0:00:05 Hi, everyone. Welcome to the A6nZ podcast. I’m Sonal. I’m here today with the third
0:00:10 episode of our new short-form news show, “16 Minutes,” where we cover recent headlines
0:00:14 the A6nZ way, offering expert takes on the trends involved and more. You can follow the
0:00:19 show in its own feed in your favorite podcast player app. Our other episodes cover multiple
0:00:24 news items and topics, but this week we’re doing two separate, short-but-deep dives connected
0:00:32 to recent headlines. One on the opioid crisis, which you can find in this feed, or at a6nz.com/16minutes,
0:00:36 and this episode, which is on eSports, gaming, and entertainment.
0:00:40 So here’s the news. The Fortnite World Cup just happened this past weekend. It’s the
0:00:43 first time ever it was the inaugural World Cup, and it actually took place in the same
0:00:49 exact stadium in New York that the U.S. opened for tennis takes place. And the news was that,
0:00:53 besides the fact that this is a big new thing, was that a 16-year-old named Kyle Gearsdorf
0:00:59 won $3 million, and that is actually the largest prize ever for a single person in eSports history.
0:01:02 And by the way, his nickname or his player name is Booga, and that’s actually the name
0:01:05 he got from his grandfather calling him Booga Booga Booga, and he was a baby, which I think
0:01:09 is really cute. Just to put this in an even more context before I introduce our experts,
0:01:13 what’s also really interesting about this is that this prize money is not that different
0:01:17 from traditional physical sports. Everyone’s talking about how Booga earned more money than
0:01:22 Tiger Woods did for winning the Masters, and it’s not even the biggest prize pool overall.
0:01:27 Dota 2’s The International is the largest ever so far, with over $30 million. And that’s
0:01:31 what everyone’s talking about. To me, the real big news here is that 2 million people
0:01:37 concurrently live-streamed this past Sunday on Twitch and YouTube. My friend Angela Watercutter,
0:01:40 Wired, pointed out that this is not as big as Game of Thrones, but that’s a hell of
0:01:44 a lot, so it’s slowly mainstreaming. I’m going to introduce our A6NZ experts, Andrew
0:01:50 Chen, general partner, who covers our consumer vertical and Darcy Kuliken on the investing
0:01:54 team for consumer. I want to hear from you guys, what’s a broader category that this
0:01:58 fits in, what’s hype, what’s real, and how are you guys thinking about this in the context
0:02:01 of the future of entertainment and tech? That’s a big question.
0:02:05 Awesome. I think when we look at esports, the most fascinating thing about it is it
0:02:12 is the most publicly visible phenomenon of the much broader trend, which is the emergence
0:02:20 of gaming as a new form of entertainment at a peer level to TV and movies and music and
0:02:25 so on. It’s inevitable that it’ll get there. Just the hours that consumers are putting
0:02:29 in really show that. For years, people have said, “Well, gaming, it’s this hits-driven
0:02:34 business and you build a game and you release it and you get all your sales in year one
0:02:40 and then that’s it.” I think what we’re seeing is that in this new style of hyper-social gaming
0:02:45 properties that have esports leagues around them, that have multiplayer built in, that
0:02:49 these properties like League of Legends Riot Games is their flagship game has now been around
0:02:53 for 10 years. It’s still doing over a billion in revenue. There’s still a ton of people
0:02:59 playing EverQuest. There’s still a ton of people playing World of Warcraft.
0:03:04 This is a new way that consumers are coming together and interacting with each other in
0:03:08 a big way. Esports is the natural outcome of all that.
0:03:12 You’ve alluded to the fact that people have been talking about this for a while. Why now?
0:03:17 What’s different that this is finally starting to compete with TV and other forms of entertainment?
0:03:20 There’s a couple different trends that are coming together. I think the very first one
0:03:26 is that video has just become such a huge thing. Streaming has become such a huge thing.
0:03:29 That is very much to do with the fact that we have phones, we carry these supercomputers
0:03:34 in our pocket, we have the bandwidth ability to be able to do it. When you look at these
0:03:39 stats around Twitch and YouTube, there’s literally billions of monthly actives that
0:03:44 are consuming video. What that means is that creates this new medium for any product that
0:03:49 produces lots and lots of visual content to live on top of that video.
0:03:54 We often will talk about this in the context of gaming or the context of education or the
0:04:00 context of many other of these things. Gaming is clearly the one that has very much benefited
0:04:06 from that. That’s one really big piece. The second piece here is that there’s steam, there’s
0:04:10 all the new consoles, there’s cloud gaming that’s coming out. I think all of these new
0:04:16 trends really serve to bring gaming that maybe back in the day, you would have had to buy
0:04:20 a $3,000 PC rig in order to run the top end.
0:04:23 Fully load up all the graphic processors and all these different things to really enjoy
0:04:24 the game.
0:04:29 Exactly. Now it’s like, wow, actually, the iPad plays Fortnite pretty well. They have
0:04:34 to modify the controls a little bit and this and that. That is such an amazing experience
0:04:38 to be able to play one of these massively multiplayer games without needing to spend
0:04:43 thousands of dollars. I think those two things and we’re also just seeing that kids that
0:04:48 are growing up playing Minecraft and Roblox, they’re graduating to Fortnite and there’s
0:04:51 a very good question like, are they going to graduate from Fortnite and what else are
0:04:56 they going to do? Are these kids going to find that in a world where they’ve been immersed
0:05:01 with all of their friends in these insane 3D environments that they’re going to go to
0:05:07 a 2D feed with static images and think that that’s actually the coolest way to hang out
0:05:08 with their friends.
0:05:11 That’s new for us, but for the kids growing up like that with that native worldview, that
0:05:14 you’re right. That’s their new, that the baseline has shifted.
0:05:18 If you grew up on AOL Instant Messenger, you would not have been able to guess that a system
0:05:22 of profiles and feeds and this and that would be the dominant way to hang out with your friends,
0:05:27 not Instant Messenger. And now for many of us that are in the Facebook or Instagram kind
0:05:32 of generation, I think it’s going to be hard to extrapolate like, maybe actually the next
0:05:37 way that all the humans in the world want to get together isn’t going to be also feeds
0:05:41 and following and photos and all this other stuff. It might look more like Minecraft,
0:05:42 might look more like Fortnite.
0:05:46 Yeah, that’s so fascinating because it has interesting implications for where the future
0:05:48 social network comes from, which is from games.
0:05:52 Yeah. I mean, I think you’re already seeing this, like the product experience of a Facebook
0:05:56 or a chat group is now the product experience of a game itself and the social network layers
0:06:01 around it. Fortnite then becomes the place where people hang out. We say why now and
0:06:05 it’s this idea that games entered the cultural zeitgeist and that’s driven by a lot of technology
0:06:08 and it’s driven by video and it’s driven by bunch of other things. But then once your
0:06:12 friends are playing it, you want to play it. It’s kind of like reaches this gating point
0:06:16 and then it hits a tipping point and then everybody wants to be playing and then they
0:06:17 want to be where their friends are.
0:06:20 So just to bring it back to the news then, because that’s where the trends are going
0:06:24 and how to think about the big picture, let’s talk about eSports for a minute in particular.
0:06:27 So you guys are saying that this is part of the larger trend and what’s happening with
0:06:31 gaming, technology, social networks, the future of entertainment really. But first of all,
0:06:35 when I was at where I did an op-ed in 2013 that argued that eSports was quite a long
0:06:38 time ago is no different than other sports. It was from Kevin Morris who was at the Daily
0:06:42 Dot at the time. And it was really interesting because I had to fight the headline desk because
0:06:45 they were like, “What the hell is eSports?” They were like, “You can’t say that.” And
0:06:49 just to give people context who are not familiar with that category, eSports is big business.
0:06:52 What really struck me is that it has a lot of the same features as traditional sports.
0:06:56 You’ve got training, like Buga in particular was playing for only two years, but he played
0:07:00 six to eight hours a day. He’s been training for two years like entirely. He has a management
0:07:04 company. There are sponsors. There are fans. There’s all these things in the regular sports
0:07:08 ecosystem that play out with eSports. I’m actually curious for your thoughts in particular
0:07:11 around eSports about where does this fit and how to think about this?
0:07:14 So I actually think the eSports term is maybe a little bit tortured. Maybe not necessarily
0:07:18 the best term, but you can just think about this as like eSports is another form of entertainment.
0:07:21 Sports is one form of entertainment. You want to watch the people that are like the highest
0:07:25 skilled people at any particular sport. And it’s kind of like a performance-based form
0:07:30 of entertainment. You also have like personality-driven forms of entertainment. That’s everything
0:07:36 from like reality TV. You can call that like some sort of eSport in and of itself. I think
0:07:41 eSports sits somewhere in the middle of that kind of like performance-based entertainment,
0:07:44 personality-based entertainment. Like Fortnite is much more kind of cartoonish. It’s much
0:07:48 more driven off the personality of the streamers. Ninja is probably the most famous and the
0:07:52 most highly compensated streamer. And he’s kind of like personality-based.
0:07:57 That’s super interesting. How do you think about this along the spectrum of sports entertainment?
0:08:00 From your vantage point and tech and like the future of entertainment, like why does
0:08:01 that matter?
0:08:07 I mean, one aspect of it is that right now, when we think about sports and eSports, inevitably
0:08:11 it’s the player versus player competitive type genre. And I think what we’re going
0:08:15 to very quickly find is that, you know, if you just go to YouTube and search for Minecraft,
0:08:20 there are so many things that people want to watch that are not this PVP competitive
0:08:21 kind of format. And so I think-
0:08:22 Pillar versus player.
0:08:25 Right. And so I think what we’re going to see instead is we’re going to end up seeing
0:08:31 a, you know, vast set of, you know, new genres of very watchable, very streamable entertainment
0:08:36 experiences ultimately that have as much to do with, you know, creativity and creative
0:08:40 expression. You know, you can imagine playing rock band or, you know, dance sense revolution
0:08:41 or whatever.
0:08:42 Oh my God, I love-
0:08:43 Imagine that as a-
0:08:44 I’ve always loved dance sense revolution.
0:08:47 Or like, you know, even if you take the metaphor as game shows, right? Game shows are some
0:08:52 of the most widely watched forms of entertainment. We don’t call them sports, right? But people
0:08:55 love watching them. And there’s going to be competitive versions that aren’t going to
0:09:00 be about shooting somebody. It’s going to be like, who can, you know, make the best
0:09:04 virtual garden, you know, who can cook the best virtual recipes. That’s going to be
0:09:05 a thing.
0:09:07 You’re right. What I love about that is things that are very native to what people already
0:09:11 do and love, since like there’s a whole cult around the great British baking bake off.
0:09:12 Yeah, totally.
0:09:16 Imagine that and like to your point, and you’re like in sports form, that’s super interesting.
0:09:18 Yeah. Well, it’s funny because people are like, oh my gosh, I can’t believe people watch
0:09:22 other people play video games. But we watch like other people answer trivia questions.
0:09:27 We watch other people play real physical sports. We watch other people like fix homes on reality
0:09:33 TV in like quasi competitive situations. That entire world exists. And it’s just bringing
0:09:35 that world into a place where people can do that more digitally. And then you’re just
0:09:38 creating the entertainment layer that sits on top of that interaction.
0:09:43 So this is good to talk about Fortnite specifically. It’s made by Epic Games. It allows up to
0:09:47 100 players to play at a time. And some people argue that’s a thing that sort of made it
0:09:51 really work. And a lot of games are now adding, you know, a battle royale mode where people
0:09:56 can fight and compete in like a confined space, et cetera. Fortnite was a top rank free game
0:10:01 last year. It made $2.4 billion in revenue according to Nielsen owned super data research.
0:10:04 And I think people only focus on the fact that it’s been around for two years, but it
0:10:09 wasn’t really a sudden overnight success because it has a longer history. And I’m just curious
0:10:12 for your guys’s view on sort of this trend of a lot of these games starting to add a
0:10:14 battle royale mode in particular.
0:10:19 Yeah. One of the really fascinating patterns that’s been happening in the games world has
0:10:23 been that, you know, oftentimes there’s, there’s a whole ecosystem of modders. These are people
0:10:24 that, you know,
0:10:25 Oh yeah. Like I love the modding community.
0:10:26 Right. Yeah. Exactly.
0:10:27 Modify games.
0:10:30 Exactly. That’s right. They’re modifying games or adding new assets, adding new rules,
0:10:35 you know, et cetera, et cetera. And, you know, League of Legends was originally derived from
0:10:41 Dota, which was a mod of Warcraft three. And similarly, Fortnite had had a bunch of predecessors,
0:10:44 I mean, there was Part PUBG, there was, you know, a mod that was built on, you know, Arma,
0:10:45 you know, et cetera, et cetera. And so,
0:10:48 And modding goes all the way back to Doom and even before that.
0:10:49 Well, yeah, exactly.
0:10:54 And so I think what we see is that, you know, many of these genres are taking time to kind
0:10:59 of incubate and kind of evolve in the indie gaming community and in the moderate community.
0:11:04 And then you have a new entrepreneur that then comes out with a fully integrated AAA type
0:11:08 level kind of thing. And that kind of, you know, brings it forward. And I think what
0:11:12 they end up tapping into, especially this kind of new generation of games is bringing
0:11:13 network effects into the games industry.
0:11:15 What do you mean by that?
0:11:19 What I mean is that it used to be that game was just a piece of content and you’d play
0:11:20 it and then you were done.
0:11:23 Right. A lot of the times these games are great, the tradition you’re describing a modding,
0:11:25 it actually leads to quick games being built and then dying.
0:11:29 Right. Right. Exactly. And so what ends up happening is in a world where you can mod
0:11:34 and then also ultimately create these full games that are multiplayer intrinsically and
0:11:38 have competition, have these different elements, what these are tapping into is they’re able
0:11:42 to create video and streaming communities around the game that kind of keep it going.
0:11:43 Hence the network.
0:11:47 That’s one form of a network. Another form of a network has been the e-sports leagues
0:11:51 and the teams and this whole ecosystem of folks that that are…
0:11:52 Management, sponsors, everything.
0:11:56 Right. Right. Who all have this very strong incentive to like keep the game going and
0:12:00 continue marketing it, et cetera, et cetera. And then, you know, third one, which we haven’t
0:12:04 talked about is, you know, user-generated content in the context of games.
0:12:06 I’m actually very interested in that because that’s actually been a trend in every media
0:12:10 wave where there’s always like a central established player that makes the content and then there’s
0:12:13 a user-generated phase that kind of comes right after that.
0:12:16 That’s right. Yeah. And I think, you know, as much as we’re talking about Fortnite’s
0:12:21 Battle Royale, you know, a lot of what the company Epic has been, you know, emphasizing
0:12:26 is their creative mode, which is just being able to like make cool structures and new
0:12:31 types of gameplay, et cetera. And that’s another form of how you can build a network
0:12:35 effect, the same one that’s propelling Minecraft and Roblox as well as, you know, kind of this
0:12:40 entire modding community. That’s obviously been one of the most powerful forces in the
0:12:44 internet consumer product sphere. And I think it’s inevitable that that all makes its way
0:12:49 into the game’s world. That’s absolutely right. And I think the focus you’re seeing on games
0:12:53 companies trying to build, whether it’s eSports, whether it’s kind of Battle Royale or multiplayer
0:12:58 modes, whether it’s UGC, like user-generated content, user-generated content, you know,
0:13:03 like Epic didn’t get Fortnite, like the eSports of Fortnite right on the first try, right?
0:13:06 It took iterations. That’s to me the interesting story here. It’s not an overnight success.
0:13:10 It’s not an overnight success. And like the game itself is not an overnight success. Like
0:13:14 the eSports, it is not an overnight success. But the idea of building towards network effects,
0:13:18 I think you’re seeing more and more games companies focused on that as the kind of ultimate
0:13:20 end goal. So how does this play out with the real
0:13:23 world? Because another really interesting article that actually the Wall Street Journal
0:13:27 did this past week, and we’ve seen this as well, which is that real estate developers
0:13:31 all over the country are trying to convert malls, convention centers, et cetera, into
0:13:36 destinations for eSports. They’re doing stuff like adding locker rooms, like broadcast studios,
0:13:41 higher speed connectivity, massive LED video walls, like in Times Square. And some of the
0:13:45 cities involved here like Baltimore, Philadelphia, Arlington, Texas, Los Angeles, New York and
0:13:49 Las Vegas, of course. So how do you guys think about this in this context?
0:13:53 So I think that’s a really interesting trend, which is around this idea of like what’s happening
0:13:57 in real life versus what’s happening in the digital world. This division between like
0:14:03 atoms and bytes and gaming and this kind of genre is like this really fascinating transition
0:14:07 point. You literally have people sitting in New York in a stadium watching something happen
0:14:12 online. You also have people within the game watching the event happen within the game itself.
0:14:16 And then you have like these characters and it’s got this like Disney World feel to it.
0:14:18 But then you also have this stuff where they announced Marshmallow was going to do a concert
0:14:22 at the World Cup. And there’s this moment where you’re like, is that happening in the
0:14:26 game? Is that happening online only? Because like Marshmallow had that concert, you know,
0:14:30 a couple of months ago that had millions of people, the cell membrane between like what’s
0:14:34 happening in real life and what’s happening in the digital world in this game’s context
0:14:37 is getting super, super thin. People are now building stadiums for people to have eSports
0:14:42 competitions and it’s just this blending of the physical world and the digital world.
0:14:45 Yeah. Nathan Juergensen used to talk about this concept of digital dualism that it’s
0:14:50 kind of a false dichotomy to separate in real life, IRL and the online world in many ways.
0:14:54 You’re saying that games is the bridge between them, which I think is super fascinating.
0:14:58 The other thing that is happening if you look at it from the real estate end of things is
0:15:02 that, you know, what are we going to do with all of this mall space, right? And what are
0:15:05 we going to do with all these, you know, restaurants that are, you know, kind of the
0:15:08 three star Yelp restaurant is just there, you know, but like really you could order
0:15:13 from your favorite place on, you know, Uber Eats or DoorDash or whatever. And like, you
0:15:17 know, that’s even better, right? So it’s, you know, cities are changing a lot and there’s
0:15:20 a lot of space that’s opening up that we’re going to have to figure out what to do with
0:15:24 it. You know, that very naturally leads to all these new forms of entertainment, especially
0:15:29 when they’re things that can drive foot traffic. Consumers are going to go to these locations
0:15:34 when they’re deeply experiential, when they’re very Instagrammable, when it’s something that’s
0:15:35 fun to do together.
0:15:38 What’s going to drive people to go to the mall and these spaces versus doing it in their
0:15:39 home?
0:15:43 Yeah, I think there’s a bunch of different reasons why people will ultimately want to
0:15:47 go to these experiential places. The very first thing is, you know, if you’ve ever been
0:15:52 to Oracle Arena while they’re playing League of Legends in a group of like, you know, tens
0:15:56 of thousands of people, it is a very different experience than doing it at home. Or you’re
0:16:01 going with your family to a, you know, a sandbox VR, you’re putting on all the latest gear
0:16:03 and you have, you know, haptic feedback, you have like…
0:16:06 You can actually feel the moves, not just play it in VR visually.
0:16:09 And you have fans, you have this and that, you know, and you’re in a thousand square
0:16:13 foot space, like how many folks in San Francisco have a thousand square feet of playing space
0:16:19 and, you know, five VR headsets, you know, and all the gear and custom software and content.
0:16:22 When you’re talking about the highest end cutting edge experience, you know, that is
0:16:26 going to be something that, you know, you’re going to have to do outside in a system that
0:16:30 costs hundreds of thousands of dollars. We also are very excited about the in-home experience
0:16:35 as well, but that will always be a more casual type of, you know, experience than what you
0:16:36 can get out in the field.
0:16:38 Ultimately, I think it’s going to be both.
0:16:41 This is a very hopeful future. Sounds like we’re going to have a lot of fun and interesting
0:16:45 entertainment and it’s going to creep into other areas of our lives, education, et cetera.
0:16:50 So we’ve covered everything in this episode from, you know, the recent milestone, Fortnite,
0:16:55 gaming, eSports, the future of entertainment, real estate, bottom line it for me. Like,
0:17:00 how should we think about the recent news of Booga, Booga, Booga, Booga, making, you
0:17:04 know, $3 million and in this context of these larger trends.
0:17:08 So I think there’s three things I can bottom line. One piece of it is, you know, it just
0:17:12 reflects Fortnite’s kind of status within the current zeitgeist at the top of the stack
0:17:15 right now. I mean, obviously these things shift around, but for right now it’s at the
0:17:19 top. The second thing is it’s the importance of eSports competitive play to gaming more
0:17:24 broadly. You know, publishers are going to continue to push this, Fortnite push this,
0:17:30 you know, the importance of events like this, the publicity they get, live events, the retention
0:17:35 it drives, the kind of engagement it drives from players is just going to kind of continue
0:17:38 to grow and it’s going to be more and more important to publishers as they develop these
0:17:39 games.
0:17:43 The third thing is just it shows the size and scale of what happens when games meets
0:17:48 network effects, right? Which I don’t think is a surprise, but I think what these events
0:17:52 do is they crystallize it for the outside world. It gives you that point where you can
0:17:57 now compare it to, you know, how big is Booga relative to Tiger Woods or Roger Federer or
0:17:58 anything like that.
0:17:59 Exactly.
0:18:00 Exactly.
0:18:03 Yeah, you literally put it in the Earth or Ash stadium and now you have this nice contrast
0:18:07 point which for people outside of the gaming industry gives them something tangible about
0:18:10 how big this is as a force in the world right now.
0:18:12 Fantastic. Thank you guys for joining this segment.
0:18:13 Awesome. Thank you.

0:00:06 Hi everyone, welcome to the A6NZ podcast. I’m Sonal and this is our second episode of 16 Minutes,
0:00:12 our new news show where we cover recent headlines of the week, the A6NZ way, why they’re in the news,
0:00:16 why they matter from our vantage point in tech, and share our experts’ views on the trends involved
0:00:21 as well. The first episode covered Neuralink and Brain Computer Interfaces, TikTok influencers
0:00:26 and AI, FaceApp and more. You can listen to that as well, it ran last week. But in this episode,
0:00:31 we covered these two topics that came up in the news this week, a new kind of mobile malware
0:00:36 that’s out there in the wild, and a new bipartisan proposal for lowering drug prices for senior
0:00:41 citizens with a short lay of the land on drug pricing in general. Remember, as we mentioned,
0:00:45 specific companies that none of this is investment advice, nor is it a solicitation for investors
0:00:51 in any of our funds. Please be sure to read a6nz.com/disclosures for more important details. Finally,
0:00:54 you should be able to find the show in the current A6NZ podcast feed, which is probably where you
0:01:00 found it, as its own show, 16 Minutes, in your favorite app shortly, and on our website at
0:01:09 a6nz.com/16minutes. So the first news item is on malware, which sounds very scary and malicious,
0:01:13 aka the mal. So let me actually quickly summarize the news and then I’ll introduce the a6nz expert
0:01:18 joining us to talk about this. So here’s the news. This week, a report was released by
0:01:22 Mobile Security Company Lookout, which also happens to be an a6nz portfolio company,
0:01:26 and basically researchers there discovered some of the most advanced mobile surveillance
0:01:31 wear ever seen. And to quote the Ars Technica article, which is one of my favorite news sites,
0:01:37 by the way, for this type of topic, the malware is called monocle. Sounds like a James Bond character.
0:01:43 And it’s been in the wild since at least March 2016, so over three years ago. And let me just
0:01:47 quickly say what it is. It’s an Android-based application that was developed by a Russian
0:01:52 defense contractor that’s apparently been linked to meddling in the 2016 presidential elections.
0:01:55 And I’m an Android user, but iOS folks, you’re not off the hook because
0:02:00 apparently a version of monocle for Apple’s operating system has been very likely developed
0:02:03 as well. And I’ll go into more details about what it can do, but let me introduce our expert
0:02:08 joining us to have this conversation, a6nz general partner, Martin Casado, who is a
0:02:13 serious expert in software-defined networking and actually has a very long and storied history
0:02:17 and security as well. Welcome, Martin. Thank you. So, Martin, can you just quickly help
0:02:22 break down what this category is? This isn’t practical advice. What is mobile malware? Tell
0:02:28 me about that. Sure. So, traditionally, in security, there’ve been two large markets. There’s been
0:02:32 network security, which are things like firewalls, which try and intercept bad things on the network,
0:02:37 and endpoint. So, endpoint is probably the most familiar. This is like protecting
0:02:42 traditionally at desktop. So, have you noticed things like Mac-A-Pee, Norton-Andy virus,
0:02:47 that’s right, Symantec, Trend Micro. So, this is the traditional endpoint security market where
0:02:52 you had a Windows desktop, typically, and you want to protect yourself from viruses. You’d get one
0:02:56 of these. You would download a package, install it, and run it on your machine. Right. Now,
0:02:59 there’s been a few things that have happened over the last, say, 15 years that have disrupted that
0:03:03 market, right? I mean, there’s been the move to cloud, which means there’s just, you know, fewer
0:03:07 desktops in the same way, and those desktops run fewer applications as opposed to like cloud
0:03:12 applications. But there’s also been a proliferation of operating systems. So, Windows used to be the
0:03:16 dominant personal operating system. Now, we see a lot of macOS, we see Android, which are mobile
0:03:20 operating systems. Right. You know, Chrome OS is another one. But also, like the form factor has
0:03:25 changed from something that sits on our desktops to laptops and, you know, like iPads, mobile phones,
0:03:30 tablets, etc. And by the way, just to emphasize, this is not like a static shift in terms of here,
0:03:33 the underlying secular trends, which I love that you just summed up for me. But we’re also talking
0:03:38 about mobile people, mobile workers. These devices enable them to move around. People are working in
0:03:42 coffee shops, you know, connecting, they’re doing their work with new tools that are letting them
0:03:46 do their work in the cloud. So, all of this affects all of that. It’s very important that
0:03:49 you point that out. Also, like there’s just a different life cycle for a mobile phone and different
0:03:54 behavior behind it. And a lot of detection of malware is behavioral. This is how a desktop
0:03:58 should act. Now, of course, a mobile phone will just be quite different. And so, mobile malware
0:04:04 is focused on that segment. Okay. So, given this recent news, tie it back to Monocle. I mean,
0:04:08 should we be freaking out or what? Actually, we’ve known that there’s, you know, like,
0:04:13 pretty serious malware out there for a long time. Here’s what’s so significant about this to me,
0:04:21 which is, for whatever reason, we’ve decided to use phones as a security device more than we have,
0:04:25 for example, desktops traditionally, right? So, they’ll give you an example of that. Often,
0:04:29 in order to secure an account, we do what’s called two-factor authentication. And the second factor
0:04:33 is an SMS. By the way, two factors, something you have, something you know. That’s right. So,
0:04:37 for example, like, for me to get into my email account, well, I’ll have a password, which is
0:04:42 something I know. But often, if they don’t know that it’s me or they want a second factor, they’ll
0:04:46 send me an SMS text to my phone. So, that’s the second factor, maybe that’s something I have,
0:04:50 which is the device. So, often, we say, well, the mobile phone is something you have. And we’ve
0:04:55 been treating it like a security device. So, like, if this is a bank account, if this is your email,
0:04:59 if this is your Coinbase account, whatever it is, actually, it turns out, like, phones aren’t
0:05:04 that secure even though we’ve been relying on it. And you can see there’s been a huge spate recently
0:05:10 of attacks against phones in order to get access to accounts. And so, this just further proves
0:05:13 that phones are very much a weak link into personal security.
0:05:16 In fact, this would be very specific about what monocle in particular can do, what we are talking
0:05:20 about the broader category. So, here’s some of the things according to the report. It can retrieve
0:05:25 calendar information, including the name of the event, when and where that event is taking place,
0:05:29 and a description of it. It can collect account information and retrieve messages from WhatsApp,
0:05:34 Instagram, Skype, et cetera. It can send text messages to an attacker-specified number.
0:05:38 It can reset a user’s PIN code. And it can download attacker-specified files,
0:05:42 reboot the device, and uninstall itself, and remove all traces from an infected phone.
0:05:44 It’s like it has a life and personality of its own.
0:05:47 Yeah, yeah, yeah, yeah. That’s the attacks I was talking about. Let’s imagine, for example,
0:05:54 like, your bank account was protected via SMS to your phone. If you have malware there that can
0:05:57 intercept that and send that to the bad person, they can reset your password on your bank account.
0:06:01 So, these things are actually very serious. In fact, how many of us authenticate using
0:06:05 SMS as our second factor? It’s very common. The first thing I do when I sign up to a new
0:06:08 thing is I turn off two-factor SMS for exactly this reason.
0:06:12 So, bottom line it for me. How should we think about security in a post-parameter world, which,
0:06:17 by the way, is what Lookout’s tagline is? And you and I talked about that topic in 2016 when you
0:06:22 first joined A6 and Z, and we did a podcast about networking as sexy. Yeah. How does Monocle and
0:06:26 Malware fit into the overall landscape of how security is changing just in the big picture?
