0:25:18 I think the other phenomenon we’ve seen, which I think is going to continue, is this idea
0:25:21 of companies staying private much longer.
0:25:24 And so it used to be that companies would go public six, six and a half years after
0:25:25 they were started.
0:25:26 Now it’s 10, 12 years.
0:25:29 I don’t see any reason to believe that’s going to change.
0:25:32 And I think the third big thing that we’re going to see over the next 10 years is more
0:25:34 of a blending of private and public markets.
0:25:38 So today you have this interesting dichotomy, which is you’re private, you’re private,
0:25:41 you’re private and then we flip a switch and all of a sudden, you know, you’re public
0:25:45 and you know, you have a stock price and you have new investors and, you know, we ring
0:25:48 the bell at the stock exchange, all these fun things.
0:25:52 I think there is a continuum that we’re already starting to see and I would expect over the
0:25:57 next 10 years, you will see a more active secondary market, which means a resale market
0:26:00 for private stock that happens in the private markets.
0:26:03 But that is a little bit, you know, may have some elements of regulation, regulation might
0:26:06 look a little bit like a public market, but not quite all the way there.
0:26:09 And so that we have more of a continuum of a life cycle of companies as opposed to kind
0:26:10 of this very sharp.
0:26:11 This climatic event.
0:26:12 Exactly.
0:26:13 Right.
0:26:14 The day of where everybody takes the pictures.
0:26:15 Yeah, exactly.
0:26:16 So yeah.
0:26:17 All right.
0:26:20 So hopefully that gives you a great sense of how venture capitalists work, what their
0:26:25 incentives are, and this is going to help you pick the right venture capitalist for you
0:26:30 if you decide venture capital is the right way to put money into your company.
0:26:36 And now we’re going to move on to part two, which is about fundraising and actually getting
0:26:38 and negotiating term sheets.
0:26:41 So for those of you that will join us for part two, we’ll see you there.
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