a16z Podcast: Beyond Disruption Theory

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0:00:22 – Hi everyone, welcome to the A6NZ podcast, I’m Sonal.
0:00:25 So this week to continue our 10-year anniversary series
0:00:27 since the founding of A6NZ,
0:00:29 we’re actually resurfacing some of our previous episodes
0:00:32 featuring founders Mark Andreessen and Ben Horwitz.
0:00:34 If you haven’t heard our latest episode
0:00:35 with Stuart Butterfield turning the tables
0:00:37 as the entrepreneur interviewing them,
0:00:40 please do check that out and other episodes in this series
0:00:41 that we’ve been running all week
0:00:45 on our website at a6nz.com/10.
0:00:48 But this episode was actually recorded in 2014
0:00:50 on the five-year anniversary of the firm
0:00:52 and features Michael Copeland interviewing Ben and Mark
0:00:54 about disruption theory,
0:00:57 as well as key traits of entrepreneurs.
0:00:59 – Disruption theory has been in the news of late
0:01:01 as it relates to Clayton Christiansen,
0:01:02 you know, the master of this.
0:01:04 And I just wanna ask you guys not so much
0:01:07 about the criticism of him,
0:01:10 but from where you set that theory
0:01:13 and his thinking kind of galvanized itself into a book
0:01:17 in 1997, you know, do you build companies differently today?
0:01:22 Does, do those theories still hold water or what’s changed?
0:01:26 – Yeah, so I think his book was actually quite brilliant.
0:01:28 It’s funny that it’s coming under criticism now
0:01:30 after he’s been proving like completely right
0:01:32 and the general idea that he had.
0:01:35 It’s kind of, it actually reminds me of the creationist attacks
0:01:39 on evolution where like, yes, from a,
0:01:41 it’s like intellectualism at its worst, right?
0:01:43 It’s like, oh, here’s something wrong
0:01:45 with Darwin’s original theory.
0:01:48 And it’s like, okay, now we’ve based all of biology on it.
0:01:49 We’ve made tremendous progress.
0:01:50 Like how about that?
0:01:52 And this is kind of like, you know,
0:01:55 I don’t believe in electricity, you know?
0:01:59 And you know, this is kind of the kind of business version
0:02:03 of that where, you know, he developed the theory,
0:02:05 all of us in high tech.
0:02:08 And it was an amazing business book at the time
0:02:11 because it explained a phenomenon that, you know,
0:02:12 and now is kind of obvious,
0:02:16 but in 1997 was tricky, which is why does there,
0:02:18 really why do there need to be new companies?
0:02:19 – Right.
0:02:22 – And what’s happened when we just got through talking about
0:02:24 like there’s an explosion of new companies
0:02:26 and these companies aren’t trivial,
0:02:28 they’re becoming very, very important company,
0:02:33 you know, companies like Google and Facebook and so forth.
0:02:37 And so he’s kind of been proven right.
0:02:39 And then not only has he been proven right
0:02:40 on kind of the large level,
0:02:45 but the mechanics that prevent the kind of incumbents
0:02:49 from innovating at the same rate as the new company
0:02:51 are still completely in effect.
0:02:56 And we, you know, use his models all the time
0:02:58 in our thinking and our analysis.
0:03:03 And no doubt there are probably some minor problems
0:03:07 with examples he’s used or like the way he worded it
0:03:10 or what have you, but like basically he was right.
0:03:11 – Yeah, I would also say two things.
0:03:14 Let’s say one is we actually use this theory basically
0:03:15 to tell us what not to invest in.
0:03:16 – Yes, right.
0:03:17 – As well as what to invest in.
0:03:18 – So how so?
0:03:20 – Well, so for example, we have this basically
0:03:22 this theory that basically it’s very, very dangerous.
0:03:24 So one of the great things about our industry
0:03:26 about venture capital is you get to do these things
0:03:28 that basically disrupt sort of the big
0:03:30 establishing incumbent companies.
0:03:32 Conversely, a very dangerous thing to do is to attack
0:03:35 companies that we, our internal term is the new incumbents.
0:03:37 And so it’s one thing to like go attack, you know,
0:03:39 a tech company that’s been in business for 50 years
0:03:41 that’s on its six C or something like that.
0:03:42 It’s another thing to go attack Google
0:03:43 being run by Larry Page.
0:03:44 – Right.
0:03:46 – Because Google being, you know, Larry Page
0:03:48 is like fully aware of the theory of disruption
0:03:49 and in full command of his company.