0:06:30 I do think that there is a macro trend, which attacks are just becoming more personal and
0:06:34 dealing more with social engineering, right? So, there’s just less about, like, “Oh, I’m going to
0:06:38 have some bad bug that, like, does something malicious,” and more, “I’m going to have something
0:06:42 that’s closer to the human being, so I can trick them into doing something I can pretend to be them,”
0:06:47 because it really is these social aspects that we’re seeing become really predominant when it
0:06:51 comes to these attacks. I think the phone is about as close and personal as the devices we have.
0:06:53 It’s like a body part for many people.
0:06:56 It really is. I mean, it’s an extension. It’s like the coprocessor to our brain.
0:06:59 Yeah. I mean, I just think that the first thing is to realize that attacks are becoming incredibly
0:07:04 personal and they’re focused on us, right, especially if you’re anywhere near, like,
0:07:09 you know, a large company with a lot of assets. And so, I think it’s very important for listeners
0:07:13 to understand best practices for protecting themselves. For example, getting a password
0:07:18 manager is a big deal using hardware tokens where you can, turning off two-factor authentication,
0:07:25 not relying on SMS. I mean, just knowing that there are these targets that are focused on us
0:07:30 as people and understanding, you know, best practices to defend against that will go a long way.
0:07:31 That’s fantastic. Well, thank you for joining, Martine.
0:07:32 That’s a pleasure.
0:07:37 Okay. So, the next item is on drug pricing. So, here’s the news. Just this week,
0:07:41 the Senate Finance Committee released a bipartisan drug pricing proposal that would cap
0:07:47 senior citizens out-of-pocket costs for drugs, as well as, this is really interesting,
0:07:51 limit price increases in Medicare. And according to the Congressional Budget Office,
0:07:56 as reported by the Washington Post, the proposal is projected to save the government about $100
0:08:01 billion over 10 years, save senior citizens about $27 billion in out-of-pocket costs over that same
0:08:07 time period, save $5 billion from lower premiums. And just to be clear, this is one of many proposals
0:08:11 in a couple of months. The House of Representatives is also expected to release a different drug
0:08:16 pricing proposal than this Grassley-Widen one, which would actually allow Medicare to negotiate
0:08:20 the prices of some drugs, and that’s currently prohibited by law. And there’s two other proposals
0:08:25 on the horizon as well. Clearly, it’s a very political, tough topic with many proposals
0:08:30 and many players involved because drugs, the argument goes, should not be so expensive.
0:08:35 They’re life-saving. They’re meant to keep us healthy. It’s insane that drugs can be so expensive.
0:08:39 And I also just want to mention that this is playing out against other recent news, which we’ve
0:08:43 talked about on A6 and Z quite a bit already, which is that in the past month, for the first
0:08:49 time ever, we’ve seen the approval of not one but two gene therapies with approximately $2 million
0:08:55 price tags each. So I’m going to welcome A6 and Z Biogeneral Partner Jorge Conde and A6 and Z
0:09:00 Biomarket Dev Partner Jay Ragani. This is a really meaty topic and something I can’t believe
0:09:07 or even trying to attack as a part of a 16-minute segment. I would just love to start with just
0:09:12 quickly the lay of the land. Why is drug pricing so damn hard? So one of the things that often comes
0:09:17 up, and it’s currently in the headlines right now, is why are drug prices in the United States so
0:09:22 much more expensive than other countries? Why can’t the government and specifically Medicare
0:09:26 use its purchasing power to negotiate against pharmaceutical companies? As you mentioned,
0:09:30 it’s illegal, but the history is interesting. So the Medicare Modernization Act of 2003,
0:09:35 the one that actually established Part D in the first place. What is Part D? Part D is the drug
0:09:40 benefit for Medicare to cover prescription drugs. And what’s interesting in that is
0:09:46 it established the Part D benefit, but it included a provision known as the non-interference clause,
0:09:50 which effectively prevents the HHS from interfering. Department of Health and Human
0:09:53 Services, the government agency that developed here. Exactly. So the Health and Human Services
0:09:58 Secretary from interfering with any negotiations between the drug manufacturer and any of the
0:10:03 other stakeholders in the value chain. Fifteen plus years later today, we have some bipartisan
0:10:09 momentum to give Medicare the ability to negotiate. And I think it’s very important to note that when
0:10:14 we talk about drug pricing, in general, you run the risk of conflating things. What’s being conflated
0:10:19 here? Well, it’s one thing that the price of insulin continues to rise at the rate at which
0:10:24 it’s risen. It’s one thing where sort of things that have been off-patent or have been generic
0:10:29 for a long time all of a sudden get these very, very large price hikes. That’s different than
0:10:33 saying a new therapy like a gene therapy that has the potential to be a cure, you mentioned,
0:10:38 a $2 million price tag. Those therapies are A, expensive to discover. B, they’re very,
0:10:42 very expensive to make. And C, they have real benefit. In this case, they’re potentially
0:10:46 cures. And so you’re not giving someone a dose of a medicine. To be clear, you’re basically saying
0:10:51 that it’s a one-time treatment and cure versus having to see a doctor with chronic therapy over
0:10:55 and over and over again. For example, in the case of Zolgensma, it’s a gene therapy that was approved
0:10:59 to treat children with spinal muscular atrophy, which is one of the leading genetic causes of
0:11:02 infant mortality. Exactly. In that case, you’re not only giving these children health, you’re
0:11:06 giving them life. And so these are two very different things. It’s talking about how we control
0:11:10 rising costs of drugs that may not be on the cutting, still necessary, but not on the cutting
0:11:14 edge of innovation versus the new… And that can get lost in the dialogue because these are
0:11:18 obviously very complex debates. And for the latter, people can listen to your episode. Jorge
0:11:24 did an episode with famous MIT economist Andrew Lowe, who has a really interesting proposal for
0:11:26 thinking about how to fund these. So you can listen to that for more of a deep discussion.
0:11:31 So now let’s go back to the big picture, lay of the land. So let’s remove the deep special
0:11:36 new therapies off this particular discussion and talk about why are drugs so goddamn expensive?
0:11:40 I’ll give you the thrust of some of the more common arguments. The first one is,
0:11:45 they’re expensive because R&D is expensive. Developing a drug is time consuming. It’s risky
0:11:50 and it costs a lot of money. And because there are a lot of failures along the way,
0:11:55 the ones that are approved have to be priced as such to not only make money for that drug,
0:11:59 but also to pay for all of the things that have failed. As Jay mentioned, it’s very clear that
0:12:04 the United States, we pay a far higher price for most drugs than we do in the rest of the world.
0:12:08 For a lot of the reasons that he mentioned, the counterargument from industry would be,
0:12:12 well, for better or for worse, the United States is subsidizing R&D for the world.
0:12:13 Right, the research and development.
0:12:19 So that’s one issue. Another issue is that we do have this question of who has market power and
0:12:24 it is illegal in the United States at the moment for the government to negotiate drug prices that
0:12:27 would be considered price controls here in this country, even though that’s not the case
0:12:32 in many parts of the rest of the world. Number three, we have a very complex industry structure.
0:12:34 Tell me more about that, like the players that are involved here.
0:12:39 Sure. So there are manufacturers who, generally speaking, discover and develop the drugs in
0:12:42 the first place and commercialize them. And probably want to make money off of it.
0:12:46 Then you have distributors and the distributors get paid to move drugs through the channel and make
0:12:50 sure that the drugs get to where they need to go and can be in a hospital, a pharmacy, whatever it is.
0:12:53 There’s a middle layer here. Yeah, there’s a middle layer here, the pharmacy benefit
0:12:58 manager that helps actually the PVMs that helps manage who gets access to the medicines,
0:13:00 who’s eligible versus who’s not.
0:13:03 They sort of consolidate some of the information too, right? They sort of summarize the formularies
0:13:07 for what are the drugs, for which condition, et cetera, et cetera, and that helps influence
0:13:12 what gets prescribed. Yeah, so the B in pharmacy benefit manager, the idea was this sort of layer
0:13:18 of the industry arises to help the insurers, the payers, control who gets access to the drug to
0:13:21 make sure the right people get the drug and the wrong people don’t, and to help manage
0:13:25 the benefits spent, which that’s the idea to the benefit of the insurer. But then, of course,
0:13:29 that layer takes a cut of the economics, and it’s a very complex thing in form of rebates
0:13:33 and otherwise. And then you have the insurers and the payers. The payers obviously want to
0:13:37 minimize costs. They’re, in fact, just tying it back to the news. As I understand it, they’re in
0:13:42 support of this current bill. Because it controls the increase of the cost of the drugs, but there’s
0:13:46 always a risk for an insurer. If you’re reducing your drug spend, is there a potential that you’re
0:13:51 going to have more expensive interventions? As you go through the system, there are various
0:13:56 stakeholders that all get piece of economics, but there’s been studies that have been done that
0:14:02 show that for every dollar of drug spend, the manufacturer gets a percentage that is surprisingly
0:14:05 low. I would never have assumed that, because right now the narrative is like they’re extracting
0:14:09 all the value. Yeah, and the reality is that there’s value taken along the way. So that’s an
0:14:13 amazing breakdown of who the players are and their incentives and motives and just sort of how
0:14:16 they’re thinking about it, because obviously we’re not going to answer and fix this in one
0:14:21 episode. Now, let’s bring it back to the current news. So how does this sort of tie back into what’s
0:14:26 on the table right now? The proposal here is to cap the amount of spend or the amount of cost
0:14:30 that Medicare patients pay out of pocket in any given year and dropping it pretty significantly.
0:14:35 I think it was in the $8,000 range, and now they’re talking about the $3,100 range. Oh,
0:14:39 wow. Big difference. So that’s one big piece. The other one, at least as I understand the original
0:14:44 proposal, is to cap how much you can increase the prices and tie it either to inflation or
0:14:49 other mechanism by which annual price increases can occur over time. Now, the risk, of course, is
0:14:53 having drugs be introduced at even higher prices, because if I’m capped at how much I can grow,
0:14:57 right, I’ll start at a higher price. That’s right. Using maybe a terribly stretch analogy of rent
0:15:02 control and the San Francisco apartment, the rent is going to start off thousands of dollars higher
0:15:05 because you know you can barely incrementally increase it after that if you’re going back on
0:15:09 the market. Yeah, I think the other element to add there is walking through the chain of
0:15:15 stakeholders from the manufacturer to when a medicine ultimately gets in the hands of a patient.
0:15:20 There is also a lot of narrative externally on the list price to net price differential.
0:15:26 Oftentimes, a manufacturer will set a list price for a medicine, but that’s actually not the price
0:15:32 that is paid for by the payer or by the patient. That rebate that is given back by the pharmacy
0:15:37 benefit manager very rarely makes it to the patient or to the payer. So a lot of inflation
0:15:42 without any felt tangible benefits whatsoever. Exactly. And so that’s why I think some criticize
0:15:50 that some of the complexity in the chain and the lack of transparency creates unfair pricing policies.
0:15:54 We can obviously dive into all the solutions, but just at a quick take in the 16 minutes episode,
0:16:00 what are some of the things that technology can do? If you’re an entrepreneur looking at this space,
0:16:05 the opportunity for technology to drive transparency across various different steps in this process,
0:16:11 at least hopefully, and we’re optimists here, can drive down a lot of the waste that happens in
0:16:15 the system. One of the things that people really are challenging, one of the things that we’re
0:16:21 excited about is value-based care contracts or outcomes-based pricing. Yes. For some of these
0:16:26 novel one-time cure therapeutics that have entered the market, you mentioned Novartis Zolgensma,
0:16:31 Bluebirds and Tenglo. What’s challenging there and where there’s a real technology problem
0:16:38 is how do you get the data to actually facilitate that contract? Basically, because if it’s saying
0:16:42 value-based, how do you know it actually is being paid on value versus just some theory that it’s
0:16:46 going to work? It actually works and therefore you pay based on that. Exactly. Manufacturers are
0:16:52 proposing a money-back guarantee, but the data, the infrastructure, the plumbing does not exist
0:16:56 today to effectively arbitrate those contracts at scale. That’s where technology can help.
0:17:01 It’s a critical point because the chain is not only complex, it’s also not transparent,
0:17:05 and so the potential for technology to have an impact there is pretty significant,
0:17:12 but it also requires some help from policy to essentially make transparency, if not an obligation,
0:17:17 at least to write. If you have that, then you can help to drive out some of the inefficiencies,
0:17:20 drive out some of the frictions that exist in the system that ultimately lead to a higher cost.
0:17:24 Well, quite frankly, the argument that I would make here as a believer in free markets is that
0:17:27 they only work if there is transparency of information or symmetry of information and
0:17:31 that that’s the thing that people always forget when these debates become all about free market
0:17:36 economics versus price controls versus X versus Y. That is the key ingredient. The irony is that’s
0:17:39 a very thing you need, yet it’s a very thing that’s being obscured. Okay, so bottom line it for me.
0:17:43 What’s on the horizon here? Look, it’s clear that we as a country need to have a debate on how to
0:17:48 deal with rising cost of health care generally and specifically rising cost of drug spend,
0:17:53 and so I think it’s important that proposals are being made. This is obviously the first step of
0:17:57 what’s going to be a broader and ultimately very complicated conversation because we’re talking
0:18:02 about drugs that can cost tens or hundreds of thousands of dollars a year for chronic therapies.
0:18:06 We need to find a solution to contain those costs and to make sure that the patients are
0:18:09 getting the right therapies and that the system becomes accessible to everybody. Yeah, that access
0:18:14 is taken care of and that the system can support it. But what’s coming down the pipe is that we have
0:18:20 new modalities, new therapies like gene therapies, engineered cells that are really changing the
0:18:25 definition of what a medicine can be. I think it’s a very important thing because the outcomes,
0:18:30 and Jay was just describing value-based contracts and all that, the outcomes of what these therapies
0:18:34 can do are very different than what we’ve seen. Cures are a very rare thing in medicine,
0:18:38 but some of these things start to approach things that look like cures, but they’re very expensive
0:18:44 to make. You mentioned Zolgensma. SMA is a disease where you otherwise did not have an option,
0:18:50 and that can be a 10-year treatment horizon that now can be potentially addressed by one cure,
0:18:55 and the cost that that pulls out in the system from an administration standpoint
0:18:59 is also part of the value of that medicine. So the Center for Medicare and Medicaid Services
0:19:04 Administrator Seema Verma earlier this year highlighted the fact that the current system is
0:19:11 not set up to execute and support these kinds of new medicines. And less than until we have a system,
0:19:16 and this includes policy, this includes technology layers and pipes to have the data of feeds that
0:19:22 we need to understand what’s working and what’s not, and a way to address the cost that is entirely
0:19:26 up front and mismatch with the benefit, which is over a very long period of time. We will find
0:19:30 ourselves, I think, in the very challenging position where we have a healthcare system that is not
0:19:34 able to support innovation, and I think that’d be the worst thing for society. Thank you, Jorge
0:19:38 and Jay, for joining this segment. Thank you. Thanks for having us.

0:00:03 – Hi, and welcome to the A16Z podcast.
0:00:05 I’m Hannah, and this episode is all about
0:00:08 the exploration for and mining of minerals,
0:00:10 specifically cobalt.
0:00:12 In this conversation, I’m joined by Kurt Haus,
0:00:14 CEO and co-founder of Cobalt Metals,
0:00:18 Professor John Thompson of Earth and Geosciences at Cornell,
0:00:21 and A16Z general partner on the consumer team, Connie Chan.
0:00:24 We explain why it is that cobalt is suddenly one
0:00:27 of the most important and in-demand metals on the planet,
0:00:29 and how technology is transforming
0:00:32 how we find it and the mining industry as a whole.
0:00:34 Along the way, we touch on a little bit
0:00:36 of battery tech history and science,
0:00:39 and how entire chapters of human civilization
0:00:42 are driven by the search for and mining of metals
0:00:45 from ancient civilizations first finding copper
0:00:47 to the major ground shift in the 1950s
0:00:50 with geophysics and knowledge of plate tectonics.
0:00:52 And finally, what kinds of new data sources,
0:00:54 technologies, and techniques we can use
0:00:56 to find more cobalt today.
0:00:59 Everything from geophysical and geochemical data
0:01:01 to agricultural information to old boxes
0:01:03 collected over centuries in the basements
0:01:05 and attics of mining companies.
0:01:08 All of this to satisfy the incredible new demand
0:01:11 as we enter a new age of battery metals.
0:01:13 Why are we even sitting around this table
0:01:14 talking about cobalt today?
0:01:17 What is it that’s suddenly so interesting about cobalt?
0:01:19 I think of it as a color, as a prep, right?
0:01:20 – Well, that’s actually right.
0:01:23 And that was the very, very first use of cobalt.
0:01:26 The very, very first use was in dyes,
0:01:29 and to get a particular type of blue,
0:01:30 that was the principal way to do it.
0:01:32 – And when was it discovered?
0:01:34 – The actual metal was first isolated as a metal.
0:01:36 And I think I’m pretty sure it’s 1739.
0:01:39 – So if you go back 15 years or so,
0:01:42 its principal uses were in high,
0:01:44 sort of high strength steels and things like that.
0:01:48 So cobalt demand sort of grew gradually,
0:01:50 but everybody listening to this podcast
0:01:53 and presumably listening to this podcast on their device
0:01:57 has 10 grams of cobalt in that device about.
0:01:58 – Some might be listening from their cars.
0:02:01 – That’s true, so good point.
0:02:02 In which case, if they happen to be driving
0:02:05 an electric vehicle, it could be closer
0:02:07 to 10 or 20 kilograms of cobalt.
0:02:09 – It’s the battery that uses the cobalt.
0:02:11 – It makes the best batteries.
0:02:13 Everyone knows they have a lithium,
0:02:15 sort of a lithium-ion battery in their phone,
0:02:17 but that’s a chemical reaction
0:02:19 between lithium and cobalt oxide.
0:02:22 And so the two parts of the chemical reaction are essential,
0:02:23 and the greatest energy density,
0:02:26 greatest rate capability,
0:02:28 how fast you can discharge the battery,
0:02:30 greatest cycle life, that kind of thing.
0:02:32 That has some or all cobalt in it.
0:02:33 – Why is that?
0:02:36 Can we get into the science of why that’s the best battery?
0:02:38 – The reason cobalt makes a great battery
0:02:40 is that the battery in your iPhone
0:02:44 is what we call a lithium intercalation cathode.
0:02:46 That’s a fancy name, but what it means is,
0:02:47 lithium is the mobile ion.
0:02:51 So a battery has an anode and a cathode,
0:02:54 and an ion that moves from the anode to the cathode
0:02:58 to react chemically and form a new molecule
0:02:58 that’s more stable.
0:03:01 The cathode looks like kind of like a layered sandwich.
0:03:04 It has cobalt oxide, then lithium,
0:03:06 then cobalt oxide, then lithium, then cobalt oxide.
0:03:07 – Oh, like a layer cake.
0:03:09 – A layer cake, in a fully discharged sense.
0:03:11 You can imagine very intuitively why that’s good,
0:03:14 because the lithium has to get access to the cobalt.
0:03:15 So when you fully charge it,
0:03:17 when you push the lithium out of the cathode,
0:03:20 the lithium can intercalate into those spaces very easily.
0:03:23 And put simply, cobalt forms
0:03:25 the most stable layered structures.
0:03:27 So as you pull lithium out,
0:03:29 it doesn’t sort of disorder or change,
0:03:32 and other similar metals tend to change.
0:03:36 And when they change, then you lose capacity.
0:03:37 Your battery fades over time.
0:03:38 Basically because it forms
0:03:40 that really robust crystal structure,
0:03:43 it forms the longest lasting batteries.
0:03:45 And then it also has the sort of the greatest energy
0:03:48 per molecule for a lithium oxide battery.
0:03:50 – And this is by orders of magnitude.
0:03:53 So like right next to lithium on the periodic table is nickel.
0:03:55 And if you made a nickel oxide,
0:03:57 lithium nickel oxide battery, it would work okay.
0:03:58 But on your first cycle,
0:04:02 it would have maybe 10% less energy density.
0:04:03 Over a hundred cycles,
0:04:06 then it would have maybe 50% less energy density.
0:04:07 – So it really adds up.
0:04:09 In the same age when you’re shopping for your iPhone,
0:04:12 battery life is one of the key things you think about.
0:04:14 – And especially with your electric vehicle.
0:04:16 – And with your electric vehicle, right?
0:04:18 It determines how long you can drive with a car.
0:04:19 – And batteries,
0:04:21 the whole battery technology world is really interesting
0:04:23 ’cause it’s such an important part of our life now.
0:04:25 So if you go back 50, 100 years,
0:04:28 the lead acid battery, which is the first car battery,
0:04:31 which is still the dominant battery
0:04:34 for starting lights and ignition, the SLI battery.
0:04:35 But once you’ve got an established battery
0:04:37 that works that people trust,
0:04:38 it’s quite hard to displace it.
0:04:40 So you’ve got to be convinced people
0:04:41 with any new battery technology
0:04:44 that it’s gonna deliver the right amount of charge
0:04:46 at many, many times.
0:04:49 If you bought your phone and tomorrow had to go back
0:04:51 to get a new battery, you wouldn’t be very happy.
0:04:52 – Right.
0:04:55 – This is where Cobalt is a key piece of that puzzle
0:04:57 ’cause it offers a level of reliability
0:05:00 that it’s gonna be hard to substitute.
0:05:01 – To sum it up simply,
0:05:03 it’s the things you really care about
0:05:05 are rate at which you can charge and discharge it,
0:05:07 how much energy there is per unit mass
0:05:08 and per unit volume,
0:05:11 and how long it lasts in a single charge
0:05:14 and then how much that charge fades over many cycles.
0:05:17 And for all those elements, Cobalt is superior.
0:05:20 – So we went from using it to make a pretty color
0:05:23 to suddenly needing it all around us.
0:05:24 – You can almost define human history
0:05:26 by the types of metals that we were pulling
0:05:28 out of the ground during that time.
0:05:31 And in fact, if you look at the 8,000 years
0:05:34 from the beginning of the metal ages to about 1970,
0:05:37 we produced a certain amount of metals
0:05:38 we pulled out of the ground, called that X.
0:05:41 In the last 50 years, we pulled out the same amount again.
0:05:43 So throughout all human history, now we’ve pulled out two X.
0:05:45 We reproduced it in the last 50 years.
0:05:47 In the next 30, we’re gonna pull out another two X
0:05:49 just on current trends, okay?
0:05:51 It’s the mass of materials coming out of the ground.
0:05:52 But here’s the thing,
0:05:54 the types of metals that we’re pulling out of the ground
0:05:58 are changing and they’re changing for both society trends
0:05:59 and society’s needs, right?
0:06:01 So in the next less than 100 years,
0:06:04 we have to rebuild the entire energy infrastructure
0:06:05 of the world.
0:06:07 Some of that requires the types of metals
0:06:08 that we’ve been pulling out of the ground for a long time,
0:06:10 but some of it requires totally new metals.
0:06:12 And we need lots of new materials.
0:06:13 We need lots of lithium.
0:06:14 We need lots of manganese.
0:06:15 We need lots of cobalt.
0:06:19 If we’re going to convert the entire automobile fleet
0:06:20 to an electric fleet,
0:06:23 we need vastly more cobalt than we’ve pulled out to date.
0:06:24 And in order to do that,
0:06:26 we need to find new sources of cobalt
0:06:27 and that’s what we do.
0:06:28 So how do you do that?
0:06:29 The metal that we need is changing
0:06:30 and now we need cobalt.
0:06:33 How is the way we mine the way we source it changing too?
0:06:35 And actually, let’s go back and start earlier.
0:06:37 What does the history of mining cobalt look like?
0:06:39 The act of exploration and discovery
0:06:42 is fundamentally an information problem, right?
0:06:45 And so the mineral exploration business
0:06:47 is an incredibly old industry
0:06:49 and it’s essentially driven and been driven
0:06:53 by the evolution of civilization.
0:06:55 Right, it’s as old as humanity.
0:06:56 It started pretty much with copper
0:06:59 and that’s because people have actually found copper,
0:07:00 the metal sticking out of the ground.
0:07:01 So they used it.
0:07:02 They could make it into different things
0:07:04 and make it into ornaments and so on.
0:07:06 So this was the very beginnings of metallurgy
0:07:08 as a science, as a discipline.
0:07:11 It’s very cool because they somehow very creatively
0:07:13 worked out how to extract metals from rocks
0:07:16 that looked green ’cause they have copper in them
0:07:18 but didn’t obviously show the copper
0:07:21 until they were smelted effectively in a very hot fire
0:07:24 and a fire that was a lot hotter than a campfire.
0:07:25 So somehow these people had figured out
0:07:28 how to get the temperature of the fire up to a level
0:07:32 where it could reduce the copper bearing material
0:07:34 and extract the metal from that and that’s amazing.
0:07:37 So that’s six, 7,000 years ago.
0:07:39 And that process of exploration back then
0:07:41 just looked like kind of studying the land,
0:07:44 understanding and reading the earth around us.
0:07:46 I read an article recently about the Vikings
0:07:51 and the age of iron and how the Vikings, they think,
0:07:53 were able to identify where the iron,
0:07:56 the bog iron was through a kind of microbial sheen,
0:07:57 apparently.
0:07:59 It’s all based on observation.
0:08:02 And then sort of correlation of different factors
0:08:05 that were purely observation and experiential.
0:08:07 Effectively, that’s the sort of original prospect
0:08:09 of the person who could go into the ground
0:08:11 and recognize that this had potential.
0:08:15 And that really was the way all exploration was done
0:08:17 until about 1950.
0:08:19 They went to places where they could still observe
0:08:20 the metals or the minerals then
0:08:22 that they knew had the metals in,
0:08:24 even if they didn’t understand exactly why
0:08:26 or how or what the concentration was.
0:08:27 – But oftentimes the minerals
0:08:29 aren’t sitting above the earth.
0:08:30 – No, not now.
0:08:33 They’d find it on the surface and they’d keep mining down.
0:08:34 And originally they would mine down
0:08:35 till they hit the water table
0:08:37 and then they couldn’t deal with it.
0:08:40 The Romans then started using wheels to actually de-water.
0:08:42 So they could then go deeper.
0:08:44 And the breakthrough in the Industrial Revolution
0:08:45 was the steam engine,
0:08:47 which then allowed them to make pumps
0:08:50 that then could take the water from much, much deeper levels.
0:08:52 So at that point then they could chase it further and further.
0:08:54 But they didn’t know where it was going.
0:08:55 They just followed it.
0:08:56 – Blindly.
0:09:00 – So the 1950s was when we started to develop technologies,
0:09:02 remote technologies, geophysical technologies
0:09:04 that could predict where things were going
0:09:07 and predict where things might be.
0:09:08 – Really recent actually.
0:09:10 – And what were those sort of different sources
0:09:12 of information in the 1950s that changed
0:09:13 that we started becoming aware
0:09:15 of these new Earth’s processes?
0:09:16 – So two really.
0:09:19 One was what was called the plate tectonic revolution
0:09:21 of the 1960s to 70s.
0:09:24 When people realized that the planet is dynamic
0:09:26 and that the planet is descending
0:09:29 off the west coast here of North America,
0:09:31 the ocean plate is going beneath us
0:09:34 and that’s giving us all earthquakes and volcanoes and so on.
0:09:37 And simultaneously was the development of geophysics.
0:09:40 So the ability to detect the signature of the Earth
0:09:43 beneath the surface in terms of its physical properties.
0:09:46 So how magnetic it is, how dense it is,
0:09:47 how conductive it is,
0:09:49 we started to be able to measure those things.
0:09:51 Those measurements, the data that comes from that,
0:09:54 correlates in some cases with the presence of metals.
0:09:56 – How much does it correlate?
0:09:57 How predictive was it really?
0:09:58 – Poorly is the answer.
0:10:00 (laughing)
0:10:03 There were many false positives.
0:10:06 So we generated maps of magnetic signatures
0:10:08 and people would say there’s all these
0:10:10 fancy looking anomalous bumps in the data
0:10:13 and they drill them, they put holes in the ground
0:10:15 and it turned out that one in a hundred
0:10:16 would actually be interesting.
0:10:18 – Incredible amount of investment and effort
0:10:20 and tools, interesting.
0:10:21 – And that hasn’t changed.
0:10:22 We’ve got more and more tools now,
0:10:26 but if statistically when we look at the chance of discovery,
0:10:27 our odds are still very low.
0:10:28 You know, we’re in thousands,
0:10:30 one in thousand, one in 5,000.
0:10:31 – Well, let’s go back to Cobalt
0:10:33 and talk about what that process has looked like
0:10:35 for Cobalt because it hasn’t,
0:10:37 we haven’t, there hasn’t been a reason
0:10:41 to invest a lot of discovery in Cobalt, right?
0:10:42 Up until this point.
0:10:43 – Yeah, that’s exactly right.
0:10:44 – Besides pretty pictures.
0:10:45 – Right, that’s right.