0:03:51 And if you like, he sees a disruptive threat coming.
0:03:53 He is quite capable of doing the things to head it off
0:03:55 that a, you know, fourth generation professional CEO
0:03:56 might not be able to do.
0:03:59 So anyway, so that was one thing I want to say.
0:04:01 The other thing I want to say is disruption.
0:04:02 It’s a, I agree with Ben.
0:04:04 It’s funny that this is a topic now,
0:04:05 but since it is, it’s worth talking about
0:04:09 which is the term disruption by its very nature,
0:04:12 the term itself has negative connotations, right?
0:04:13 It’s disruption seems like
0:04:15 it’s one step away from destruction.
0:04:17 And so it gets, it’s got this kind of,
0:04:19 you see it in this kind of popular kind of conception
0:04:21 that there’s something bad about it.
0:04:23 The actual way that Christensen used the term
0:04:25 was actually in a very sort of applied way
0:04:28 in a very specific circumstance in business.
0:04:31 And, and actually in a very positive way,
0:04:33 which is basically he described as a way
0:04:34 that progress happens, right?
0:04:37 So progress doesn’t happen by basically old companies
0:04:38 like deciding to do new things.
0:04:39 Company, progress happens
0:04:41 because new companies decided to do new things.
0:04:43 And then disruption is the process
0:04:44 by which the new things are able to take over
0:04:45 from the old things.
0:04:47 If you decide you don’t like disruption,
0:04:49 what you’re basically saying is you don’t like new things,
0:04:49 right?
0:04:51 It’s basically to be against disruption
0:04:53 is to basically be pro the status quo.
0:04:54 And pro the status quo means the way,
0:04:55 however the world is today,
0:04:58 like that’s it, like that’s all we’re gonna have.
0:04:59 Like the way things work today,
0:05:01 this is as good as it’s ever gonna get.
0:05:02 The disruption argument is no, no, no, no, no, no,
0:05:04 things can become much better.
0:05:06 Products can become much better.
0:05:07 Businesses can become much better.
0:05:09 Opportunities for people can become much better.
0:05:11 And so it’s a, it’s a negatively connotated term
0:05:13 that has very positive implications.
0:05:15 And I think that that’s really at least in the last couple
0:05:17 of years that’s been lost in a lot of the commentary.
0:05:19 – You mentioned Google and one of the things
0:05:20 that we’ve seen, you know,
0:05:22 through the technology industry’s history
0:05:25 is that it’s very, very hard to disrupt yourself
0:05:27 and kind of make a transition from one thing to another.
0:05:31 IBM, maybe the only company that’s done it.
0:05:34 Google, you know, they’re trying everything.
0:05:36 You know, and Facebook is trying everything.
0:05:39 And do these companies somehow change the rules?
0:05:42 Or is it the same rules applying and, you know,
0:05:45 disruption theory catches up with them in 50 years maybe.
0:05:48 – So I think you’re, I think kind of have to break
0:05:51 that back apart and go back to what Mark said.
0:05:53 I think that people often think of big companies
0:05:55 can’t innovate, little companies can,
0:05:59 but the real truth is new companies can innovate
0:06:03 and companies that are so old that the original inventors
0:06:06 are gone, have a lot of trouble doing it.
0:06:10 And so if you go back to HP or IBM
0:06:13 or any of these companies, when the founder,
0:06:15 when Thomas Watson was running the company,
0:06:17 when Dave Packard was running the company,
0:06:20 they didn’t have any trouble doing new things.
0:06:22 And they did a phenomenal, I mean, HP in particular
0:06:24 did like a crazy number of new things,
0:06:29 just amazing and in retrospect, really phenomenal.
0:06:30 And if Mark Zuckerberg’s running the company
0:06:32 or Larry Page is running the company,
0:06:33 you know, that’s not an old company.
0:06:34 That’s a new company.
0:06:39 And as innovators, they, you know, we believe
0:06:43 and this gets back to why we don’t attack them
0:06:46 because they’ll attack right back and very effectively.
0:06:48 You know, they’re going to be able to do new things.
0:06:50 And like sometimes that will mean
0:06:52 bringing in new talent through acquisition
0:06:55 or new technologies through acquisition,
0:06:59 but they’re going to be able to think about the problem
0:07:02 through a lens that is not the business they’re in.
0:07:05 And that’s kind of, this is the amazing thing
0:07:08 that Clayton Christiansen laid out was that, you know,
0:07:10 if you’re like, if you’re an old company
0:07:12 run by professional managers,
0:07:13 you’re really good at studying
0:07:15 and optimizing the business you’re in.