0:10:46 So one of the interesting things
0:10:49 about Cobalt in particular as a metal
0:10:51 is that you have big copper mines
0:10:52 that are principally there because of copper
0:10:55 and they also have a lot of copper and a little bit of Cobalt.
0:10:57 – And that just happens to be because Cobalt and copper
0:10:58 tend to be–
0:10:59 – Hang out together.
0:11:00 – They hang out together.
0:11:01 – Not always, but in certain circumstances they do
0:11:04 and so it was, effectively the marginal cost
0:11:06 to produce Cobalt out of these mines is very low.
0:11:07 – A nice little extra perk.
0:11:08 – It’s an extra perk, right?
0:11:09 You would develop the mine anyway
0:11:11 if there was no Cobalt there.
0:11:14 So you have this sort of kind of gift to the world.
0:11:16 We’re gonna invest in copper production
0:11:18 and we get a little more, a little Cobalt.
0:11:19 And same thing with nickel.
0:11:22 You get a lot of Cobalt associated with nickel.
0:11:25 So that byproduct production of Cobalt
0:11:28 alongside copper and nickel was more than sufficient
0:11:32 to supply the world up until now.
0:11:33 – When you say more than sufficient,
0:11:35 does that mean sometimes people didn’t?
0:11:36 – Absolutely.
0:11:38 – So there’s just piles of Cobalt sitting around?
0:11:40 – Even just in the last 15 years
0:11:42 where copper mines were developed,
0:11:45 the Cobalt was well-known, its presence was well-known
0:11:47 and investment decisions were made
0:11:49 not to extract the Cobalt from the ore,
0:11:51 to extract the copper and to throw the Cobalt
0:11:53 into the tailings pile.
0:11:54 – Why?
0:11:58 – Because at the time if you did make that investment
0:12:01 and supplied that Cobalt, it would have tanked the market.
0:12:02 – Too much.
0:12:05 – Because the demand was not there from the smartphones
0:12:07 and the laptops and the electric cars yet.
0:12:08 – Nobody needs it.
0:12:09 – Quite literally.
0:12:10 – Exactly.
0:12:12 And so now the whole situation has flipped.
0:12:15 So now all of those mine tailings
0:12:19 that are full of Cobalt and that are known
0:12:21 are being reprocessed or investments are being made
0:12:22 to go reprocessed.
0:12:24 – So everyone that was sitting on a garbage pile of Cobalt
0:12:26 is suddenly feeling good about it.
0:12:27 – Oh, absolutely.
0:12:30 In fact, the two largest projects to come online
0:12:34 in the next 18 to 24 months are exactly that,
0:12:36 our waste pile reprocessing projects.
0:12:40 But in order to convert the entire global vehicle fleet
0:12:45 to electric vehicles, we need vastly more than is available.
0:12:47 – Even just current predictions,
0:12:48 if you include global demand,
0:12:52 especially from Asia of electric vehicles,
0:12:56 we’re likely gonna run out of Cobalt from known supply
0:12:57 in less than 10 years.
0:13:00 – Wow, we have the sudden increased demand.
0:13:02 What are the sourcing efforts starting to look like?
0:13:05 How is it changing how we actually find and source Cobalt?
0:13:06 – If you look into the scientific literature
0:13:09 and you look at gold or deposit formation,
0:13:12 you’ll find a very rich scientific literature
0:13:13 on how gold deposits form.
0:13:15 You’ll find a very rich scientific literature
0:13:17 on how copper deposits form.
0:13:19 You will not find a rich scientific literature
0:13:21 on how Cobalt deposits form
0:13:22 because people haven’t looked for it
0:13:23 and people haven’t done that.
0:13:24 – Right, there was not the same incentive.
0:13:25 It just wasn’t important.
0:13:27 – So, John, what does that science look like
0:13:29 for how to find Cobalt?
0:13:30 How much do we know?
0:13:32 – Not very much is the simple answer.
0:13:35 I mean, it’s kind of starting pretty at a basic level.
0:13:37 If we wanted cobalt, we’d have gone looking for copper
0:13:38 and we know how to do that quite well.
0:13:40 And we’d have to go looking for nickel.
0:13:42 – So it’s kind of like piggyback on other knowledge.
0:13:44 – And when we’d hope that we found some copper
0:13:45 and oh, this is terrific.
0:13:47 We’ve got a bit of extra cobalt.
0:13:49 But there’s no science basis for that
0:13:51 to what actually makes cobalt tick.
0:13:56 So understanding what kind of liquid will transport cobalt?
0:13:59 So if we have a fluid that moves through the earth,
0:14:02 you know, just water dominated, maybe salty water,
0:14:05 it moves through the earth and it interacts with a rock,
0:14:07 will it actually extract cobalt?
0:14:09 We know kind of how much copper it might extract,
0:14:10 but we don’t know with cobalt.
0:14:13 So if it did and then it keeps moving
0:14:15 and then that liquid kind of comes up on the surface
0:14:17 or comes into a different environment,
0:14:18 would it precipitate cobalt?
0:14:20 We don’t know the answer to that either.
0:14:21 And yet we know it did that
0:14:23 because we can find occurrences around the world
0:14:25 which are rich in cobalt.
0:14:27 And we can see the evidence that came
0:14:30 from the passage of a liquid through the rock
0:14:33 and it left the cobalt behind in cobalt minerals.
0:14:34 – So that’s one clue.
0:14:35 – So that’s one clue.
0:14:36 And if we understand how that work,
0:14:38 then can we extrapolate to other areas
0:14:40 and predict where it might work again
0:14:42 or where it might even work even better
0:14:44 and give us a greater concentration of cobalt?
0:14:47 So that’s the science kind of basis.
0:14:49 – And what are some of the other clues
0:14:50 that we’re starting to gather
0:14:51 and where you wanna dive deeper
0:14:54 into why is this happening with cobalt?
0:14:56 – Well, it’s key to understand it’s not that rare.
0:14:58 – When you look at the distribution of cobalt,
0:15:01 it occurs in environments that formed from liquid rocks,
0:15:03 so very high temperature, plus 1,000 degrees,
0:15:06 but also it’s precipitating on the ocean floor,
0:15:08 deep, deep on the ocean floor below 4,000 meters
0:15:10 beneath the surface.
0:15:13 We have the nodules, these little concentrations of metal
0:15:15 that are precipitating out of seawater.
0:15:17 And so at seawater temperature,
0:15:19 that’s two degrees in the deep ocean.
0:15:20 – And how do we know those are there?
0:15:23 – They were found in the late 1800s on an expedition
0:15:25 that was just dredging stuff off of the bottom
0:15:27 for the heck of dredging stuff off of the bottom.
0:15:28 – Oh my gosh.
0:15:29 – We pulled up these little round balls
0:15:30 called manganese nodules
0:15:33 because the major constituent actually is manganese,
0:15:35 but they contain significant cobalt.
0:15:38 – And how interesting that that’s what exploration was back
0:15:39 then like let’s just drag.
0:15:42 – Yeah, let’s just pick stuff up on the ocean
0:15:44 and see what’s there.
0:15:45 – The result is we know cobalt can form
0:15:46 at really high temperatures
0:15:49 and we know it can form at really cold temperatures.
0:15:50 That’s a huge range of conditions,
0:15:52 range of pressures, temperatures.
0:15:53 Now we want to get a little bit smarter
0:15:56 and cleverer understand which of those range of conditions
0:15:58 will give us more cobalt
0:16:01 relative to copper or nickel or manganese
0:16:01 or other things that make them more.
0:16:04 – I think that’s where the data play makes so much sense.
0:16:07 – Exactly, that takes us into now the data world.
0:16:09 – Because rather than like comparing
0:16:10 various exploration efforts,
0:16:11 they’re looking at places
0:16:13 that are fundamentally so different.
0:16:17 Now you can track every known source of cobalt
0:16:20 and what aspects or what qualities
0:16:22 around that land made it particular
0:16:23 and then pattern match.
0:16:25 – There’s pattern matching that process
0:16:28 and then there’s just looking at the patterns of data
0:16:30 until and get them to tell us a story.
0:16:33 – That almost reminds me of like the initial way
0:16:35 of looking at the landscape with very little information
0:16:38 and trying to pattern match the green rocks
0:16:40 or the iron sheen or what have you,
0:16:42 but this is like at a much higher resolution
0:16:45 and much greater than any one human could ever do, right?
0:16:49 – What the data world can do for us now AI machine learning,
0:16:51 it is the 21st century prospector
0:16:54 because it’s not biased and prospectors weren’t biased.
0:16:55 They were just observers.
0:16:57 So the digital world can observe and integrate
0:17:01 and interrogate the data in ways that we humans,
0:17:04 geologists with all our biases will never do.
0:17:07 – And we can go back and look at all the other historical
0:17:10 known traces of cobalt and all the reports that are written
0:17:13 that are like in PDF form right now actually
0:17:15 over the last several decades.
0:17:18 – Or not even in PDF, yes, or in paper form.
0:17:21 – So where are you pulling these different
0:17:22 information sources from?
0:17:23 What are they?
0:17:25 What are the main streams of different kinds of information?
0:17:27 – There’s a huge amount of information out there.
0:17:30 The challenge is that it’s not well-structured
0:17:32 or even digitized in some sense.
0:17:34 You have geophysical data, which is that we’re talking
0:17:36 about things like gravitational anomalies,
0:17:40 magnetic anomalies, electromagnetic responses,
0:17:42 things like that, it’s a whole class of data.
0:17:45 Geochemical data is compositional data
0:17:48 in basically a point in space
0:17:52 and a list of concentrations at that location.
0:17:53 Then you have mineralogical data,
0:17:55 which is like geochemical data, but it’s more complex
0:17:58 because it gets into not just a list of elements,
0:18:01 but actually what molecules the elements were in.
0:18:04 And then you have things like agricultural information,
0:18:05 right, which are sort of indirect
0:18:07 or topological information.
0:18:09 – Meaning like what is the soil like here?
0:18:11 – I mean, this is used for inference, right?
0:18:13 It’s not necessarily direct observation,
0:18:14 but that’s really important.
0:18:18 Then hyperspectral data, which is just the wide band
0:18:21 of electromagnetic emissions and reflection
0:18:22 from the surface of the earth.
0:18:23 – Is weather a part of that as well?
0:18:25 – Groundwater is a great source of information.
0:18:30 So you have very, very wide sets of data.
0:18:33 That data has been collected over centuries really.
0:18:35 – Right, it sounds like basically every piece of knowledge
0:18:37 we have about the earth and the way the earth works.
0:18:39 – That’s exactly right.
0:18:40 To first order, every piece of knowledge
0:18:42 about how the earth works and what about the earth
0:18:43 is relevant.
0:18:45 It’s just a matter of how relevant,
0:18:47 those sort of relative weightings of importance.
0:18:49 And so in certain jurisdictions,
0:18:52 that data has been sort of aggregated in certain ways.
0:18:54 And there’s a lot of it as public in certain places.
0:18:56 It has not even been digitized.
0:18:58 – Over what kind of time scale are you looking at?
0:19:00 Is this all like fresh new data?
0:19:02 Is this data from 200 years ago?
0:19:04 When people were panning for gold?
0:19:06 – Both, new and old.
0:19:07 So something like–
0:19:09 – The good thing is the rock doesn’t move that quickly.
0:19:11 – That’s the one possible.
0:19:13 – So 200 years ago is not really that.
0:19:15 – That’s so fun.
0:19:16 – Unlike a lot of, it’s actually interesting.
0:19:19 Unlike a lot of data analytics and data science plays,
0:19:22 we are looking at effectively a static system.
0:19:23 I mean, of course the earth is dynamic,
0:19:25 but on a time scale we’re looking at it,
0:19:26 it’s effectively static.
0:19:30 That’s a very different data science problem,
0:19:31 but we’re dealing with sparse data
0:19:34 and then we’re dealing with highly, highly disparate data.
0:19:37 So we have a program of trying to aggregate
0:19:38 all these different data sources
0:19:40 and then do two different things on it.
0:19:43 From one side, we have our basic science approach,
0:19:46 which is sort of how these ore bodies formed,
0:19:49 cobalt or any other material we might be looking for,
0:19:51 and then looking for those sorts of indicators.
0:19:53 And then you have the really exciting thing,
0:19:56 which is the data, rather than us asking the data questions,
0:19:58 the data tells us stuff, right?
0:20:00 So this is where your machine learning
0:20:02 or statistical association modeling becomes important, right?
0:20:05 Because the data itself can make predictions
0:20:07 based on the patterns that it sees.
0:20:10 And that’s where you eliminate the human bias
0:20:13 and the non-systematic approach of historic exploration.
0:20:15 – Yeah, and just like to tie that back to again,
0:20:18 like the demand for cobalt is so new.
0:20:20 So there’s lots of reports out there
0:20:23 where they’ll say there’s known cobalt in these places,
0:20:24 they just didn’t go mine them.
0:20:27 If you even get all those reports and digitize them
0:20:28 and look on a map, oh, you know,
0:20:31 all those reports are clustered in these areas.
0:20:33 That already surfaces some interesting sites.
0:20:37 – And probably enough, if you go back 30, 40 years,
0:20:39 a lot of the people out exploring
0:20:41 were very good at identifying minerals,
0:20:43 and better than we probably are now,
0:20:46 because we rely on a lot of extra tools to do it for us now.
0:20:47 And they recorded that presence of that mineral.
0:20:50 So now you’re not looking through all these old texts
0:20:52 for the word cobalt, because they didn’t write cobalt down.
0:20:55 They wrote down the name of a scooterotorite,
0:20:58 which is a very, you know, as a particular code arsenic.
0:21:00 So yes, they would have found that interesting,
0:21:02 but not from a commercial perspective.
0:21:04 They just thought it was cool.
0:21:05 They found another mineral,
0:21:06 because they were just like being a birdwatcher.
0:21:08 They were mineral watchers, so they recorded that.
0:21:10 So now you’ve got to go through the data
0:21:12 and find those references to that kind of thing.
0:21:15 – I just want to drill one level down just for like fun color.
0:21:17 Where do those reports live now?
0:21:19 Where are these types of data coming from?
0:21:21 I mean, the modern data must be easier to access,
0:21:23 but the old data– – Boxes.
0:21:25 Boxes and boxes and boxes and boxes and paper.
0:21:26 – In warehouses. – Warehouses.
0:21:28 – Dusty basements. – Basements.
0:21:31 – How do you even get access to all these?
0:21:31 – It’s hard.
0:21:33 I mean, some of the mining companies
0:21:34 are 100-year-old companies,
0:21:36 and they have 100-year-old data.
0:21:38 And so they have boxes and boxes sitting there.
0:21:41 Some would be well-archived and cataloged,
0:21:43 and some is completely unknown.
0:21:45 And inside those boxes could be anything.
0:21:47 It could be actual good information,
0:21:48 a mention of a mineral,
0:21:50 or it could be some mention of a conversation
0:21:51 between two people.
0:21:54 And in the conversation, they made mention that,
0:21:57 “Oh, when I was in the hills, I found this rock,
0:21:58 and it has this mineral in it,
0:22:00 and that happens to be a cobalt mineral.”
0:22:03 – 20 years ago, if you went to a new city,
0:22:05 and you wanted to find a business in a new city,
0:22:07 you had to get the yellow pages for that city,
0:22:09 and you had to get a paper map for that city,
0:22:12 and you had to look up the address in the book,
0:22:15 and then you had to look on the map for that location.
0:22:17 And a lot of what mineral exploration does now
0:22:18 is exactly that.
0:22:21 It’s very site-specific.
0:22:23 You kind of collect all the data for a new project
0:22:24 in a new area at a new time.
0:22:28 But it’s relatively easy to image the surface of the earth
0:22:29 and the infrastructure of the earth
0:22:30 and the way Google Maps did,
0:22:33 and to catalog all the businesses.
0:22:36 The problem we deal with is data sparsity, right?
0:22:37 So in some locations,
0:22:40 we have tremendous amounts of surface data density
0:22:43 and meaningful amounts of subsurface data density.
0:22:46 And in other locations, it’s very data poor.
0:22:49 And so then we have to use really sophisticated statistics,
0:22:52 really, to try to figure out and predict
0:22:53 what is in those materials,
0:22:55 what is in those areas where there is no data.
0:22:58 How do you actually deal with that incredible variety
0:23:00 and huge amounts of data in some areas
0:23:02 and very little, very old data in other areas?
0:23:04 It’s about making predictions, right?
0:23:07 So it’s about using places where there is a high density
0:23:10 of data and you can train and make predictions
0:23:11 and then make those predictions in areas
0:23:13 where there isn’t high densities of data
0:23:16 and then go out and validate it by collecting new data.
0:23:18 It’s interesting because in some ways
0:23:20 it feels incredibly modern and new,
0:23:22 but in other ways it also feels like a kind of old fashioned way
0:23:24 of exploring again.
0:23:25 Actually, a lot of this reminds me
0:23:28 of like their original idea of venture capital,
0:23:31 which is when kings and queens would fund
0:23:34 these exploration efforts to look for natural resources
0:23:36 or look for new land or whatever they were looking for.
0:23:39 – The whole idea of exploring the earth
0:23:42 to encourage people to look for the materials that we need
0:23:45 such that society can improve and do new things.
0:23:47 That’s an old concept.
0:23:49 That’s what developed California ultimately,
0:23:52 was that influx of people looking for gold.
0:23:55 And governments also fairly early, 150 years ago,
0:23:57 started mapping the rocks on the surface
0:23:59 because they knew if they map rocks
0:24:02 that somebody would recognize associations
0:24:04 and realize that that might have potential
0:24:05 and therefore they’d go exploring,
0:24:07 therefore they’d find things and that would then open up
0:24:09 and create economic activity and so on.
0:24:12 It’s a very old cycle we’re repeating,
0:24:13 but more efficient and more effective.
0:24:15 – Because now one of those explorers is a computer.
0:24:18 – Yeah, it’s also gonna help us actually mine
0:24:21 more efficiently and more effectively and more cleanly.
0:24:23 And that’s really important because to me,
0:24:25 there’s no point in us going electric
0:24:27 and having electric cars using cobalt for batteries
0:24:30 and so on to do that if we create a big mess
0:24:31 in terms of providing those materials.
0:24:34 So we’ve not only got to find it better,
0:24:36 we’ve also got to then exploit it and develop it
0:24:38 in a way that’s more efficient and cleaner
0:24:39 and doesn’t have the kind of problems
0:24:41 that we’ve seen all over the world.
0:24:44 – Well, I think it’s fantastic to think about the way
0:24:46 that the searches and exploration for these metals
0:24:50 have driven sort of entire chapters of human civilization.
0:24:53 And if we think about that, the age of copper,
0:24:55 the age of iron, if we think now we’re entering
0:24:57 the age of cobalt, what are some of the ripple effects
0:25:01 that we’re gonna see as we begin to more smartly mine
0:25:05 and access this new incredibly important mineral?
0:25:08 – Trying to solve climate change and other major issues
0:25:10 that requires very specific use of commodities
0:25:12 that we’re not so familiar with, like cobalt.
0:25:15 And so that changes the way we need to think about them
0:25:17 and the way we therefore also need to exploit them.
0:25:20 And the exploitation part is to be more selective.
0:25:22 We’ve been, we’ve bulk mined everything.
0:25:23 So we make big, big holes in the ground
0:25:26 in order to get iron ore or copper out of the ground.
0:25:28 And if we want to be really clever,
0:25:31 we’ve got to only find higher concentrations
0:25:33 because higher concentrations are more efficient.
0:25:36 But we also now need to try and be very selective
0:25:37 about how we mine them.
0:25:38 – Have much higher certainty.
0:25:40 – Yeah, so, and it’s great if we go back
0:25:43 and reprocess the tailings, which as we’re doing for cobalt.
0:25:45 And actually the Romans were the first people
0:25:48 who started reprocessing waste rocks to do that.
0:25:50 They did a couple of cycles of this kind of stuff.
0:25:52 So that’s not a new idea either.
0:25:53 But it’d be much better to be a really efficient
0:25:56 at the outset and extract as much metal as we can
0:25:58 from the less and less volumes of rock
0:26:01 instead of moving more and more rock to get, you know,
0:26:03 to get metal. – And from a consumer perspective,
0:26:05 this can result in much better batteries.
0:26:08 Because right now even the amount of cobalt
0:26:11 in the battery is kind of a financial decision.
0:26:11 – Oh really?
0:26:12 – And sourcing this decision.
0:26:14 – A financial and sourcing decision, right.
0:26:17 Like if these companies could put more cobalt
0:26:19 than they put in today in their batteries,
0:26:20 it would still be a better battery.
0:26:22 So if we want batteries or iPhones
0:26:25 that last one, two weeks without a charge.
0:26:27 – Yeah, we need more cobalt.
0:26:28 – Yeah.
0:26:29 – You know, there must be a cobalt craze, right?
0:26:31 Like everyone, everyone and their mom
0:26:33 suddenly wants to go mining cobalt.
0:26:35 – That’s the other cobalt issue
0:26:37 is that a lot of it comes from the DRC.
0:26:40 – Over two thirds of the world’s supply.
0:26:42 And again, remember, cobalt’s not a rare metal.
0:26:45 So the fact that two thirds of our supply
0:26:48 comes from the DRC, the Congo right now
0:26:48 is largely a function
0:26:51 of where those copper and nickel mines historically were.
0:26:54 – And it’s mined at a scale of local people
0:26:56 who don’t aren’t regulated,
0:26:59 don’t necessarily do it in an appropriate manner
0:27:01 and use child labor and may have links
0:27:03 to all sorts of other potential problems.
0:27:05 It’s basically done by local people
0:27:07 and DRC in other parts of the world.
0:27:11 They’re doing it because they are impoverished
0:27:14 and they feel they can probably make a better living
0:27:16 by scraping up the material
0:27:19 than plowing a little piece of land.
0:27:20 – Well, this highly valuable material.
0:27:21 – Highly valuable material.
0:27:24 – So it’s these small teams that are taking the gamble
0:27:29 and using shovels and very basic tools to go look for this.
0:27:30 – Correct.
0:27:32 – So that’s actually how it’s happening right now still
0:27:34 is just small groups of people
0:27:37 with eyeballs and shovels in the dirt.
0:27:40 Consumers care about where their products came from now.
0:27:42 They care about the ingredients.
0:27:44 They care about how they were made.
0:27:47 They care about if this came from a local farmer.
0:27:49 So they will eventually start also caring
0:27:52 about where their batteries came from.
0:27:54 – In the DRC where this is done,
0:27:56 they are mining material where,
0:28:00 which was originally a copper cobalt deposit
0:28:04 that then suffered thousands of years of weathering.
0:28:07 So rain came down and dripped through the rocks
0:28:10 and it actually separated the copper from the cobalt.
0:28:12 So the cobalt stayed near the surface
0:28:14 and deeper down it gets more copper rich.
0:28:15 And the mineral that they mine now
0:28:18 is it’s got this great name called heterogenite,
0:28:20 which as you might guess,
0:28:21 is something to do with being heterogeneous.
0:28:22 It looks all over the place.
0:28:23 It’s really messy stuff.
0:28:26 And they can just literally dig that up and put it in bags.
0:28:27 But unfortunately,
0:28:29 that also concentrate quite a bit of thorium,
0:28:30 which is radioactive.
0:28:34 So now we have artisanal miners, local people and kids
0:28:36 who are mining bags for this stuff,
0:28:37 which is slightly radioactive.
0:28:38 It’s not super radioactive,
0:28:40 but it’s radioactive enough to cause concern.
0:28:41 They don’t know that.
0:28:43 They’re just interested in getting bags full
0:28:46 and getting paid for the bag of dirt that they scrape out.
0:28:49 Some people estimate as many as 100 million people
0:28:53 on the planet involved in some kind of activity
0:28:54 like this at this scale.
0:28:55 Not just cobalt.
0:28:56 Not just cobalt.
0:28:59 Gold diamonds, other coltan, other minerals.
0:29:03 Okay, so let’s talk about what this new kind of endeavor
0:29:07 of exploration and mining and knowledge aggregation,
0:29:10 what does that mean on the company building side?
0:29:11 Who do you need?
0:29:13 What kind of people do you need
0:29:16 to sort of represent all those different elements?
0:29:17 It’s a fantastic question.
0:29:21 And basically it’s two very different classes of people
0:29:23 and they’re both essential.
0:29:26 Our company is effectively half made up
0:29:29 of economic geologists, geochemists,
0:29:30 mineral explorationists,
0:29:33 people who have spent their careers
0:29:34 looking in sort of the conventional manner
0:29:36 for mineral deposits of all kinds.
0:29:39 And then the other half is data scientists, right?
0:29:41 And so one of my co-founders,
0:29:44 has got his PhD in quantum computing.
0:29:46 And the other one was the chief reservoir engineer
0:29:49 for ConocoPhillips for many years.
0:29:52 Oil and gas has been incredibly sophisticated
0:29:54 in how they use technology
0:29:56 because there’s a very clear financial reason
0:29:58 to go find oil and gas.
0:29:59 Right, right.
0:30:02 But that same sophistication has not brought
0:30:04 over to mineral and metal exploration.
0:30:07 We relatively well understand the environment
0:30:08 in which we find oil and gas
0:30:10 and we have very good sophisticated tools
0:30:12 to then help us do that.
0:30:15 So the mining business is playing cash up on discovery
0:30:17 and it’s playing cash up on exploitation as well.
0:30:19 And so just in the last 10 years,
0:30:23 everything now in mining is being sensors all over it.
0:30:25 Data is being gathered in the mining process.
0:30:27 Autonomous vehicles are coming into mining so on.
0:30:30 And that’s why the team makeup I think is so interesting
0:30:32 because you have data scientists,
0:30:35 you have people who are truly experts in cobalt
0:30:36 and they already know
0:30:39 and have this gut feeling of where to look.
0:30:41 And then you have people from oil and gas
0:30:43 who can take that sophistication
0:30:45 and kind of bring them up to date.
0:30:46 Okay, so we’re entering a new era
0:30:50 not just about sort of the importance of cobalt
0:30:53 but also about new ways of mining as a whole,
0:30:56 transforming a whole industry and a whole model
0:30:59 of how we find and explore in the earth.
0:31:03 So what changes as a result of that entire model
0:31:04 shifting so dramatically?
0:31:06 That’s a fantastic question.
0:31:08 I think when you think about,
0:31:10 when you think about like the metallurgic epochs, right?
0:31:14 The sort of copper age, the bronze age, the iron age,
0:31:18 the steel age, giving rise to the industrial revolution
0:31:20 and then petroleum that’s we’re basically at,
0:31:24 we’re still in a petroleum age from a material standpoint.
0:31:26 I would say we’re entering the battery materials age.
0:31:29 And so battery materials will be the sort of,
0:31:32 the backbone of energy infrastructure
0:31:33 in the next 100 years.
0:31:36 And that requires a staggering amount of new material
0:31:38 and different materials than we needed in the past.
0:31:41 Cobalt being a salient one, but not the only one.
0:31:44 I think that the tools that we’re developing specifically
0:31:46 to develop, to look for cobalt
0:31:47 actually have a lot of generality to them.
0:31:50 And ultimately I think we’ll probably be looking
0:31:53 for a lot of things other than cobalt
0:31:58 to feed the need of the battery materials age broadly.
0:32:00 So a new kind of exploration
0:32:01 for a new age of new materials.
0:32:03 When you create the Google Maps,
0:32:04 you don’t just know where that stores,
0:32:07 you know where everything else is too.
0:32:09 And funnily enough, it’s different, but it’s the same.
0:32:13 It’s still source to material, to technology,
0:32:15 to people’s desire to change the world.
0:32:16 And that’s the way it’s been
0:32:18 when it was the sword 5,000 years ago
0:32:21 to electric vehicle now, it’s that same process.
0:32:24 But what we’re doing is gonna speed it up,
0:32:27 make it more efficient, use the data more effectively.
0:32:29 So we’re bringing all our tools that we have now
0:32:32 to do the same thing as it was done 5,000 years ago.
0:32:33 – That’s wonderful.
0:32:35 Thank you so much for joining us on the A16Z podcast.
0:32:36 – You’re welcome, thank you.

0:00:02 – Hi, everyone, welcome to the A6NZ podcast.
0:00:03 I’m Sonal.
0:00:05 Sonal Choksi, our editor-in-chief,
0:00:07 and I’m excited to share a new show from us today.
0:00:10 16 Minutes, a short news podcast,
0:00:12 where we cover recent headlines of the week,
0:00:13 the A6NZ way.
0:00:14 Why are they in the news?
0:00:15 What’s hype?
0:00:16 What’s real from our Vantage point?
0:00:19 And what are our experts’ quick takes on the trends?
0:00:21 Today’s episode is a little over 16 minutes,
0:00:22 covering TikTok with General Partner
0:00:24 for Consumer Connie Chan,
0:00:26 FaceApp with Operating Partner for Security,
0:00:28 and former CISO@Box, Joel de la Garza,
0:00:29 iHeartRadios Direct Listing
0:00:31 with Operating Partner Jamie McGurk.
0:00:35 But we began with A6NZ Bio General Partner, VJ Pande,
0:00:37 on the recent headlines around one of the companies
0:00:40 co-founded by Elon Musk, Neuralink,
0:00:43 and go over that news for the first half of this episode.
0:00:45 – Elon Musk this week announced advances in BCIs,
0:00:48 or brain computer interfaces, or neural interfaces,
0:00:50 and it’s something that people have been talking about forever.
0:00:52 And while they did acknowledge it’s a long road,
0:00:54 he even hinted, and this is where it gets a little crazy,
0:00:57 but sci-fi cool, he even hinted at the option
0:00:59 of merging with AI in the future.
0:01:01 What’s interesting is they announced a sewing machine,
0:01:03 which is basically a robot that sews
0:01:06 in delicate flexible electrodes called a neural lace,
0:01:08 which by the way is not a marketing term
0:01:09 that Elon Musk invented.
0:01:12 It’s actually a term from the culture sci-fi series
0:01:14 from Ian Banks, which was written
0:01:16 from the late 80s to 2000s.
0:01:18 The processor is an application-specific
0:01:20 integrated circuit, and basically it monitors
0:01:23 brain activity, decodes it, and ideally in the future,
0:01:25 way future claim is that you could even potentially
0:01:28 translate machines to not just read,
0:01:30 but actually even write to the brain.
0:01:32 But the paper they release, which you can download,
0:01:34 it’s called an integrated brain machine interface platform
0:01:36 with thousands of channels, was not peer reviewed,
0:01:37 it’s a white paper.
0:01:39 So I think we wanna figure out, Vijay,
0:01:40 like what’s hype, what’s real here,
0:01:43 especially given the trend of brain computer interfaces,
0:01:45 like where are we really in this journey?
0:01:46 – Well, you know, if you think
0:01:47 about like what this technology can do,
0:01:48 there’s different styles.
0:01:50 Like so one style is to be non-invasive.
0:01:52 That sounds appealing, ’cause you don’t have to like,
0:01:54 literally go into your brain.
0:01:56 But the reality is there’s just very little information
0:01:58 you can get out if you’re non-invasive.
0:01:59 Now, of the invasive categories,
0:02:01 there’s one maybe slightly less invasive technique
0:02:03 where actually they go through your femoral artery,
0:02:05 which is the artery on your leg, near your femur,
0:02:07 and it’s a well-known path to go from there
0:02:09 all the way into your brain.
0:02:11 And they insert through the femoral artery
0:02:12 something that would go into your brain.
0:02:14 So this is invasive, but you’re not drilling holes
0:02:15 in your head.
0:02:18 I don’t know how reliable you can depend
0:02:19 on where it’s gonna stay there.
0:02:21 What Neuralink’s doing is literally drilling
0:02:26 multi-millimeter holes and then sewing wires
0:02:27 directly into your brain.
0:02:28 Like flexible electrodes.
0:02:29 Flexible electrodes.
0:02:32 And so this has the greatest chance for bandwidth
0:02:34 and getting real information out and in.
0:02:36 It’s almost like a direct connection.
0:02:39 I think, you know, all of us have sort of a,
0:02:41 ooh, the ouch kind of reaction to that.
0:02:42 So they make analogy to Lasik,
0:02:45 which if we were, let’s say, 50 years ago,
0:02:46 and I told you that, hey, look,
0:02:48 I’m gonna have these lasers
0:02:49 and they’re gonna fix my eyes.
0:02:52 And by cutting them and reshaping the eyeball
0:02:54 on the lens, I’m gonna do that on the ball.
0:02:55 I think everyone would think that’s insane.
0:02:57 – That’s actually super interesting analogy.
0:02:59 So Lasik, when it was new, it sounded very invasive,
0:03:00 but now it’s like cookie cutter.
0:03:02 – Now, I mean, it’s still, I don’t know
0:03:03 if everyone like loves the idea of Lasik,
0:03:05 but it’s pretty standard, you know?
0:03:08 And so it sounds like there’s a huge adoption issue
0:03:10 or concern, but really I think the question is,
0:03:11 what can it do?
0:03:12 – Okay, so where are we in the technology now
0:03:14 for what it can do and where do you,
0:03:16 given your vantage point in the bio world,
0:03:19 think BCIs or brain computer interfaces are interesting.
0:03:21 – Yeah, it’s interesting to think about where you can start
0:03:22 because start with a population
0:03:24 that really probably is in dire need.
0:03:26 People that are paraplegic, quadriplegic,
0:03:28 their lives are obviously very limited
0:03:30 compared to what they were at birth.
0:03:31 – In terms of movement.
0:03:32 – In terms of movement.
0:03:35 And really just in terms of access to the rest of the world,
0:03:37 because their brains are just like ours,
0:03:40 but they can’t move their limbs and it’s just really tragic.
0:03:41 A natural place to start would be,
0:03:42 and I think where they’re starting,
0:03:44 is just in communication.
0:03:45 And it’s not just typing,
0:03:47 but it’s really being able to use a computer.
0:03:49 And you think about what that means,
0:03:51 that’s the difference between being in the modern world
0:03:53 and being isolated from the modern world.
0:03:55 That would be a huge game changer.
0:03:57 – And is it only for paraplegics and quadriplegics
0:03:58 or are there other like sort of
0:04:00 neurological movement disorders where it could play?
0:04:02 – I think in time, I think they’ll,
0:04:05 would you shift from cases where it’s sort of a easy,
0:04:08 it’s so hard to avoid puns like no brainer,
0:04:10 easy, no brainer kind of a thing to where,
0:04:14 okay, maybe it’s less obvious, but become more accepted.
0:04:16 – Maybe, who knows, 20, 30, 100 years from now,
0:04:18 we could get to the Lasik point.
0:04:19 But let’s talk about the timing.
0:04:21 The company’s been around for two years.
0:04:23 Five years is roughly the FDA process
0:04:25 for them to get to human trials with five patients,
0:04:26 or so they claim.
0:04:27 They said the road is long.
0:04:29 So given the evolution of BCIs,
0:04:31 and then as a topic that’s been around forever,
0:04:33 where do you see, not prediction,
0:04:36 but where are we in the evolution of this entire journey?
0:04:39 – It’s clearly very early in this journey.
0:04:41 What’s interesting though is that we’re actually talking
0:04:45 about even if it’s just a trial, putting this in patients.
0:04:47 – ‘Cause right now I think it’s only in rats implanted.
0:04:48 – And in monkeys.
0:04:50 – And that’s right, he claimed on stage,
0:04:51 I think it surprised his president,
0:04:52 who’s like, “What, are we talking about this now?”
0:04:54 And he realized this, which is so funny
0:04:55 and so typical musk.
0:04:58 – And so to be in humans, that’s a pretty major job.
0:05:00 – Is it, ’cause I was gonna say,
0:05:02 don’t people argue that our DNA is very similar
0:05:02 to that of monkeys?
0:05:03 – Oh yeah, no, but I’m just thinking
0:05:05 from a cultural point of view, not from a technology.
0:05:07 The thing is that actually humans are probably easier
0:05:09 than mice because mice brains are really little.
0:05:11 So actually ironically, I think that part would be easier,
0:05:12 but the reality is now you’re talking about people,
0:05:14 and you don’t wanna mess around with people.
0:05:16 – Okay, so the swimming social acceptance
0:05:17 is a separate issue altogether.
0:05:21 Technologically, and this is the heart of what you love
0:05:22 when science becomes engineering.
0:05:23 – Yes.
0:05:25 – Where is the engineering reality of this?
0:05:27 – Where the engineering comes in is that,
0:05:29 I think much like, we’ve seen Moore’s Law
0:05:31 and other things on the computer side,
0:05:33 once you can make this interface,
0:05:35 then the advances on the computer side
0:05:36 get to translate over.
0:05:39 So for instance, machine learning is a very, very natural way
0:05:41 to take the signals out of our brain
0:05:43 and then use that to interpret what you mean
0:05:44 and what’s going on.
0:05:45 And so as machine learning gets better and better
0:05:48 and that’s sitting on Moore’s Law and other areas of compute,
0:05:49 that will just come along for the ride.
0:05:52 The other one is I suspect the sewing will get better and better
0:05:54 and that you’ll have more and more electrodes in there
0:05:56 and be able to sort of pinpoint other areas.
0:05:58 And so year after year after year,
0:06:01 if it only gets, let’s say 20% better every year,
0:06:03 that’s a dramatic change over 10 years.
0:06:04 – So bottom line it for me though,
0:06:07 because getting that the social thing can happen,
0:06:08 getting that engineering,
0:06:11 it can be empowered by Moore’s Law,
0:06:13 still not sure where it feels a little nutty
0:06:16 that there’s literally electrodes floating around
0:06:18 in our juicy, gooey brain.
0:06:20 And that’s pretty much like a mess if you think about it,
0:06:21 like reality of a hardware.
0:06:23 – But you know, people have artificial hearts.
0:06:24 – Oh, that’s a good point.
0:06:26 – People who have Parkinson’s often have devices
0:06:28 that are actually in their skulls
0:06:30 that are put there to sort of mediate that.
0:06:33 So there’s actually a lot of precedent for this.
0:06:36 I think in all those cases, the alternatives are pretty dire.
0:06:37 – I mean, right now,
0:06:39 if they don’t have like transmitters right now,
0:06:40 they actually get from their rats,
0:06:42 I think they’d take it out by a USB-C sticks.
0:06:44 So in this case, you probably for a while,
0:06:45 I assume you’re gonna be wired tethered.
0:06:47 But again, for this population,
0:06:50 it’s better than they have limited mobility, unfortunately.
0:06:51 – Right, they already have wheelchairs
0:06:53 and devices that they’re tethered to already.
0:06:54 Any final thoughts?
0:06:57 – Yeah, you know, I think this is like a great example
0:06:59 of something we talk about in the firm
0:07:02 is sometimes really great ideas look like bad ideas.
0:07:03 And what makes them great
0:07:06 is that they’re just so inherently controversial
0:07:08 and it’s so inherently paradigm shifting.
0:07:10 And I don’t know what could be more controversial
0:07:13 than paradigm shifting and drilling holes in your head
0:07:15 to access the internet or something like that.
0:07:17 Now, also bad ideas look like bad ideas.
0:07:19 So time will tell and there are many other players.
0:07:21 And that’s what partially makes this particularly exciting
0:07:22 is that there’s gonna be, I think,
0:07:24 in time, an ecosystem of alternatives.
0:07:25 – By the way, DARPA tweeted,
0:07:26 “They’re the ones who pioneered
0:07:28 “the sewing machine technology with UCSF
0:07:30 “and funded it as part of their thing.”
0:07:32 So what Musk is doing is actually using that technology.
0:07:34 But the funnier part is this paper.
0:07:36 So I came out of academia, I’m an editor,
0:07:38 I care a lot about bylines.
0:07:39 I think it’s crazy that the author said,
0:07:43 “Elon Musk and Neuralink, he didn’t list his authors.”
0:07:45 Like, do you think that’s okay if you run a lab?
0:07:48 – Yeah, I mean, I think especially if you wanna reach
0:07:50 the academic audience, that’s not the way to do it.
0:07:51 I don’t know if an average person cares
0:07:53 about the individual authors in there,
0:07:54 but if I were in the company,
0:07:57 I’m sure I would love to sort of have my contributions.
0:07:58 – Yes, exactly.
0:07:59 Well, maybe when they do a peer-reviewed paper,
0:08:01 this is how I justified it to myself.
0:08:03 They might then do that paper with the actual authors,
0:08:05 whereas this was like a marketing white paper.
0:08:07 – You could also choose to interpret it
0:08:07 in a more positive way,
0:08:09 which is that he wants to really acknowledge
0:08:10 the whole company.
0:08:12 – Ah, it could be the other interpretation.
0:08:14 – There’s generous and non-generous interpretations of this.
0:08:15 – I like your glass half full view
0:08:17 of the world of VJ Pande.
0:08:18 Thanks for joining. – Yeah, thank you.
0:08:19 – So the next item on our list,
0:08:22 TikTok has actually been in the headlines plenty of times,
0:08:24 but it’s the third most installed app worldwide
0:08:27 since Q1 of this year behind WhatsApp and Facebook messengers.
0:08:31 It has 1.2 billion MAUs, monthly active users or something
0:08:32 in the last reading.
0:08:34 So given that phenomenon is happening
0:08:35 and it’s been happening for a while,
0:08:38 the news this week was about them having
0:08:40 a huge influence at VidCon,
0:08:42 which builds itself as the world’s largest celebration
0:08:43 of digital video and online creators.
0:08:46 Basically a huge ask conference for a video.
0:08:47 It’s sponsored by YouTube,
0:08:49 but ironically it was not dominated by YouTube.
0:08:52 It was actually dominated by TikTok stars,
0:08:54 according to Taylor Lorenz, a writer at The Atlantic.
0:08:55 This is actually the first time
0:08:58 that TikTok had such a huge presence at VidCon,
0:09:00 but on top of it, the other recent news
0:09:03 is that there’s talk of banning it in India,
0:09:06 which is its biggest overseas market.
0:09:08 The question here, Connie, for you is,
0:09:09 what is going on with TikTok?
0:09:11 Tell us really quickly, what is TikTok?
0:09:14 Frankly, the ability to do short 15 second videos
0:09:15 is a very familiar model.
0:09:17 Vine tried that, many people have tried that.
0:09:19 – It’s a series of short video apps,
0:09:21 but the difference between that and say like a YouTube
0:09:24 is rather than search for anything, there’s no search bar.
0:09:27 The app completely dictates what you see
0:09:28 by using AI algorithms.
0:09:30 – It’s purely AI driven.
0:09:32 There’s no preference selection,
0:09:34 except by what you choose to watch.
0:09:35 – Yeah, I mean, if there’s a TikToker
0:09:37 that you really love, you can follow them.
0:09:39 But when you initially start,
0:09:41 that whole entire feed is dictated by the platform.
0:09:45 So it chooses things that are high quality or high impact,
0:09:46 and it surfaces that.
0:09:49 And that’s why it was such a big deal at VidCon,
0:09:50 because you had all these people
0:09:52 who had trouble becoming famous on YouTube,
0:09:55 because YouTube’s been around for so long right now.
0:09:58 It was so much easier to become an influencer 10 years ago
0:09:59 than it is today.
0:10:00 But on TikTok, it’s different,
0:10:04 because you create one really hit piece,
0:10:07 it can through AI be shown to a ton of people worldwide,
0:10:09 because it’ll trigger the algorithm
0:10:11 to share it with a lot of people.
0:10:13 And that’s how you can gain followers really quickly.
0:10:15 Whereas on YouTube, unless you’re searched
0:10:16 or unless a friend shares it,
0:10:18 it’s much harder to get surfaced.
0:10:19 The article talked about how someone
0:10:22 who tried to become famous on YouTube
0:10:25 struggled for a really long time getting followers.
0:10:27 But on TikTok was able to amass a following far greater
0:10:29 and a much shorter period of time.
0:10:31 – So this particular segment is focused
0:10:34 on our friend Taylor’s piece in the Atlantic on this.
0:10:36 She has an open-ended question at the end though,
0:10:37 which I think is worth answering,
0:10:39 which is how are they gonna make money?
0:10:40 – The answer to me is really obvious,
0:10:45 because TikTok is the English version of a Chinese app,
0:10:46 same company, right?
0:10:47 This is just the American– – All by Byte Dan.
0:10:49 – English version, all by Byte Dan’s.
0:10:51 And then the Chinese one is called Dohing.
0:10:54 And it has a bunch more features and monetization methods
0:10:56 that you just don’t see in the English version yet.
0:10:59 And if you just imagine that stuff translating in America,
0:11:01 which I think it perfectly can–
0:11:04 – Yeah, yeah, I mean, a lot of it is around e-commerce.
0:11:08 A lot of it is around becoming a super app actually even,
0:11:11 allowing people to find restaurants or even book hotels.
0:11:13 You have leaderboards of top brands.
0:11:16 Basically commercials you can instantly buy, right?
0:11:20 In the US we’ve talked about when is this interactive TV
0:11:21 world ever gonna happen.
0:11:22 I don’t think it’s gonna happen on the TV.
0:11:23 It’s gonna happen on the mobile.
0:11:25 And short videos are a great way to do it,
0:11:27 because short videos are in essence commercials
0:11:28 you wanna watch.
0:11:29 They can become commercials you wanna watch.
0:11:30 – That’s such an interesting idea.
0:11:32 What’s fascinating to me, because in China
0:11:35 you have a lot of these TikTok or Dohing short videos,
0:11:39 and you can purchase directly there with like three taps.
0:11:42 Right after the video loops twice, a little thing pops up.
0:11:44 You can click in, you can buy it,
0:11:46 and it gets delivered to you.
0:11:48 I’m talking like buying physical things.
0:11:50 Fruit is a huge category.
0:11:51 – What?
0:11:52 – I’m not kidding.
0:11:54 Fruit, random gadgets, like for the fruit,
0:11:57 the grower who’s growing oranges,
0:11:59 he’s showing you his orange farm,
0:12:00 or he’s squeezing the orange juice.
0:12:02 So you see how juicy it is,
0:12:04 and then you can just buy a box of oranges.
0:12:05 – That’s a thing.
0:12:06 Oh my God.
0:12:06 – That’s a huge thing.
0:12:07 – That’s fantastic.
0:12:09 The fruit meme is way better than a 10X engineer meme,
0:12:10 I gotta say.
0:12:12 Well Connie, thank you for joining this segment.
0:12:15 All right, so we’re doing the next segment on FaceApp,
0:12:17 which is an app that is in the headlines this week.
0:12:20 First of all, what it does, it basically morphs your face.
0:12:22 So if you’re a woman, you can change your gender
0:12:23 into a man, vice versa.
0:12:25 It can show you how you age,
0:12:26 like how you look when you’re old.
0:12:28 And of course people are freaking sharing this,
0:12:30 ’cause how interesting to share it.
0:12:32 Now I personally am too vain to share something like that,
0:12:33 so I would not even share that.
0:12:36 The reason it’s in news is not because it’s going viral,
0:12:37 ’cause that’s not news.
0:12:40 The news is that there are claims of Russia
0:12:43 collecting facial recognition data based on this.
0:12:46 And it’s so concerning that a US senator
0:12:49 wrote a letter to the FBI and FTC asking for investigation
0:12:52 into its potential national security threat,
0:12:54 and its risk to the privacy of Americans,
0:12:55 given the fears of election hacking.
0:12:57 The privacy policy basically says,
0:12:59 you’re allowed to have a perpetual, irrevocable,
0:13:01 non-exclusive, royalty-free, worldwide, fully paid,
0:13:05 transferable, sub-licensible access to your photo,
0:13:07 but that’s kind of what all apps already do.
0:13:09 So what I really wanna talk to you about Joel,
0:13:11 especially as a security expert,
0:13:13 I wanna get your take on should people be worried,
0:13:14 the people who downloaded this,
0:13:16 or is this just app business as usual?
0:13:18 – Well, I’m a strong believer in the fact
0:13:20 that you should never waste a crisis, right?
0:13:22 And so any opportunity we have to get privacy
0:13:24 front of mind in people is really important
0:13:26 because consumers just don’t really appreciate
0:13:27 or understand privacy.
0:13:30 That said, I think that you actually really,
0:13:32 risk is a really funny thing,
0:13:33 and it varies from person to person.
0:13:35 And so does the average teenager
0:13:36 need to care about this?
0:13:37 Probably not.
0:13:40 If you are a Democratic or Republican politician
0:13:42 that is in the public space,
0:13:44 it’s probably a bad idea that you give your access
0:13:46 to your photos to anybody, right?
0:13:47 – Why?
0:13:48 I don’t understand the distinction there, to be honest.
0:13:50 – Well, there may be photos in there
0:13:52 as a high-profile individual
0:13:54 that may make you susceptible to things like blackmail.
0:13:56 When you’re a public official,
0:13:58 when you’re working in the national security space,
0:14:00 when they say something as a threat to national security,
0:14:02 they don’t always mean that like,
0:14:04 they’re gonna get the launch codes and take our weapons.
0:14:07 They often mean that you’re gonna get some kind of information
0:14:09 that you can use as leverage over a public official.
0:14:12 And if you look at most of the national security investigations
0:14:14 that happen in this country,
0:14:15 they’re usually over someone trying
0:14:17 to get negative information,
0:14:20 or they’re over some form of kind of information leakage,
0:14:21 right?
0:14:23 – So that helps explain the national security side.
0:14:25 I’m very patriotic, and of course,
0:14:27 I’m worried about people hacking elections or other things.
0:14:29 It did strike me as kind of xenophobic, actually,
0:14:32 to just blandly accuse an entire country
0:14:34 of anything that comes out of Russia and China
0:14:35 and all these other countries is dangerous.
0:14:37 Like, that just feels like a little bit of fear mongering.
0:14:38 – I think the important thing
0:14:39 that we should be talking about,
0:14:41 rather than saying that Russia, China,
0:14:42 and these countries are evil,
0:14:45 that’s just kind of a ridiculous position to take, right?
0:14:47 I think the real discussion we should be having
0:14:50 is that every country conceives of privacy in a different way.
0:14:51 – What’s the US is?
0:14:53 – Well, in the US, generally,
0:14:57 we’re in this weird place where convenience or features
0:14:58 or user experience, right,
0:15:01 will always trump privacy and security.
0:15:02 So if I can provide you with a widget
0:15:05 that gives you 15 minutes of joy,
0:15:07 there’s some amount of private data
0:15:08 that you’ll let me extract from you.
0:15:11 And so I think the fundamental problem here
0:15:15 is that US consumers generally undervalue their private data,
0:15:17 whereas I would say German or European
0:15:20 or people that have very strong data protection cultures
0:15:21 have a much higher price on their data.
0:15:23 But these apps are global.
0:15:24 I was going to say these glass,
0:15:27 ’cause it’s like global apps, these apps are global.
0:15:29 And so is their infrastructure.
0:15:30 Like in the case of FaceApp,
0:15:33 specifically the servers are in the US,
0:15:35 or so they claim in their response to the concerns.
0:15:38 They also claim that images are deleted within 48 hours
0:15:39 from the upload date.
0:15:42 So I guess my question for you is,
0:15:44 as a user in a practical way,
0:15:46 how should someone who’s not a politician
0:15:47 with a high profile,
0:15:49 how should someone really think about
0:15:50 whether they should trust these apps or not?
0:15:53 I mean, there’s the no brainer kind of answer
0:15:54 to that question, which is that if you have stuff,
0:15:55 you don’t want other people to see,
0:15:57 don’t give them access to apps
0:16:00 that let them get access to that information.
0:16:03 And so generally, I think, be conscious and cognizant
0:16:05 of the fact that these apps are taking information,
0:16:06 they may be taking information
0:16:08 that you’re not fully aware of.
0:16:10 The way that these companies present their terms of service
0:16:12 is really designed so that they get people
0:16:14 to kind of buy in and accept that transfer.
0:16:15 – Quite frankly, I don’t know anybody
0:16:17 who really fucking reads them.
0:16:18 I just accept.
0:16:20 I’ve never read a policy.
0:16:21 – I must shamefully admit
0:16:22 that I am one of those people that does.
0:16:24 I’m also gonna be home alone on Friday,
0:16:28 but the fact of the matter is that this language
0:16:30 and this legalese is just done to confuse consumers.
0:16:33 And so exercise some level of practical caution.
0:16:36 Understand that access to your private information
0:16:37 is actually really important.
0:16:39 And as we move into this new world
0:16:40 and you look at these new apps,
0:16:43 these are essentially becoming massive data collection efforts.
0:16:44 – And just wait till we add Neuralink
0:16:47 and BCIs into this whole equation.
0:16:48 Well, thank you for joining, Joel.
0:16:52 So let’s do the last segment of the news on direct listings.
0:16:54 Our next agency expert is Jamie McGurk,
0:16:57 who runs our corporate development function
0:16:59 and is a former investment banker.
0:17:02 We recently put out a post all about direct listings,
0:17:04 which explains what they are, how they work,
0:17:06 and especially given this new trend of companies
0:17:09 like Spotify and Slack having done them.
0:17:12 So the news here, though, is that iHeartRadio,
0:17:15 which this shocked me because first of all,
0:17:17 I’m into podcasting and they’re an audio company
0:17:19 and they’ve been around for a while
0:17:20 and they just announced a direct listing
0:17:21 and that shocked the hell out of me.
0:17:23 So like that’s the news, like what’s going on?
0:17:25 – No news, actually.
0:17:26 – Okay, you’re telling me
0:17:28 we shouldn’t bother recording this episode now?
0:17:30 – So I guess what people don’t realize is
0:17:32 this product has been around for a long time.
0:17:34 There were two primary use cases previously
0:17:36 for doing a direct listing.
0:17:38 One was companies emerging from bankruptcy
0:17:40 and the other was companies being spun off
0:17:41 of larger companies.
0:17:41 – Ah, interesting.
0:17:44 – And so iHeartRadio falls into the former category
0:17:45 emerging from bankruptcy.
0:17:48 So the direct listing product has been
0:17:51 more or less repurposed by Spotify and Slack
0:17:55 in recent history as an alternative to the IPO.
0:17:57 They don’t suffer the dilution of a traditional IPO
0:17:59 and there’s no lockup period.
0:18:01 So traditionally you would have a 180 day lockup period
0:18:03 in a traditional IPO and that goes away.
0:18:08 So there’s strong momentum for a new way of going public.
0:18:09 – I mean, basically the point of direct listing
0:18:11 is that the company’s not raising capital.
0:18:12 – They’re not raising capital
0:18:14 and they’re not doing so at an artificially low valuation
0:18:16 that exacerbates the dilution
0:18:18 that they would otherwise get from fundraising.
0:18:21 – Right, but just in the big picture why this matters,
0:18:22 why do you think it’s gonna be such a big trend
0:18:24 in terms of the importance of it?
0:18:26 – In our blog post we talked about several different features
0:18:27 of the direct listing
0:18:30 and why we think that it’ll be more popular.
0:18:31 You know, I think the short soundbite
0:18:34 is that there’s a lot of things broken
0:18:36 about the legacy IPO process.
0:18:38 Who really benefits?
0:18:39 Is it in the company’s best interest to raise capital
0:18:41 or to go public in this way?
0:18:42 – Yeah, by the way, a lot of those are structural things
0:18:44 that are due to lack of technology
0:18:47 and transparent information and just time and old policies.
0:18:49 – Doing things the way that things have always been done.
0:18:51 So it’s more of an inertia argument
0:18:54 as to maybe why the legacy IPO has persisted
0:18:56 as long as it has.
0:18:57 You know, it works at raising capital
0:18:59 and it works as entering the public markets.
0:19:01 It just so happens there is a better way.
0:19:02 That’s the trend that we see.
0:19:03 That’s what you and I wrote about.
0:19:05 – So to bring it back to iHeartRadio,
0:19:07 then why this is different Spotify and Slack
0:19:09 versus the iHeartRadios of the world?
0:19:11 – So I think iHeartRadio got a lot of attention
0:19:14 because it fell in close time proximity to Slack.
0:19:15 It also has a business model
0:19:17 that is very similar to Spotify.
0:19:19 I think they drafted off the PR headlines of those two
0:19:20 about the direct listing,
0:19:23 but the emerging from bankruptcy use case
0:19:24 is a well-worn path.
0:19:26 It just so happens that they had similarities
0:19:28 to two of the recent more, you know,
0:19:30 the newer use case direct listing.
0:19:31 – Thank you, Jamie, for that.
0:19:33 And just to be clear to everyone listening,
0:19:34 please note that the content here
0:19:36 is for informational purposes only,
0:19:38 should not be taken as legal business tax
0:19:39 or investment advice
0:19:41 or be used to evaluate any investment or security,
0:19:43 including the ones that we mentioned.
0:19:44 It’s not directed at any investors
0:19:47 or potential investors in any A6 and Z fund.
0:19:49 And honestly, any investments or portfolio companies
0:19:52 mentioned, referred to or described in this episode
0:19:54 are not representative of all A6 and Z investments.
0:19:56 And so there can be no assurance
0:19:58 that the investments will be profitable
0:19:59 or that other investments made in the future
0:20:01 will have similar characteristics or results.
0:20:03 You can find a full list of investments
0:20:05 at asixandz.com/investments
0:20:07 and more details on our disclosures
0:20:08 at asixandz.com/disclosures.
0:20:12 And thank you everyone for joining our news segment today.

0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
0:00:20 I’m Frank Chen.
0:00:26 Today I’m here with Scott Cooper and we are now in part three of three of our de-mystifying
0:00:28 Silicon Valley.
0:00:31 This part is all about living with your investor.
0:00:35 As Scott will point out, the average length of time that you will work with a venture
0:00:42 investor, 8, 10, 12 years, is longer than the average marriage, terrifying statistic.
0:00:46 And so you want to make sure that you understand how to work and pick with an investor that
0:00:49 you can live with over a long period of time.
0:00:53 And so we’re going to talk about ways that you can think about getting the most out of
0:00:59 your venture investor and board member and how to handle situations from the bad situations
0:01:04 where you have to wind down the company to the awesome situations where we hope you find
0:01:07 yourself, which is you’re doing an IPO for your company.