0:07:17 And so if there’s a new business that comes along
0:07:22 that doesn’t, is inconsistent with that, you get stuck.
0:07:23 But if you’re Mark Zuckerberg
0:07:26 who created a business from nothing,
0:07:27 then you have a very different view of the world.
0:07:31 And it’s not like, okay, how do I optimize the business
0:07:32 that I’m in?
0:07:33 It’s like, well, how do I get another business
0:07:34 that’s like Facebook?
0:07:36 That’s more the way you think about it.
0:07:37 – The other thing is the fact that Christiansen
0:07:38 was able to articulate this in a theory
0:07:40 that’s so clear and put in the book is,
0:07:43 I think that like the best professional CEOs
0:07:45 in the tech industry today, like now understand this
0:07:46 in a way that maybe their predecessors
0:07:48 10 or 20 years ago didn’t understand it.
0:07:49 So I’ll just give you two examples
0:07:51 of people I work with, John Donahoe at eBay.
0:07:53 Like when mobile came along, you know,
0:07:55 sort of classical professional CEOs,
0:07:56 when mobile comes along, you know, would look at it
0:07:58 and say, well, I’ve got this great business on the web.
0:08:01 If I move to mobile, it may or may not work as well.
0:08:03 And so maybe I don’t want to try to make the move.
0:08:05 Maybe I want to stay on the web and reinforce the web
0:08:07 and like not take the risk of quote disrupting myself
0:08:09 by making the jump to mobile.
0:08:11 But since John understands disruption theory
0:08:13 and it’s been like articulated and explained
0:08:15 in a way that makes sense, you know,
0:08:17 he was able to be based on a phenomenally successful job.
0:08:19 He went full throttle into mobile
0:08:21 and they made the jump and they’ve done it very well.
0:08:23 Meg Whitby doing the same thing with this.
0:08:25 I just, one example is this project Moonshot
0:08:27 which is these cartridge based servers.
0:08:28 – At HP, right?
0:08:31 – At HP that are a direct attack
0:08:32 on the existing blade server business.
0:08:33 And the blade server business at HP
0:08:35 is a very, very big and profitable business.
0:08:37 And HP is basically self disrupting
0:08:39 with this new kind of cartridge based server.
0:08:41 And so again, and when you have the discussion,
0:08:43 you know, HP board meeting and you have the discussion,
0:08:45 you’re like, okay, why are we taking the risk
0:08:47 of damaging this big existing profitable business
0:08:48 by doing this new thing?
0:08:50 The answer is because it’s the right thing to do
0:08:51 according to disruption theory.
0:08:54 Like it is, like there is a logical framework.
0:08:56 And again, think about what’s happening
0:08:58 which is something new is happening.
0:08:59 Progress is happening, right?
0:09:01 This is now the reason and the motivation
0:09:02 and the explanation and the justification
0:09:03 to be able to make progress.
0:09:06 So it’s an incredibly powerful positive thing.
0:09:09 – Let’s get to entrepreneurs and entrepreneurship.
0:09:11 You guys founded the firm.
0:09:15 In part, I’ve been told because you wished
0:09:18 you’d been told or helped in certain ways.
0:09:21 What’s one thing both of you wish you knew
0:09:25 or someone had told you as entrepreneurs?
0:09:28 – Well, that presumes we would have listened.
0:09:34 You know, there’s just so much that we did not know
0:09:36 going through it the first time.
0:09:37 And one of the great things
0:09:39 about the entrepreneurial experience
0:09:42 is it’s just an amazing learning curve
0:09:46 about everything from markets to organizational structures
0:09:48 to compensation to everything.
0:09:54 But probably one of the most challenging things
0:09:55 to learn while you’re out there
0:10:02 is kind of how macroeconomics impact markets
0:10:06 and particularly how they,
0:10:11 how private funding can change very, very rapidly.
0:10:14 You know, when we were, you know, particularly,
0:10:17 and this wasn’t as a harsh lesson at Netscape,
0:10:20 but at Opsware and LoudCloud,
0:10:23 it was like incredibly difficult for us
0:10:24 to go from the funding environment
0:10:28 where basically had the highest multiples
0:10:30 in the history of anything
0:10:32 to there was no money available, period.
0:10:33 I mean, like that was,
0:10:36 it was the most dramatic fall imaginable
0:10:38 from the highest of highs to the lowest of lows.