0:01:09 So let’s dig right into it.
0:01:13 Let’s talk a little bit about, fundamentally, what do I want from my investor?
0:01:16 And usually they’ll live basically as my board member.
0:01:17 Yeah.
0:01:18 Right?
0:01:19 Like what are the big things I’m looking for?
0:01:20 Yeah.
0:01:21 So look, I think, you know, certainly you want a board member and all the things that a board
0:01:25 member entails, which is hopefully they are a good coach, a good mentor, a good sounding
0:01:29 board for you, hopefully they’re good stewards of corporate governance and help you kind of
0:01:31 think through important strategic decisions for the company.
0:01:35 But then I think more importantly, you know, and this extends beyond often just the general
0:01:40 partner who’s sitting on your board, you want some value from them that allows you to help
0:01:41 you accelerate the growth of the business.
0:01:46 I mean, ultimately, you and the venture capitalists are along for the same ride, which is you’re
0:01:51 both trying to achieve an outcome that yields a very important, longstanding, hopefully independent
0:01:52 and publicly traded company.
0:01:57 And so, you know, whatever the venture capitalists can do to help you with that, whether it’s
0:02:01 making customer introductions or helping you understand, you know, how and when to add
0:02:06 a CFO or a head of sales or, you know, how best to kind of navigate, you know, the PR
0:02:09 and marketing world and who are the right press relationships to have.
0:02:13 All those things are, I think, fair game where, you know, kind of good VCs find ways in which
0:02:17 they can be valuable to entrepreneurs in that regard.
0:02:22 So one of the jobs of the board is that they can fire me as the CEO.
0:02:23 Yes.
0:02:24 Okay.
0:02:26 So now I’ve got this weird incentive, which is on the one hand, I want that partnership.
0:02:27 Yeah.
0:02:28 I want to get great advice.
0:02:32 And on the other hand, like if I share too much or like I, you know, too open about my
0:02:35 vulnerabilities or my shortcomings, like I could get fired.
0:02:38 And so how should I think about transparency, trust?
0:02:39 Exactly right.
0:02:42 It’s a little bit like the relationship, you know, probably your youngest has with you
0:02:43 as a parent, right?
0:02:44 Which is okay.
0:02:45 I want to be truthful.
0:02:46 Right.
0:02:48 I want to tell them what I’ve wrong, but I know there’s consequences for doing that, right?
0:02:53 So yeah, look, I think, so you’re absolutely right, which is, look, the fundamental power
0:02:55 the board does, of course, is to be able to hire a private CEO.
0:02:58 Now we talked about this in a different session.
0:03:02 It’s also changing these days, which is often the boards are not controlled by the venture
0:03:06 capitalist, but controlled by the CEO and, you know, kind of, you know, other common shareholders,
0:03:09 in which case the board really can’t, you know, the venture capitalist can’t, you don’t
0:03:10 really do anything.
0:03:14 They would have to actually really generate consensus with a much broader set of folks.
0:03:19 So I think some of those risks of kind of, you know, a VC being, you know, kind of random
0:03:23 or, you know, kind of, you know, not thinking through these things and, you know, and doing
0:03:26 that is much, that risk is much lessened today.
0:03:27 Technically they can’t out-vote me.
0:03:28 That’s exactly right.
0:03:29 Right.
0:03:31 They would have to kind of, you know, co-opt other members of your kind of, you know, constituents
0:03:33 to do so.
0:03:37 But that notwithstanding, I think even in the scenario where that’s not the case, I think
0:03:38 you’re right.
0:03:42 In some cases, look, you have to, you still have to build a relationship, though, where,
0:03:46 you know, you are willing to share enough information to, you know, to kind of, you know, get their
0:03:48 advice and get their help.
0:03:52 Yeah, in some cases, maybe that means you’re vulnerable, but I think in most cases, I think
0:03:56 most VCs would say, hey, look, if there’s, if you can tell us stuff and we can help you
0:04:00 fix it and help you address it, then, you know, there’s no reason, it doesn’t necessarily
0:04:03 mean that every time you do something wrong, you know, you get punished and you basically
0:04:04 find yourself out of a job.
0:04:06 So I think most people are pretty rational about this, but you’re right.
0:04:12 There is this kind of strange dichotomy of kind of, you know, having somebody who’s also
0:04:17 your boss essentially be your consigliary as well.
0:04:23 And then sort of as I build the company, I’m going to basically grow the board from, you
0:04:24 know, people who invest in money, right?
0:04:27 So I have a Series A investor who takes a board seat, then the B investor takes a board
0:04:28 seat.
0:04:32 So now I’ve got like a whole cat herding exercise to go through.
0:04:37 And there are situations in which the economic interest of my investors, A’s and B’s and
0:04:38 C’s, can diverge.
0:04:39 Absolutely.
0:04:42 Like I might get into a situation where somebody’s heading into a fundraise.
0:04:43 They need a liquidity event.
0:04:44 Yeah, yeah, yeah.
0:04:48 They need to put up some dollars and so like now they’re pressuring me to sell the company.
0:04:49 Yeah, yeah, yeah.
0:04:50 Right?
0:04:53 Whereas the A and B investors might be like, no, no, no, we’re like, let’s go for a bigger
0:04:54 outcome.
0:04:55 Yeah.
0:04:56 So how do I manage these situations?
0:04:59 Those are tough issues in managing, I think, again, as a CEO, it’s really important for
0:05:02 you to kind of understand exactly what those incentives are.
0:05:06 And you mentioned it, hey, maybe I, as the VC, need to go fundraise a new fund and so
0:05:10 I need to show my LPs that I’m smart and I’m making some money and we get an acquisition
0:05:11 offer for your company.
0:05:14 And for me, it’s a good outcome, but maybe it’s not a good outcome for you and others.
0:05:20 Now the good news is, as a board member, you are a fiduciary to those shareholders.
0:05:24 And so you do have legal constraints on your ability to be completely self-serving.
0:05:26 But still, even within that, you have to think about it.
0:05:31 And so this is, you know, oftentimes you’ll see, you may have heard of this term called
0:05:35 a waterfall analysis, which is oftentimes it’s a mechanism by which often the lawyers
0:05:39 will do it for you for the company and they’ll say, hey, look, if you sell the company at
0:05:42 this price, here’s what the A people will get, here’s what the B people get, here’s what
0:05:44 you and your employees get.
0:05:48 And it’s good in those situations to look at that because that will help you understand
0:05:51 if you do have this kind of divergence of interest among folks.
0:05:55 You know, again, I think, as with all things, look, the best thing you can do is hopefully
0:05:58 you’ve stacked your board with good people who are rational and who respect things like
0:06:00 fiduciary duties.
0:06:03 And you can have a meaningful conversation around that.
0:06:04 Yeah.
0:06:08 In theory, the board is supposed to be exercising duty of care.
0:06:15 In theory, they’re not supposed to put their own interests ahead of all of the, but there
0:06:19 are situations where you will get this sort of self-serving behavior.
0:06:25 Yeah, well, you kind of find this weird situation and is often times when company, we talked
0:06:29 about liquidation preference in one of our prior sessions, where a company is getting
0:06:31 sold for at or around the liquidation preference.
0:06:34 This is where you tend to kind of get these issues that come up, right?
0:06:39 Because the VCs are, you know, if they’ve got $30 million of liquidation preference,
0:06:44 they’re probably indifferent between a $30 million sale and a $35 million sale and a
0:06:46 $40 million sale because, you know, I’m just making up these numbers.
0:06:49 But let’s assume in those cases, they’re still going to get the same amount of their
0:06:53 liquidation preference because the price isn’t high enough to actually cause them to convert
0:06:55 and take their normal equity ownership.
0:06:57 And so you do get these weird scenarios.
0:07:01 Now, again, as I said, the good news is most of the time, you know, people still act rationally.
0:07:05 There are a couple cases, though, that we’ve seen where the courts have kind of said, “Hey,
0:07:08 we don’t like the behavior we’re seeing from the VCs because you kind of didn’t take
0:07:12 care of the common shareholders, which is really your main job here.”
0:07:18 And so, you know, I don’t want to put everybody to sleep on this webcast here, but, you know,
0:07:21 there’s a whole chapter on this in the book which kind of helps you understand how we
0:07:22 got there.
0:07:24 And then, importantly, what are the kinds of things that you can do to make sure that
0:07:27 you don’t run afoul of those problems?
0:07:31 So the take home message for me as the startup CEO is like, “I need to understand all of
0:07:37 the incentives and the timeframes of the people who are on my board so I can try to understand
0:07:38 why are you saying what you’re saying?”
0:07:39 That’s exactly right.
0:07:41 Yeah, and look, it goes, again, you know, it goes back to, you know, where we started
0:07:42 the conversation.
0:07:46 Our first session when we started talking was, you know, incentives drive behavior for
0:07:47 better or worse.
0:07:48 Right?
0:07:52 You know, you know, we, again, you and I spent time in the enterprise world where, look,
0:07:55 if you want to change the way you sell your product, the best thing to do is change the
0:07:57 quota structure for your sales reps, right?
0:08:00 And that’s not, you know, a denigrating statement.
0:08:03 It’s just the way that, look, incentives may have a matter and people respond to incentives.
0:08:06 And just like that, you know, venture capitalists are people, too.
0:08:09 And so, they respond to the incentive structure they have, and the more you understand that,
0:08:14 the more I think you can finally cut through and actually have a rational dialogue.
0:08:15 Great.
0:08:19 Now, I want to do some sort of play acting with you on three scenarios.
0:08:23 So scenario one is things aren’t going well, we’re going to have to do something tough
0:08:27 like raise a down round or a bridge, and then a scenario where, hey, yeah, we’re getting
0:08:30 acquired and, you know, we’re going to clear the liquidation preferences.
0:08:31 It’s going to be happy.
0:08:32 Yeah.
0:08:34 And then the super happy scenario where we’re going public.
0:08:35 All right.
0:08:36 So let’s, advice for each one of those.
0:08:37 All right.
0:08:38 Tough times.
0:08:39 Yeah.
0:08:40 It’s not going the way I expect.
0:08:41 I have to raise a bridge.
0:08:42 Yeah.
0:08:43 Maybe I have to raise a down round.
0:08:44 How should I think about this?
0:08:45 Yeah.
0:08:46 This is hard.
0:08:49 I talk about this in the book a lot, but I’d say the most important thing I think to think
0:08:52 about here is, and this is where I do think having good relationship with your VC is critically
0:08:55 important, is having a real open, honest discussion, right?
0:08:59 So sometimes, unfortunately, despite your best efforts and, you know, despite our best
0:09:03 efforts, hopefully to be supportive of you, maybe the market’s just not there or the product’s
0:09:07 not taking, you know, for whatever reason, you know, look, you gave it 110% and it’s
0:09:08 just not there.
0:09:13 And, you know, it’s interesting when I’ve had those conversations with entrepreneurs,
0:09:16 I was kind of, I was, you know, dreading going into that conversation because I was worried
0:09:18 that, you know, it was going to be a contentious discussion.
0:09:21 And more times than not, they actually come out and they say, you know what, I’m kind
0:09:25 of relieved because I was thinking the same thing you were, which is I was doing this
0:09:31 because I thought my job to you as the VC was to just run through walls no matter what.
0:09:34 And honestly, I don’t know that spending another three, four years doing this is likely to yield
0:09:35 a better outcome.
0:09:38 It doesn’t always happen that way, but more often than not, I’d say that happens.
0:09:42 And so I think in those cases, look, it’s perfectly respectable to say, hey, look, we
0:09:44 all gave it our best and it didn’t work.
0:09:47 And the right thing to do is let’s wind it down in a reasonable fashion so that we can
0:09:51 hopefully, you know, take care of our employees and take care of our vendors and do all the
0:09:53 things we can.
0:09:57 If you still feel like, you know, the alternative is true, which is, hey, yes, maybe we got
0:10:01 the product wrong or maybe the market’s developed more slowly, but you know what, like, I’m committed
0:10:05 as an entrepreneur and I really believe this market is still here in the survival business.
0:10:08 Then, you know, kind of, I talked about this in the book, but things like what you call
0:10:11 like a recapitalization, which is kind of almost a reset, right?
0:10:14 Which is we say, hey, look, we raised a bunch of money, we spent it, it didn’t yield what
0:10:18 we want, but we’re all still believing this thing and I want to go spend the next 10 years
0:10:20 of my life trying to do this.
0:10:22 Then let’s set the company up for success, right?
0:10:26 And it’s unpleasant, the word recap is obviously has such a negative connotation, but in that
0:10:30 respect, it’s actually a positive thing, which is we’re going to figure out, okay, how do
0:10:34 we kind of make the company attractive for potentially new investors to come back in
0:10:38 by cleaning up some of these things like liquidation preference we’ve talked about, resetting the
0:10:42 price to a point that actually reflects the progress of the business.
0:10:44 But importantly, and this is where I think entrepreneurs need to make sure they’re aligned
0:10:49 with their VCs, for you as an entrepreneur and your employees to also make sure that
0:10:50 you get reset as well, right?
0:10:55 So there’s no sense in any of us putting more money in the company if it turns out all of
0:10:59 your stock options are underwater and you’ve got no financial incentive and then tomorrow
0:11:01 everybody’s going to walk away from the business, right?
0:11:04 So this requires kind of give and take on both sides, which is, you know, the VCs will
0:11:07 give up a lot of the rights that they otherwise had.
0:11:11 But importantly, the give that the VCs, you know, need to do to make this successful is
0:11:15 to kind of re-insent the team as well and make sure that you all are, you know, shooting
0:11:18 for the same ultimate outcome.
0:11:21 So there’s a lot of emotional freedom, just sort of listening to you talk, right?
0:11:26 Because even if we have to wind it down, we can have the conversation and then realizing
0:11:29 that like half your portfolio is going to go belly up anyway, right?
0:11:32 I don’t have to feel like, oh my god, I’m like the world’s biggest failure, right?
0:11:34 Which is like you’re kind of expecting this.
0:11:35 I think that’s right.
0:11:36 Yeah.
0:11:39 But it’s, you know, it’s more, obviously look, it’s more emotional and more personal
0:11:41 for you as the entrepreneur, of course, right?
0:11:45 Because you’ve, you know, this has been your life’s dream.
0:11:46 But you’re right.
0:11:47 So you shouldn’t feel sorry for the VCs, right?
0:11:51 And I certainly never, would never suggest that you should feel sorry for the VCs because
0:11:52 you’re right.
0:11:54 We expect that that kind of risk is what’s inherent to the business.
0:11:57 The more important question is really, do you still believe in the market?
0:12:01 Do you still want to pursue this or also do you feel like, hey, it was a good idea, but
0:12:05 just for a variety of reasons, didn’t materialize in the way we thought and the more rational
0:12:07 thing to do is go do something else?
0:12:08 Got it.
0:12:09 Great.
0:12:10 Let’s move on to scenario two.
0:12:11 Right.
0:12:14 So we’re getting an acquired and an attractive price, yay, it’s not quite an IPO, but it’s
0:12:15 not a wind-down.
0:12:16 Yeah.
0:12:17 It’s not a recap.
0:12:21 So what are things that are important to think about as we’re going through this process?
0:12:24 So maybe let’s start with sort of how, you know, how are we getting value?
0:12:27 Is it cash or private stock or public stock?
0:12:28 Yeah.
0:12:29 Yeah.
0:12:30 So there’s lots of things to think about, right?
0:12:32 One is you’re right, which is look, what’s the economic interest we’re getting here?
0:12:36 And, you know, sometimes, as you said, that could be you might be getting paid in cash,
0:12:38 sometimes you might get stock of the other acquirer.
0:12:42 And so depending on the scenario, right, you may want to do some homework if you’re getting
0:12:45 stock to understand what do I think about that stock, what do I think about the prospects
0:12:49 of that company, because your economic future is now going to be tied to the success of
0:12:51 that business as well.
0:12:54 I think the most important thing, though, to think about, obviously price is important,
0:12:56 so I don’t want to belittle that.
0:13:01 But the next most important thing to think about is what is the go-forward business going
0:13:02 to look like, right?
0:13:05 Are you being acquired because they really love your product and love your vision and
0:13:09 now you’re going to go be the general manager of some new unit in the company and have the
0:13:13 ability to affect the vision that you had hoped you would affect as a standalone company,
0:13:17 but now inside of a bigger, you know, better resource, better capitalized company?
0:13:18 That’s wonderful.
0:13:21 Obviously if you’re signed up to do that and your employees are signed up for that, or
0:13:25 are they saying, hey, you know what, we really like those engineers, but all these sales guys,
0:13:27 all these product guys, you know, we don’t need them.
0:13:31 And so like we’re going to, you know, incent the engineers to stick around, but quite frankly,
0:13:34 we want you to lay off everybody else before you kind of, you know, come over.
0:13:37 So those are, I think those are the most important things, which is kind of, you know, what is
0:13:38 going to happen to the employees?
0:13:40 What does the go-forward business look like?
0:13:44 And you know, again, I know we all get excited and we like to talk about the price because
0:13:48 of course it’s a lot more fun and sexy to talk about money, but it’s, I think, I think,
0:13:52 you know, managers and CEOs make their reputations quite frankly in these types of situations
0:13:55 where, you know, they are thinking first and foremost about kind of the prospects for their
0:14:01 employees and their team members, you know, kind of, you know, not secondary to the actual,
0:14:02 you know, value of the company, right?
0:14:03 So who’s getting a job?
0:14:04 Who’s not getting a job?
0:14:05 That’s right.
0:14:07 What are the terms of the stock options?
0:14:08 That’s exactly right.
0:14:10 What’s the financial incentive look like, right?
0:14:12 Are they going to give you new stock options in the new company or are they just going
0:14:15 to take the ones you had and move them over?
0:14:18 Sometimes people do what are called retention bonuses, right, where they say, hey, you know
0:14:22 what, like, for the first two or three years of the deal on each of the one-year anniversaries
0:14:25 of the deal, if you’re still here, we’re going to give you maybe a cash bonus or we’re going
0:14:27 to give you a stock bonus.
0:14:30 So all those things that kind of allow you to kind of get a better sense of what is that
0:14:34 go-forward structure going to look like and is that something that you as a CEO believe
0:14:39 you can sell to your employees to say, hey, look, you know, we gave it a shot, we did well,
0:14:42 and now here’s an opportunity for you to both enjoy financial reward as well as feel like
0:14:47 you’re enjoying the reward of being in a bigger company and having access to more resources.
0:14:52 I hear that sometimes in these cases and also with the recaps or the down rounds, there
0:14:54 are these things called management carve-outs.
0:14:55 Yes.
0:14:56 What are they?
0:14:57 Yes.
0:14:58 Should I be looking for one?
0:14:59 Is that a good thing, a bad thing?
0:15:01 Yeah, sometimes you’ll see, yeah, management carve-out, management buyout, MBO sometimes
0:15:02 is what they’re called.
0:15:07 Yeah, so the basic idea is typically sometimes what happens is, and it goes back a little
0:15:10 bit to this liquidation preference discussion we’re having, is the company might be doing
0:15:15 well, but there may be so much money invested in the company that even in a nice acquisition,
0:15:19 a lot of that money ends up going towards people like me, the VCs, as opposed to you
0:15:22 and the people who are going to actually go have to run this business now.
0:15:26 And so oftentimes what the VCs will do is say, “Hey look, we want to incent you to kind
0:15:30 of be motivated to try to find a buyer for this business if we all agree that that’s
0:15:32 the right outcome for the company.”
0:15:35 And so essentially the VCs will say, “Look, let’s carve out some of the money that might
0:15:40 have otherwise gone to the VCs or in some cases other common shareholders and make a
0:15:44 pool that effectively becomes a bonus pool for the executives and/or the people who are
0:15:46 responsible for the acquisition.”
0:15:49 And that’s a perfectly fair and reasonable thing to do.
0:15:52 We do it, you know, in many cases in that scenario.
0:15:56 And then in addition, on top of that, sometimes the acquire themselves will also put an additional
0:16:01 incentive pool in place and say, “Okay, as we talked about post the acquisition, maybe
0:16:05 on the first and second and third year anniversaries or something, we will also contribute to a
0:16:08 pool that will inset longer term retention for people.”
0:16:09 Got it.
0:16:16 So the management carve out pre the transaction is about, “Look, this is the way the waterfall
0:16:17 would have worked.”
0:16:18 That’s right.
0:16:20 And that’s the portion of it and basically giving it a choice.
0:16:21 That’s exactly right.
0:16:22 Yeah.
0:16:23 So think of the just time periods, right?
0:16:26 Which is kind of, you know, let’s reallocate some of the dollars to the existing shareholders,
0:16:29 you know, and then post and post, you know, acquisition as we talked about.
0:16:33 It’s just an incentive structure to kind of create a long-term, it’s like new options.
0:16:34 That’s exactly right.
0:16:35 Yeah.
0:16:36 Got it.
0:16:37 Good.
0:16:38 Well, let’s talk about the happy scenario.
0:16:39 We’re going public.
0:16:40 All right.
0:16:41 We don’t want to end on a depressing note.
0:16:42 Yeah, of course.
0:16:43 Exactly.
0:16:44 Here we go.
0:16:45 This is what Silicon Valley does, is create IPOs.
0:16:53 So maybe talk a little bit about picking an investment bank and what are some of the incentives
0:16:54 they have.
0:16:55 Yeah.
0:16:56 And they bring the bear.
0:16:58 And are they always aligned with my existing investors or can they be?
0:16:59 Yeah.
0:17:00 Yeah.
0:17:01 Sort of differently.
0:17:02 Yeah.
0:17:04 The investment banks, you know, you’ve heard of these names, Goldman Sachs, JP Morgan, Morgan
0:17:05 Stanley.
0:17:08 You know, their main job is to kind of, you know, help you prepare for the IPO and make
0:17:10 sure all the documentation of things ready.
0:17:13 And then to basically kind of shepherd you through the process by introducing you to
0:17:17 all the relevant institutional investors who will hopefully go on to kind of, you know,
0:17:19 be the long-term shareholders for your business.
0:17:21 And so, you know, they do that.
0:17:22 They’re professionals.
0:17:23 They do this all the time.
0:17:25 So, you know, you certainly generally don’t go through that process without an investment
0:17:26 banker.
0:17:31 Where the conflicts potentially come up is, you know, they’ve got kind of two clients,
0:17:36 right, which is you’re their client for this transaction, but, you know, a firm like Fidelity
0:17:42 or T-Row Price or BlackRock, who is a institutional investor who buys, shares all the time in lots
0:17:47 of IPOs and also trades, shares through the desks that the firms have.
0:17:48 They’re also a client of the bank, right?
0:17:49 And so, there’s this tension.
0:17:54 You see this in the pricing for when IPOs are priced, where your incentive as the entrepreneur
0:17:58 is I want the price to be as high as possible because that means I raise more money for
0:18:01 less dilution, right?
0:18:04 But I don’t want to be too high where obviously the stock trades, you know, kind of poorly
0:18:05 the next day.
0:18:08 And, you know, the financial investor has the opposite incentive, of course, which is
0:18:12 I’d like to buy it as cheap as possible so that I have the maximum amount of upside in
0:18:13 the stock.
0:18:16 And so, this is where I think sometimes, you know, sometimes fairly and sometimes unfairly
0:18:21 I think that bankers, you know, are accused of potentially kind of favoring the institutional
0:18:25 investors because they are the repeat players for the business at the expense sometimes of
0:18:26 the company.
0:18:30 Having done this once, you know, I was a banker, you know, earlier in my career and having
0:18:34 seen the process, I, you know, there’s always some, you know, I think true to that, but
0:18:38 I think more likely these are just more art than science, quite frankly, and it’s really
0:18:42 hard to know based on the demand signals that they get exactly where to price the stock.
0:18:46 And so, you know, sometimes they get it right, sometimes they don’t, I think it’s probably
0:18:49 a little bit unfair to assume that there’s all kind of nefarious, you know, activity
0:18:51 at work here.
0:18:53 And what do I want to get out of my board in this situation?
0:18:56 Are they basically sort of at this point not that important?
0:19:00 Yeah, the board really starts to shift as you go public from being kind of, you know,
0:19:03 more active and probably more, you know, in some cases, more valuable in the business
0:19:07 to more of, quite frankly, a governance and a legal board in that sense, right, which is
0:19:11 making sure that the process is good, making sure that you’re doing your audit committee
0:19:12 and all the other things.
0:19:16 So it’s not that boards are irrelevant as a public company, but I would say the nature
0:19:20 of where boards spend their time starts to shift towards more compliance related activities
0:19:24 versus kind of, you know, potentially forward business looking activities.
0:19:25 Great.
0:19:26 Fantastic.
0:19:28 Well, Scott, thank you for spending so much time demystifying this entire process.
0:19:32 I appreciate it and I hope this is helpful and I hope people will find, you know, they
0:19:35 can go buy the book and, you know, dig deeper into a lot of these topics.
0:19:39 Yes, there’s one big takeaway from having written the book and then been on the circuit
0:19:40 promoting it.
0:19:42 Like, what’s the big takeaway you would want entrepreneurs to take?
0:19:46 Yeah, look, I think the biggest thing, and we hit on a lot of this, is, you know, look,
0:19:49 understand, you know, who your partner is, as I mentioned, you know, somewhat facetiously,
0:19:51 but it’s true, you know, these are marriages, right?
0:19:55 You’re going to be with these companies for eight, 10, 12 years.
0:19:58 And so, you know, I don’t want to over strain the analogy, but the concept of dating and
0:20:02 understanding them really is relevant here, which is, you know, you wouldn’t get married
0:20:05 without really understanding your spouse and who they are and what makes them tick.
0:20:09 And I think in many respects, that is the equivalent of the dating process in the venture capital
0:20:13 game is know what their incentives are, know what they’re interested in, and, you know,
0:20:14 make sure you’re aligned.
0:20:15 Great.
0:20:16 All right, congratulations.
0:20:21 You’ve made it to the very end of part three of our three-part series with Scott Cooper.
0:20:25 Hopefully, you’ve got a really good sense of what goes on inside our heads when you meet
0:20:30 with us because you understand what our incentives are, how we work, and how we’re trying to help
0:20:34 you build a big, great, durable software business.
0:20:40 We hope that this encourages you to continue your entrepreneurial journey, that it demystifies
0:20:41 part of the process.
0:20:44 Look, we’re in this together.
0:20:47 Entrepreneurs and investors are here to change the world together.
0:20:49 And yeah, there’s going to be tension on the line.
0:20:51 There’s going to be times when we disagree.
0:20:56 But fundamentally, we need to be about being side by side entrepreneur and investor because
0:20:59 that’s the way that we get to change the world.
0:21:02 So, we encourage you on your entrepreneurial journey.
0:21:07 And if you’ve got a company that you’re building that seems like a good fit for the types of
0:21:10 investments we make, the house is open, and we’d love to meet.
0:21:18 [BLANK_AUDIO]

0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
0:00:20 I’m Frank Chen.
0:00:23 Today I’m here with Scott Cooper and we’re doing a three-part series.
0:00:27 You’ve landed in part two, which is all about fundraising.
0:00:32 What we’re going to do is dig into the mechanics of how you work with a VC during the fund
0:00:36 raise process, how you interpret the terms of the term sheet, and hopefully this will
0:00:42 give you a sense of how you can actually have a meaningful dialogue with a venture capitalist.
0:00:47 We produce this video for the same reason that Scott wrote this book, which is as venture
0:00:49 investors we do this day in and day out.
0:00:54 We will see thousands of entrepreneurs will write dozens of term sheets, whereas you may
0:00:56 end up doing this once in your life.
0:01:01 And so we wanted to help you understand some of the terms and the art and the science that
0:01:02 go into fundraising.
0:01:05 All right, so let’s get right into it.
0:01:06 Why do I need to be a Delaware C-Corp?
0:01:11 Like what’s special about Delaware and what makes other entities hard to fund from a VC’s
0:01:12 point of view?
0:01:16 Yeah, so there are lots of varieties of, you know, kind of organizations of business you
0:01:17 can do.
0:01:19 There’s C-Corps, there’s things called partnerships.
0:01:24 The main reason why you do a C-Corp and why it’s in Delaware, quite frankly, is there’s
0:01:26 a lot of just legal precedent there.
0:01:29 Delaware had kind of made themselves kind of the home of businesses many, many years
0:01:30 ago.
0:01:34 And so it makes people like us and lawyers feel comfortable because we know that there’s
0:01:39 hundreds of years of, you know, kind of legal precedent that says, hey, if this thing happens,
0:01:40 this is what happens.
0:01:41 And things are fairly well settled.
0:01:45 So you could certainly go other places, but Delaware is pretty good.
0:01:46 The C-Corp does a lot of things.
0:01:49 I think the main advantage of a C-Corp is it allows you to have lots of shareholders.
0:01:53 And so if you’re going to grow over time, you’ll want to do that.
0:01:56 It allows you to have kind of different classes of shareholders, right?
0:01:59 So one of the things we’ll talk about probably is the fact that you as an entrepreneur might
0:02:03 hold what are called common shares, whereas the VC investors might hold what are called
0:02:04 preferred shares.
0:02:08 And Delaware has a very well-established legal framework for us to have different shares
0:02:11 that have different types of rights associated with them.
0:02:14 And then ultimately, if you go public, you know, kind of the way public investors are
0:02:17 used to, you know, investing in and taking public C-Corps.
0:02:21 And so it’s a much easier and quite frankly, just more seamless way to think about kind
0:02:24 of starting with ultimately quite frankly, where you want to end up.
0:02:25 Got it.
0:02:26 So the rails are well-defined.
0:02:27 That’s right.
0:02:29 And I don’t have to, like, place my own trails with a machete.
0:02:30 That’s right.
0:02:31 You can do a trail on this one, right?
0:02:32 Exactly.
0:02:33 Right.
0:02:34 Every now and then we do get some entrepreneurs who come in here and want to do it.
0:02:38 And they’ve got lots of interesting reasons, but so far I haven’t heard a really compelling
0:02:39 one.
0:02:40 Fourteen reasons.
0:02:41 I need to be an LLC.
0:02:42 Exactly.
0:02:43 Right.
0:02:44 Okay.
0:02:45 Good.
0:02:46 All right.
0:02:47 Let’s pretend I’m still working at a company.
0:02:48 Yeah.
0:02:49 Let’s call it BigCo.
0:02:50 Yeah.
0:02:51 And I haven’t incorporated yet.
0:02:55 I need to make sure that whatever I do is protected, my old company is going to come
0:02:56 after me, right?
0:02:57 Yeah.
0:03:01 This is one of those things where I would say a little foresight can go a very, very
0:03:02 long way.
0:03:07 So what the VCs will worry about when you come to pitch them is you’ll say, “Hey, I’m
0:03:08 working at BigCo.
0:03:11 And oh, by the way, in my spare time on nights and weekends, I developed this wonderful new
0:03:15 product and now I’d love you, Ms. VC, to kind of fund it for me.”
0:03:18 And the first question that’s going to go off our heads is, “Okay, wait a second.
0:03:22 Do you actually own that technology or could there be some theory under which your existing
0:03:25 employer says, “Hey, I may own that stuff?”
0:03:30 You may remember this whole case that happened with Uber and the company called Waymo, right?
0:03:35 Where Waymo was part of Google and then a number of people left and ended up at Uber.
0:03:39 There was this whole question about whether kind of the principle of that company had
0:03:44 basically taken some kind of proprietary knowledge outside of Google and kind of given it to
0:03:45 Uber.
0:03:48 And the challenge with these cases is you’re kind of proving the negative, right?
0:03:54 So in that case, Anthony Lewandowski, who was the person, he had to prove that he didn’t
0:03:55 take anything, right?
0:03:58 As opposed to them proving that he did take something in many respects.
0:04:01 Now, the law doesn’t actually work that way, but in practice and perception, that’s the
0:04:02 way it works.
0:04:07 So our best advice on this stuff is, look, if you’ve got a great idea, number one, don’t
0:04:10 ever use your work laptop for any of these things, right?
0:04:12 So have some physical separation.
0:04:15 And when you really get to the point where you feel like, “Okay, now it’s really, this
0:04:20 is a real thing, either take a leave of absence from your company, quit your company, do whatever
0:04:21 you do.”
0:04:24 Because the last thing you want to do is find that you’ve come up with this wonderful idea,
0:04:28 but you’ve just been sloppy and all of a sudden you just can’t find a way to commercialize
0:04:30 it anymore.
0:04:31 Got it.
0:04:35 And then let’s get into the question of how much money should I raise?
0:04:38 And there’s a couple of Twitter questions around it.
0:04:41 So beginning with, do I even mention a check sign?
0:04:43 Should I come with an ask or do I let the VC tell me?
0:04:44 Yeah.
0:04:45 Yeah.
0:04:46 Let’s talk about the broad question.
0:04:51 So the simple answer to how much money to raise is, how much money do you need to accomplish
0:04:54 the objectives that you will need to accomplish to be able to raise the next round?
0:04:57 And I know in some ways that sounds funny, but kind of the best advice I think we give
0:05:02 entrepreneurs is, if you’re raising your Series A round today, you should be at that point
0:05:06 in time thinking about, “What’s the pitch I’m going to give the Series B investors?”
0:05:09 And then essentially work backwards and say, “Okay, for the Series B investors to be compelled
0:05:14 by what I’m doing, what milestones, what objectives will they need to be able to see?
0:05:16 Therefore how much money will I need to do that?
0:05:18 How much time will I need to do that?”
0:05:22 And that’s kind of the way to kind of back into your amount of money.
0:05:27 And the answer to the Twitter question is, “Look, absolutely, you should tell the VC’s
0:05:30 what you want and you should be able to articulate for X amount of dollars.
0:05:31 This is what I can do.”
0:05:36 And oh, by the way, if you gave me X plus 50%, I could do this much more.
0:05:40 And part of the exercise, I think, for you and your VC partners to do is to say, “Okay,
0:05:44 what is the right amount of money that doesn’t dilute us too much today, but gives us kind
0:05:48 of enough degrees of freedom that when we go for that next round of financing, somebody
0:05:53 will come in and put more money in at a higher price, hopefully, than kind of we did this
0:05:54 first round.”
0:05:55 Got it.
0:06:00 So if I’m raising a Series A of financing, I need to start this whole sort of mental process
0:06:02 with, “What’s the Series B investor want to see?”
0:06:03 That’s exactly right.
0:06:04 That’s how you start.
0:06:08 And I think that’s the best mental framework to think about it because if you remember,
0:06:12 if you think about from the perspective of the VC, who’s going to do the Series A, that’s
0:06:15 what they’re worried about is, “Okay, do I believe this person can accomplish enough
0:06:18 so that we can continue this ride?”
0:06:23 And for you as the CEO, you care about that too because the best thing you can do is to
0:06:27 have this very nicely, monotonically increasing valuation and share price over time.
0:06:32 I tell the story of the book, which I know you’ll remember when we were at Loud Cloud.
0:06:35 And Ben Horowitz and I spent a bunch of time raising this very large round.
0:06:40 We raised $120 million and an $820 million post-money valuation.
0:06:44 And so we walk into this all hands thinking that we’re heroes and everybody’s going to
0:06:46 clap for us and tell us how smart we are.
0:06:51 And we get this very muted silence and it turns out that everybody was upset, not because
0:06:52 we didn’t raise at a very high valuation.
0:06:54 In fact, our last round was about 60 million.
0:06:59 So we raised at whatever that number is, 12, 13, 14 times our last round.
0:07:04 But the company down the street from us, Storage Networks, had raised at a billion-dollar valuation.
0:07:11 And so I tell people that story just because so much of company success and employee engagement
0:07:15 is a function of these external benchmarks that people think about.
0:07:19 And so that’s why thinking ahead to the next round is important because as much as you
0:07:23 want to focus on accomplishing the objectives for your business, you also want to set yourself
0:07:27 up so that you can continue to show progress to your employees by demonstrating that kind
0:07:32 of a new investor values the company at a higher level than your prior investor did.
0:07:33 Interesting.
0:07:37 So that’s the perfect segue to this other Twitter question, which is, how often do you
0:07:41 find that founders pushing too hard on high valuations end up hurting themselves?
0:07:46 And so maybe talk about structurally, what happens if you get too high a valuation in
0:07:47 this round?
0:07:50 Because on the face of it, it’s kind of like, look, too high a valuation means I suffer the
0:07:51 less solution.
0:07:52 I own more of this company.
0:07:53 Victory.
0:07:54 Right?
0:07:55 Like why is that not always victory?
0:07:56 I agree.
0:08:01 But honestly, this is a very hard thing as a VC to talk about because look, the immediate
0:08:04 reaction from an entrepreneur, understandably so, is, well, of course you want the valuation
0:08:08 to be lower because that’s right, it’s in your own financial interest to pay as little
0:08:10 as possible and own as much as my company.
0:08:15 And I won’t fight that argument, which is that’s true, but let me at least try to make
0:08:18 the pro case for why I do think entrepreneurs should care about this.
0:08:22 And I think it goes back to kind of the story I just mentioned, which is, if you think about
0:08:26 running the business, you’re the CEO, you’re telling your company, okay, hey, good news,
0:08:29 we just raised $5 million from Andrews and Horowitz, okay?
0:08:31 Now, here’s all the things that we’re going to accomplish.
0:08:34 Here’s your objectives, here’s what we’re going to do in terms of hiring, here’s what
0:08:39 we’re going to do in terms of customer acquisition, and hopefully you’re executing all those, right?
0:08:45 And so 18 months comes down the road and you say, great, we’ve accomplished all those objectives.
0:08:48 I’ve been telling my employees, they’re right on track, and then all of a sudden I go out
0:08:52 to raise money and I run into this buzz saw where a new investor says, hey, congratulations
0:08:53 on all that.
0:08:58 But by the way, I think you actually overvalued your company at that last round, and so even
0:09:04 though all of your metrics have doubled from where you had said they were, I’m only willing
0:09:07 to pay 50% more for the company or something like that, right?
0:09:10 And there’s reasons why that may happen that are outside your control, right?
0:09:15 So maybe the market has changed and we just now value companies differently, and of course,
0:09:17 there’s nothing you can do about that.
0:09:21 But what you can do is at least derisk the situation and say, okay, if I accomplish the
0:09:26 things that I set out to accomplish, do I believe the market will reflect that in how
0:09:27 they value the business?
0:09:31 And it’s really hard as a CEO to imagine going up and doing it all hands when you’ve
0:09:35 been telling everybody all along, everything’s great, and now you have to kind of tell them,
0:09:39 oh, by the way, it’s not that great based on some external metric.
0:09:43 And even though it’s only one metric, these are important data points that unfortunately,
0:09:47 for better or worse, do have psychological impact on how the employees feel about their
0:09:50 progress, on how you think about recruitment and retention of employees.
0:09:56 So it’s a hard balancing act, of course, to happen, but in general, the idea of kind
0:10:01 of having a stock price that goes up and down all the time is more probably kind of disheartening
0:10:06 to the company than kind of something that where the progress of the business also is
0:10:08 reflected in the progress on valuation.
0:10:11 Yeah, it’s hard because there’s sort of an emotional moment, which is I’m negotiating
0:10:13 this round of financing.
0:10:14 That’s right, exactly.
0:10:17 And I want to preserve as much ownership as I can, and it’s harder to think about the
0:10:18 long-term consequences.
0:10:19 Absolutely.
0:10:20 Right, yeah.
0:10:21 It’s a very hard thing.
0:10:24 And look, as I said, this is a hard tension between entrepreneur and venture capitalist
0:10:29 because in one level, the incentives are different, which is at the point of time I’m investing
0:10:30 as a venture capitalist, yes.
0:10:35 If I could invest less money for more ownership, that’s better for me.
0:10:39 Where we are aligned is that it’s not good for either one of us if we end up in these
0:10:43 situations down the road where kind of we can’t raise more money or we can only raise
0:10:47 more money at a substantially lower value than we thought because that has both emotional
0:10:50 and economic implications for both of us.
0:10:51 Got it.
0:10:55 Let’s talk a little bit about the form of investment.
0:10:59 And so you can raise a priced equity round or you can raise a convertible note where
0:11:00 there’s no price.
0:11:03 So you have a recommendation in the book and maybe walk me through it.
0:11:06 Yeah, so I talk in the book a lot about convertible notes.
0:11:09 You’ll hear this term if you’ve been in the YC world of something called a safe, which
0:11:14 is basically just a fancy way of saying it’s a piece of debt that ultimately converts into
0:11:18 equity at some predetermined price in the future.
0:11:20 They’re very good because they’re very simple.
0:11:22 There’s very low legal costs for doing them.
0:11:27 The paperwork’s very easy and all that is good and I’m all for efficiency and cost.
0:11:31 The failure case that I’ve seen, unfortunately, with a number of entrepreneurs is in some
0:11:35 respects because in number one, it’s so easy to raise money on a safe.
0:11:39 You often find people do what are called rolling closes, which is usually on a priced round
0:11:41 we’re like, this is your date, right?
0:11:43 Get your money in by June 30th or else you’re out of this deal, right?
0:11:48 And the safes have this very nice convention, which is I can close one on June 30th and
0:11:51 I can kind of do one on July 31st, I can kind of keep doing it.
0:11:53 And that’s very good and convenient.
0:11:58 The problem is never along that way does the entrepreneur see the actual capitalization
0:12:03 table of what is it going to look like when all those safes convert into equity.
0:12:07 And so several times we’ve had entrepreneurs come in here and it’s kind of sticker shock
0:12:12 when we give them an offer on the A round and then we actually kind of build the capitalization
0:12:16 table out of that and they realize that they inadvertently sold more of the company than
0:12:20 they had realized based upon this kind of concept of these rolling closes of notes.
0:12:26 So I’m not against safes, I would just say if you do it, this is kind of a failure case
0:12:27 that I think happens.
0:12:32 And I think you can accomplish the same efficiency goals with there’s a thing called series seed,
0:12:34 which is a very, very lightweight way of doing an equity deal.
0:12:38 So I just would encourage entrepreneurs to make sure if they go that route, they really
0:12:43 do pay attention and understand how much of the company they’ve sold and don’t kind of
0:12:48 find themselves kind of all of a sudden frightened one day when they realize kind of how much
0:12:51 money they may have given away in the company.
0:12:52 It’s very tempting, right?
0:12:56 Because the reason that you do a rolling close with these safes is, oh, I found the perfect
0:12:57 advisor.
0:12:58 That’s right.
0:13:00 Or I found the perfect early customer who wants to invest.
0:13:02 Or I found somebody else, right, a friend or family.
0:13:04 And so it feels convenient.
0:13:05 Yeah, it’s convenient.
0:13:06 Right.
0:13:11 Yeah, arbitrarily why we should have these kind of specific hard closes at different
0:13:12 times.
0:13:13 But yeah, it is convenient.
0:13:14 And again, it’s got a lot of value.
0:13:15 So I don’t want to suggest it’s never the right thing.
0:13:21 But I think it’s something to be aware of and make sure that you consider as an entrepreneur.
0:13:23 So let’s imagine I go through this process.
0:13:24 I’ve assembled my pitch deck.
0:13:27 I’ve got an offer and now I’m evaluating offers.
0:13:32 Yay, I’m in this enviable position evaluating term sheets.
0:13:36 So you talk a little bit in the term sheet about sort of the economic parts versus the
0:13:37 governance parts.
0:13:40 And so maybe let’s talk about each of them in turn.
0:13:47 So on the economic parts of my term sheet, maybe let’s talk about what is this thing
0:13:49 called, liquidation preferences?
0:13:50 What is this?
0:13:53 Yeah, there’s a whole several chapters in the book on this.
0:13:54 So I’ll give you the 30 second version.
0:13:58 So the simple way to think about liquidation preference is just the order in which money
0:14:00 comes out of the company.
0:14:03 So a liquidation is a fancy way of saying hopefully not an actual liquidation where
0:14:06 we’re saying now the company, but hopefully a sale of the company.
0:14:08 But it could certainly be the former as well.
0:14:12 And so what that means is who gets their money and in what order.
0:14:16 And generally what happens in venture fencing is the money that I invest as a venture capitalist
0:14:21 has what’s called a liquidation preference on it, which means my money comes out first
0:14:24 relative to the monies that would be owed the common shareholders, which is typically
0:14:26 where the founders and the team.
0:14:27 That’s right.
0:14:34 A simple example, if I invest $10 million and let’s say we sell the company for $10 million,
0:14:38 typically I will have $10 million worth of liquidation preference, which means all 10
0:14:43 of that money comes back to me and unfortunately for you and your employees, you have nothing.
0:14:45 And so that’s kind of the simple way to think about it.
0:14:53 It’s fairly common in venture deals, but typically it is kind of capped by just the amount of
0:14:56 money that the venture investors have put into the company.
0:15:01 And what’s kind of the most entrepreneur friendly liquidation preference formula that I should
0:15:02 live with?
0:15:05 There’s so many different kinds of liquidation preference.
0:15:08 Participating prefer non-3x, right?
0:15:09 So what’s the most entrepreneur friendly?
0:15:12 The most entrepreneur friendly and the one that I think generally predominates quite
0:15:16 frankly, particularly in Silicon Valley is what you would call a 1x non-participating
0:15:17 liquidation preference.
0:15:21 If you break that apart, 1x just means one times the money we put in, right?
0:15:25 So I don’t get two times my money, I don’t get three times my money, I get my $10 million
0:15:27 in that example we talked about.
0:15:31 And then non-participating means I don’t get to do what’s called double dipping.
0:15:35 And what double dipping means is not only do I get to take my liquidation preference
0:15:41 off, but then I also get to share in the proceeds that reflect my percentage ownership of the
0:15:42 company, right?
0:15:48 So in an example where let’s just say I put in $10 million and I own 25% of the company
0:15:54 or something like that, if I had participating preference, I would get my $10 million first
0:15:56 and then there’d be 10 left over, right?
0:15:57 Because we sold it for 20, there’s 10 left over.
0:16:02 Then I would also get 25% of that additional $10 million, fundamentally, you know, and
0:16:06 I say this the book, like I think that’s very unfair to the entrepreneurs and to the common
0:16:10 shareholders because liquidation preference is really intended to protect your downside.
0:16:11 And so it’s not obvious to me-
0:16:12 Something’s gone wrong.
0:16:13 Yeah, right.
0:16:16 Once you’ve kind of gotten your money out, it’s not obvious to me why you should also
0:16:20 participate in the upside and obviously take money away from the founders or the employees.
0:16:21 Yeah.
0:16:26 So when I hear my friends complaining about deals with structure, I guess this is an example
0:16:29 of deals with structure, like unfair liquidation preferences.
0:16:35 Right, unfair liquidation preferences, other structures sometimes you see is things, there’s
0:16:39 something called anti-dilution protection, which is again a basic way to say, “Hey, look,
0:16:44 if we later in the future raise money at a lower price than we raise today, it kind of
0:16:47 trues up the venture capitalist to a certain extent.”
0:16:52 And there’s a very common one, which is called weighted average anti-dilution, which is fairly
0:16:55 common, but there’s also a very egregious form of that, which you sometimes hear called
0:16:56 a ratchet.
0:16:59 And what a ratchet is, is really a complete price reset.
0:17:04 So it says, “Hey, if today I bought shares at $2 a share, and tomorrow you sell shares
0:17:09 at $1 a share, my $2 price converts to the $1 price,” meaning I literally get double
0:17:12 the number of equity ownership in the company than I thought.
0:17:18 And so you’ll see structure like that is sometimes happens when kind of people are trying to balance
0:17:20 off valuation with some of these other rights.
0:17:23 And that’s really a lot of what I try to point out in the book, is that it’s very hard to
0:17:26 look at these in isolation because they all have some kind of economic value.
0:17:30 So if you’re going to push on valuation, you might expect a venture capitalist to push
0:17:32 on some of these structure items.
0:17:35 And so the big advice that we always give entrepreneurs, and I echo this in the book,
0:17:38 is the simpler you can keep it the better.
0:17:42 And so if you’ve got one deal that’s got a lot of structure at this price, ask the
0:17:47 question for a lower price, what would a deal that’s a clean deal that doesn’t have all
0:17:52 the structure look like, that’s often quite frankly the advice that we give to entrepreneurs.
0:17:58 So I can actually get myself in trouble by sort of taking the highest post money because
0:18:02 of all of this structure and how does the money come out in these scenarios.
0:18:05 Yeah, I think there’s two risks that you always have to think about when you do the structure.
0:18:09 One is just, you’re potentially postponing the inevitable, right, which is you don’t
0:18:13 really know what the impact of these things will be until you have that next financing
0:18:14 event, right.
0:18:18 And so, look, the world may be perfect and you may never have to, you know, everything
0:18:21 may go up and to the right, which we all hope, but that’s not always the case.
0:18:25 And so, you know, a great example of this was, this is public information, but when Square
0:18:29 went public, they went public at $8 a share.
0:18:32 Their last round of financing was at $16 a share.
0:18:36 And those $16 investors had this full ratchet that we were talking about.
0:18:41 So, those $16 shareholders basically got issued two times the number of shares to bring their
0:18:42 price down to eight.
0:18:47 And so, all the existing shareholders obviously bore the brunt of that incremental, you know,
0:18:48 dilution from those shares.
0:18:49 So that’s kind of thing number one.
0:18:53 Thing number two is just, and this is why we always say keep it simple, is everything
0:18:56 you do today has the risk of creating precedent for the future.
0:18:58 And so, you may think, hey, look, you know, you and I are buddies.
0:19:01 This is, you know, I’m giving you these special rights because we’re friends.
0:19:05 But when that next investor comes in and looks at the paperwork from the previous round and
0:19:09 sees that you gave that stuff to the other investor, you know, the likely outcome is
0:19:10 they’re going to want the same thing.
0:19:13 And now you start to kind of get the cumulative effect of some of these things, which can
0:19:15 be, you know, pretty harmful at one time.
0:19:16 Right.
0:19:19 So, every subsequent investor is going to kind of want the same deal with a prior investor
0:19:20 or better.
0:19:21 Yeah, exactly.
0:19:22 Right.
0:19:23 You have to think into the future.
0:19:24 That’s exactly right.
0:19:25 You have more than one shareholder.
0:19:26 Yeah.
0:19:27 And you just don’t know how much negotiating leverage you’ll have at that time.
0:19:30 So, you don’t want to set yourself up to kind of start by having to defend or walk
0:19:33 away from a deal that you did prior.
0:19:34 Got it.
0:19:38 So, we’ve come back to the idea that, like, when I’m raising the Series A, I need to really
0:19:42 think about Series B and Series C and Series D, right, sort of like the sequence of investors
0:19:43 that I’m going to need.
0:19:44 That’s right.
0:19:50 I should sort of think through the entire financing plan before I start fundraising for
0:19:51 the Series A.
0:19:52 I think that’s right.
0:19:55 Yeah, look, I mean, you know, you want to kind of project as much foresight as you can,
0:19:58 recognizing that, look, markets may change, you know, kind of the financing environment
0:19:59 may change.
0:20:01 Those are things out of your control.
0:20:04 What’s in your control, at least, is to have a thoughtful plan for if I accomplish these
0:20:09 things, is that likely to lead to, you know, a favorable financing situation.
0:20:13 And if I make sure that I don’t kind of load up my terms with all kinds of crazy bells
0:20:16 and whistles, hopefully I set myself up for success.
0:20:17 Right.
0:20:19 So, it sounds like on the economic side of the term sheet, let’s keep it simple.
0:20:20 Yeah.
0:20:23 It’s sort of the big advice and think about the subsequent investors.
0:20:24 Absolutely.
0:20:27 I mean, so don’t do something abnormal early because that’s just going to bite you later.
0:20:31 Let’s talk a little bit about governance, the governance side of the term sheet.
0:20:35 So maybe the first question is, I heard that Google and Facebook have these dual class voting
0:20:38 shares and then, like, the founders have ultimate control.
0:20:39 That sounds good to me.
0:20:41 Like, don’t I always want that?
0:20:43 I want 10 times the voting share.
0:20:44 Right, exactly.
0:20:45 Does anybody else?
0:20:47 We do get some entrepreneurs, even, in the private markets who come ask us for that.
0:20:51 So, the important thing, I think, to think about in these, the idea, by the way, behind
0:20:55 dual class shares, for people who don’t know, is that literally shares have differential
0:20:56 voting rights.
0:21:00 Like, in the Facebook and Google cases, you’re right that Mark Zuckerberg and Larry Page
0:21:03 and other founders have kind of, you know, a high vote stock, which means they have more
0:21:07 influence on corporate matters and then everyone else has a low vote stock.
0:21:12 The reason those exist in the public markets is out of concerns of kind of potential misalignment
0:21:15 between long-term versus short-term incentives in the market, right?
0:21:19 And so, in a company like Facebook, let’s use that, you know, Mark probably has all
0:21:23 kinds of product ideas that he wants to execute over the next three, five, 10 years.
0:21:24 Those will all take time.
0:21:25 They will cost money.
0:21:29 There could be quarter-to-quarter gyrations in his expenses and revenue as a result of
0:21:31 these product plans.
0:21:34 And the main reason why somebody like that puts in dual classes, because he wants to
0:21:39 be able to make sure that if there are investors who are more short-term oriented, they can’t
0:21:42 out-vote him and say, “Hey, look, I don’t like your product strategy because of kind
0:21:44 of these short-term gyrations.”
0:21:48 The reason why those tend not to exist in the private markets is we’re all completely
0:21:50 aligned, which is none of us have liquidity, right?
0:21:54 So, we can’t, you know, in general, in many times we are prevented from selling our shares
0:21:55 legally.
0:21:59 So, there’s no liquid market, and we have a time horizon that’s consistent with the
0:22:01 entrepreneur’s time horizon, right?
0:22:04 You know, we don’t care, you know, obviously we don’t care about what they do quarter-to-quarter
0:22:07 other than to the extent it just represents them not being able to manage the business
0:22:09 in a way that makes sense.
0:22:14 And so, that’s why you tend not to see them in private markets.
0:22:17 What we’ve done with many of our companies is as they get closer to going public, we
0:22:21 have agreed with them that, okay, having these dual-class shares when and if you go public
0:22:26 is a good thing to do, but we haven’t done that, obviously, in the private markets.
0:22:27 Got it.
0:22:32 So, my first board members will likely be sort of either my co-founders and then my
0:22:33 early investors.
0:22:34 Right.
0:22:38 At some point, we’re going to go on a quest for an independent board member, and how should
0:22:39 I think about that?
0:22:40 When do we do that?
0:22:41 Why do I need one?
0:22:42 Who should I look for?
0:22:43 Yeah.
0:22:47 So, most boards you’re right are, in fact, most boards at the beginning don’t have independent
0:22:48 board members.
0:22:49 You’re right.
0:22:52 So, if you’re a co-founder and then typically as part of a venture capitalist coming into
0:22:56 your company as an investor, you will generally give them a board seat.
0:23:00 The reason I think independence are important is you want to have kind of balance on the
0:23:01 board.
0:23:05 And so, one of the phenomenon that we’ve seen over the last 10 years is a change in the
0:23:08 board structure in that it used to be that the venture capitalist would outnumber the
0:23:14 common shareholders, and that was of concern to many founder CEOs because it gave the venture
0:23:17 capitalist kind of the unilateral right in many cases to be able to remove the CEO if
0:23:19 they didn’t like them.
0:23:23 Over the last 10 years, that’s really shifted, and more of our boards have more common shareholders,
0:23:29 more founder and employee-led board members than they have preferred shareholders.
0:23:34 And that’s understandable and fair given some of the kind of changes we’ve had in governance.
0:23:39 The idea, though, behind an independent is can we find someone who is kind of not representing
0:23:42 either just the founders and not representing the preferred shareholders, but someone who’s
0:23:45 going to take a more neutral and expansive view of the business?
0:23:51 And so, I think it’s hard to probably do it early in your days, but as the board grows,
0:23:56 maybe as the board gets to four or five people, having an independent or two will be valuable.
0:23:59 And I think most people who’ve done it have gotten great value out of it, and oftentimes
0:24:04 they’ll look for an industry expert in the domain they’re in, or maybe they’re looking
0:24:08 for, hey, we need more sales and marketing help, and so let’s bring in someone who has
0:24:10 kind of expertise from an organizational perspective.
0:24:13 So those are the characteristics we tend to see with independence.
0:24:19 And as I approach an IPO, if all goes well, it seems like it’ll be expected that I have
0:24:20 an independent board member.
0:24:21 That’s exactly right.
0:24:22 One of the checklist items for going public.
0:24:23 That’s right, yeah.
0:24:24 So you’ll see this with companies, right?
0:24:26 When they go public, there are the different exchanges.
0:24:32 NASDAQ and NYSE have what they call listing rules, which require some number of independence.
0:24:35 They require some number of financial experts to be able to sit on things like the audit
0:24:36 committee.
0:24:39 So it becomes much more prescriptive as you go, and so you’ll often see a company kind
0:24:44 of, you know, T-minus one or two years leading up to an IPO start to kind of augment their
0:24:47 boards to satisfy these listing standards.
0:24:48 Got it.
0:24:51 Let’s talk a little bit about pro-rata rights.
0:24:54 So there’s going to be this element in the term sheet that says, here are what my existing
0:24:59 investors can be expected or are allowed to invest in subsequent rounds.
0:25:02 So how should I have that conversation with an investor?
0:25:05 What kind of pro-rata rights do I want them to have, and so on?
0:25:09 So it’s pretty typical when you do a fundraise that, you know, kind of one of the things that
0:25:13 we as venture caps will ask for is exactly this right, and what it means is it’s the
0:25:17 right for us to invest additional dollars in the next round of financing in order to
0:25:20 preserve the economic ownership that we already have in the company, right?