0:10:42 And, you know, to have the NASDAQ fall over 80%
0:10:46 and that not being, you know, that’s NASDAQ,
0:10:48 that’s not tech, tech fell 95%.
0:10:50 It’s just like not something you could even imagine
0:10:51 or get your head around.
0:10:55 So I wish, you know, like I wish we would have known that.
0:10:58 I wish, I don’t know if we would have believed anybody
0:10:59 if they had told us that,
0:11:03 but that would have probably made it a little less painful
0:11:05 if we had any idea how bad it could be.
0:11:07 – It would have made a worse book.
0:11:09 I’ll tell you that, that you wrote, but still.
0:11:10 – Yeah, yeah.
0:11:13 – On the other side of the table,
0:11:17 what do you want more or less from entrepreneurs,
0:11:19 more of or less of from entrepreneurs?
0:11:23 – Yeah, well, you know, it’s very different
0:11:25 across different businesses,
0:11:27 but like the one thing
0:11:30 that would probably be nice if there was less of
0:11:33 that’s pretty consistent is it’d be nice
0:11:36 if it wasn’t so important to entrepreneurs
0:11:40 what their peers valuations were.
0:11:44 Like that, that is probably the most meaningless thing
0:11:48 to focus your mind on as an entrepreneur imaginable.
0:11:50 It’s just like irrelevant.
0:11:53 – You don’t have anything else to base your value on, do you?
0:11:56 – No, no, no, that’s, you go ahead.
0:11:59 – Yeah, so it’s not actually,
0:12:02 you know, your company is your company,
0:12:03 their company is their company.
0:12:06 You’re looking at the price they got,
0:12:09 not any of the business metrics that they have
0:12:11 or like how the company is going.
0:12:13 So you’re not actually basing your valuation
0:12:15 on anything in that sense.
0:12:19 And there’s better data to be gotten for sure.
0:12:21 Like, you know, we have better data.
0:12:24 We can talk to them about all the kind of valuations
0:12:26 based on actual revenue and so forth,
0:12:28 as opposed to the person they went to school with
0:12:31 or the person they worked at their last company with.
0:12:33 And, but people get very wrapped around the axle on that
0:12:37 because there’s, you know, it’s kind of the thing
0:12:38 that Peter Thiel talks about,
0:12:40 whereas competition is actually like really destructive.
0:12:42 And that’s like the worst kind of competition
0:12:44 ’cause it’s competition that’s irrelevant
0:12:47 to anything in life other than, you know,
0:12:50 you can go tell your friend what valuation you got.
0:12:55 And I think that it causes bad, you know,
0:12:57 errors in judgment and delays in decisions
0:13:00 that need to be made quickly and things like that.
0:13:02 So, you know, it’s just,
0:13:05 it’s one of those things where humanity gets a better view.
0:13:10 And I wouldn’t like, less of that would be good.
0:13:13 – Mark, any, anything you would offer on that?
0:13:14 – Well, the thing that the great entrepreneurs
0:13:16 all have in common, we talk about this a lot,
0:13:18 but you just see it every day is the great entrepreneurs
0:13:20 all have amazing courage.
0:13:21 And so I would say we’re blessed
0:13:23 in that the entrepreneurs we work,
0:13:24 and we select for it.
0:13:25 I mean, we try very hard to select for it,
0:13:27 but the entrepreneurs we work with that are amazing.
0:13:28 One of the things they all have in common
0:13:29 is they’re incredibly courageous,
0:13:30 but which I mean, they don’t give up.
0:13:31 They don’t, they don’t quit.
0:13:33 Like they don’t, they don’t quit.
0:13:33 They don’t flinch.
0:13:34 They don’t get demoralized.
0:13:36 They don’t get, I mean, well, actually,
0:13:37 they may get demoralized or depressed,
0:13:39 but they show up to work the next day
0:13:41 and they work their way out of whatever problem they’re in.
0:13:43 And they just keep pounding and pounding
0:13:44 and pounding and pounding.
0:13:45 And I think there’s a little bit too much
0:13:48 in the Valley right now of the pivot
0:13:50 and the lean start, you know, the lean startup
0:13:51 and the, you know, the everything’s an experiment
0:13:54 and minimum viable product and failure is good
0:13:57 and kind of all of these excuses to be able to give up
0:13:59 when things aren’t going well.
0:14:02 And I think that the great entrepreneurs through history
0:14:04 have always been the opposite kind of personality
0:14:05 and all that they’ve always been.
0:14:06 “I’m gonna make this thing work
0:14:07 hell or high water no matter what.