0:25:25 So if I own 25% of the company today, this gives me the right to hopefully put more money
0:25:29 in later such that my 25% kind of stays, you know, in and around that.
0:25:30 At a higher price?
0:25:31 Because I’ve made progress?
0:25:32 At a higher price, right?
0:25:34 So in general, it’s a very good thing.
0:25:39 Now, pro-rata rights become more challenging in the very, very good case, which is a nice
0:25:43 place to be, but, you know, if you are just executing phenomenally well and you’ve got
0:25:47 a new investor, you’re going to raise money and a new investor comes in and says, “Hey,
0:25:51 I want to put a bunch of money in, but for me to make my business model work, I need
0:25:53 to own a certain percentage of the company,” right?
0:25:57 Because if you go back to where we started from our last session, so much of what the
0:26:01 venture capitalist incentive is, can I get a Facebook, can I get a Google, and, you know,
0:26:03 there’s kind of two big cardinal sins in this business.
0:26:06 One is you miss one of those companies, you don’t invest in them.
0:26:09 The other is that you invest in it, but you don’t own enough of it so that when it gets
0:26:12 to be Facebook, it still doesn’t meaningfully change your economics.
0:26:16 And this pro-rata thing is kind of an example of the latter where that new investor may
0:26:19 come in and say, “Hey, look, I’m going to give you all this money, but I still only
0:26:24 own 3% or 4% of the company, and so, hey, I want you to go back to your existing investors
0:26:27 and tell them, ‘Don’t do your pro-rata, but let this new investor do it.’”
0:26:30 Now, admittedly, it’s a good problem to have, right?
0:26:32 Because it means we’ve got people who are bound, you know, kind of pounding down the
0:26:34 door to let us in.
0:26:36 But that does create tension.
0:26:40 You often see this even in the series A to seed side of things, that seed investors feel
0:26:44 like many times that they get compromised, and that the A round investors are trying
0:26:46 to kind of prevent them from doing pro-rata.
0:26:50 So it’s a very common thing to have, but I think it’s something where it puts you as
0:26:54 a CEO in a situation where you may have to manage kind of conflicting incentives among
0:26:55 your investors.
0:26:58 And so, you know, you just need to kind of go in eyes wide open, and hopefully you’ve
0:27:02 got a good enough dialogue with your existing investors where you can say, “Hey, let’s figure
0:27:05 out some compromise here that makes sense where everybody can feel like they can walk
0:27:08 away happy from the table.”
0:27:10 And what should I expect from my existing early investors?
0:27:14 So somebody invest in my A, should I expect them to be along for the ride and do their
0:27:18 pro-rata in the B and the C and the D all the way?
0:27:21 Yeah, you know, different firms have different philosophies on this.
0:27:25 You know, the way we do it here is, if we’re the A round investor, our general thinking
0:27:29 is that, you know, unless something dramatic happens with the company, you know, we should
0:27:32 expect that we’re going to participate pro-rata in the next round of financing.
0:27:35 We think, I think that’s kind of generally the convention in the industry.
0:27:38 On that, though, the answer for most firms, and we treat it the same way, is it’s kind
0:27:42 of an independent decision at that point in time because, you know, the dollars can get
0:27:45 very, very big and, you know, kind of, you have to think about, you know, how much do
0:27:47 I own at what kind of cost basis.
0:27:51 So I think it’s an important conversation, actually, to have with your VC when you take
0:27:55 money from them because you certainly don’t want to kind of, you know, miss set expectations,
0:27:58 you know, between the two of you, and you also want to be able to make sure when you
0:28:03 go raise money that you’re not creating some signaling effect otherwise where the new investors
0:28:07 are expecting your existing investor to participate and the fact that they don’t do it, they read
0:28:08 as a negative signal.
0:28:12 That can happen sometimes if you haven’t kind of had this conversation and, you know, already,
0:28:14 you know, set the right expectations up front.
0:28:15 Yeah.
0:28:18 So I need to be clear with you as soon as you put your money in.
0:28:22 I can count on you for the next round, or maybe the round after that, but like we should
0:28:23 just be on the same page.
0:28:24 That’s exactly right.
0:28:25 Yeah.
0:28:26 Great.
0:28:27 Good.
0:28:28 So last few questions on sort of governance.
0:28:32 Let’s talk about stock restrictions, like what are they, how should I think about them?
0:28:33 Yeah.
0:28:37 So this is one that’s come up more often because of this phenomenon now that companies are
0:28:38 staying private longer, right?
0:28:42 So it used to be not a big deal because companies about, you know, six years or so from founding
0:28:44 was kind of the median time to going public.
0:28:46 Now we’re talking 10, 12 years.
0:28:49 And so the things that you want to think about as a founder is two things.
0:28:53 Number one is, what are my investors going to do?
0:28:56 And so often you will see that investors will have restrictions on their ability to sell
0:29:00 shares and those come in lots of different flavors, which we won’t go into detail, but
0:29:01 you can read about on the book.
0:29:03 And then the other question is, what do you do about employees, right?
0:29:07 Because you’re probably going to have employees who will have fully vested their shares, some
0:29:09 of whom will have left the company.
0:29:11 And you know, this is one is a tough one to navigate, right?
0:29:15 Because on one level as a CEO, you know, I think you want to, you know, you want to
0:29:19 get flexibility to your employees, particularly the ones who are still, you know, at the company,
0:29:21 right, doing great work.
0:29:25 The thing you want to be careful about though is making sure that those shares don’t kind
0:29:29 of take up demand that would otherwise exist for people to buy shares from the company,
0:29:32 where the cash would come into the company, and therefore allow you to kind of raise money
0:29:33 and grow the business, right?
0:29:37 So if you think about this at some level, there may be a finite amount of dollars that
0:29:40 all the investors are willing to put in this company.
0:29:44 And if you have employees share sales competing with sales that you’re making as the company
0:29:48 to try to raise money to put in your own coffers, there can be a kind of a tension there.
0:29:54 And so more generally these days, we see fairly restrictive provisions here, which is most
0:29:58 companies try to kind of, you know, say, “Hey, look, if you’re going to sell as an employee,
0:30:02 you need the consent of the company,” or something like that, so that you kind of have more control
0:30:07 over the timing and also the volume, potentially, of these purchases.
0:30:12 Thinking about employee incentives, since this is sort of part of the discussion, my
0:30:17 friends who are doing longer vesting schedules or back-loaded employee options instead of
0:30:22 sort of, you know, one 48th over four years, they’re doing, you know, 10, 20, 30, 40, right,
0:30:26 to incent people to stay longer, how should I think about those types of incentives?
0:30:27 Yeah.
0:30:29 You know, there’s lots of discussions on this right now.
0:30:32 The short answer is I’m not sure there’s yet a real change in convention.
0:30:35 I think most people are still doing the pretty straight four years.
0:30:40 The big change that you may have heard about from some people is normally when you leave
0:30:44 the company and you’re vested, you typically have about 90 days to either exercise your
0:30:47 shares or you have to forfeit them.
0:30:51 And because of this elongation of companies staying private, a lot of companies now have
0:30:54 extended that period and they say, “Hey, look, we’re going to give you a year or two years
0:30:58 or something because we recognize there’s not a liquid market in the form of an IPO
0:31:02 to be able to sell them and we know it’s expensive for you to come out of pocket to have to exercise
0:31:03 your options.”
0:31:07 So, there’s probably more creativity, I would say, happening on that side, less creativity
0:31:11 on fundamentally rethinking whether we should have just a different investing schedule overall
0:31:14 that reflects, you know, kind of the fact that companies are staying private longer.
0:31:15 Got it.
0:31:19 So, if I wanted to be as sort of maximally employee-friendly as possible, I’d be extending
0:31:22 the time that people can choose to exercise their contracts.
0:31:23 That’s exactly right.
0:31:24 Yeah.
0:31:27 And, you know, the only thing that, you know, and we’ve talked about this in some of our
0:31:32 blogs, the only thing to think about there is that means that those shares, you know,
0:31:36 those shares will be what’s called an overhang, meaning that, you know, kind of they’re sitting
0:31:37 out there.
0:31:40 You don’t really know if they’re going to get exercised or not, but, you know, sometimes
0:31:43 in the alternative, people might not have exercised them.
0:31:46 Those shares can be returned to the company and the company could use them, obviously,
0:31:48 to issue new options to people.
0:31:52 So, there’s a, you know, a very emotional, understandably so, and a very kind of deep
0:31:53 debate on this.
0:31:57 But, yes, in the perfectly employee-friendly case, you would extend it out as long as possible
0:31:59 to give people the maximum time period.
0:32:00 Got it.
0:32:01 Great.
0:32:04 Thanks for talking to us about all of the economic and governance terms.
0:32:08 The term sheet can be very intimidating, so I’m glad you sort of went through it and
0:32:09 demystified it.
0:32:10 Thanks, Frank.
0:32:11 All right.
0:32:12 Congratulations.
0:32:16 You’ve survived to the end of part two, where we talked about understanding fundraising
0:32:19 and the terms that go into a term sheet.
0:32:23 Hopefully this gives you a sense of all of the mysterious terms you’ve now seen, maybe
0:32:28 for the first time, when a term sheet has arrived.
0:32:31 Next up, we’re going to do part three of our series.
0:32:35 And part three is all going to be about living with your venture investor over a long period
0:32:36 of time.
0:32:41 So, you might actually have the same person on your board of your company for 10 years,
0:32:49 and so Scott has great tips for how to understand the bends in that relationship and how it
0:32:55 will change over time, and we’re going to dig right into three concrete scenarios that
0:32:59 you might end up encountering, one in which you are winding down your company, one in
0:33:03 which you’re selling your company, and one in which you are actually going public.
0:33:06 Congratulations, and we’ll see you at part three.

0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:19 For more details, please see A16Z.com/disclosures.
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.
0:26:51 [BLANK_AUDIO]

0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:18 For more details, please see a16z.com/disclosures.
0:00:23 Hi everyone, welcome to the A6NZ podcast, I’m Sonal.
0:00:28 So this week, to continue our 10-year anniversary series since the founding of A6NZ, we’re
0:00:33 actually resurfacing some of our previous episodes featuring founders Mark Andreessen
0:00:34 and Ben Horwitz.
0:00:38 If you haven’t heard our latest episode with Stuart Butterfield turning the tables as the
0:00:42 entrepreneur interviewing them, please do check that out and our other episodes in this
0:00:46 series on our website at a6nz.com/10.
0:00:52 But this episode was recorded at our Innovation Summit in 2018 and features economist Tyler
0:00:57 Cowan interviewing them about everything from their partnership and how it works to
0:01:01 talent, tech trends, and software eating culture.
0:01:02 Thank you all for coming.
0:01:06 I’d like to start with the two of you as a couple.
0:01:07 Oh yeah.
0:01:10 How was it you met at Netscape in 1995?
0:01:13 Well, Mark interviewed me way back then and he interviewed me.
0:01:18 I think I was interviewing for product management role and he was the founder of the company
0:01:24 and I had worked on a product called Lotus Notes and Mark had a fascination with Lotus
0:01:26 Notes for a couple of reasons.
0:01:31 One was it was kind of sort of the closest proprietary thing to the internet and then
0:01:35 they had email in it and Netscape was looking at doing email.
0:01:40 So he had all kinds of questions for me and I remember him just being absolutely shocked
0:01:46 and flabbergasted that like 50% of our code base and Lotus Notes was just making like
0:01:52 all the LAN protocols work together, IPX and Apple Talk and Net Buoy, Net Bios.
0:01:55 You guys don’t even know what any of that is anymore.
0:01:59 He was like literally just making the network talk to each other, which he thought was like
0:02:02 ridiculous given there was TCP/IP.
0:02:04 That was the very first conversation we had.
0:02:06 Mark, how did he do in the interview?
0:02:07 He did very good.
0:02:08 He did very good.
0:02:10 So he had a giant asset.
0:02:12 He was the first employee from Lotus.
0:02:15 So he looked great in comparison to all the ones we haven’t seen before.
0:02:18 No, he did great.
0:02:20 He was super knowledgeable and actually it was actually a really big deal at the time
0:02:25 because Lotus Notes was a big thing at the time and what Ben just alluded to in the architecture
0:02:28 like it just basically assumed that the internet was not going to work, which was the dominant
0:02:29 assumption at that time.
0:02:32 It’s kind of how the whole thing was built and then most of the people working on it
0:02:35 I think probably agreed with that.
0:02:37 There were many, many arguments that the internet couldn’t possibly do what a system like Lotus
0:02:38 Notes did.
0:02:41 So Ben was, I would say, young enough and smart enough and knowledgeable enough to figure
0:02:46 out very early among his cohort of kind of the professionals in the space that it actually
0:02:51 was going to happen a different way and so we were a little fly by night startup.
0:02:53 So we fast forward to 1999.
0:02:55 You two do loud cloud together.
0:02:56 Why?
0:02:57 How’d that happen?
0:03:01 Well, so the big thing basically that happened was so it turns out the internet worked, which
0:03:03 turned out to be a big deal, go figure.
0:03:06 And then basically what happened was basically people were unprepared for the internet to
0:03:10 work at some fundamental level and then we saw a very specific kind of version of people
0:03:14 being unprepared for that, which is we sold Netscape in 1998 to AOL and so Ben and I and
0:03:17 a bunch of us were working at AOL and then AOL had this thing at the time.
0:03:22 AOL was a little bit like the Google of the era or something where they had like a firehose
0:03:25 of traffic that they could basically steer wherever they wanted to steer it.
0:03:27 And so if you went on AOL and you typed in by clothes.
0:03:29 Half the traffic on the internet went through AOL.
0:03:30 I remember that.
0:03:31 It was a really big deal.
0:03:32 Not my half, by the way.
0:03:33 Yeah.
0:03:34 But that’s a lot, still.
0:03:35 Half.
0:03:36 That’s right.
0:03:37 And then by the way, almost all consumers, right?
0:03:38 Almost all consumers were on AOL at the time.
0:03:43 So you type in by clothes on AOL and then they would sell to like J Crew or Gap or whatever
0:03:44 that slot.
0:03:48 So basically what happened is that advertising business and then AOL would turn on that ad
0:03:52 and then basically the firehose of traffic would just blast the website to bits, right?
0:03:56 If it was J Crew, they just blasted the J Crew website to bits and then the J Crew people
0:03:58 would spend weeks trying to get the website to work to actually take advantage of all
0:03:59 this traffic.
0:04:03 And so it was sort of, you know, it just seemed kind of obvious that we, you know, we were
0:04:05 kind of in this business and so you go talk to the people running these things and they
0:04:09 just, they didn’t, they were just unprepared for this kind of sophistication.
0:04:13 And so we sort of incubated this idea that, boy, what if there was a cloud, right?
0:04:17 What if basically there was a system in which you could take your content and all your apps
0:04:19 and you could run them and it could handle the load and you could, you know, it could
0:04:23 load balance and it could spike up in response to demand and then all these companies, instead
0:04:25 of being in the business of running all your own stuff, like why can’t you just hand it
0:04:26 over to the pros?
0:04:29 And so, and then this is in the full flush of the dot com boom.
0:04:31 So it just seemed like an obvious opportunity.
0:04:36 And so 2009 comes along and why is it it seems to you both then that’s the right time for
0:04:38 a new venture capital firm?
0:04:39 What was the thought?
0:04:44 Well, you know, it was really one of those ideas that just came out of our experience.
0:04:49 You know, we were customers of venture capital and, you know, we had a couple of observations.
0:04:53 One was, you know, we had noticed over the years and Mark really made the observation
0:04:59 first that most of the really great companies, like forget about successful, but like great
0:05:02 companies, companies you admire and tech were all run by their founders for a very long
0:05:03 time.
0:05:10 Like Thomas Watson at IBM or Dave Packard, Bill Hewlett at Hewlett Packard or, you know,
0:05:16 Bill Gates or whoever it was, all the really giant successes were run by their founders.
0:05:20 And the conventional wisdom and venture capital was set up to replace the founder.
0:05:25 And then in our own experiences as technical founders, we knew why that was true because,
0:05:30 you know, well, if you just took, you know, loud like nobody would have ever been able
0:05:32 to fix loud cloud other than us.
0:05:36 Like there was no way you could bring in a professional to do that.
0:05:39 And so getting to that next product after you get the first product, getting to the
0:05:43 next product market fit required an innovator.
0:05:46 And so if you wanted subsequent product cycles, you needed the founder.
0:05:50 And so we just thought there ought to be a firm that is designed to do that.
0:05:53 And what is it that the two of you figured out?
0:05:56 What is it you two understood that other people didn’t?
0:05:57 And how would you articulate that?
0:06:01 You know, like we were just, there was a bunch of things.
0:06:02 One differentiation.
0:06:06 So like we came from a company, so we’re like, first we’re going to tell a very clear
0:06:09 sharp story about a real network that we’ve built out systematically.
0:06:13 We’ve got people who are going on your board who know exactly how to build companies.
0:06:17 So sometimes it feels to some people, there’s a lot of money running around, but talent
0:06:18 is quite scarce.
0:06:22 What is it that you two in the company as a whole have understood about talent search
0:06:23 that other people have not?
0:06:26 So we actually thought of it as a talent business.
0:06:30 And a lot of the reason for that is, you know, a friend of ours, Michael Ovitz, who founded
0:06:33 the talent agency, CAA, was a board member of ours at Opsware.
0:06:41 And you know, he always thought about talent in amazing detail and like, in incredibly
0:06:46 specific and one of his biggest concepts about it was, it was a network.
0:06:50 And you had to run the, and it seemed simple, oh, it’s a network, okay, great.
0:06:52 But like, how do you build that network?
0:06:53 How does it work?
0:06:56 How do you take a long view of the relationships with the talent?
0:07:03 So you know, we really thought out very early on, we’re going to invest heavily in building
0:07:09 this network and having the time, the luxury of time to build real relationships as opposed
0:07:13 to transactional relationships with every single person that we run into, be they an
0:07:18 engineer, an entrepreneur, a corporate partner, or whomever.
0:07:21 And that all kind of came out of this original CAA concept.
0:07:26 If you take a long view of relationships, you can build a network that’s so powerful
0:07:27 that nobody will ever be able to match it.
0:07:30 And that was kind of the original inspiration.
0:07:35 And we were fortunate enough to just hire a really astoundingly good team to help us
0:07:36 do that.
0:07:38 And Mark, how do you think about talent assessment?
0:07:41 So I think, you know, the other side of it is just the entrepreneur assessment, right?
0:07:44 And so it’s just one of those things where, you know, there is kind of this fundamental
0:07:47 question of kind of how extreme are you willing to get, right, with some of these people, right?
0:07:52 Because you know, the kinds of people who start these companies are not normal.
0:07:55 And we can say that speaking from experience, having done it ourselves.
0:07:58 And so, and I would actually go so far as to argue, like, it may be that the founders
0:08:02 are getting less normal as sort of society gets, let’s just say, more interesting in
0:08:03 recent years.
0:08:06 And so, you know, the ideas are getting bigger, the technologies are getting more disruptive,
0:08:09 the companies that win are getting much larger, technology is more central in everybody’s
0:08:10 lives.
0:08:11 By the way, there’s more competition than ever.
0:08:12 There are more tech startups than ever.
0:08:16 And so the kind of very special person who’s going to conceive of an original idea and
0:08:19 then be able to build a team and be able to prosecute the idea is going to be a very extreme
0:08:20 person.
0:08:24 And so a lot of it is sort of this, you know, the discovery and then partnering with these
0:08:25 really extreme people.
0:08:28 I’m going to throw out a few questions about particular technologies.
0:08:33 And either of you feel free to answer blockchain, what will be the breakthrough application
0:08:34 for blockchain?
0:08:35 I’ll take that.
0:08:38 So first of all, like asking what the killer app is, nobody ever gets it right.
0:08:42 Like I remember the internet killer app, it was never Facebook, that’s for sure.
0:08:48 But the way that we think about blockchain technology is that it’s a new computing platform.
0:08:54 And like other new computing platforms that preceded it, it’s worse in every way, but
0:08:56 really a very few ways.
0:09:00 So if you think about the smartphone, when it came out, it was much worse than the PC
0:09:02 at a tiny screen.
0:09:05 It was far less powerful, et cetera, et cetera.
0:09:08 People were like, how am I going to run my spreadsheet on that little ass screen?
0:09:11 Like there’s no way it’s going to work.
0:09:13 But I had a couple of properties that you didn’t have in the PC.
0:09:14 It had a GPS.
0:09:15 It had a camera.
0:09:17 And so you can now build things like Lyft.
0:09:21 You can now build things like Instagram that you could never build on a PC, and you still
0:09:22 can’t build on a PC.
0:09:26 And it created a whole new world of applications.
0:09:27 Blockchain is like that.
0:09:28 It’s slower.
0:09:29 It’s harder to use.
0:09:30 It’s harder to program.
0:09:34 But it has a new feature, and that feature is trust.
0:09:39 And trust is really, really an interesting feature because it means that you don’t have
0:09:45 to trust the government or a corporation or your lawyer.
0:09:50 You just have to trust the mathematical properties and the game theoretic properties of the system,
0:09:51 and then you can do things.
0:09:56 And it opens up applications such as you can program money.
0:09:59 You can program contracts.
0:10:03 You can create digital property, which is, you know, if you just think about the art
0:10:07 world, it’s an amazing kind of world, and it’s all virtual value.
0:10:13 You know, Bosque, it’s $150 million, but like the canvas is probably less than $5.
0:10:16 But because you know that it’s one of one, it’s got value, well, you can now do that
0:10:17 digitally with blockchain.
0:10:19 So there’s those kinds of things.
0:10:21 And then you don’t have to trust companies.
0:10:25 So if you’re a developer and you’re building an application, you know, you don’t have to
0:10:28 trust Facebook to not go, well, like, you know, we decided, like, we’re changing our privacy
0:10:29 policy.
0:10:30 You can’t run anymore.
0:10:33 Or if you’re a consumer, you don’t have to say, OK, like, I’ve got to trust you with
0:10:34 my data.
0:10:38 So that property of trust, we think, is very, very powerful, and there is a large set of
0:10:40 applications that will come off of that.
0:10:44 But you know, like, it takes a while for developers to get used to it, for the technology to
0:10:45 mature and so forth.
0:10:48 But it’s one of the things we’re most excited about.
0:10:52 Paint a picture for me 15 years from now.
0:10:53 Retail and wearables.
0:10:57 What will tech do for me in those areas that it’s not doing right now?
0:11:00 So I think retail will basically be gone by then.
0:11:01 I mean, so.
0:11:02 Gone?
0:11:03 I can’t go to the shopping mall anymore.
0:11:04 Who wants to go to the shopping mall?
0:11:05 I want to go to the shopping mall.
0:11:06 Oh, you can go.
0:11:07 OK.
0:11:09 They’ll have special preserved shopping malls.
0:11:10 OK.
0:11:11 For the people.
0:11:12 You’re in Washington, DC.
0:11:13 The Smithsonian.
0:11:14 You’re in DC.
0:11:16 The Smithsonian will have a shopping mall that you can visit.
0:11:22 In fact, you can drive there on a special road for your non-self-driving car.
0:11:27 So, and tie your horse up out back.
0:11:32 So, I mean, look, there will be, the term is experiential retail.
0:11:33 So like, experiences.
0:11:36 Like, if it’s, look, I mean, if it’s like a Gucci boutique, and it’s a whole experience
0:11:39 to go there, or it’s an Apple store, or it’s a, you know, it’s got something where it’s
0:11:42 like there’s like real magnetic appeal to the experience, then fair enough, right?
0:11:43 And there’s, there’s actually a bunch of companies we’re involved in that are doing
0:11:44 things like that.
0:11:48 But like, you know, the idea of we’re going to buy a bunch of stuff that other people
0:11:51 make, and we’re going to put it in a big box, and then we’re going to make everybody
0:11:52 drive to the big box.
0:11:53 Like, the problems with that are kind of twofold.
0:11:57 Number one is consumers don’t actually want, what you want is you want the Star Trek replicator,
0:11:58 right?
0:12:00 Like, what you want is like, you press the button and like, there’s my stuff, right?
0:12:01 Like, it worked great on Star Trek.
0:12:02 We don’t have that yet.
0:12:03 Like, we don’t quite have that.
0:12:06 We don’t actually have the materializer yet, but we do have the ability to press the button
0:12:07 and stuff gets dropped off.
0:12:11 So, and the logistics infrastructure to support delivery is getting built up, right?
0:12:12 Very rapidly now.
0:12:15 And so, I think the consumer behavior is cutting over quite quickly.
0:12:18 And then the other problem is just kind of traditional, let’s say, third-party retail
0:12:21 where you’re not selling your own product, you’re selling somebody else’s product is,
0:12:24 you just can’t, basically, you’re levered as a retailer, right?
0:12:27 You basically live on the basis of credit from the suppliers.
0:12:29 And the problem with that, so you’re kind of like an overlevered bank in a lot of ways.
0:12:33 And so, the problem with that is you loot, there’s basically no retailer of other people’s
0:12:36 products where they could lose 30% of their revenue and then they stay in business.
0:12:39 Which is why you see these retailers just going bankrupt like all the time, right?
0:12:43 It’s like, Toys R Us was the most recent big one, like, it detonated and then it detonated
0:12:45 so hard that it actually went into full liquidation, right?
0:12:48 Which everybody thought, obviously, it’s Toys R Us, like, people love toys.
0:12:53 Like, obviously, somebody was going to buy Toys R Us and there was just no way to make
0:12:54 the math work.
0:12:57 And so, I just think it’s an overlevered business and that part is going to go down.
0:13:00 Now, what it’s going to do is very interesting, it’s going to open up all the space, right?
0:13:04 And so, there’s a whole revitalization of physical environments that’s going to happen,
0:13:05 right?
0:13:07 Including, you know, you see that happening already in cities, but I think it’s going
0:13:10 to happen all over the place because a lot of this space is going to open up for, let’s
0:13:11 say, more interesting uses.
0:13:15 So instead of going shopping, I’m going to do something with my wearables.
0:13:16 And what will that be?
0:13:17 What’s the potential in wearables?
0:13:21 I think the really big one right now is I think audio, you know, audio is on the rise,
0:13:22 just generally.
0:13:24 And particularly Apple, you know, with the AirPods is just, I think, hit an absolute
0:13:25 home run.
0:13:28 It’s one of the most deceptive, you know, things is it’s just like this little product
0:13:31 and like how important could it be and I think it’s like tremendously important because
0:13:34 it’s basically just like a voice in your ear anytime you want.
0:13:36 And so, you have, well, I’ll just give you one random example.
0:13:39 There are now these YouTube, you know, there’s these kind of new kinds of YouTube celebrities
0:13:41 and everybody’s kind of wondering like, what, you know, where are people getting all this
0:13:44 spare time to like watch all these YouTube videos and listen to all these YouTube, you
0:13:47 know, people, you know, in the tens and tens of millions and the answer is like they’re
0:13:48 at work.
0:13:49 Right?
0:13:54 They’ve got like, they’ve got like a Bluetooth thing in their ear and they’ve got a hat,
0:13:55 right?
0:13:56 That’s 10 hours on the forklift, right?
0:13:57 10 hours of Joe Rogan, right?
0:13:59 And so, like, that’s a big deal.
0:14:03 It’s a voice in your ear all the time and then, of course, speech as a UI is rapidly
0:14:04 on the rise.
0:14:07 And so I think audio is going to be, you know, titanically important.
0:14:10 I would say the second thing I nominate for wearables is just generally the concept of
0:14:11 sensors on the body, right?
0:14:14 And so here the Apple Watch is clearly out in the lead with what they’re doing with
0:14:18 the heartbeat sensor, but I think we’ll have a full complement of medical grade sensors,
0:14:22 you know, on our bodies in a way that we have chosen to over the next five or 10 years.
0:14:24 And I think we’re, I think we’ll get to the point where we’re going to be able to do things
0:14:26 like predict heart attacks and strokes before they happen.
0:14:29 But I think it’s like, I mean, talk about, like, talk about a killer app.
0:14:33 Like, I’m going to have a, beep, I’m going to have a heart attack in four hours.
0:14:34 Maybe I should drive to the hospital.
0:14:37 The survival rate for heart attack in the hospital is like 99%.
0:14:39 The survival rate for heart attack at home is like 50%.
0:14:43 Like, there’s an opportunity for like a massive increase of quality of life with the sensor
0:14:45 platforms people are going to have.
0:14:47 And then I think, I think optics are coming, right?
0:14:49 And it’s going to be a long road, but I think AR and VR are both going to work.
0:14:53 And I think they’re, I think we’re going to have heads-up displays that are, that honestly
0:14:55 are going to remove the need to, you know, what we have now, which is kind of this little
0:14:58 pane of glass that we’re expected to kind of experience the whole world through, right?
0:15:00 The whole world’s going to open up around us.
0:15:03 What are we, what are we going to do with augmented reality and virtual reality?
0:15:05 So I’m big believers in both.
0:15:09 I think AR has, you know, tons of potential applications both working at home.
0:15:10 We can spend a lot of time on that.
0:15:13 I think VR is going to be like a thousand times bigger in the valley right now.
0:15:16 This is a very contrarian view because I’ll, the general kind of theme that you hear in
0:15:18 the valley is AR is going to be bigger than VR.
0:15:22 And it seems like obviously AR should be bigger than VR because obviously if you can do things
0:15:26 overlaid on the real world, that should be sort of inherently more interesting than having
0:15:28 to construct sort of a synthetic world.
0:15:31 I just think that that’s only true for people who live in a very interesting place in the
0:15:34 real world, which we all do.
0:15:38 But you know, only, you know, something between like point 1% and 1% of people on earth live
0:15:41 in a place where it’s like they wake up every morning and they’re like, wow, there are so
0:15:42 many interesting things to see, right?
0:15:45 Like most people don’t live in a place like that, right?
0:15:50 And so for everybody who doesn’t already live on a college campus or in Silicon Valley or
0:15:53 in a major city, the new environments we’re going to be able to create in VR are going
0:15:56 to be inherently much more interesting, right, than the physical environments.
0:15:58 And there’s going to be a lot more of them to choose from.
0:16:00 And so it’s going to be amazing.
0:16:03 Ben, there’s a tweet I’ve been dying to ask you about.
0:16:10 There’s two types of people in this world, fresh prince of Bel Air people and Martin people.
0:16:13 I’m a Martin person for what it’s worth.
0:16:14 Who’s Martin?
0:16:15 That’s funny.
0:16:17 I think Nate wrote that tweet and I replied to it.
0:16:23 So there were two kind of major African-American television shows on in the early nineties.
0:16:28 The Fresh Prince of Bel Air, which was based on a rapper known as the Fresh Prince and his
0:16:31 DJ, DJ Jazzy Jeff.
0:16:33 The Fresh Prince was actually Will Smith.
0:16:35 Him I know, but the Martin is what puzzled me.
0:16:42 Martin is Martin Lawrence, who is a comedian, a genius comedian who is also incredibly crazy.
0:16:44 So crazy that his special was called You So Crazy.
0:16:48 He’s just like a very, very crazy guy.
0:16:53 But Fresh Prince of Bel Air was kind of like the hood Beverly hillbillies.
0:16:57 It’s kind of like, you know, you get the black people from the inner city and you put them
0:17:02 in Beverly Hills and it’s kind of funny and it’s safe for, you know, everybody.
0:17:03 There’s nothing too itchy.
0:17:05 You know, they keep it kind of easy.
0:17:11 And whereas Martin was like just full out, like Martin was like actually the hood and
0:17:13 he was nuts and like the whole thing was great.
0:17:15 And so that was my show.
0:17:16 Now it makes sense.
0:17:22 Could you recommend a rapper for people who think they do not like rap music?
0:17:23 Will Smith.
0:17:24 Will Smith.
0:17:26 The Fresh Prince of Bel Air.
0:17:28 And does Mark like Will Smith?
0:17:29 I don’t know.
0:17:31 Fire of Spotify tonight.
0:17:38 Mark, if we think about television as presenting conceptual material to us and every now and
0:17:41 then you’ll watch TV shows.
0:17:45 What’s a TV show you’ve been watching lately that has a lesson in it about venture capital
0:17:47 and what’s that lesson?
0:17:48 Can I name three?
0:17:49 Three, yes.
0:17:50 I watched a lot of TV.
0:17:53 Halt and Catch Fire, which actually recently ended after four seasons.
0:17:56 Halt and Catch Fire, when it came out, it came out right after Mad Men and it came out
0:17:58 as kind of people were like, well, it’s kind of like Mad Men, but it’s like much more of
0:17:59 like a pot boiler.
0:18:02 It’s like super like dramatic and they’re like, it’s just all the emotionality of it.
0:18:06 Like, you know, it’s about this creation of basically it’s about the creation of a compact,
0:18:10 the PC company in the early 80s, it’s a thinly bailed kind of starts out kind of with that,
0:18:11 the birth of the PC.
0:18:14 And so all the critics were like, well, this is like too dramatic.
0:18:18 And like Ben and I watch it and we’re like, you know, no, that’s, it’s about right.
0:18:19 Exactly.
0:18:21 It was like literally going back in time.
0:18:22 It was like.
0:18:23 It’s exactly right.
0:18:25 And it really is like that dramatic and that stressful and that crazy.
0:18:28 And so especially the first season of that show, I think it’s the most accurate portrayal
0:18:31 of what a tech startup is actually like that’s ever been aired.
0:18:32 So that’s one.
0:18:36 Another one that I really like for founders to watch and they always think I’m crazy,
0:18:37 but I really, really believe this.
0:18:42 There was a, there was a great show on USA years ago called Burn Notice, which is a
0:18:43 very fun show.
0:18:47 It was about a spy who’d gotten burned, a CIA spy who’d gotten burned and had a whole
0:18:50 of Miami try to clear his name and he took on all these odd jobs.
0:18:51 So fairly normal setup.
0:18:54 The conceit of the show was though, he had every conceivable skill you could possibly
0:18:55 have.
0:18:56 Right.
0:18:57 And so he knew how to make like explosives out of bleach.
0:19:00 Like he knew how to like, you know, I don’t know, like disarm somebody with a mop handle.
0:19:04 Like whatever circumstance he was in, he had the, and then there was a voiceover or he
0:19:05 would explain to you.
0:19:06 And you haven’t hired him yet.
0:19:09 Well, we would love to hire him, but basically, I look at him and it’s like, that’s kind
0:19:10 of, that’s a good founder.
0:19:14 Like a good founder has to basically have every conceivable skill.
0:19:16 Like you basically have to be good at product development and at marketing and at sales
0:19:21 and at finance, legal and at HR and management and, you know, on and on and on and on.
0:19:24 And there really is no substitute for actually being good at all these things.
0:19:26 And so I like that one.
0:19:31 And then the third one is succession, which I just finished, which is one of the darker
0:19:33 and funniest things I’ve ever seen.
0:19:37 Let’s just say it’s a, it’s inspiring for founders because it, I think, pretty accurately
0:19:42 shows the dysfunction at, let’s say, certain kinds of larger companies.
0:19:46 It’s a show about a succession battle at a major media company and I can’t recommend
0:19:49 it highly enough if you’ve got the stomach for bad words.
0:19:54 So Ben, the company is starting something called a cultural leadership fund.
0:19:58 What are the strengths and weaknesses of applying the venture capital model to culture and
0:19:59 entertainment?
0:20:02 Well, I think we’re trying to apply culture to the venture capital model.
0:20:04 So it’s a little bit the opposite.
0:20:07 Like, you know, you know, back to your earlier question, you know, we really pride ourselves
0:20:13 on being able to understand talent and talent of all kinds.
0:20:18 And you know, one of the things we did very early is we built a lot of relationships with
0:20:23 geniuses at moving culture and we thought this was important because as tech was moving
0:20:29 into much more kind of consumer oriented field when we started the firm, that the people
0:20:35 who really knew how to change and create new consumer behaviors would be interesting.
0:20:40 So we, you know, had relationships with all these cultural geniuses like Quincy Smith and
0:20:46 Sean Puffy Combs and Nas and so forth, but we were doing it kind of fairly one-off and
0:20:51 we thought, you know, it would be really great, you know, and it was a great advantage for
0:20:52 us.
0:20:55 And Oprah had one of our entrepreneurs on her favorite things show, but we thought, you
0:20:59 know, it was a good thing to share with the rest of the industry.
0:21:04 And so we would have these cultural geniuses, but you know, geniuses, but who didn’t look
0:21:08 like the geniuses, our guys were used to like, you know, Mark Zuckerberg or Brian Chesky.
0:21:13 They kind of felt different, but our guys were interested in working with them.
0:21:14 So we put them together.
0:21:18 They get to know each other, which has got value on both sides.
0:21:24 And it also gives a lot of value to our CEOs because not only do they get to kind of learn
0:21:27 how to move culture, but they also get to learn about how a different kind of talent
0:21:33 looks like, which is very, very valuable when you’re kind of in the war for talent.
0:21:38 And then we invested back in kind of young African Americans who are wanting to come
0:21:39 into tech.
0:21:44 So we created talent pipeline with the fund and we have straight access to the pipeline.
0:21:49 So I would just say we get a lot of credit for being nice, but we’re really just winning.
0:21:50 So it’s gone great.
0:21:51 It works well.
0:21:56 And look, you know, the main thesis is, you know, if you’ve got like a very small group
0:22:01 of people that created every new musical art form in the last century from jazz to blues
0:22:05 to hip hop to rock and roll, you know, like that’s a real thing.
0:22:06 Like to be able to do that.
0:22:12 And that’s a real talent base that, you know, we need to figure out how to get to.
0:22:14 And we’re here in Los Angeles.
0:22:16 We’re very close to Hollywood.
0:22:21 What is it conceptually that Hollywood grasps about venture capital and talent identification
0:22:23 where Silicon Valley lags behind?
0:22:27 Well, I think that, you know, I just think of their different kinds of talent.
0:22:32 So and this is the thing that I think people make a mistake on when they think about, you
0:22:37 know, how diversity works or how inclusion works and so forth is there’s talent that
0:22:38 looks different.
0:22:41 And then if you don’t have that talent, you might not be able to see it.
0:22:46 And so, you know, in Hollywood, they see certain kinds of talent that they’re used to because
0:22:51 they know what that is, they know how it pops on screen, they know how like people emotionally
0:22:52 connect to it.
0:22:56 And then in Silicon Valley, we know another kind of talent, you know, a talent for like
0:23:00 systems thinking and engineering and this kind of thing.
0:23:04 But both are very valuable when you put them together in a company.
0:23:09 And so I think that, you know, in these endeavors, what we try to do is to see talent that we’re
0:23:10 not.
0:23:11 And it’s not an easy thing to do.
0:23:15 And there’s a story I tell that Margaret had in her profile.
0:23:18 One of the things she looked at in her employees was helpfulness.
0:23:23 And when I saw that, it shocked me because I had been managing for like nearly 30 years
0:23:27 at the time and I’d never interviewed anybody on that.
0:23:28 I couldn’t even see it.
0:23:33 Like, there’s a thing that’s an important talent, very important talent to a services
0:23:36 firm like ours that I couldn’t even see.
0:23:38 So how am I going to hire it if I can’t see it?
0:23:42 And so we spent a lot of time at the firm trying to see talent that’s not like us.
0:23:46 I’d also for a good, the LA effect we’re down here.
0:23:51 So I think it’s also very interesting time because, you know, for basically from when
0:23:55 I entered tech in the early 90s up through call it maybe 2012, 2013, it was just kind
0:23:59 of taken as a given that the Silicon Valley companies were never going to figure out culture
0:24:00 and never going to figure out content.
0:24:03 And it was also taken as a given that the media companies were never going to figure out tech.
0:24:05 And there were tons of attempts to kind of cross over, but they basically didn’t, none
0:24:06 of them worked.
0:24:09 And it really isn’t the last like three years it feels like.
0:24:13 It feels like a bunch of the Valley companies are really starting to decode culture, but
0:24:16 to the big, I mean, Netflix being Netflix sort of, you know, sort of setting a new model,
0:24:20 but now being, you know, replicated by other companies, Amazon being the most notable example,
0:24:24 you know, becoming big forces in the, in the formation of culture and entertainment and
0:24:25 media.
0:24:28 And then also by the way, the other is the flip side is that a bunch of the big media companies
0:24:30 now have gotten to the point where they now take tech incredibly seriously and have, you
0:24:34 know, really sharp people working for them, working on very interesting projects.
0:24:37 And then there’s a whole tech thing obviously now happening down here in LA that’s that’s
0:24:39 of a new level of magnitude than before.
0:24:43 And so it does feel like both of the kind of central hubs of California are developing
0:24:44 and crossing over, you know, quite nicely now.
0:24:50 A general question, 20 years from now, will location and being in the Bay area matter more
0:24:51 or less?
0:24:52 Yes.
0:24:53 Clearly both.
0:24:55 So on the one hand, it is absolutely true.
0:24:59 I mean, in 20 years, you know, basically like telepresence technologies, right?
0:25:01 So video conferencing and VR and all these things, like 20 years from now, there’s no
0:25:05 question it’s going to be like much easier to run large distributed organizations, large
0:25:07 distributed efforts than it is today, right?
0:25:10 We’re going to have such high fidelity video conferencing everywhere.
0:25:11 You can actually see this today.
0:25:15 If you see the super high end video conferencing systems, it really is like you are there.
0:25:17 And then we have these robots that we love in our office.
0:25:21 Some of you have seen the beams, which are a prototype of what I think, I think telepresence
0:25:24 robots are actually going to be a very big deal because they give you a sense of physical
0:25:26 presence of somebody in a room that’s even different than a screen.
0:25:30 And so like those technologies and then collaboration technologies like Slack and GitHub, right, are
0:25:31 becoming really good today.
0:25:35 And in 20 years, they’re going to be, you know, just spectacularly amazing.
0:25:38 And so it’s going to be easier to run all these companies and be able to run all these
0:25:41 efforts on a broad basis, and then it’s just going to make it much more straightforward
0:25:44 for people all over the world to participate.
0:25:46 So that’s on the one hand, but the other thing though is just like, okay, that’s going to
0:25:49 be a world that’s much more connected, right, much more networked, right?
0:25:53 It’s going to be, you know, past 5G, we’re going to be like 9 or 10 or 11G, right?
0:25:54 It’s going to be bandwidth everywhere.
0:25:56 It’s going to be, everybody’s going to be online all the time.
0:25:59 We’re going to have all these, you know, wearables, being online is going to be part
0:26:01 of everybody’s daily experience all the time.
0:26:04 You know, the economy is going to reform itself around software network effects.
0:26:07 And so the winning companies, you know, the winning entrepreneurial companies 20 years
0:26:10 from now that win are going to be staggeringly large.
0:26:13 Like they’re going to be like, I don’t know, 10 or 100 times the size of Google and Facebook.
0:26:18 And so the prize to have a startup that scales and wins is going to become so large that
0:26:22 you’re going to want to hyper-optimize every possible thing you could possibly do to have
0:26:25 that extra chance that you’re going to be the one that wins, right?
0:26:28 And that’s going to mean like people in the same room together, right?
0:26:32 And so I think the valley is actually going to become more central, not less central,
0:26:35 even though the technologies that we’re building are making it possible for the world to distribute.
0:26:37 Ben, I love your book on management.
0:26:40 It’s the only book on management I’ve ever given to my daughter.
0:26:41 No, I appreciate that.
0:26:42 I knew I had one chance.
0:26:44 I picked yours.
0:26:46 In your view, what is the best predictor?
0:26:47 Not of innovation.
0:26:50 We’ve talked about that, but of simple managerial intelligence.
0:26:53 How do you spot that and what does it consist of?
0:26:55 Well, you know, it’s interesting.
0:26:59 It’s two skills that don’t normally go together.
0:27:07 So it’s systems thinking, which is, you know, and I hadn’t even noticed Mark actually pointed
0:27:10 this out to me many years ago, which is most people are not systems thinkers, meaning they
0:27:16 cannot think about, OK, if I change this here, then it’s going to affect that over there.
0:27:21 And you know, you know, as an economist, people always make these dumb mistakes like, OK,
0:27:23 well, move the minimum wage and nothing else will happen.
0:27:25 It’s like, well, no, no, it’s a system.
0:27:26 You have to think of it in terms of the system.
0:27:30 And so that’s kind of part of it and a big part of it.
0:27:37 But the other part, which is, can you actually see the people in your organization?
0:27:42 Like, do you know who they are as opposed to you’re talking to them like they’re you?
0:27:46 And meaning, do you understand their motivation?
0:27:49 Do you understand what they would think about something if they were in the room and you’re
0:27:52 making a decision?
0:27:57 Can you interpret them well enough so that it’s as though they’re there?
0:28:01 And can you understand the implications through the eyes of the people who work for you?
0:28:05 And if you have those two things together, those are the people who are really great,
0:28:06 but it’s a rare thing.
0:28:09 And you can kind of see it because you’ll be talking to them and like you might not
0:28:12 be able to articulate something and they can articulate it for you the way you would have
0:28:14 done it better.
0:28:19 Like somebody who’s that perceptive on people plus a systems thinker is really the those
0:28:21 of the people who are gifted.
0:28:24 And Mark, did you really invent the TweetStorm?
0:28:26 And if so, what’s the general lesson about innovation?
0:28:27 We should learn from that.
0:28:31 What is a general lesson?
0:28:36 Inability to shut up, I think might have had a lot to do with it.
0:28:37 But you did invent it.
0:28:39 I think there might have been sequences of tweets, but literally I couldn’t shut up.
0:28:41 So like, I think it kind of catalyzed.
0:28:44 Well, look, I mean, the big lesson from it has been that the big lesson actually have
0:28:47 a lot of the Internet platforms, which is emergent behavior is incredibly important, right?
0:28:52 The really successful platforms let the user surface the behaviors, right, that the creators
0:28:54 of the platform could have never thought of and, you know, Twitter set all kinds of issues
0:28:57 over the years, but like it always has been amazing.
0:28:59 Most of the compelling ways in which people use Twitter have been invented by the users.
0:29:03 I mean, I think it’s true, retweets were invented by users, right, like very, very fundamental
0:29:04 features.
0:29:05 And that’s not just Twitter.
0:29:06 That’s also been true.
0:29:07 It was true of actually personal computers.
0:29:08 It was true of smartphones.
0:29:10 It’s been true of, you know, many of these platforms.
0:29:15 And so it’s a useful principle of product design, which is let the users innovate.
0:29:20 Ben, you’re famous actually for your barbecue cooking, viewed as a problem of management
0:29:22 and also innovation.
0:29:26 What makes for the difference between good and truly excellent barbecue?
0:29:27 Time.
0:29:28 Say more.
0:29:29 Time.
0:29:30 So, you know, it’s funny.
0:29:36 I had an interesting conversation years ago with my wife’s cousin, Atlee, in Kanye West,
0:29:41 which was just like a weird thing because Atlee’s from Baton Rouge, Louisiana.
0:29:45 And I have him to be in New Orleans and Kanye was there and we’re all out to dinner.
0:29:50 And Kanye asked Atlee, he says, “What’s the definition of luxury?”
0:29:53 Which is like, if you’re from Baton Rouge, you just don’t think of that word, like you
0:29:55 never hear the word luxury.
0:29:59 And so Atlee says, “I just like to cook.”
0:30:00 And Kanye says, “Well, how do you cook?”
0:30:03 He says, “Well, like I like to make red beans and rice.”
0:30:04 And he’s like, “Well, how do you do that?”
0:30:08 He’s like, “Well, I take my time, you know, I cut the onions very slowly, I boil it for
0:30:10 a long time, I make sure it simmers.”
0:30:15 And Kanye says, “Exactly, time is luxury.”
0:30:17 Like that’s why I make luxury records.
0:30:18 I take my time.
0:30:21 And I was like, yeah, that’s it.
0:30:22 So.
0:30:28 Mark, do you prefer to eat for-profit sushi or nonprofit sushi?
0:30:33 This is Tyler’s favorite question to suss out whether people are actually pro-government,
0:30:34 pro-increased government services.
0:30:40 The idea of nonprofit sushi makes me so nauseous that I think I want to throw up on stage.
0:30:47 General question, what’s the one thing that Wall Street does not understand about technology
0:30:49 that you would change if you could?
0:30:51 I think part of it is it’s a 3,000-mile-like thing.
0:30:55 I think a big part of its culture, there’s just a delay, and there always has been.
0:30:58 And so, you know, if I wanted to fix that, I would say, like, we need to spend a lot
0:30:59 more time.
0:31:02 And by the way, the tech industry does need to spend a lot more time trying to tell people
0:31:05 what we’re doing, but at the same time, people from outside the tech industry need to spend
0:31:08 more time in the valley and understand what’s happening here.
0:31:10 And a lot of that is happening as well.
0:31:13 That’s how I’m not sure I want to fix it.
0:31:15 The question assumes I want to fix it, like, I don’t think I want to fix it, because that’s
0:31:17 a big part of the opportunity.
0:31:21 What’s the one thing the U.S. government does not understand about tech that you would change
0:31:22 if you could?
0:31:25 So I think the first thing is something that Andy Grove said many years ago, which is it’s
0:31:27 inevitable.
0:31:31 And so, you know, somebody had asked him, you know, is the microprocessor good or bad?
0:31:34 He said, well, that’s like asking a steal, a good or bad, he’s like, we’ve got to deal
0:31:36 with it, like, it’s here.
0:31:41 And I think that, you know, the biggest mistakes the government makes are assuming it’s not.
0:31:46 So, you know, stem cells is a great one where the U.S. government went to really hold that
0:31:47 back.
0:31:49 They end hold back stem cell development or research at all.
0:31:53 They just made it very inconvenient for people in the United States, and a lot of people died
0:31:57 and, you know, missed out on cures and all kinds of things because of that.
0:32:00 And so I think that’s number one.
0:32:05 And then I think the other thing is that technology is always had and always will have good and
0:32:06 bad implications.
0:32:12 Going back to the cotton gin, the printing press, you know, certainly the internet has
0:32:13 had good and bad.
0:32:18 But if you look at it overall, it’s overwhelmingly positive.
0:32:26 And more than that, we have to go back to our population levels in like 1750 if you’re
0:32:30 going to take away technology and take away technological advancement because the way
0:32:35 the human population is growing, there’s no way we can, you know, live the way we want
0:32:37 to live and have the lives we want to live without technology.
0:32:42 So getting into these debates of whether we should hold it back is just, you know, if
0:32:45 there’s one thing I would change, it’s like, let’s not have that debate.
0:32:47 Let’s have the debate how to make it great.
0:32:52 Mark, what’s the last thing software will eat?
0:32:53 Other than sushi.
0:32:55 Other than sushi.
0:32:59 So I think it’s fundamentally, the term that you used actually called it, I think, project
0:33:00 selection.
0:33:05 And so basically it’s this question of like, okay, how do you organize a small number of
0:33:07 people to do something new, right?
0:33:09 And by the way, that could be a startup company.
0:33:11 That could be many other kinds of efforts where you need a small number of people to
0:33:12 do something new.
0:33:14 It could be a new political campaign, a new activist movement, whatever, but a small number
0:33:16 of people to do something new, right?
0:33:19 And then how do you pick, if you’re going to finance or donate or fund those things,
0:33:23 how do you pick ones to donate to, and then how are those things actually going to run,
0:33:24 right?
0:33:27 So the new part there is really important, like the little known fact, for example, about
0:33:31 venture capital is that there’s a term in venture capital and hedge funds called Cary,
0:33:34 which is basically called Cary’s interest, which is the sort of profit participation
0:33:36 that the VCs or hedge fund managers make.
0:33:42 The term Cary actually comes from whaling in the 1600s off like, you know, in the Atlantic
0:33:46 Ocean, like literally their term Cary was the people who would finance the captain and
0:33:49 the crew of the boat, but the boat actually would run as a startup.
0:33:52 There was actually like equity participation for all the people in the boat, and then they
0:33:56 would pick a captain, you’d raise money in town, you’d raise capital, and then the boat
0:33:59 would go off and try to take down a whale, right?
0:34:03 And about, you know, three quarters of the time the boat would come back, the other quarter
0:34:04 of the time.
0:34:05 The whale would win.
0:34:06 The whale would win.
0:34:08 Moby Dick was not a joke.
0:34:12 And so the boat comes back about 75% of the time, and then literally Cary was the portion
0:34:15 of the whale that the investors got, right?
0:34:18 And so if you think about it, like the process, if you’re like in, you know, I don’t know,
0:34:22 whatever, Boston or wherever, in like, you know, 1675, and you’re trying to say, okay,
0:34:28 this ship, this captain, this crew, this mission, into these waters, right, with these weather
0:34:31 patterns, like, and how are they going to behave under pressure, and what’s going to
0:34:33 happen when things go wrong, and it’s a crew going to mute me, and like, are we going to
0:34:34 make any money doing this?
0:34:39 Like, the whole thing is just such an intricate kind of puzzle, and it revolves around people.
0:34:45 And so, if you’re sitting out at the whaling expedition, you know, the Santa Maria is the
0:34:46 same kind of thing.
0:34:47 Tech startups are the same way.
0:34:50 By the way, you know, green lighting a movie or a TV show in Hollywood is the exact same
0:34:51 kind of process.
0:34:55 And it’s just, it’s so intangible, and it’s so much based on the interaction of a small
0:34:57 number of people who are going to be under extreme pressure.
0:35:01 Like, if we could figure out a way to automate that, like, we’d fund that company and then
0:35:03 retire, but at least we don’t know how to do that.
0:35:07 For each of you, what’s an interesting book you’ve read lately?
0:35:11 So one of the most interesting books I’ve read lately is a Genghis Khan and the Making
0:35:17 of the Modern World by Jack Weatherford, and it turns out to be very unexpectedly the most
0:35:22 interesting book on the topic of how you think about inclusion that I’ve ever read, and Genghis
0:35:27 Khan is not known for his thoughts on inclusion because he’s mostly known for, like, being
0:35:29 just ruthless.
0:35:35 But he really, you know, he was a guy who came from kind of the border of northern Mongolia
0:35:39 and Siberia, a very bad part of the world, he had a very, very hard life growing up.
0:35:45 He was from kind of the lower, they had white bones and black bone, kind of the higher and
0:35:50 lower caste, he was a lower caste person, and, you know, a lot of his experience growing
0:35:56 up led him to this idea that he should choose for kind of talent, not the caste system,
0:36:00 and not even the tribe that he was in, which was a huge breakthrough at the time, you know,
0:36:04 nobody had done that, and the way he thought about it and the techniques that he used for
0:36:11 doing it were breakthroughs today, you know, and so I just found it to be like a super
0:36:15 interesting book, definitely a great management book for anybody who’s interested in that
0:36:16 topic.
0:36:17 Mark.
0:36:20 So, the best book, the book’s had the biggest impact on me, it’s an incredibly well-written
0:36:24 book, it’s, of course, out of print, it’s by actually a guy, I think, Tyler, you know,
0:36:25 Timur Karan.
0:36:26 Sure.
0:36:29 You know quite well, who’s a economics and…
0:36:30 Economist at Duke.
0:36:31 At Duke.
0:36:36 So it’s a book about, 20 years ago, it’s called Private Truth’s Public Lives, and it basically
0:36:38 tells the story, the theory that he basically has, he calls preference falsification, and
0:36:43 it’s basically the idea, it’s a situation in which people believe something in their
0:36:46 own head, and then they feel for social reasons that they can’t say it out loud.
0:36:50 And so it starts kind of with that as kind of an idea, and then it kind of extrapolates
0:36:54 out kind of what happens as a society becomes the kind of society in which people feel like
0:36:58 they can’t speak the things that they believe, and it turns out to be quite an elaborate
0:37:01 process because basically, right, you can have these very interesting situations where
0:37:04 you can have a majority of people who believe something, but then they all believe they
0:37:08 can’t say it, but then as a consequence, they all come to believe that there are many fewer
0:37:12 people who believe it than there actually are, and so you can kind of suppress a point
0:37:16 of view artificially for quite a long time, but then he describes in the book how you
0:37:19 can then kind of just get the reverse process, kind of get the whole thing, kind of the spring
0:37:24 to expand, which is if a few brave people start to speak up, then a lot of other people who
0:37:27 have had that secret belief all of a sudden realize they’re not alone, and then you start
0:37:30 a cascade, right, in which a lot of people start to speak up, and he basically models
0:37:34 in the book like that’s where revolutions come from, and it’s basically like an explanation
0:37:39 for the fall of the Berlin Wall, it’s an explanation for political revolution.
0:37:42 It so happens to be, I think, highly relevant to what’s happening both on the left and the
0:37:44 right in the U.S., like right now.
0:37:47 Like, I think it’s, as you read the book, you’re just like, okay, that’s the cleanest
0:37:51 explanation of the Trump phenomenon I’ve ever seen, and furthermore, it’s also the cleanest
0:37:53 explanation of the Bernie phenomenon I’ve ever seen, like I think it actually describes
0:37:54 both quite accurately.
0:37:58 For the last question, I’d like to return to Mark and Ben as a couple.
0:38:03 Ben, what’s Mark’s biggest misconception about you, and Mark, what’s Ben’s biggest
0:38:05 misconception about you?
0:38:11 So this is the sad thing, is that he knows me so well that I wish he had misperceptions
0:38:18 about me, but like, he actually knows who I am, and so this is, and it manifests itself
0:38:22 the worst, like if something’s going wrong at the firm, it’s always some combination
0:38:27 of his and my fault, and he’ll know exactly the flaws that I have that have led us to
0:38:34 that situation, and like, it’s unbearable, and vice versa, but I’ll let him answer.
0:38:36 And Mark, you have the last word.
0:38:39 Ben’s biggest misconception to me is he thinks I’m gonna go to my room tonight and listen
0:38:43 to Will Smith.
0:38:45 I thank you both very much for this dialogue.
0:38:46 Thanks everybody.
0:38:50 (audience applauding)
0:39:00 [BLANK_AUDIO]