0:14:09 I am going to knock my way, you know, headfirst
0:14:12 through any, you know, barrier that I run into.
0:14:13 I don’t care what people say about me.
0:14:15 I don’t care what kinds of problems I have.
0:14:18 I’m gonna figure this out and I’m not gonna give up.”
0:14:20 And so I would just say we love working with people
0:14:22 who have that personality type
0:14:23 and you can never have enough of them.
0:14:25 – Elon Musk comes to mind.
0:14:26 I mean, cars and space.
0:14:28 – Yeah, so to start, think about this,
0:14:30 to start a new electric car company.
0:14:32 And by the way, think about the last car company
0:14:33 started in the United States.
0:14:34 They literally made a movie about the catastrophe
0:14:36 that resulted, which is this movie, Tucker.
0:14:39 And so if you want like a story of like a horrible business.
0:14:40 – Which went better than DeLorean.
0:14:42 – Yes, well, actually, yeah, DeLorean.
0:14:43 Well, he had the added,
0:14:44 he had the cocaine smuggling business on the side,
0:14:47 which helped cover the, to free the expenses.
0:14:49 But, you know, car companies,
0:14:52 like all the car companies in the US that are successful
0:14:53 are like, you know, from the 1910s and 1920s.
0:14:55 And so to start a new car company
0:14:56 in the electric car category,
0:14:58 when all the electric cars had failed,
0:15:01 simultaneously to start the first new private rocketry company
0:15:04 in the United States in probably 40 years
0:15:05 to go straight up against the big boys,
0:15:07 to do those at the same time.
0:15:09 And then to go through the 2008 crash.
0:15:12 And he has actually recently opened up on this of like,
0:15:13 he almost lost both companies in 2008.
0:15:15 Like they’ve almost both vaporized.
0:15:17 And then a gut through both of those
0:15:18 and have both come out the other side,
0:15:21 like just like an excreaming successes is just a,
0:15:23 it’s a spectacular performance.
0:15:26 And a huge part of it is he didn’t give up.
0:15:28 – Ben, let’s touch on your book a little bit.
0:15:29 The hard thing about hard things.
0:15:31 One thing it got great reception,
0:15:34 but you’re like, well, yeah, that sounds good for you, Ben,
0:15:36 but that was your story.
0:15:38 How can I embrace that and make that my story?
0:15:41 But, you know, was there anything in the response
0:15:45 that you wish people had pushed you harder on?
0:15:48 – Well, the things that people pushed me on
0:15:49 actually annoyed me.
0:15:52 So I, it’s hard to say that I wish about that.
0:15:55 I mean, I think that to your point though,
0:16:00 it was my story and the reason for that,
0:16:02 I mean, there was a really specific reason for that,
0:16:04 which is building these companies
0:16:07 tends to be very dynamic and very situational.
0:16:10 And so a very frustrating thing
0:16:12 about management and advice in general,
0:16:15 and particularly, you know, both in books
0:16:18 and then things that you often get from board members
0:16:22 or kind of pattern matchers as it were,
0:16:23 is that they’re giving you advice
0:16:25 and it’s based on something.
0:16:28 And that advice and what it’s based on
0:16:30 may or may not be relevant to you.
0:16:31 And if you don’t know what it is,
0:16:33 it’s very difficult to interpret it.
0:16:35 And I always found that, you know,
0:16:37 management books would give like guidance
0:16:39 and you’d be like, well, okay,
0:16:41 is that what I should be doing?
0:16:44 But I have no idea where it came from.
0:16:45 And so it’s hard to say.
0:16:48 So a lot of putting my story in was just to say,
0:16:50 look, this is why I’m telling you this.
0:16:54 And like, if your situation is completely different
0:16:56 than this, then that might be the part of the book
0:16:59 that you ignore or like, at least,
0:17:01 or maybe you can map it on to what you’re doing.
0:17:03 But I think that without knowing
0:17:05 why somebody is telling you something,
0:17:09 it’s pretty difficult to get value out of it.
0:17:10 – And on the topic of the entrepreneurial journey,
0:17:11 we have to go see a pitch.
0:17:13 – All right, that’s what you guys get paid to do.
0:17:15 So Ben and Mark, thanks so much.
0:17:16 We will do this.
0:17:18 Well, it won’t do it in five years.
0:17:19 We’ll do it much sooner than that.
0:17:20 Thank you very much.
0:17:21 – Okay, thanks, Michael. – Thanks, Michael.